China's Automotive Market

The center of gravity of the world's automotive market has shifted dramatically. China's automotive market is now the largest in the world, with close to a quarter of global volume. Stepping out onto the noisy streets of Shanghai, you will be greeted by a fleet of Land Rovers, Porsches, and Maseratis, mixed in with Volkswagens, Buicks, Toyotas, and so on. Every major carmaker in the world is represented here, and many of them are currently making more than one-third—some almost two-thirds—of their profits in China.¹ The number of vehicles sold in the country surpassed the U.S. sales volume during the recession in North America and Europe, and though the rate of market growth has slowed in recent years, sales remain far higher than those in either the United States or Europe.² Within five years the Chinese automotive market could be more than 30 percent larger than that of the United States.

The structure of China's automotive industry is a petri dish of intermingled joint ventures and alliances, with new facilities sprouting up all over the country.³ Non-Chinese automakers are required to enter a joint venture with a Chinese partner and may have up to two of these partners. There are several dozen Chinese automakers with names less well-known outside of the country, but many of them have huge capacity and ambitious plans to expand both domestically and abroad: Shanghai Automotive, Dongfeng Motor, Chang'an Motors, Guangzhou Automobile, Chery, Brilliance China Auto, BYD Automobile, and Great Wall Motors. Domestic manufacturers are often owned by a branch of the Chinese government; others are controlled by provinces—this would be the equivalent of a Texas Car Company in the United States, or a Bavarian Motor Works in Germany that was actually owned by the state of Bavaria.

Innovation in this environment comes in various forms, many of them counterintuitive to people from other parts of the world. Take the brand image of Buick, often characterized in its U.S. home market as a mediocre, mid-range car driven by aging grandparents. General Motors has leveraged the car's historical associations—respected former premier Zhou Enlai had a Buick⁴—to position it as a luxury brand for dynamic businesspeople. Buick in China is seen as a car for the “big boss,” or at least a person who aspires to that status. Its Chinese owners are almost half the age of those in the United States. However, this dissonance between types of customers in different markets no longer matters, as GM makes close to 80 percent of its Buick sales in China.⁵ Even the mini-van Buick model in China appeals not to soccer moms but to executives, and General Motors has designed an especially roomy and comfortable minivan for these high status customers, resulting in a huge boost in sales.⁶

There are many other opportunities for innovation in China's car industry in addition to distinctive brand positioning. Here are a few examples:

• Luxury cars: The emphasis in this segment is not so much on experience as a driver but rather as a passenger. Most Chinese executives are driven by chauffeurs, so carmakers have rushed to expand backseat legroom and conveniences. Potential buyers often want a vehicle that conveys an impression of prestige without being too flashy in a way that might single out an individual for criticism, especially if the person holds a government office.
• Compact cars: Around three-quarters of Chinese car buyers are purchasing their first automobile, most commonly in the compact car segment. Approximately 80 percent of buyers use cash rather than financing.⁷ Consumers are highly connected to digital resources: more than 90 percent reportedly use social media to inform themselves about a possible purchase, and they view comments from fellow consumers as being relatively trustworthy; over half interact directly with companies through the web about their products or services.⁸ Advertising and Internet descriptions must be tailored to these newbie buyers, and there is ample room for introducing novel marketing and financing practices. Some dealers even organize social clubs with outings such as hiking and rafting trips for youthful customers, publicizing these events in their facilities and on the web to create an inviting sense of community.
• Sport utility vehicles: Prospective SUV buyers are often making their second purchase, so they are looking to this next vehicle as a symbol of their climb to a higher social rung. They want to feel they can leave China's crowded, polluted cities to breathe cleaner air on holiday outings or to travel to their hometown. Many SUV buyers—a rapidly growing segment of the market—are looking for a car that will seat seven people: parents, the one child allowed in China unless both parents are from one-child families, and sometimes two sets of grandparents.⁹

