The Hidden Dragons

Last Updated Mar 12, 2008 1:15 PM EDT

The Idea in Brief

What multinational doesn't want a piece of the action in China--with 1.3 billion potential customers, 9.3% percent annual economic growth, and a per capita income that quadruples yearly? Carried away by these figures--along with the Chinese workforce's low wages--most multinationals have rushed to set up manufacturing facilities in China or sell products there.

But they've ignored an important development: the emergence of Chinese companies as powerful rivals not only within China but also in the global market. Why? Many global managers assume that Chinese companies aren't big enough or profitable enough, or sufficiently financed or equipped, to pose a threat.

Yet as the Chinese government encourages more private ownership of companies, firms that blend private and public ownership are tackling the global market. Though these companies enjoy state support, the government doesn't interfere in their management. It permits them to list on the China stock exchange ahead of other companies and acquire other firms quickly. Armed with these advantages, some "mixed-ownership" companies have quietly grabbed market share from older, bigger, and financially mightier rivals in Asia, Europe, and the United States. Western managers who ignore these "hidden dragons" risk seeing them become their strongest rivals in the next five years.

The Idea in Practice

Four groups of Chinese companies are simultaneously tackling the world market:

National Champions

These domestic leaders build global brands by identifying segments that global market leaders have dismissed because of volume is too low or profit margins negligible. They leverage their experience in adapting technologies and features to meet cost-conscious Chinese buyers' price points. Low manufacturing costs give them a further edge.

To enter the U.S. refrigerator market, Chinese appliance company Haier focused on basic, cheap--but reliable--products that didn't demand state-of-the-art technologies. It sold small refrigerators for hotel rooms and students' dorms--products incumbents had ignored--capturing 50% of the minifridge market. Nine of the ten largest U.S. retail chains now carry its products.

Dedicated Exporters

Leveraging their economies of scale, dedicated exporters set their sights on the external market. They first break into mass markets, where their low production costs give them an edge. Then they develop expertise with crucial technologies--often forming strategic partnerships and acquiring rivals--to migrate to specialized, high-value markets.

China International Marine Containers bought Hyundai's container-making operations in China for its manufacturing technology. In five years, CIMC captured half the world market for refrigerated containers. It's the first in its industry capable of designing and manufacturing refrigerated containers for air, sea, road, and train transport.

Competitive Networks

These networks comprise hundreds of small, specialized, entrepreneurial companies located in one limited geographical area. Operating as a cohesive, interdependent entity, they take on world markets. With scant bureaucracy and overhead, they're flexible, low-cost producers. They thrive in markets requiring quick responses to changes in demand.

The 1,000-unit Shengzhou fashion network produces 250 million ties annually, supplying Armani, Pierre Cardin, and others. It codesigns ties with these fashion houses, using Internet-based collaboration software--and turns designs into products in 24 hours. It's challenging European incumbents at the top of the market.

Technology Upstarts

The Chinese government built a large infrastructure for scientific and technological research, then required state-owned laboratories to obtain funding by commercializing their technologies. In response, research institutes have spawned companies and encouraged scientists to become entrepreneurs in emerging industries.

Copyright 2003 Harvard Business School Publishing Corporation. All rights reserved.

Further Reading


Asia's New Competitive Game

Harvard Business Review

September-October 1997

by Peter J. Williamson

In this article, Williamson provides an early roadmap to the changing business landscape in China. Western companies' toughest competition, he explained in 1997, were about to come not from familiar rivals but from lesser-known Asian companies. These companies--such as China's national champions, dedicated exporters, competitive networks, and technology upstarts--often use the following tactics and strategies:

Be the first mover into markets. China's national champions use this tactic by jumping into markets that other, larger companies have ignored or hesitated to enter.

Seize the dominant position in your industry. Again, national champions use their dominant positions in several industries as a source of free cash flow to finance international expansion.

Leverage your host company's goals. Because the Chinese government commonly awards monopoly rights and concessions to companies whose investment decisions fit in with national goals, companies that align themselves with those goals reap similar rewards.

Give commercialization and invention equal weight. This is what China's technology upstarts are doing.


Winning in Asia: Strategies for Competing in the New Millennium

Harvard Business School Press

Forthcoming February 2004

by Peter J. Williamson

Williamson expands on the ideas in "The Hidden Dragons," explaining in further detail the ways in which the competitive landscape in Asia is undergoing a sea change. Companies are finally breaking the bonds imposed by the 1997 financial crisis, and the engine of growth is shifting from exports to Asian market demand. China's rapid development is redrawing the Asian playing field, and national fiefdoms are succumbing to cross-border competition. Together, these forces signal the emergence of a wholly new competitive game--from which there will be no going back.

Williamson argues that competing in this rapidly evolving arena will require a very different kind of company--Asian or Western. He explains how Asian companies will need to leverage the strengths of their local heritage by building distinctive new strategies. Western multinationals, for their part, will have to reassess the approaches that won them a share of Asia's rapid growth in the last two decades.

Williamson identifies the key challenges that will distinguish the winners in tomorrow's Asia and explores the profound changes--in business models, mind-sets, organizational structures, and management processes--that companies must navigate to meet those challenges.