For Australian companies seeking to establish, sustain or expand their presence in China, a critical new battleground is emerging: the "good-enough" market segment, home of reliable-enough products at low-enough prices to attract China's fast-growing mid-level consumers. It is 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.
China's markets historically have had two tiers. At the top, a small premium segment served by global brands realising 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, fuelled by China's stunning economic growth. Consumers with rising incomes are trading up from low-end products. As a 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.
Some interesting patterns have emerged among the ways that companies are choosing to enter this battle. Multinationals tend to attack from above, Chinese firms burrow up from below, and both are acquiring their way into the good-enough space.
Discerning multinationals aim to lower manufacturing costs, introduce simplified products or services and broaden distribution networks while maintaining reasonable quality. For example, to expand sales of its MRI equipment in China, 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.
Multinationals, including Australian companies, commonly attack from above but have to compete with Chinese firms, which tend to burrow up from the low-end segment to enter the good-enough market. Their goal is undercutting established players by providing new offerings that ratchet up quality but cost consumers much less. Huawei Technologies, a Chinese maker of 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 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 recognise that ceding China's middle space will breed competitors that eventually challenge them on a global scale. As Haier has attacked international markets and won share abroad, local companies such as The Little Swan Group and multinationals including Whirlpool have been nibbling away at its middle market in China, 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, including Australian firms, are discovering why.