Meanwhile, the Chinese government is trying to foster the development of locally based champions, thereby reshaping the competitive environment. For example, given the perpetual grayness in many cities from rampant pollution, the government has been strongly encouraging the development of electric cars by offering financial incentives to consumers who purchase one from a domestic maker. Many cities have also begun to restrict the number of cars that can be purchased each year, with a significant quota reserved for electric vehicles. This supports potentially disruptive Chinese entrants into the industry such as BYD Automobile, which was originally a battery maker; the company's most famous investor is Nebraska billionaire Warren Buffett. BYD has struggled recently, facing accusations of copying and of safety hazards as well as declining sales of its conventional vehicles. In the face of these setbacks, it has announced daring plans to go all-electric, and is currently winning a substantial share of China's still small electric vehicle market.¹⁰ Time will tell whether BYD or another Chinese automaker will be a successful challenger to foreign automakers on its own turf and on a more global basis.

Innovation on a Global Scale

It is easy to underestimate the potential impact of innovation that is occurring outside of more mature markets, even for those who are based in fast-growth markets themselves. Would-be innovators in these newer markets are often characterized as tinkering around the margins with adaptations, incremental improvements, or outright copies that are winked at in countries with loose intellectual property standards, corruption, and large gaps between rich and poor. China's automotive industry provides an outrageously rich set of copycat examples, including domestic cars that appear to be exact copies of foreign models. For example, there is a clunky Hummer lookalike as well as a copy of Audi's A6 that is labeled with a cheeky and ungrammatical name: Refine A6.¹¹ Some hybrid copies actually mimic the front end of one model and the rear end of another.

Leaders from the developed world may steer away from new market opportunities due to what they perceive as their incremental, bargain-hunting nature—plus ample evidence that the art of copying still abounds. It is common to hear statements such as the following:

• “It would be easiest just to tweak what we've got already and send it to other markets. They're going to copy what we do anyway.”
• “We can do a phased rollout that starts in our most mature markets; this will help to protect our intellectual property.”
• “We need to focus on our core competencies and our biggest customers at home, as that's where we're making money.”
• “The opportunities out there look small. We need to be able to quantify our return on investments in new markets.”
• “Let's target just the top tier of the market in Country X, as we know we can be profitable there.”

Meanwhile, current and future leaders in fast-growth markets face a mirror set of challenges of their own:

• “I wish we had been involved earlier in the product development effort. Now we have a product that doesn't really fit this market, with too big a footprint, too high a price, and features that local consumers don't need. We're told we can ‘tweak’ the product, but we really need to completely redesign it.”
• “It is frustrating to bring our company's own product to market six months after its initial introduction elsewhere and to find that competitors have already adapted and have come out with a superior product.”
• “It is hard to feel like our market is a second or third priority when we're aware of its potential and how fast our competitors are growing.”
• “I know the market here is growing rapidly and providing us with a huge opportunity, but it is hard for me to demonstrate this to people at headquarters; they see our current market size as too small to justify a significant investment.”
• “Everything in our company moves too slowly. Our local competitors are not slowed down by so many internal processes and systems.”
• “We do not have the sales and service networks that our local competitors have. They are better at responding quickly and providing good service in many locations around the country.”

Example: iPad's India Launch

Widely regarded as one of the world's most innovative organizations, Apple stumbled badly in India when first introducing its iPad. The company's approach outside of mature markets has been to position itself as a higher-end player and to retain its pricing premium over other market entries. However, as Sanjeev Prashar and his co-authors observe in their account of this rollout, the iPad came to the Indian market nine months later than in the United States, had far fewer applications available, and was handled by a limited number of distribution channels, many with poorly trained retail staff. Archrival Samsung beat Apple to market in India by two months, with aggressive pricing and features that already addressed the original iPad's deficiencies.¹⁴ As a result, Apple's market share in India was less than a quarter of its worldwide iPad market share. Although it has owned about half the global market in this product category, Apple's tablet offering continues to struggle in India. A recent report cites only 7 percent market share, with not only Samsung but also local competitors such as Micromax, iBall, and Datawind holding larger market segments.¹⁵

Part of the problem may have been strategic choices Apple made regarding the Indian market. Given the rich opportunities in North America and Europe for a hot new product like the iPad, it may have seemed logical at the time to make India a secondary priority, and to assume that a later rollout could still be successful there based on the strength of the Apple brand, even at premium prices. Decision-makers likely underestimated the country's tech-savvy, rapidly evolving mar-ket situation, including stiff competition and demanding consumers. The company was overconfident that its globally standard product offering would carry the day and failed to place sufficient emphasis on strengthening and positioning its local functions in India to win for it the success gleaned elsewhere.

