Product (Solution and Innovation)

The Chinese have tended toward me-too copies of established incumbents' solutions. Chinese quality levels have historically been good enough, but have recently been improving significantly. As mentioned previously, in the past they were known more for manufacturing and/or delivery of product and less for innovation.

They generally follow the market; they don't lead it. There traditionally has not been a strategy of product leadership. They have focused on replicating—with some customization—and provide minimal innovation. The ability of the Chinese to rapidly develop new products based on customization requests makes China a fast follower, thanks in part to plentiful labor resource availability at costs lower than those of most Western countries.

Price (Value-Add)

With an average or mediocre product set, a new market entrant often goes with penetration pricing. The price is almost too good to be true and too attractive for a customer to pass the product up, since it is so inexpensive that it is worth the risk to at least try it out.

With price positioning, the emerging competitor claims that its product is the same as that of the established Western company but at a lower cost. Using penetration pricing, the emerging competitor may undercut their competitor's price by 30 to 50 percent. Its product covers the basic functionality required and it offers flexible payment terms.

The emerging competitor may also offer financing or special payment terms to those customers who cannot afford its offer—or any offer, for that matter. Gaining market share and customer references in order to gain industry credibility are key objectives of Chinese companies, whatever the cost. It is almost as if they are buying their customers.

Even as private entities, Chinese companies are not necessarily focused on immediate profits, but on consistent, rapid, long-term revenue growth. They have a strong relationship with the Chinese government that provides low-cost lines of credit, customer financing, and favored or protected vendor status for government-sponsored projects. They also have the ability to offer flexible business terms so that they can acquire market share and achieve long-term revenue growth, as opposed to focusing solely on year-one profits.

Place (Partnerships)

As previously discussed, when you have an unproven, average (or less than average) product, you might target low-hanging fruit in order to practice on lower-tier customers and to gain some level of presence in the industry. That's one reason why emerging markets are attractive targets for the Chinese and other emerging entrants.

Direct selling is another approach to distribution channels that is big with the Chinese, for a number of reasons. First off, they can afford to assign a lot of people to a customer opportunity because the cost of labor is comparatively low in China. Direct selling is also a way to learn while practicing—when you don't have expertise or an established plan of action, learning on the job is a good way to acquire sales knowledge. And when you have a willing customer who is pleased to receive so much attention along with an opportunity to implement a potentially beneficial technology at a low cost, it becomes an attractive proposition for both supplier and customer.

Continuing with the partnerships theme: The Chinese are known to assist their customers in reaching their socioeconomic goals (e.g., infrastructure buildouts) and are successful at winning business because of this assistance, despite how the product rates on the spectrum of other options. Another advantage is that these customers—emerging-market countries—often also have natural resources that China Inc. (the Chinese government) is vying for—an even grander win-win result of the partnership.

Promotion (Customer Relationships and Culture)

The Chinese are very good at building relationships with customers and nurturing these relationships long term. And this skill is often a key winning point or success factor for them, particularly since these customers might be being paid less (consistent) attention by more established suppliers that have a more dependable customer base. While the Chinese might fall short on product superiority or brand equity, they make up for these things with a high-touch customer model. Customers love it!

The Chinese are also very strategic and deliberate about whom they target and why. They are good at staking out primary accounts that they deem to be important to their long-term, larger strategy. When customers are selected as chosen, strategic accounts, they are also likely to be accommodated when they make customization requests.

Politics

Targeted markets and geographies are sometimes not only beneficial to Chinese companies, but also to China's overall strategy for the country. This is when the influence of the Chinese government would come into play, and when the Chinese company would be included in country-level trade agreements. Surprising wins take place, often leaving incumbent competitors baffled by a selection that may not have been based on the merit or superiority of the offer.

The advantage of China's approach is that the Chinese company does not have to go it alone. They have the invaluable backing of the Chinese government, which goes out as an ambassador on behalf of many Chinese companies and represents them collectively, positioning all that the companies have to offer in one bundle. The proposals of these companies are much more compelling when presented as a unified offer, particularly when the governments of the visited countries are approached with an offer that is hard to refuse.

The Chinese are especially shrewd and strategic, and know precisely what will whet the appetite of the targeted country. They understand what it takes to make irresistible bargaining power, and they know how to bait their hook and then throw in other deal-closing conditions (e.g., requiring that one of their companies win a bid or contract that it may otherwise have been too far from winning). There have also been many examples of the Chinese government providing money to Chinese companies to use as a source of financing for customers who cannot afford to purchase on their own.

China's tactics have been the source of complaints by many other countries, particularly those in the West, which are less accustomed to such practices. The Chinese have also been accused of unfair trade practices and hovering on the fringes of WTO rules.

Summary of China's Market Penetration Strategy

• Copy or customize products.
• Offer low prices and provide financing.
• Sell direct and assist with socioeconomic development goals.
• Focus on building relationships.
• Employ high-level, political engagement.
• Know what it takes to win.