Friday, April 24, 2009

Dragon at your door at cost innovation

Caption: Green coconut juice that better quenches ones thirst is seen at Canton Fair, Guangzhou, April 15 that ends May 7. The Fair is China’s largest and famous trading expo that attracted 22, 104 domestic and overseas attendee companies this year, one of PNG’s opportune forum to showcase its products. Did PNG attend? Pic by Canton Fair Guangzhou


By Albert Kaupa Tobby in Beijing

FORGET the idea that the rise of Chinese businesses simply means cheap, low-quality imitations flooding world markets.

But the fact is that Chinese business competitors are starting to disrupt global competitions by breaking the established rules of the game.

Their tool of choice is cost innovation; the strategy of using Chinese cost advantage in radically new ways offers customers around the world dramatically more for less and this is benefiting the more than half the world’s total population who lived in low income countries. PNG included.

Cost innovation has three faces, as identified by Ming Zeng and Peter J. Williamson of Cheung Kong Graduate School of Business in Beijing.

Ming Zeng and Peter Williamson in their book “The Dragon at Your Door” published by Harvard Business School was a 9 years research project sponsored by INSEAD and Cheung Kong Graduate School of Businesses.

They present three astonishing facts about the rising Chinese competitors and how their cost innovation strategy disrupts global competition.

As China is increasingly dominating global arena of business it is important that all keen developers, policy makers, business competitors and individual should be aware of these strategy to engage constructively with Chinese businesses.

The three faces of cost-innovation are as stated by M. Zeng and P. Williamson includes:

First Chinese companies are starting to offer customers high technology at low cost. Computer maker Dawning, for example has put supercomputer technology into low-cost servers that are the everyday workhorses of the world’s IT networks.
This novel strategy is demolishing the conventional wisdom that high technology is restricted to high-end products and segments.
And it is interrupting the game whereby established global competitors maximize their profits along the product life cycle by only slowly migrating new technology from high-priced segments toward the mass market.

Second, the emerging Chinese competitors are presenting customers or consumers with an unmatched choice of products in what used to be considered standardized, mass-market segments.
For example Goodbaby offers a product line of over sixteen types of strollers, car seats, basinets and playpens all at mass-market price, thus challenging the idea that if customers (consumers) want variety and customization, they have to pay a price premium.

Third, Chinese companies are using their low costs to offer specialty products at dramatically lower prices, turning them into volume businesses.

For example consumer appliances maker Haier has transformed the market for wine-storage refrigerators from the preserve of a few wine connoisseurs into a mainstream category sold through America’s Sam’s Club at less than half the then prevailing price.

The end result: Haier has 60% market share while yesterday’s niche players have been left floundering.

This new Chinese competitions is challenging the notion that specialty products must forever remain low-volume and high-priced.

These three new faces of the Dragon cost-innovation whilst disrupting the global business arena and threatening traditional key global players also provides tremendous opportunity to new emerging competitors.

Traditionally dominant players from the western liberal market economy who are advocators of competitions are now hesitantly pushed to the back stage of the global playing field paving the way for new champions lead by Chinese, followed closely by India, South Korea, Brazil, South Africa and Indonesia.

A good example of a Dragon cost-innovation that displaced established competitors from the core of the Market can be better illustrated in the case of China International Maritime Containers Group (CIMCG).

CIMCG has penetrated every segment of container markets, including products with sophisticated refrigeration, state-of-the-art electronic tracking, internal tanks, folding mechanisms and customize features – all niches that specialist European container makers believed could defend, despite their high cost.

Today CIMCG is the world’s number one in terms of volume, six times larger than its nearest competitor and dominating 55% of the global market share.

Ironically in 2005 CIMCG bought 77 patents from the bankrupt competitor Graaff – the German firm from which CIMCG licensed its first refrigeration technology back in 1995.

The Dragons compete in areas where conventional market norms considered unfavorable business environment and continuously neglected by traditional global players.

The areas for example, where lawlessness is rampant, illiteracy rate is high, and majority of the population living in rural subsistence agriculture.