The pricing and features of the product itself were only one set of obstacles to winning larger market share (although Samsung quickly exploited the original iPad's lack of a second camera, USB ports, and a Flash multimedia player—especially important in India's entertainment-focused market). A more critical problem was that the overall product offering—including rollout schedule, applications, distributors, and quality of retail staff—was inadequate, reflecting lower prioritization in Apple's system and insufficient capabilities of its local functions such as marketing, sales, and distribution.¹⁶

In order to be a successful innovator in India—even with a product that did not require extensive local adaptation—Apple clearly needed to rethink its strategy and to increase its local capabilities in a number of functional areas. Figure 7.1 summarizes the reasons other than pricing that the iPad did not do as well as it has in other markets; its attractive features were offset by the shortcomings in the product offering based on limited local adaptation and capabilities.

Example: Haier India Restructures

Haier, the Chinese maker of appliances and electronics, took a different approach after struggling for many years in the Indian market. In the face of sluggish sales and strong competition (also Samsung in this case), it revised its retail structure. According to Nikhil Celly's analysis of this subject, Haier added new dealers and retail outlets, provided substantial dealer incentives, and strengthened after-sales support to respond to every customer issue within six hours in all major cities. The company also made its pricing more attractive while preserving its premium image, launched a whole series of new products, upgraded the capacity of local factories, paid for in-store promotions, and advertised aggressively using television advertisements and a Bollywood actor as brand ambassador.¹⁷

While none of the products in Haier's portfolio had the appeal of an iPad, it nonetheless managed to more than double its sales revenue within a couple of years. Figure 7.2 shows Haier's market position before and after the successful changes; it has both upgraded its product features and added local capabilities that have made its products more accessible and attractive to Indian consumers.

It is easy to equate innovation with a new phone, an electric car, a piece of software, or a blockbuster drug. However, as the iPad example illustrates, bringing an innovative product to a different global market doesn't guarantee success, even when the product has a brilliant design, desirable features, and an impressive track record of sales results elsewhere. Innovation is ultimately judged by buyers in each marketplace, and they naturally weigh what is the best total package of product features, price, and related services. Haier, in spite of its humble origins as a bankrupt collective enterprise,¹⁸ has grown rapidly in India because the total package of products and services it offers is now seen as desirable. While Apple has garnered far greater global recognition as an innovator, Haier's innovation strategy in India created a value proposition that local consumers perceived more favorably. From this perspective, Haier has been a more successful innovator than Apple in the Indian market to date.

7-Eleven Taiwan: When the Child Outgrows the Parent

7-Eleven Taiwan would be a baffling place for a store employee from Dallas, Texas, where the familiar chain of stores was born. Aihwa Chang and Shih-Fen Chen, who have written a fascinating case study on this topic, note that 7-Eleven customers in Taiwan typically arrive on foot rather than by car. Some may even live upstairs in the same building, as many homes in this small and densely populated island off the coast of China are located in high-rise buildings with retail establishments on the lower floors. A variety of Chinese foods await customers in the store: tea eggs, breakfast buns, simmered vegetables, and rice wrapped in seaweed with meat or fish inside.

