Copycats: The Chinese are Finally Catching On
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Baidu (NASDAQ: BIDU), the Chinese version of Google (NASDAQ: GOOG), has become something of a tech juggernaut by riding on Google's coattails.
Google was formed in 1998, and Baidu incorporated two years later. How has Baidu been successful? It watches Google's successful tactics - then copies and implements them in China.
Employing a copycat strategy has worked well for Baidu. Baidu is trading at 29 times earnings and 17.8 times next year’s earnings, compared to Google’s 20.2 earnings multiple and 13.8 multiple of next year’s earnings. Baidu has become Google's counterpart by watching its competitor closely, then adding Google's best practices into its own business.
Now To Consumer
The Chinese copycat strategy is also playing out in the consumer space – and it is working quite well. For an example, let’s look to the toothpaste market.
Procter & Gamble (NYSE: PG), Unilever (NYSE: UN), and Colgate-Palmolive are firms that own the consumer market in the U.S. and abroad. But not for long in China – if the Chinese have their way.
Procter & Gamble, for instance, has to worry about copycat products in the Chinese market. P&G’s Crest brand, targeted towards the growing Chinese consumer market, was selling off the shelf. At least it was until a new Chinese herbal toothpaste, made by the Yunnan Baiyao Group, and not that different from Crest, hit the market.
Five years ago the toothpaste barely made a dent in the marketplace, capturing just a 1.1% share. Today the toothpaste is stealing away market share from the American firms despite selling at roughly $8.60, twice the price of Crest’s 3D White Vivid toothpaste. As a result, P&G has seen its market share slip from 20.8% to 19.7%.
One reason for the market share increase is because the Chinese toothpaste is more expensive, and market share is measured in dollars. But still there is the underlying problem of local products faring better than imports. This must be fixed – the problem is across the board, as Unilever’s market share in this segment fell a disastrous 2.1% to 9.9% overall.
Improving the Situation
The market share problem is too big to ignore. Procter & Gamble rakes $6 billion in sales from China, and the market is quickly growing. Thus, the company needs to act fast to find a new strategy. Here are two ways that American consumer companies can out-innovate the Chinese, who are copying their products.
First, conduct extensive customer research to find out exactly what appeals to the Chinese. Peter Drucker claimed that what companies thought they were selling and what consumers wanted can often be two separate things. Find out exactly what the Chinese want, then give it to them.
For example, American firms could be providing toothpaste that is adept at cleaning teeth, but the Chinese want both white teeth and healthy gums. Researching the target market can help the firms to better understand what explicit needs to address when packaging, marketing, and selling their products. The Chinese may not even know what products are local and which are imported – but they do understand what they want.
Next, the Chinese market is growing by leaps and bounds. Be the first to cater to the growing number of middle-class consumers. The beauty and personal care market, for example, is expected to grow by 12% to $32 billion. Further, the home-care market is expected to grow by 11% to $12.2 billion. New consumers will be flooding the market, and American companies can profit by capturing these customers before Chinese firms.
To conclude, Chinese companies have figured out how to quickly wring profits from China's growing base of middle-class consumers - find the American products that sell the best, then copy them.
In both the internet market and in the consumer product market, Chinese firms have successfully followed a copycat strategy, and their products are quickly catching up with American products. Baidu has followed the strategy well to become China's top search engine, and now Chinese consumer brands are taking the best parts of American brands and mixing it into their products. To win the battle, Americans must stay nimble and out-innovate Chinese copycats.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend Baidu, Google, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
