As global sales slump, mainland manufacturers are competing with multinationals to market to hard-pressed Chinese consumers
Over the past three decades hundreds of thousands of small factories making everything from rivets to refrigerators have popped up across China. While competition was always cutthroat, many of these companies—both domestic and foreign-owned—prospered by avoiding the brutal domestic scrum and selling abroad.
But with overseas consumers reining in spending, Chinese manufacturers are now piling into the crowded domestic market. "Competitors are coming out of the woodwork," says Frank Rexach, Asia chief for Michigan-based office furniture maker Haworth, which faces a slew of new rivals that once sold primarily to such foreign giants as Wal-Mart Stores (WMT) and Office Depot (ODP).
Across the economy, the story is the same. On Feb. 5, Beijing-based Lenovo Group (LNVGY), the world's No. 4 PC maker, fired its American CEO and said it would refocus on China. In November, a Russian customer cancelled an order for 50,000 TVs from electronics manufacturer Skyworth, so the Shenzhen-based company quickly dispatched them to the domestic market. And Dongguan Meng Qiren Fashion, which once sent all of its sweaters to Polo Ralph Lauren (RL) and a host of smaller Western brands, is selling more to Chinese supermarkets and shops.
"EVERYBODY IS CHASING SHARE"
These companies couldn't have picked a worse moment to wade into their home market. At least 20 million migrant workers have lost their jobs, and urban unemployment is rising. Chinese customers, among the world's biggest savers when they're feeling flush, are likely to cut back wherever they can. "The toughest times are yet to come," says Stephen Shao, president of paper products maker Kimberly-Clark China (KMB).
The shift threatens foreign manufacturers that had high hopes for China. The country has long been a bright spot for the likes of General Motors (GM), Ford Motor (F), and Toyota Motor (TM), but they face renewed competition from domestic rivals that ramped up in anticipation of export demand that isn't likely to materialize anytime soon. "Everybody is chasing share" in the mainland, says Nigel Harris, Ford's No. 2 executive in China.
Some foreigners have already had to revamp mainland plans. On Feb. 5, Swedish appliance maker Electrolux said it will close a refrigerator factory in the central Chinese city of Changsha because it couldn't compete with low-cost domestic rivals. "This downturn is the most significant setback multinationals have had in China in the last 10 years," says Gordon Orr, partner at consultancy McKinsey in Shanghai.
It won't be easy for Chinese companies to break into their home market overnight. Exporters that have worked with just a handful of foreign customers don't know how to negotiate the Byzantine distribution channels. Shing-Hing Group, one of China's 10,000-plus manufacturers of screws, has supplied clients abroad for two decades. Now it faces years of hard work to build a sales network at home, says founder Edward Tsui. "In China, the culture is different," he says, "and more difficult than overseas."