A handful of big foreign brands, such as L’Oréal’s Garnier, recently announced plans to exit the China market; meanwhile some upstart Chinese brands such as smart phone maker Xiaomi, have managed to hold their own at home against strong foreign competitors and are beginning to make inroads abroad. These recent moves illustrate the research findings of CEIBS Professor of Strategy Sam (Seung Ho) Park on the competitive dynamics between multinational companies (MNCs) and local Chinese firms as they battle to win over Chinese consumers.

Despite their superior brands and technology, as Prof Park notes, foreign companies experience difficulties competing against strong local companies in China, and many are unable to overcome these competitive challenges. While the nature and extent of competitive dynamics between local companies and MNCs differ greatly across industries, he says there are two important aspects for MNCs to consider. First is the complexity of their technology – the more complex it is, the more difficult it will be for local firms to imitate or maintain continuous upgrades. Second is market heterogeneity, that is, whether there is a clearly identified market segment for the product – this is particularly a factor in the FMCG (fast-moving consumer goods) sector and is where MNCs usually excel at analysing customer demand and can create and market brands to specific consumer segments.

The cases of L’Oréal’s Garnier brand and Xiaomi vs. MNC smart phone giants Apple and Samsung offer object lessons of these two aspects. Garnier failed the market heterogeneity test. It was priced too high to appeal to price-sensitive consumers at the lower end of the market, yet viewed as not luxury enough for consumers who could afford it.

Xiaomi, founded in 2011, is an example of what Prof. Park calls an “emerging local firm”; it accumulated technological skills by benchmarking its foreign competitors and hiring engineers and managers away from them (in fact its most recent hiring coup was to recruit the head of product management for Google’s Android platform). This, coupled with its decision to price its phones well below the leading foreign brands helped it to quickly build market share and make it a strong contender in China’s smart phone sector.

Competition in the Chinese market continues to intensify as local firms gain more experience and accumulate managerial and technological capabilities, while MNCs expand their positions locally. MNCs must become better aware of the competitive context and apply proper strategies in timely and flexible ways if they are to keep up with their Chinese competition. In the paper entitled “Winning Strategies in China: Competitive Dynamics Between MNCs and Local Firms” which was published by the journal Long Range Planning, Prof Park and his co-author Sea-Jin Chang share their research findings, which illustrate the different advantages and disadvantages of MNCs over local firms depending on the nature of the competitive dynamics. The co-authors also offer general strategies for MNCs and ways to implement them in each competitive dimension of the Chinese market.

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