Commonly known as the least developed economy and considered as the market periphery of the global market.

They start from the market periphery and gradually penetrating into the core of the global market and aggressively ceasing every little opportunity to maximize their gain and minimizing their costs.

While doing so, they transfer entrepreneurial skills, low cost technology, variety supplies of goods at affordable price and local market diversification for local customers.

Those countries that welcome the Dragons and strategically engaged them in their market have seen significant improvement of their market, example of such would be South Africa, Vietnam and Malaysia.

Today most of the world’s paramount leaders confessed that the presence of the Chinese firms at the core of the global market is inevitable.

Paul Skinner, Chairman of the Rio Tinto when selling 12% stake to the state-owned Chinalco said from Canberra last week that, “this is the way the world is moving and it is important that strategic partnership should be developed with China which is economically beneficial for Australia.” Rio Tinto made large chunks of mining in Australia.

US President Barack Obama in his meeting with Chinese President Hu Jintao in London during the G20 Summit said publicly that US-Sino …“relations is not only important for the citizens of the two countries but also will set a stage for how the world deal with a host of challenges.”

Rusian President Dimitry Medvedev, Franch President Nicholas Sarkozy and British Prime Minister Gordon Brown all share the same sentiments that in the current global condition, it is very important to maintain favorable relations with Chinese government and its people.

This shows the Dragon of the Middle Kingdom is again the epicenter of global business and the whole range of other global issues.

Even in this current global crisis multinational corporations in China continues to increase production and performance looks bright whilst their competitors in traditional market core looks grim.

A good example would be the US automaker General Motors (GM) with its joint venture partner SAIC in China expected to double sales in China to over 2 million units.

Despite stumbling on the edge of bankruptcy in the U.S., GM still sees China as the most important growth market in the world.

In 2008 alone, GM sold more than 1.09 million vehicles in China, which is 6.1% higher than 2007.

I have shared a lot about the Dragon-cost innovation strategy that can be used to effectively displaced established competitors from the core of the global market to the periphery and coincidently create new opportunity to those at the market periphery to catch-up and engage actively in the market core.

The Dragon’s influence is felt everywhere and PNG is no exception. The Chinese merchant’s ships were in PNG long before the Dutch and Portuguese Explorers set foot.

Chinese Traders were in PNG in the 16th century purely for the purposes of trade and not extending their more than 2000 years old imperial powers.

They were in search of Bird of Paradise plumes and trepang or beche-de-mer. PNG has the advantage of having ancient trade relations with the Dragon.

The geographic proximity of Sino-PNG is a strategic competitive advantage for both countries to effectively collaborate, to feed the rapidly increasing demand of manufactured goods from the Pacific Island nations.

Papua New Guinea has the labor base and resources, but lack the technological capacity and capital to turn its resource and labor into productive use.

China has the technological capacity and capital with a proven track record of growth through innovative production.

PNG is the center of the periphery of the global market. Over the years the global community often refers to Australia and sometimes New Zealand as the center of South Pacific Region.

That was during the period when the Dragon was just an observer and also struggling to fly out of the Middle Kingdom.

However with the rise of the Dragon out of the Middle Kingdom offers tremendous opportunities to PNG and other island nations which are often considered as the periphery of the region.

PNG has the potential to gain the center stage and influence regional and global issues.

What PNG need is simple user friendly technology, know-how skills and capital to create a rural based industrial economy, where the bulk of the population lives.

That is to start at the periphery of the national market, with cost-innovation production method.

That is exactly what the Dragon from the Middle Kingdom does best.

They offer the customers with high technology at low cost, present the customers with unmatched choice of good and finally they offer specialty products at dramatically lower price, turning them into volume business.

Combination of the strengths of a multinational using its technology, system, brands, and the experience with the reach of its existing subsidiaries and the cost innovation advantage built by the Dragon would be an unbeatable force in the global competition.

Note: This article is contributed by Albert Kaupa Tobby, a PNG student doing Masters program majoring International Development at Tsinghua University. Inquiries, contact Albert at e-mail gaul_bire@yahoo.com.au

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