western hi-tech companies are missing the best opportunities in China
because their strategies are aimed at high-end customers.

sticking too rigidly to product specifications designed for developed
markets and to premium prices, multinationals in many sectors have
squeezed themselves into the thin, high-end market in China.

That's the conclusion of an interesting article
in the McKinsey Quarterly, which recommends that foreign hi-tech
manufacturers take a leaf out of local firms and drop their sights to
focus on the fast-growing mid-range market, where prices are typically
20% to 30% less than for high-end products.

The consultancy
gives the example of electrical equipment, a $60bn industry comprising
sectors such as automation and power generation. Foreign multinationals
like GE and Siemens have traditionally enjoyed a significant presence
in this market, but they focus almost exclusively on the high end.

Now, mid-range Chinese players, such as Chint, a maker of low-voltage electronics, and Shanghai Electric Power,
a maker of power generation products, have expanded their share of the
overall market from 55% to 65% over the past five years.

says the mid-range is the place to be in China's electrical equipment
market, as this segment is growing almost twice as fast as the overall
market. Multinationals as a group have seen their share of the market
drop from 45% to 35% since 2001.

In other hi-tech sectors, the local mid-range players are also growing faster than the foreign competition. Take for example, Hangsheng Electronics, which makes automotive electronics or Shinva,
a maker of medical equipment. These two may not yet be household names,
but such enterprises are gaining dominance in their respective

McKinsey estimates that by 2010, Chinese companies will hold as much as 80% of China's high-tech market, up from 67% in 2004.

knee-jerk response to this challenge is for a western hi-tech
manufacturer to acquire a local mid-range manufacturer, which takes out
a competitor and allows the western firm to move down market. However,
this is not as easy as it might appear,as local companies may close
ranks and enlist local government officials to make life difficult for
the western firm. Gaining government backing for a deal is thus a
“vital prerequisite,” says McKinsey.