One of the of the authors' key points is that as leading Chinese firms go global, they are challenging basic assumptions on which many companies in developed nations depend on to remain profitable. Example - retreating/focusing 'up-market' to avoid intense price competition and obtain large margins. Toyota's and Wal-Mart's early U.S. strategies showed both how futile this can be, as well as the value of avoiding major competition when just beginning, and the Chinese have proven fast learners. A second key point is that the Chinese market is so large that even niches provide the opportunity to achieve large learning curve, scale, and high utilization benefits; multinational competitors (MNCs) that don't fight emerging dragons in China leave themselves exposed in the long run. A third is that Chinese firms are more likely than others to leap forward by copying, partly because they are relatively new and have little personal ego or capital invested in older approaches. Thus, they are quick to acquire foreign firms, brands, patents, physical assets, and proprietary expertise, as well as to hire consultants. Fourth - while Chinese firms have an inherent advantage from low-cost manufacturing labor, the best build upon that with low-cost R&D to further reduce costs - innovating with new methods, materials, and/or approaches. Fifth - Chinese companies can seemingly come out of nowhere - eg. moving from software or textiles to medical equipment or microwave manufacturing. Sixth - manual production is more flexible, taking only days instead of months for production changeovers, and avoids expensive equipment maintenance; in addition, human operator flexibility sometimes permits use of lower-cost less-standardized inputs. Seventh - building and operating plants, as well as sales in underdeveloped nations provides valuable technical, managerial, and marketing experience prior to entering developed markets. On the weakness side, Chinese businesses lack strong brands, have difficulty penetrating businesses where the market is immature/non-existent in China (eg. investment banking - especially M&A), are not strong service sector players (eg. retailing, health care), and their science/engineering graduates are currently not comparable to those from U.S. colleges and universities. (The latter point is being addressed through an intense improvement effort, as well as strong efforts to recruit its overseas science/engineering students to return.)
The bulk of "Dragons at Your Door" is a treasure trove of examples of how Chinese companies have moved quickly from minor in-country entities to major world-wide competitors.
Dawning Computer (founded in the late 1980s) makes supercomputers and servers. Its initial challenge was catching up with its global competitors. Analysis revealed that only 20% of the performance improvement achieved in supercomputers during the prior decade came from better chips. Improved software accounted for another 30%, and the biggest contributor came from innovations in the way the chips interacted. Its first supercomputer (1993) performed 640 FLOPS (floating point operations per second); Nebulae, its latest, was ranked as the world's second-fastest in 2010, and performed 1.27 thousand trillion FLOPS (Petaflops). The U.S. 'Jaguar' from Oak Ridge Laboratory was #1 and 35% faster (1.76 Petaflops), but Nebulae was much cheaper - $39/megaflop, vs. $114, consumes less than half the power, and is believed to have greater potential speed. Nebulae was built using American chips and Windows; Dawning's next product will use Chinese designed and built chips, with Linux. Meanwhile, using its skills linking supercomputer processors, it has also cut server development costs by 30-40 percent, and added supercomputer management software features that reduce server downtime.
Zhongxing Medical Systems (founded in mid-1990s) decided to build a direct digital radiography (DDR) system that bypassed the hundred year-old chemical processes. G.E. and Phillips were using advanced flat-panel machines for high-end users (eg. heart scans) that cost $150,000-$200,000. Zhongxing instead went with a simpler line-scan approach that works well for standard chest scans and medical examinations. In 1998, Zhongxing bought the technology previously developed by the Russian Academy of Sciences. Zhongxing innovations reduced scan times from ten to two seconds and created a machine costing around $20,000. Five years later Zhongxing had 50% of the Chinese DDR market, G.E. had to drastically cut prices, and Phillips left the market.
