Monday, October 22, 2007

Book Review: Dragons at Your Door

Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition.
Ming Zeng and Peter Williamson. Harvard Business School Press. 2007. List $29.95. 204 pages.

Ming and Williamson explore the power of the cost advantage that China has in manufactured goods, and the way they are leveraging this to become global competitors in the 21st century. We are accustomed to the fact that American and European companies are off-shoring much of their production to companies in Asia. This has allowed electronic, textile, plastic, and a host of other goods to be offered to consumers at significantly lower prices in recent years. It has also created a very large trade imbalance with Asia. All of this is foundation material which Ming and Williamson use to explore the position of China in future international business in Dragons at Your Door.

The authors suggest that this cost advantage is a disruptive innovation of the type introduced by Clayton Christensen in Innovator’s Dilemma. Chinese companies are outgrowing their role as the world’s manufacturing facilities and are extending their reach to the distribution, retailing, services, R&D, and branding of products. These moves have already begun in a number of global industries, but have just begun to extend into the American retail sector where they are evident to the average consumer. Companies like China International Marine Container Group (CIMC) and Haier are becoming true international companies, supplying both their native country and the rest of the world. To do this they have begun exercising strategy, financing, partnerships, and acquisitions “in the Western style”. These companies are aiming to be international competitors, not simply Chinese suppliers to western international companies. This move will redirect significant profits from the western integrators, branders, and distributors into the hands of the Chinese manufacturers turned full-service competitors.

At the root of this expansion is the cost advantage of labor in China, as well as government support of the expansion. The authors cast this as a disruptive innovation in the Christensen style. But it appears to be more of a competitive advantage ala Michael Porter. In his works, Porter argues that a company can either compete on cost or on unique capabilities. The Chinese companies profiled are currently basing their strategy on lower costs, which has a limited duration. But, they argue that this is just the beginning of a more full-featured advance that includes R&D, branding, and unique product features based on Chinese intellectual property. Their prime example of this is Dawning Computer who offers low-cost, high performance computers (HPCs) based on the intellectual property of China’s Institute for Computing Technology (ICT).

Ming and Williamson point out that Chinese companies are not well prepared to compete in all industries or product classes. Their cost strategy works best when an industry is well established and has a dominant product design. Given this situation, Chinese companies are in a position to imitate that design at a lower cost as the basis for their competition. In industries based on the complex integration of intangible assets like IP and branding, the Chinese competitors are not prepared to mount an effective opposition.

The authors’ prescription for western companies who want to defend against this attack is three fold: (1) begin your own internal cost innovation program, (2) give a global mandate to your Chinese subsidiaries to beat their Chinese competitors at this game, and (3) build alliances with the Chinese dragons to strengthen your global competitiveness.

The story of the emergence and growth of China is not new. It follows a pattern that has we have seen from Japan and that will probably be repeated by Eastern Europe in the near future. Once an international firm gains access to the markets of a rich country it continually expands its ability to win business there. Just as Japanese electronics and automobiles are known for their high quality, Chinese industries will probably achieve a similar reputation over the next decade.

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