We are a successful Canadian company whose two main competitors just moved aggressively into China. We know they’re losing money there. but still I worry that we’re making a mistake by staying local.
Actually, don’t just worry. Be afraid. Be very afraid.
In a global economy, scale is a competitive weapon you cannot ignore. And with China’s vast markets, low-cost manufacturing, and increasingly strong technical talent, scale is what it can give you. No wonder companies from around the world are tripping over themselves to get a foothold there.
It is also no surprise that your competitors are not yet profitable in China. Most foreign companies haven’t figured out how to take the pain out of entering the mainland. Regardless, even if your competitors appear to be in that category, remain paranoid. Because if they eventually do find a way to take advantage of China’s opportunities, they could leap into another competitive league, leaving you far behind.
Our first advice is this: Channel the energy you spend worrying into addressing hard questions about why your competitors have gone to China. What exactly do they see? Is it just the huge market? Or do they have a unique product or service offering the Chinese will jump at? Is it a manufacturing-cost edge? Or is it a low-cost, low-investment process that will alter the game? Is it access to new technologies that might change your product's functionality or design appeal? Is it potential partnerships with Asian companies that will, in time, send imports of your product back to Canada and the rest of the world?
Throughout this soul-searching process, your operating assumption must be that your competitors know something about China’s upside that your company does not. Even though that may not end up being true.
China is littered with the wrecks of companies that went to China….just to go to China. They went, for instance, because their two main competitors had gone, and someone in the organization (like you, perhaps) couldn’t get a good night’s sleep because of it. They went because the China-or-bust mantra is invoked everywhere these days, from B-school classrooms to boardrooms, all duly reported in the media.
They went because there is a pervasive sense that everyone is going. None of these are good reasons.
Yes, the allure of China’s scale is enormous, and the competitive power of scale is real. But there is no point in going to China if you don’t know how scale is going to make your company better, more productive, and more profitable. In that way, the decision to go to China is just like the decision to enter any new market—be it on the other side of a state line or the other side of an ocean. It has to make strategic and financial sense. Maybe not immediately, but in a reasonable amount of time.
So, yes, worry. In fact, assume your competitors have figured out how China’s scale will improve their market position and economics. Then take your fear and use it to start a conversation about why your company hasn’t figured out its China advantage.
Maybe there isn’t one. Not every company has to go to China. But most do—and should. As long as they know why.
This question and answer originally appeared in Business Week magazine on May 22, 2006.
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