Early Birds and China’s Mice

This latest blog post deals with a very interesting strategic issue of Western companies entering a promising foreign market, only to find themselves later outsmarted and outcompeted by the local upstarts who have not only adopted their technologies and production techniques but are also able to better compete and steal massive market share both home and abroad.

This is a perennial problem (remember Japanese cars and electronics a couple decades back?), which also has broad strategic implications for Western companies with high labor costs.

Western companies can deal with this problem in two ways: they must foresee such a scenario and be ready to cede the market over the long-term once it’s commoditized; and they need to focus on R&D and stay ahead of the curve by innovating and discovering new niches and attractive market segments where a premium is placed on engineering, research, customer service, branding and top-quality manufacturing.

Apple and Motorola Solutions are great examples of such strategies. Apple uses Chinese manufacturing to assemble its products but owns the customer experience, brand, design, research and development. Motorola Solutions also is very adept at staying on top of markets and technologies. It focuses on developing state-of-the-art products to solve complex problems in the fields of global healthcare, shipping and logistics, and public safety, all while divesting its mature and commoditized segments such as its Wi-Fi networks business.

Another way for Western companies to defend against domestic competitors abroad is to remain competitive in their manufacturing processes, reduce labor costs and vastly improve productivity.  This means introducing robotics into manufacturing operations and reducing human labor costs.

Both of these techniques, I would imagine, will not be popular with organized labor.  Yet, union leaders must take a long hard look at the current competitive situation of the Western companies and realize the dire predicament of such an inherent cost disadvantage. By refusing to adopt to the global market pricing (we do not necessarily need to match the labor costs offered by emerging markets, but bridging the gap will help immensely), unions risk long-term erosion in favor of the temporary bliss and comfort of the labor force, which is clinging to the mirage of  current high wages and generous benefits. It is a strategy that is doomed for failure.  We have already witnessed the downfall of the U.S. garment industry, as well as TV and furniture manufacturing.

Unless Western companies understand the broad strategic implications of the global balance shift toward leading emerging markets, they are doomed to be relegated to the status of also-ran.

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