On Tuesday and colleague and I visited a local Chinese manufacturer, an OEM of domestic appliances. We had a longish discussion about price competition and the struggle to improve margins through product differentiation.
Firms in Zhejiang compete on price in highly competitive commodity markets. Price competition limits profits. No financial capital is accumulated to invest in research and development, marketing research or other foundations for product differentiation. Without these, higher value exports are impossible. This sounds like Mark Elvin’s low
level equilibrium trap all over again.
The story is a familiar one; one that I have heard from other Chinese SMEs, from business and investment analysts and from some of the public commentators on globalism.
To overcome this two things need to happen together. First, firms need to develop cultures of innovation that empower mid-level managers and free time for senior managers to guide innovation. Second, marketing and marketing research skills need to be developed to enable OEMs to break their reliance on foreign designs. These two things need to happen together, one is useless without the other. Of course, both of these require firms to draw down on capital, which, given the small profit margins, they might not be able to accumulate.
In addition, the transformation of firms from product-, manufacturing- and price-oriented to customer-, service- and value-oriented cannot happen in a vacuum. This needs a pool of managers and staff to draw on, cross industry fertalisation, universities and consultancies with appropriate skills and competitors and supplers striving to make the same transformation, understanding investors and so on.
Without a supporting culture and resources for innovation, surplus capital tends to be applied to property and stock market speculation rather than industry development.
In our discussion with the owner, we made an interesting distinction between SMEs in Zhejiang and those in Germany and Northern Italy, where small firms can be highly innovative (albeit in different ways). There seems in China to be a belief that higher level industial activity requires enormous scale, which the European firms disprove but which is probably true at miniscule profit margins.
A number of things might help Zhejiang SMEs become more like their European competitors.
First, the Chinese central and provincial governments are working to build intellectual and physical capital on key industries. This should help overcome some of the capital issues, though only in key industries and only to a limited extent. Price sensitive domestic and foreign customers and a rising currency will counter this to some extent.
Second, there is a committment to develop the cultural industies, which can act as a social and cultural support for a creative, innovative business environment.
Third, education is being developed and experiments with new programmes and institutions are evident (such as University of Nottingham Ningbo, China). What is probably important here is the diminshment of homogeneous university programmmes rather than the type of programme per se (i.e., its the potential for cross fertalisation that matters most).
It could be that it will take a generation for these factors to have an effect. It could just take a few successful examples. It will be interesting to watch.
–
Posted from my iPod and written on a train, please forgive typos!
Product Differentiation and the Chinese SME
On Tuesday and colleague and I visited a local Chinese manufacturer, an OEM of domestic appliances. We had a longish discussion about price competition and the struggle to improve margins through product differentiation.
Firms in Zhejiang compete on price in highly competitive commodity markets. Price competition limits profits. No financial capital is accumulated to invest in research and development, marketing research or other foundations for product differentiation. Without these, higher value exports are impossible. This sounds like Mark Elvin’s low
level equilibrium trap all over again.
The story is a familiar one; one that I have heard from other Chinese SMEs, from business and investment analysts and from some of the public commentators on globalism.
To overcome this two things need to happen together. First, firms need to develop cultures of innovation that empower mid-level managers and free time for senior managers to guide innovation. Second, marketing and marketing research skills need to be developed to enable OEMs to break their reliance on foreign designs. These two things need to happen together, one is useless without the other. Of course, both of these require firms to draw down on capital, which, given the small profit margins, they might not be able to accumulate.
In addition, the transformation of firms from product-, manufacturing- and price-oriented to customer-, service- and value-oriented cannot happen in a vacuum. This needs a pool of managers and staff to draw on, cross industry fertalisation, universities and consultancies with appropriate skills and competitors and supplers striving to make the same transformation, understanding investors and so on.
Without a supporting culture and resources for innovation, surplus capital tends to be applied to property and stock market speculation rather than industry development.
In our discussion with the owner, we made an interesting distinction between SMEs in Zhejiang and those in Germany and Northern Italy, where small firms can be highly innovative (albeit in different ways). There seems in China to be a belief that higher level industial activity requires enormous scale, which the European firms disprove but which is probably true at miniscule profit margins.
A number of things might help Zhejiang SMEs become more like their European competitors.
First, the Chinese central and provincial governments are working to build intellectual and physical capital on key industries. This should help overcome some of the capital issues, though only in key industries and only to a limited extent. Price sensitive domestic and foreign customers and a rising currency will counter this to some extent.
Second, there is a committment to develop the cultural industies, which can act as a social and cultural support for a creative, innovative business environment.
Third, education is being developed and experiments with new programmes and institutions are evident (such as University of Nottingham Ningbo, China). What is probably important here is the diminshment of homogeneous university programmmes rather than the type of programme per se (i.e., its the potential for cross fertalisation that matters most).
It could be that it will take a generation for these factors to have an effect. It could just take a few successful examples. It will be interesting to watch.
–
Posted from my iPod and written on a train, please forgive typos!