Teknova Medical decided to create a low-cost all-digital ultrasound scanner; Siemens and G.E. had restricted digital technology to their highest-end products and used expensive computers equipped with specially designed chips. Teknova decided to instead use programmable chips developed for Internet equipment and add its own software. Six years later it succeeded, and also replaced competitors' expensive proprietary input-output devices with PC-compatible equipment. The new approach had the added advantage of being much simpler and cheaper to update by simply reprogramming newer generic chips. Neusoft, founded 1991 as a software group, took a similar approach to designing MRI and digital X-ray machines, is now the 7th-largest supplier of medical equipment in the world, and has forced competitors to drastically cut prices.
Build Your Dreams (BYD) was established in 1995 - its original product was a nickel-cadmium rechargeable battery, competing with Japanese imports in China. Handicapped by limited capital and Japanese prohibitions on importing battery-building equipment, it used manual labor for assembly instead of expensive machines, studied patents owned by Sanyo and Sony, and also found a ways to use cheaper inputs and avoid the need for expensive climate-controlled rooms. BYD then innovated from nickel-cadmium into more powerful lithium-ion products, again reducing production and material costs, while avoiding fire mishaps that plagued competitors. BYD is now the world's 4th largest rechargeable battery producer. Meanwhile, it acquired a Chinese auto manufacturer, became the first mass-producer of a plug-in hybrid, now exports electric cars to Africa, South America, and the Middle East , is partnering with Mercedes to produce electric cars, and is expected to soon compete with its $22,000 F3DM against the $41,000 Chevy Volt in the U.S. It now employs 150,000 in China and plans to sell 800,000 vehicles this year, up from 450,000 in 2009.
Lifan was founded as a motorcycle repair shop in 1992 before it became one of the leading motorcycle builders in China. It then set its sights overseas, beginning with a factory in Vietnam, followed by Bulgaria, Thailand, Iran, South Africa, and Taiwan. Its cars are sold in Chile, China, and Russia - the latter using a plant completed in 2009. It is the world's #1 engine manufacturer.
Similarly, Chery (founded 1997) used Japanese consultants and VW licenses to get started. Bosch, Lotus Engineering, Italian design houses, Chrysler, and others also contributed. Its first car exports were to Syria, followed by a 2003 plant in Iran, then Egypt and Taiwan. Manufacturing in Argentina and Brazil will begin within three years.
Pearl River Piano was a small-time piano producer that began in 1956. In 1987 a new one-million square-foot factory was completed; when the founder's son took over in 1992 he committed to building the best and brought in ten world experts. At the time, Pear River was only earning one-third the price of foreign pianos in China because of quality problems. Automated equipment manufacturing, climate control, and improved polishing systems were installed. Partnering with Yamaha brought additional production and equipment updates, and in 2001 another 500,000 square-feet was added for grand piano production. U.S. sales started in 1999. Later Pearl River also bought rights to two respected German brands. Today it has 40% of the U.S. market in upright pianos, manufactures some pianos for Steinway, produces top-of-the-line German-branded pianos, has the world's largest piano factory, and is either the world's #1 or #2 producer.
Haier is the world's fourth-largest white-goods manufacturer. It began in 1984, partnered with a German firm, and through acquisitions and product improvements became the dominant Chinese-market firm. Production facilities were then opened in Indonesia (1996), Malaysia and the Philippines (1997), Pakistan (2002), Jordan (2003). Haier plants are also in Algeria, Italy, Egypt, Nigeria, South Africa, Tunisia, and the U.S., and plans to expand into Venezuela. Its first venture into the U.S. addressed small markets - small wine coolers sold in Wal-Mart, small lockable refrigerators for Office Depot, and small refrigerators for dorm and motel rooms.
Galanz Microwave (1978) began as a small textile-maker, and is now the world's largest microwave producer. Galanz decided to produce microwaves in 1992 because of limited growth in textiles. It purchased an existing Toshiba manufacturing line, patents, and expertise for $4 million in 1994. R&D investments eventually totaled $100 million and brought 600-some patents that were combined with acquisitions, experience as a supplier and OEM, and taking over a French firm's manufacturing by pricing at 20% of its costs.
