A critical new battleground is emerging for companies seeking to establish, sustain or expand their presence in China: It's the "good-enough" market segment, home of reliable-enough products at low-enough prices to attract China's fast-growing midlevel consumers. And while the battle is being fought in China, it's becoming clear that China's middle-market space--where multinationals and Chinese firms are going at it head-to-head today--is the market segment from which the world's leading companies will emerge.

In several respects, China is the crucible for tomorrow's global competitors. To cite one: Goldman Sachs estimates that China will account for 36% of the growth in the world's GDP between 2000 and 2030. Forward-thinking companies (multinational and Chinese firms alike) are thus doing more than winning market share and brand recognition in China's middle market. The same firms have also started building the scale, expertise, quality and business capabilities to serve other emerging markets and, eventually, circle around to developed ones as well.

How will it play out?

	"Companies choose to enter the battle in different ways: Multinationals tend to attack from above, Chinese firms burrow up from below, and both are acquiring their way into the good-enough space". - Till Vestring
View a slide presentation on entering China's middle market.

China's markets historically have had two tiers. At the top, a small premium segment served by global brands realizing solid margins and rapid growth. At the bottom, a vast, low-end segment served by local companies offering low-quality, undifferentiated products (typically 40% to 90% cheaper than premium ones) that often lose money-when there's rigorous accounting. What's new is the rapidly expanding good-enough segment, fueled by China's stunning economic growth.

Not surprising, consumers with rising incomes are trading up from low-end products. The result: China's middle market is growing faster than the premium and low-end segments combined, and accounts for nearly half of all revenues in some product categories such as televisions and washing machines.

Some interesting patterns have emerged among the ways that companies are choosing to enter this battle. Multinationals tend to attack from above, Chinese firms are burrowing up from below, and both are acquiring their way into the good-enough space.

From above, discerning multinationals aim to lower manufacturing costs, introduce simplified products or services and broaden their distribution networks while maintaining reasonable quality. To expand sales of its MRI equipment in China, for example, GE Healthcare used a line of reliable but less expensive machines targeted at hospitals in China's remote and financially constrained second- and third-tier cities. By 2004, GE Healthcare had 52% market share of this fast-growing marketplace.

From below, Chinese challengers in the low-end segment tend to burrow up. The goal for these companies is undercutting established players by providing new offerings that ratchet up quality but cost consumers much less. Huawei Technologies, a Chinese maker of fixed and mobile telecommunications networks, both built and acquired the technical and managerial capabilities needed to rise up from the low end of the market. At the same time, it forged technical alliances to further broaden its product mix.

Notably, given the failures in quality control by some Chinese companies at the low end, improving product quality is a critical step for Chinese firms moving up to good-enough segments. Appliance giant Haier and Galanz, a leader in microwave ovens, both began quality marches that initially helped them offer good-enough products and subsequently enabled them to achieve global quality standards.

In the middle is the acquisition route. Multinationals that can't reduce their costs fast enough, and domestic players looking for more skills, technology and talent, frequently use this tactic. Buying into the good-enough segment worked for consumer-goods giants Gillette, L'Oreal and Anheuser-Busch-and it worked equally well for Haier, which rolled up a series of low-end Chinese competitors to gain scale, and then used its position in China as a launching pad to enter markets abroad.

Indeed, domestic firms as well as multinationals are coming to recognize that ceding China's middle space will breed competitors that eventually challenge them on a global scale. Ironically, Chinese companies that have already gone global are finding themselves on the defensive back at home as well. As Haier has attacked international markets and won share abroad, for instance, local companies such as The Little Swan Group and multinationals including Whirlpool and Siemens have been nibbling away at its middle market in China, trimming Haier's domestic refrigerator market share from 29% in 2004 to 25% last year, according to Forbes magazine.

In Mandarin, China is called Zhongguó, which is often translated as "Middle Kingdom." Actually, it means "central country," and companies all over the globe are discovering why.

Orit Gadiesh is chairman of Bain & Company. Philip Leung is a Bain partner in Shanghai. Till Vestring is a Bain partner based in Singapore and leader of Bain's Southeast Asia Industrial Practice.

For more information on entering China's middle market, read "The Battle for China's Good-Enough Market" by Orit Gadiesh, Philip Leung and Till Vestring in the September 2007 issue of Harvard Business Review.