“We don’t try to grab market share quickly by competing on price. That’s not a long term, sustainable growth strategy.”
Can you guess the technology CEO who recently said that? If you guessed anyone inhabiting the corner office of a Western company, you’d be off by a hemisphere.
The speaker was Jonney Shih of ASUSTeK Computer, a Taiwan-based company that’s one of the largest manufacturers of computers and related equipment, producing everything from motherboards and servers to PDAs and notebooks, among other products. Although you may not have heard of the company, with 97,000 employees and 2006 revenues of US$16.5 billion, they are unquestionably significant players in their niche.
Shih’s comment was lifted from a recent BusinessWeek story (Nov. 12th issue) about the growing trend of Taiwanese electronics companies evolving from their traditional role as behind-the-scenes anonymous suppliers to branded producers in their own right. The strategy shift is said to be due in large part to the suppliers’ weariness of the never-ending price competition game and the consistent margin erosion it inevitably brings.
Shih’s company is among those looking to play the margin game by launching a branded business not only in Asia but out here in the West. Although it’s a risky endeavor, hindsight will probably prove it to be a smart move for his company and other Chinese manufacturers currently following similar paths. Recent recall issues aside, the overall quality of their products is on par with goods produced in the U.S. or Europe. And, because these manufacturers are already familiar with Western product preferences and proclivities, they have the advantage of already knowing what “works” for Western consumers. These companies are building on this foundation by placing bets in the right places – investing in design, marketing, and strategic U.S. acquisitions to establish their gateway into the west – all of which are smart, practical investments that will smooth their transition from the price game to the margin game.
Now, contrast this approach to what many North American manufacturers are doing.
The same BusinessWeek article featured a sidebar on how U.S. manufacturers – the ones who lost their business to the Asian companies in the first place – are trying to fight the decline of the North American contract manufacturing sector. Their strategy? Move into industry segments such as medical devices, aerospace parts, and auto components that haven’t farmed out their production to low-cost countries – yet. In other words, replace contract manufacturing business lost to Asia with contract manufacturing business in areas that the Asians aren’t particularly active.
They may want to rethink their Plan B. After all, unless there are legitimate national security or logistical or inherent product constraints, there are few areas where low-cost countries won’t be able to battle. Going after markets untapped by Asian manufacturers is more a stall tactic than a survival plan, much less a growth strategy. Ask any business person in any sector in any jurisdiction and they will tell you that cost containment is an issue. How could it not be? As such, it is no doubt a question of “when”, not “if”, the Asian producers will expand into these aforementioned underserved sectors themselves. And when they do, they’ll inflict just as much economic havoc and competitive angst on Western suppliers in those spaces as they have on companies in sectors already availing themselves of lower-cost outsourcing options.
Look at the story from a wider perspective, and you read a compelling tale between the lines about the contrasting competitive strategies of each “side”. It speaks not only to the battle for marketshare between Asian and Western manufacturers, but also more broadly about the business of business in the West versus the business of business in Asia.
The value chain in its traditional sense has been turned upside down, and we are all trying to figure out the new global playbook as it is being rewritten. That said, however, the value chain for any given product is not fixed and will fluctuate as industries grow and develop. Where once Japan was the hub of low-cost production, this hub has shifted and is now in China. Without question, it will move again in time – the difference between success and failure comes down to how a company reacts when it does.
Asian companies effectively introduced the concept of global price competition, and they are again taking the lead as the outsourcing arena evolves. These companies are adapting to changes in their business environments in innovative ways, carving out opportunities where there were previously challenges. While they have been busy redefining the rules of the proverbial game, their U.S. counterparts lag well behind, trying to figure out how best to play the old game. The notion of chasing industries not currently outsourcing to China on any grand scale is a prime example. Remind me – what is it they say about those that don’t learn the lessons of history?
The key to fighting a competitor with an inherent advantage (’superior’ products, vast resources, or, indeed, inherent cost superiority) isn’t to keep fighting the same battle over and over or, as is the case cited in the BusinessWeek sidebar, to delay the inevitable. You either join them (e.g. move your own manufacturing to Asia, perhaps splitting up higher end activities at the front end and shifting others to the back end) or you find a way to change the model.
Price competition doesn’t have to be the end game. Sure, you can buy and build, consolidate, play the numbers, and work the margins through scale economies, but that requires a certain level of intestinal fortitude, not to mention investment. Smart players try different tacks – for example, identify a niche that is focused on higher quality, emphasize an innovation that is sufficiently unique, positioning yourself differently by branding (and of course backing up with the right products). There are a myriad of ways to tackle this issue – none are easy or necessarily cheap. The key is to identify segments that allow you to play the margin (as opposed to margin erosion) game, and to look for ways to be truly innovative, the very bedrock of competitive strength in any geography.
As ASUSTeK’s Jonney Shih would agree, competing on price will only get you so far and for so long.
Innovation will carry you much further.