Beyond the sight and smell of such unfamiliar foods, other activities in the store would seem out of place. One customer is picking up books and dropping off laundry; another is purchasing tickets for an upcoming concert and a train trip and paying her personal taxes and electricity bill. A third customer is leaving an item he just sold on an auction site for delivery to the buyer at another store and receiving the Valentine's Day chocolate he had preordered on his cell phone the previous week. Other customers, particularly elderly ones, are sitting at the store's coffee counter, known as City Café, having a drink and chatting with other seniors; one of them, a disabled individual who is ready to leave, asks the store clerk to call him a cab. Meanwhile, children who have finished school are sitting and doing their homework, waiting for their parents to pick them up on the way home from work.³⁷

At first glance, the Dallas visitor to 7-Eleven Taiwan might regard this plethora of products and services as an odd jumble—a bit like 7-Eleven, Amazon, Ticketmaster, eBay, Starbucks, a laundromat, a senior center, a taxi service, and a daycare center all rolled into one. The visitor might wonder what 7-Eleven Taiwan executives could possibly be thinking to try to compete in so many different areas at the same time. On the other hand, the store is full of people of all ages, and seems to be doing a brisk business.

7-Eleven is an example of a company whose overseas subsidiary children have literally outgrown the original parent. Afflicted by financial woes after a management buyout provoked by a corporate takeover threat, in 1991 the bankrupt firm sold a controlling share to its largest franchisee—the Japanese company Ito-Yokado—which later rescued it from bankruptcy. Japan now has nearly 16,000 outlets, almost double the approximately 8,000 stores in the United States. Tiny Taiwan, which is the size of South Carolina and less than half as big as Ireland, now holds close to 5,000 7-Eleven stores.

As the revitalized 7-Eleven under Japanese ownership targets major growth markets in other countries, innovations from 7-Eleven Taiwan appear to be more relevant in many locations than the U.S. store formula, which still prominently features low-tech products such as pizzas, sodas, and Spicy Wing Zings. (An informal inquiry by one of the authors at his local 7-Eleven about the store's best-selling items elicited the laconic reply, “sandwiches.”) 7-Eleven Taiwan is, in fact, taking the lead on expansion to nearby Shanghai, which has a similar urban population density and set of consumer tastes. One of the most successful elements of Indonesia's relatively new 7-Eleven franchise seems to be its Internet café seating. As in Taiwan, Indonesia's 7-Eleven provides what many consumers consider to be affordable luxury, serving inexpensive local foods in a clean, well-lit facility that both offers the favorite menu items of local street vendors and surpasses them in terms of hygiene and air-conditioning.³⁸

It is likely that a different physical environment and competitive landscape render some of the products and services invented in Taiwan or elsewhere in Asia unfeasible for introduction into North America. 7-Eleven Taiwan is run by a local conglomerate that has access to significant information technology, warehousing, and delivery capabilities, providing it with unique infrastructure strengths as well. In spite of these differences, however, surely the U.S.-based former parent has as much to learn from its erstwhile children these days as vice versa. The U.S. operation of 7-Eleven has been focused in recent years on upgrading dingy stores and introducing private-label 7-Select brand products. It could certainly benefit from the image of a convivial, safe, social gathering spot that has been created in Taiwan and Indonesia; stores in Jakarta are such popular places for young people to gather that they have even hosted live bands.³⁹ The U.S. stores also now offer prepaid cell phones, electronics, gaming, and financial services, so Taiwan's experience with online services and e-commerce should hold considerable interest.

In their classic work, Managing Across Borders: The Transnational Solution, Christopher Bartlett and Sumantra Ghoshal described four possible roles for subsidiary operations, depending upon the strengths of the subsidiary and the strategic significance of their market:

• Implementer (low capability, low market importance)
• Contributor (high capability, low market importance)
• Black Hole (low capability, high market importance)
• Regional Leader (high capability, high market importance)⁴⁰

Some 7-Eleven subsidiaries have clearly outgrown all four of these categories. In the case of Taiwan, it has become a global innovation leader, while 7-Eleven Japan has become the new parent.

The 7-Eleven example suggests wider roles that subsidiaries can fulfill, in contrast to previous eras when headquarters drove innovation and subsidiaries were supporting cast members. These newer roles—shown in Figure 7.4—may undergo a radical metamorphosis as a subsidiary matures.

