Competing Against Low-Cost Countries

Foreign competition has become a fact of life in industrialized countries. But the nature of that competition is changing, as new entrants increasingly arrive from countries with dramatically lower costs. Not all such new entrants are alike, say two researchers, so companies will need to adopt strategic responses appropriate to the type of low-cost-country competition.

Andrew B. Bernard, Jack Byrne Professor of International Economics at the Tuck School of Business at Dartmouth, and Peter Koerte, director of corporate strategies at Siemens AG, conducted a survey of 423 manufacturing companies in the United States and Germany to determine how companies respond when competitors come from developing nations whose factor costs — particularly labor — are so low (even after considering lower productivity) they make price wars unwinnable.

What they found is that domestic companies’ strategies vary based on the perceived quality of the new entrants’ products. Their 2007 working paper Strategic Responses to Multiple Dimensions of Low-Cost-Country Competition first confirms that more intense foreign competition increases the need for a strategic response. A push for cost efficiency is always involved, for example, even though no amount of belt-tightening will fully close the cost differential.

That’s when the quality dimension comes into play. When imports are shoddy, common responses are those of marketing differentiation and avoidance. Brands are hard to replicate for entrants with low-quality goods, so incumbents can protect their positions with good marketing. And companies can avoid direct competition by moving into adjacencies and market niches, again to protect their margins from the ravages of competing on price alone.

When competing products are of high quality, however, incumbents have different responses. Most notably, they are much more likely to consider relocating their own facilities to the same low-cost country. After all, goes this reasoning, if the work force, capital equipment and infrastructure in that nation are good enough to produce high-quality products for the competition, then why not set up shop there, take advantage of the cost savings and compete on a level playing field?

Given that developing nations such as China and India are encouraging their larger enterprises to become global champions capable of moving higher in the value chain, these pressures will only intensify in the future. And their effects may not be limited to the manufacturing industries covered in this study. In fact, Bernard says, “these multiple dimensions of low-cost-country competition are likely to be even more important in service industries.” So, as imports grow in both products and services and their quality rises, look for companies increasingly to call property developers in Shanghai and Mumbai as they try to match the cost structures of their newfound competition.

For more information, download the paper or contact Andrew Bernard at andrew.b.bernard@tuck.dartmouth.edu or Peter Koerte at peter.koerte@siemens.com.