In his October 2009 Harvard Business Review article co-authored with GE CEO Jeffery Immelt, “How GE Is Disrupting Itself” Govindarajan discusses the transition from “glocalization” to “reverse innovation” and the organizational transformation companies must undergo to position themselves to capitalize on this trend.

“Glocalization” vs. “Reverse Innovation”

Glocalization is a combination of “globalization” and “localization” and is the traditional approach adopted by multinationals. Initially for US companies “going global” meant developing products in the US and localizing them for European and Japanese markets where local consumers have similar purchasing power. Govindarajan argues that the consumer markets of emerging economies like China and India are fundamentally different from those of developed countries. He questions “How can you take a product that was originally designed for a US consumer with a median income of $50,000 and profitably adapt it for a middle-class consumer in China whose earnings are significantly less?”

(http://www.vijaygovindarajan.com/2009/10/what_is_reverse_innovation.htm)

“The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. There is no way to design a product for the American mass market and then simply adapt it for the Chinese or Indian mass market. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.”

What if you developed a product for the Chinese mass market first, and then adapted it for the US mass market?

That is the question “reverse innovation” seeks to answer, and the reason why Govindarajan feels all companies will ultimately have to adapt in the future.  He sees development of products like GE’s $15,000 portable ultrasound machine, originally developed for rural China and later adapted for the US market, as the norm for innovation in the future.

In the context of China, I think we can use Jack Perkowski’s recent post on Geely in China to frame the distinction between glocalization and reverse innovation for what he considers China’s two markets.

“…there are two markets in China—a high priced, high technology market where the 400 million people who have benefited most from China’s economic development shop, and the low priced, low technology, purely local, market where the other 900 million people buy the goods needed in their daily lives.”

While glocalization might get you your piece of the consumer market of 400 million, reverse innovation can get you the other 900 million. If this is the case, then can you come up with a way to effectively implement a combined approach and get the full 1.3 billion?

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I am fascinated with China as a consumer market. It has 1.3 billion people and if one reaches just one percent of the market…..

Joel Backaler over at China Observer blog just came out with a post assessing McKinsey’s newest report on China’s consumer market. The post is entitled, “One Country, Many Markets – McKinsey’s Alternative Method of Analyzing Chinese Consumers,” and it describes McKinsey’s newest innovation of dividing China’s consumer market by clusters, as opposed to region or cities. I buy into the cluster approach, as does Joel, though with some reservations…

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(http://static.guim.co.uk/sys-images/Guardian/Pix/pictures/2009/7/28/1248782959908/Shopping-Crowd-in-Hangzho-013.jpg)

Back when I first started studying Chinese and traveling to China, my friends and colleagues thought I was crazy. While they were impressed that I was able to gain fluency in a language so different from English, but to them it just seemed more logical to study a “practical” language like Spanish or French. Around the same time as I was learning to differentiate the four tones of Mandarin and cramping my hand writing characters over and over, Western multinationals grew aware of the tremendous opportunity the China market presented. The dream of tapping into a market of 1.3 billion consumers led CEOs to empower China heads to achieve growth at all costs even if operating at a loss.

Fast forward to November 2009. People no longer look at me like I’m crazy when I say I speak Mandarin. Those same companies have shifted their focus as well. Due to pressure from the financial crisis, MNCs in China are not just expected to grow, they’re under pressure to achieve profitable growth. Thus, companies can no longer assume the existence of a homogenous “China market” and monolithic block of 1.3 billion consumers, adopting a one-size-fits-all strategy. They are forced to recognize the fact that while China is one country, it is comprised of distinct regions, cultures, dialects, and consumer preferences. Just like my Chinese vocabulary expanded over the years, so has that of the executives charged with leading growth in China. In addition to “Beijing,”  “Shanghai,” and “Guangdong,” they are learning to pronounce new cities such as “Hefei,” “Yantai,” and “Changzhutan.” They have finally come to the conclusion that a handful of forward-thinking MNCs reached a while back: there is no such thing as a “one China strategy.” As McKinsey fittingly titled their 2009 Annual Chinese Consumer Study – “One China, Many Markets.”