• Market Observer: A subsidiary in a rapidly evolving market that seeks out and transmits to other global locations new ideas and applications of products or services occurring in this market for the first time.
• Early Adopter: A subsidiary that experiments with new technologies, products, or services not currently in use at headquarters, sharing the results with the rest of the company's global network.
• Global Innovation Leader: A subsidiary that takes on the role of generating new solutions and transmitting them to other locations in the world based on its acknowledged areas of world-class expertise.
• New Parent Company: A subsidiary that outgrows the parent, acquires greater market and financial momentum, and becomes the new owner and driver of the global innovation process. Some companies also have implemented a dual headquarters strategy, placing a second headquarters in a location where the local and/or regional market opportunities are the greatest.

As subsidiaries' capabilities and resources grow, they may become able to do much more than extend the core strengths of headquarters—they can gauge fresh threats and even create new markets. There is often a fundamental tension between two popular approaches to business strategy, known by the labels “core competencies” and “blue ocean.” Core competencies are by definition limited, and the general advice to leaders is to find out what their organizations are really skilled at and then stick to their knitting. Blue Ocean Strategy, on the other hand, offers the enticing prospect that there are adjacent businesses which, with a targeted expansion beyond the organization's current business model, could offer major new market opportunities without the bloody competition found in waters closer to well-traveled shores.⁴¹ Subsidiaries are frequently better positioned to explore possible blue oceans, as they are less tied to the parent's core competencies and the market environment in which they were originally developed.

For example, the underlying company principle of customer convenience at 7-Eleven Taiwan has been expanded to e-commerce and community services for which customers are willing to pay. Such services have helped to create a virtuous cycle of increased consumer footfalls and collateral purchases, contributing to a growing, profitable country operation with the highest density of 7-Eleven stores anywhere in the world, even double that in Japan. Has 7-Eleven Taiwan strayed beyond the original parent's core competencies of making reasonably priced goods available in a uniform set of locations on a 24-hour basis? It has, but by drawing upon additional core infrastructure competencies of its Taiwanese parent, it appears to have hit upon complementary and profitable forms of customer convenience, appreciated by consumers elsewhere in Asia's fast-growth markets, opening up a new ocean of possibilities.

Andrea's choice to react to a locally based rival in India with a fast-follower strategy could lead to significant risks and missed opportunities. Indeed, Sanjay's description of the product introduced by a local competitor includes several signs of disruptive innovation, referred to earlier in this chapter: adequate functionality, significantly lower price point, interest from new types of customers. What if this product succeeds not only in India but in other markets beyond the region and Andrea's business unit does not have an effective response? Is there a large new market that her company might be missing? She would probably be better off with a different approach that gauges the extent of the competitive threat and experiments with new possibilities.

There are a number of specific steps Andrea, Sanjay, and others in their organization might take to ensure that their company is enhancing its position as a market innovator and that they themselves are serving as effective global leaders:

• Assign a cross-functional team of high-potential employees with the necessary expertise—including representatives from the local subsidiary and from headquarters—to take a closer look at the competitor's product and evaluate its market potential, both in India and beyond.
• Learn more about customer perceptions of the business unit's current product, with a focus on whether it is vulnerable to an alternative product offering with disruptive characteristics or ancillary benefits; find out about the needs of those new customers who are snapping up the competitor's product.
• Consider the potential for a more comprehensive product package that would be superior to the local Indian competitor's in terms of process infrastructure and marketing along with product features.
• Take full advantage of the company's worldwide network and presence in other markets to look for new ideas, economies of scale, and opportunities for regional or global collaboration.
• Be ready to accelerate the prioritization or pace of new product development and commercialization if necessary; examine how to support the product development process with metrics that are suitable to the current stage of innovation.
• Enforce bottom line standards for quality and safety to uphold the company's brand and avert disasters, while avoiding overly bureaucratic, risk-averse, or overengineered processes.
• Plan a trip, possibly with other members of the leadership team, to view the market firsthand in order to better understand customer needs and to gauge its potential as a launch point for global innovations.
• Carefully examine the strengths and weaknesses of the functions and product offerings in the India subsidiary with an eye toward determining the right global/local balance for each; augment the areas that need to be strengthened.
• Seek opportunities to make social contributions tied to the business unit's products and services that would embody the company's values and enhance its brand image as a good corporate citizen in the local market.