China International Marine Containers Group (CIMC) has a 55% global market share and is 6X the size of its nearest competitor. CIMC has products with sophisticated refrigeration, electronic tracking, and internal tanks. Production began in 1982, though by 1990 it was still a minor producer producing less than 10,000 containers/year and competing with more than 20 others in China. A new CEO in 1993 used an IPO to buy up competitors and expanded to five large plants; by 1996 it was #1 in China, and one of the world's largest. As global container market competition intensified, prices fell - 1995 standard container price of $2,850 fell to $1,300 by 1999, squeezing margins to 3%. CIMC was certain its rivals, almost all part of diversified Korean conglomerates, would decide standard containers were unprofitable 'dogs,' so it stepped up the pressure by squeezing another 33% out of material costs, 46% from manufacturing and overhead, and $5 million from transportation. Thus, even when competitors moved manufacturing to China they couldn't compete. When the 1997 Asian financial crisis hit, diversified rivals exited as predicted. CIMC then bought Hyundai's plant for less than $20 million (estimated replacement value $180 million), expanded its capacity further at half the cost of Hyundai's estimate, and again improved operations. CIMC then invested $450 million to manufacture 'reefers' and entered a licensing agreement (Graaff) to use its innovative and proprietary technologies to manufacture insulated panels. CIMC also bought an existing production line and the services of a recognized German expert. Expensive aluminum in reefers was replaced with cheaper treated steel after licensing steel-treatment technology from Germany. After eight years most competitors exited that market as well. Pursuing wider offerings, CIMC then signed a technology-transfer agreement with a British container specialist for technology that enabled tank container weight to be reduced. A CIMC innovation allowed reducing setup time between models form 20 minutes to five. By 2003 it had 30% of the world market in tank containers. In 2004 CIMC acquired a 60% share in Clive-Smith Cowley and its "Domino" technology allowing empty containers to be 'folded' (80% space reduction) for ease of back-hauling. In 2005 it acquired Graaf's, now bankrupt, patents for reefer seals, automatic drains, etc. and moved on to dominate that segment as well.
The Three Gorges Dam project needed turbines in 1997 generating 700 MW/unit - only 21 of this size and complexity had been previously made worldwide. Fourteen more were needed. Chinese firms had only made smaller turbines - 320 MW. Bidders were required to transfer technology and partner with Chinese firms. By 2005, Chinese firms were able to make these turbines themselves and took two-thirds of the orders for the dam's second phase. Then in 2006 they used that expertise again to win a contract for a million-MW dam in Indonesia.
Shanghai Zhenhua Port Machinery Co Ltd. (ZPMC, founded 1992) focuses on custom designs (has 2,000 engineers) and a variety of standard models, recognizing that each port is different. ZPMC has six delivery ships and over 75% of the world market for harbor cranes. It won an early deal by accepting a customer's demand for a delivery time so tight that most established firms in the industry thought it was impossible. Unable to get a slot in the shipping schedule of the only carrier able to transport the finished cranes, it bought a large cargo ship, converted it into a crane carrier, and delivered the four cranes itself. ZPMC now requires its sales operation to respond to any customer request with an initial proposal within 20 yours.
Goodbaby (1990) controls 80% of the Chinese stroller market and sells 1,600 kinds of strollers, children's car seats, etc. - 4X its rivals, at comparable prices. It is the world's largest stroller-maker, selling in more than 30 nations, including the U.S. Goodbaby took advantage of China's large niche markets. One of its first strollers converted to a child's car seat, doing two jobs for the price of one.
Wanxiang Group was founded in 1969 by 7 farmers with $500 for the purpose of repairing agricultural tractors; previously Chairman-to-Be Lu Guanqui worked as a self-employed bicycle repairman and a machinist. This was a perilous period for Chinese business - the often violent anti-business Cultural Revolution had years to run, and people would call the group 'tails of capitalist dogs.' While state-owned enterprises became tied up in political struggles and neglected customers, Lu's group got a steel quota, used it to make universal joints, and the firm went on to specialize in their production. By 1990, its was one of only three of the 56 original universal joint makers that survived, and then went on to capture over 70% of the Chinese market. Wanxiang won business outsourced by suppliers such as Delphi, Bosch, and Visteon to become the world's largest universal joint supplier, expanded to other driveline parts, brake system parts, etc. Acquisitions brought respected brands, and increased business and knowledge assets. It now has 40,000 employees, plants in a number of countries, and is a first-tier supplier to large auto manufacturers.
