China strategy: a price war - the WTO column

Defining Chinese corporate strategies, as different from those in Japan, the US or Europe, has always been problematic. A Chinese miracle is taking place, so you would expect there should be tools and strategies, conscious or less conscious, that would define a Chinese way of doing business. All the time you know you are probably looking at the solution, but when you are in the middle of the mayhem, it might be hard to recognized.

Professor Z. John Zhang of Wharton Business School, together wit CEIBS-professor Zhou Dongshen, had a thorough look at the price wars in China (here is the academic article). They might be on their way of defining for China what has been the "just-in-time" principle for Japan: an explanation of a strategy that does not yet fit the Western corporate mindset and has been ignored for that reason.

Just like many others, price wars iin China have been fascinating me over the years. Lowering the prices has been a primary business instinct, but the western bias towards price wars, might have caused some analytic blindness.

In the West, Zhang says, a price war is something to be avoided. The outbreak of a price war is thought to have disastrous consequences for companies and is viewed as the failure of managerial rationality. This prevailing philosophy was once highlighted in a Fortune magazine article that asked, "What are price wars good for?" The answer? "Absolutely nothing."

In China, where companies have earned a reputation for starting price wars, the outbreak of a price war is considered a legitimate and effective business strategy.

Both authors analyze two major prices wars that took place in China since the mid-1990s and see how the war fare, that shocked foreign and domestic companies alike, were tools for the major players to eliminate local competitors by increasing their efficiency and move against foreign competitors on price. It was not an irrational process, as many thought at the time as for example TV-manufacturer Changhong, with leading CEO Ni Runfeng, started the price war in his industry.

"Our study has convinced us that luck has nothing to do with being a victor in a price war," write the researchers. "Good planning and execution are the keys to winning. In other words, Chinese companies do seem to know something about price wars that executives in the West do not, or have forgotten."

The strategy was successful, although the foreign competitors were up in arms, started dumping procedures: a clear sign they had not clue what was going on in China. The authors think there is nothing specific Chinese on entering a price war.

"What is intrinsically Chinese, however, is the fact that a whole generation of Chinese executives have grown up in a business environment characterized by growing markets, heterogeneous firms with a wide distribution of cost-efficiencies, and new technologies with significant scale economies. This business environment provides many profitable opportunities for them to engage in price wars and to hone their skills, whereas in Western markets, oligopolistic competition among mostly equals in mature markets encourages more finesse in devising marketing strategies. In both cases, firms are weighing the same factors, [although] making different strategic choices in the end."

Both authors do not speculate on how those price wars spill over into the West. There are good reasons to assume that in a mature market, the pre-conditions for a successful price war do not exist in the same way. But as price wars force industries to consolidate in China, focus on higher quality, efficiency and cheap prices, they might create increased attacks on the American and European markets within their own rights, so without Western traders as in-betweens. Both Europe and the US have reacted in the past by imposing anti-dumping measures against those Chinese imports, blaming a favorable government policy for the low prices that were lower than they perceived as the lowest possible production costs.

But as those products have not been produced with government assistance, but are part of a rather clever business strategy, the legal basis for anti-dumping measures might start to erode as we know more about those business strategies. What remains is then of course a political basis, that might have been disguised behind legal arguments in the past.

Fons Tuinstra