Foreign invested companies in China — also known as multinational corporations (MNCs) — have experienced plenty of ups and downs over the years. Their performance varies a great deal for several reasons.

While many MNCs have made big strides in China, many others have encountered numerous challenges. Probably one of the biggest was the rapid emergence of Chinese competitors, and the speed, scale and complexity of the associated market development.

For a long time, MNCs did not pay much attention to the local players because many did not view them as competitive, and associated their products with low prices and poor quality. In the early stages of China’s reform and opening-up, many Chinese companies started off imitating their Western counterparts — quick to replicate foreign products but often offering them at lower prices. Pundits tended to jeer that these companies were “copycats” (or shanzhai in Chinese), implying that they did not have any real capabilities and, by implication, could not overtake the MNCs.

That was a couple of decades ago. Today, in most sectors, Chinese companies have emerged as credible competitors to MNCs and among themselves. Once these companies internalized the underlying technologies, built supply chains, and invested in innovation, many would evolve into authentic innovators, quickly upgrading their products, services, or business models. The very best of these players have now become global tech and industrial leaders. Initially, perhaps they didn’t get everything right, but with rapid refinement and adaptation, they improved swiftly.

In sectors such as household appliances, consumer electronics, smartphones, electric vehicles, solar panels, wind turbines, medical devices, e-commerce, and logistics, Chinese players have now become very competitive. Even in less tech-related sectors such as coffee shops, local players like Luckin Coffee are giving Starbucks a run for its money.

While the rise of Chinese competitors is changing the competitive landscape sector by sector, China’s market development is also being transformed as a result of the shifting dynamics between policy, innovation, and demand patterns.

Over the past decade, the emergence of Chinese competitors has followed a distinct trajectory. Whenever a market opportunity becomes sizable enough, it often triggers a swarm of Chinese entrants. This flood of players quickly transforms the landscape from being dominated by just a few into a fiercely competitive battleground. The resulting competition is not only intense but also relentless, simultaneously pushing up the pace of innovation and driving down costs.

When MNCs first entered the Chinese market, most would bring their products from elsewhere in the world and try to sell them locally. Given the nascent nature of the Chinese economy at the time, most of these foreign products would be viewed as “premium”. They would often dominate in the premium segment, achieving a leading position, giving MNC managers the impression that they were taking a “dominant share of the China market”. In fact, that was often only a small part of the entire potential market in China.

A big part of the (latent) market was actually in the midmarket or the mass segments, where most Chinese customers were to be found. The Chinese players typically started from these segments, offering much more price-competitive products, often with different price-value trade-offs. While MNCs did not pay much attention because their managers felt that local players wouldn’t be able to compete with them, the very best local players would begin to migrate upward to the higher price segments and start to compete with the MNCs on their home turf. Local players began to offer a more diversified product portfolio than MNCs, as well as a different set of price-value options to customers. This helped strengthen the Chinese players’ competitiveness.

Many Chinese companies are adept at supplying products that offer compelling price-value trade-offs, often enabled by significant cost advantages and localized supply chains. Some of them may start from replicating foreign companies’ products, but very soon the best ones would come up with their own innovations. Their fast, swarmlike behavior accelerates market stratification, and forces incumbent players to compete across increasingly diverse customer segments.

This evolution forces MNCs to confront a strategic dilemma: either expand their portfolios downward to remain relevant across segments or risk being marginalized in a narrowing premium niche. Along the way, many Chinese players would build robust supply ecosystems, often with support from the local government. Many of them would later expand internationally, bringing their ecosystems along. For these companies, their competitiveness increasingly derives from ecosystem-level capabilities rather than firm-specific ones.

These ecosystems, covering everything from upstream materials to downstream assembly, enable the companies to amalgamate their capabilities. The investment of over 10 billion yuan ($1.4 billion) in 2020 by the government of Hefei, capital of Anhui province, into Nio, an electric vehicles manufacturer, exemplifies this approach. It enabled the formation of more than 120 EV supply chain partners pivoting around Nio by 2024. In turn, this kind of ecosystem strength allows some Chinese companies to expand into adjacent sectors, and into international markets too.

China’s market development and competitive dynamics are tightly intertwined, and their interplay also goes way beyond the country’s borders. Changes in policies, technological shifts, and demand patterns reinforce one another

This ecosystem approach gives Chinese companies a significant edge. When they expand abroad, they often bring their supply ecosystems with them. Examples include BYD in Thailand and LONGi Green Energy Technology, a leading photovoltaic manufacturer, in Malaysia, where not only the core company but also key suppliers co-invest to form fully integrated local clusters. This makes competition with Chinese companies no longer just about individual companies, but also about entire ecosystems.

Over the years, this interplay between market development and competition in China, while evolving fast, took some time to gestate. As such, many MNC managers did not take notice and many stuck to “business as usual”. However, this interplay reaches a tipping point, driven by policy shifts or technological breakthroughs, triggering abrupt market changes that catch unprepared foreign players off guard.

We’ve seen this happening across many sectors: Automotive, industrial robots, and medical imaging come to mind. In the magnetic resonance imaging and intelligent robotic mobile computed tomography markets, for example, Chinese companies like United Imaging have already captured significant market share in the domestic mid- to high-end segments.

In short, China’s market development and competitive dynamics are tightly intertwined, and their interplay also goes way beyond the country’s borders. Changes in policies, technological shifts, and demand patterns reinforce one another. Once this interaction reaches a certain threshold — triggered by a major policy change or a technological inflection point or a combination — the market and competition undergo a fundamental and often abrupt shift. These inflection points frequently catch non-Chinese companies unawares, forcing them to reevaluate their strategies or risk being displaced.

As market development and the competitive landscape evolve, China is offering companies, regardless of where they are headquartered, a world-leading stage to build more capabilities and accelerate innovation. Meanwhile, as China’s competitive intensity grows, MNCs that can survive and adapt often develop capabilities that are globally competitive. Many foreign companies that learn to operate successfully in China find themselves stronger in other markets, especially those where China’s ecosystems are expanding, and the country’s overall prevalence is becoming significant.

Through intensive sparring with fast, agile and innovative competitors, companies inevitably become better themselves (if they can survive). Often, companies that survive in China become truly capable players overseas, particularly in those markets where China’s prevalence becomes most obvious.

As companies, regardless of where they are headquartered, look for new sources of competitive advantages in the new and evolving world, we would also expect to see a rise in cross-border corporate relationships — spanning partnerships, joint ventures, alliances, and acquisitions — aimed with more competitive advantages.

The interplay between market development and competition in China is reshaping businesses across the world.

The author is founder and CEO of Gao Feng Advisory Co, a strategy and management consulting firm with roots in China.

The views do not necessarily reflect those of China Daily.