Six Key Points: 1)Most U.S. incomes are stagnating or falling in inflation-adjusted terms. The result - retail discounters such as Wal-Mart and Target now account for 75% of the total valuation of the retail sector, while low-cost U.S. airlines are now 55% of the market value of all carriers. Meanwhile, experts emphasize that emerging markets will account for most economic growth in the near-term future, and that succeeding in those markets will require an emphasis on low costs.
2)Recent labor strife at China's Foxconn and Honda plants has led many to envision an end of its low-cost manufacturing capability, and very limited ability of Vietnam, Cambodia, etc. to fill in. Author Zeng, however, torpedoes that wishful thinking by noting that China's rural labor force can release 340 million more workers if it falls to 20% of the total workforce, the average for new industrialized countries. Meanwhile, China's proportion of college graduates, potential R&D contributors, are rising rapidly and already vastly outnumber their U.S. peers.
2)The Chinese government is always an important, though sometimes hidden customer, that cannot be taken for granted. Its approval is required for all large investments, partnerships, and permit renewals; frequently the government also gets involved in setting terms and requirements. Google's confrontation with the government over censorship, though applauded by many, was a very poor business move. Its Chinese market share has fallen from 32.8% in 2009 to 27.3%, while local (and more compliant) Baidu's share rose from 67.8% to 70.8%. Worse yet for Google, the Chinese government has decided to build its own search engine, creating another competitor.
3)While the U.S. hectors, bombs, bans certain exports to, and applies sanctions on nations it is upset with or fears (eg. Afghanistan, Cuba, Iran, Lebanon, North Korea, Russia, Somalia, Syria, Sudan, Venezuela), China uses them as trade partners to make profits and friends while building its skills. As for the U.S. ban on selling our latest high-technology to or manufacturing it in China, that didn't stop China from building the world's 2nd-fastest supercomputer - it has, however, blocked Intel from Chinese R&D and manufacturing savings on its latest products.
4)Weak U.S. government leadership vs. China on global warming goals creates another problem for U.S. businesses. China has set a goal of obtaining 15% of its electric power from renewable sources by 2020, invested $34.6 billion in 2009 vs. $18.6 billion in the U.S., and plans on another $738 billion over the next decade. It has 17 nuclear reactors under construction or in the planning stages, targeted a 60X increase in solar power to 20,000 MW (has 43% of the global market) and 100 gigawatts of wind power by 2020, and has already become the leader in building 'clean coal' generating plants. China's 2015 fuel economy standard (42.2 miles/gallon) exceeds that in the U.S. for 2016 (35.5); China also plans to put over a million hybrid and electric cars on the road in the next few years, and is investing $15 billion in R&D. (China has also committed to closing 2,087 inefficient plants by 9/30/2010 to improve energy efficiency and reduce pollution, and idling its least efficient coal-fired electric plants.) China also plans to double its high-speed rail and maglev (up to 240 mph) to 7,500 miles by 2012 (20,000 by 2020), is spending $120 billion on the 2012 goal, has 940 patents, is offering to help U.S. rail construction, and proposing high-speed rail travel from Beijing to London. One more point - 'political correctness' limitations on stem-cell, DNA and other areas of research that limit U.S. firms are absent in China.
5)Both U.S. and Chinese governments still protect their firms from each others' competition through local-content requirements and security concerns (eg. Huawei vs. Sprint, Texas wind farm).
6)"Dragons at Your Door" makes clear that China has become a prolific launch-pad for strong, new, and fast international competitors. MNCs and even large foreign national firms that ignore the book do so at great peril.