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Published on August 21, 2007

Over the past several months, Thai exporters have been asking the Bank of Thailand to lower the baht's value, so that they can compete profitably in the current globalised economy.

At the same time, many other experts have been imploring them to move up the value chain and leave all low-value-added manufacturing to companies in low-cost countries like China and India.

In their new best-seller, "Dragons at Your Door: How Chinese Cost Innovation Is Disrupting Global Competition", Ming Zeng, a professor of strategy at Beijing University's Cheung Kong Graduate School of Business, and Peter J Williamson, a professor of international management and Asian business at Insead Business School's campuses in Paris and Singapore, say merely moving up the value chain may be a dead end.

"As leading Chinese firms go global, they are adopting strategies that challenge some of the basic assumptions on which a lot of companies from the United States, Europe and other developed markets depend on to remain profitable," they wrote.

Zeng and Williamson's warning should also be well heeded by Thai exporters and manufacturers.

"Forget the idea that the rise of Chinese competitors simply means cheap, low-quality imitations flooding world markets."

They say Chinese companies are now solidly disrupting global competition by breaking the once-established so-called "rules of the game".

"Their tool of choice is cost innovation."

Zeng and Williams say these Chinese companies are reinventing the classic experience curve that allows companies in more developed countries to continue competing by moving up the value chain.

"It means that even if they use their specialist knowledge to move into upper-niche segments, above the fray of low-cost competition in the mass market, they risk being blown away as the Chinese explode these niches into volume businesses," they warn.

Far from being a zero-sum game, Zeng and Williamson say China's global competitors have emerged as significant players in the global markets by promising new benefits to the world's consumers.

"They are using their low costs in creative ways to build sustainable competitive advantages."

They say the cost-innovation challenge presented by Chinese companies is "disruptive" because it strikes at the heart of what makes many businesses in high-cost countries profitable today.

"Chinese companies are now beginning to offer global customers high technology at low cost."

They cite the example

of computer-maker Dawning, which has put supercomputer technology into low-cost servers

that are now everyday workhorses for information-technology networks.

"This novel strategy is destroying the conventional wisdom that high technology is restricted to high-end products and segments."

They say that in the past, companies in developed markets could maximise profits along a product life cycle by slowly migrating new technology from high-priced segments towards the mass market.

Second, in what should serve as a warning to Thai manufacturers who think they can compete successfully merely by moving up the value chain, Zeng and Williamson say Chinese competitors are now using their low-cost advantages to offer customers unmatched choices of products in what used to be considered standardised, mass-market segments.

"Goodbaby offers a product line of 1,600 different types of strollers, car seats, bassinets and playpens - four times the nearest competitor's range and all at mass-market prices."

Again, if customers wanted variety and customisation in the past, they would have to pay a price premium. Now they can pay low prices for highly customised products made in China.

Zeng and Williamson say Chinese manufacturers have also been very successful in using their low costs to turn high-priced low-volume speciality products into mass-market volume businesses.

"Haier transformed the market for wine-storage refrigerators from a preserve of wine connoisseurs into a mainstream category sold through Wal-Mart's Sam's Club subsidiary."

The result, they say, is another one-time niche-market player marginalised by the competition, which has successfully challenged the notion that speciality products must forever remain low volume and expensive.

What must Thais do to compete in this highly charged environment?

Zeng and Williamson say, "Act now."

"Remember the dragons rejected the idea that innovation is only about developing sophisticated products. They focused on using new technology to improve costs and increase variety while maintaining keen prices."

They said companies in places like Thailand must use cost innovation to beat the Chinese dragons at their own game.

"All businesses must take on board the notion of cost innovation and deploy their own distinctive capabilities and experiences."

They must also look to partnering with Chinese firms for global - not only local - advantage, they conclude.

Parts 1, 2 and 3 appeared

on August 13, 14 and 20, respectively.