So, if you can’t consider China’s market at the country level, then what is the most appropriate way to divide up China? At the provincial level? At the city-tier level?

McKinsey’s answer to this question is: Neither. McKinsey suggests an alternative approach, which they call a “Cluster Map.” They divided China into twenty-two city clusters, defined as “groups of cities that are developing around one or two large hub cities.” The twenty-two clusters are broken down by size with Kunming and Taiyuan classified as “Small clusters,” Xiamen-Fuzhou and Chengdu classified as “Large clusters” and Shenzhen and Hangzhou classified as “Mega clusters.”

What does all of this “clustering” accomplish from a China business strategy perspective? First, in terms of industry composition, clusters develop around certain industries. The report cites Shanghai’s automotive industry as an example. Due to SAIC and GM’s successful joint venture, a developed network of automotive parts suppliers has emerged in the suburbs and cities nearby. Additionally, McKinsey found that clusters offer a more accurate depiction of consumer preferences as income differences across city tiers decrease.

I think the city cluster analysis is an innovative way of approaching China market strategy. That said, I am still not convinced it is the best approach or that a best approach exists at all. The key takeaway from my perspective is that the days of looking at “The China Market” are over. Companies are scrambling to find a more tailored approach to be successful in China’s many markets, adopting multiple strategies to gain access to their portion of the coveted 1.3 billion consumers.

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According to Telefonica, the leading telecommunications operator in the Spanish- and Portuguese-speaking world, the company has completed its stock swap with the Chinese telecom operator China Unicom.

Under the agreement signed by Chang Xiaobing, chairman of China Unicom, and Cesar Alierta, chairman of Telefonica, in Beijing at the beginning of September 2009, the two parties agreed to make mutual investments by acquiring shares of USD1 billion from each other. On the completion of this transaction, China Unicom would own a 0.88% stake in Telefonica; while Telefonica would increase its stake in China Unicom from the previous 5.38% to about 8%.

The strategic agreement also shows that China Unicom and Telefonica will enhance cooperation in joint purchase, mobile service platform development, transnational customer service, international roaming, and technology development. Meanwhile, the two parties will share their experiences and set up strategic cooperation projects to promote the communications and exchanges between them.

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“The two sides have basically agreed on the investment in Geely already, but have yet to work out some technical details,” one source with direct knowledge of the deal told Reuters.

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Let’s look back at a few favorite posts:

Chinese Consumer: Making the Sale - Importance of Salespeople at Point of Sale in China

Fleshing Out the Truth: Chinese Netizens Unite to Deliver Their Own Form of Justice - An Analysis of RenRou SouSuo

Tuangou: Chinese Consumers Group Together For Bargains - Group Buying in China

An Introduction to Virtual Currency in China

SeekingAlpha Interviews:

China’s Stimulus Package and Its Consumers: Interview with Shaun Rein

Interview with Warren Liu, Former Vice President of Yum! Brands Greater China

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“The driver of our growth is not to make money, but to continue investing in this market,” said Harish Manwani, president of Unilever’s Asia, Africa, Central and Eastern Europe division. “No one has actually started penetrating the Chinese market in a real sense.”

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The company, Innovation Works, will search for talented Chinese engineers and entrepreneurs and help them develop the next generation of Internet and mobile computing technologies, Mr. Lee said in an interview by telephone.

“We’re going to collect the best ideas, and we’re going to hire the best engineers and entrepreneurs,” he said. “After one year, we’ll send the companies into the open. If they get venture capital funding, great; if they don’t, they won’t live.”

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Doing business in China is getting harder, not easier, according to European businesses, as they laid out almost 600 pages of complaints in a new report.

The report, from the European Union Chamber of Commerce in China, covers the whole gamut of the Chinese economy, from industrial chemicals to mobile phones to banking.

It paints a troubling picture of the Chinese business landscape, filled with discrimination against foreign companies, arbitrary laws and regulations, and abuses of China’s World Trade Organisation obligations.

Although China has repeatedly complained about protectionism in the United States and Europe, the report suggests that China is one of the most protectionist major economies…

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