Turnaround of Chinese companies reflects a changing market that becomes more competitive

China's cleaning and household products industry is a sector that well reflects the growth of the country's private sector. The setbacks suffered by local firms in the 1980s and 1990s, their comeback early this century and their ongoing competition with multinationals for the high-end market reflect China's transition from a cheap goods producer to a strong manufacturer excelling in quality and brand.

Since China opened its cleaning and household products sector to foreign investors in the 1980s, multinationals such as P&G and Unilever have made big inroads.

Strong financial brawn, advanced management and high efficiency helped these global giants easily beat their Chinese counterparts, most of which were then State-owned enterprises with backward management and poor marketing skills.

That was why many household Chinese brand names were acquired by the foreign giants in the 1980s and 1990s.

A much-hyped deal took place in 1994 when Unilever acquired Zhong Hua toothpaste. The deal signified the fallout of almost all top local brands in the sector and heralded a dominance of foreign players for nearly a decade.

However, private Chinese players grew up quietly. At first, they were small manufacturing mills for foreign giants, exactly what most Chinese producers did then - original equipment manufacturing.

Several years later, a few private businesses built up their capital base and acquired management and marketing skills from these foreign giants. And they avoided competing with foreign powerhouses in big cities and turned their focus on the vast lower-tier areas, something foreign giants paid little attention to.

Regardless of the difficulties in these marketplaces, such as poor infrastructure and low buying power, Chinese firms still managed to sell more and more there, and finally put those markets under their wings.

Two of these firms, Liby Group and Nice Group, now boast a combined 25 percent share of the sector.

Local companies' success should be largely attributed to three factors.

First, as always, is price advantage. In the early 2000s, their prices were 30 percent cheaper than those of foreign companies. The gap has narrowed but they are still about 10 to 15 percent lower.

Second, these firms were familiar with the local markets, especially in smaller cities and rural areas.

For example, these companies' products came in large packages, each containing 10 or more small bags of detergent and small pieces of soap. Such packaging is attractive to consumers who live in big families and tend to make bulk purchases.

The companies also became good at making heavy-duty detergent to meet the need of consumers in lower-tier cities and rural areas where most people undertake outdoor jobs.

Last was their advertisement strategy.

Unlike international names such as P&G and Unilever, which signed young international stars to endorse their products, local companies signed middle-aged Chinese comic stars, favored by many middle-aged and senior women, as product promoters.

All these factors helped local players grow so quickly that they are now able to grab a significant market share from foreign giants' traditional stronghold - large cities.

Meanwhile, the foreign giants have become aware of the huge potential of China's smaller cities and rural areas and have stepped up their efforts to penetrate these markets.

This kind of market division was popular in many other sectors, with foreign giants taking a lion's share in high-end, first-tier markets and local players dominating the medium- to low-end, and rural markets.

In the past decades, they were developing different markets and there were little overlapping. However, now that both groups want to tread on each other's turfs and cost differences are narrowing, the rivalry between them will surely turn fiercer.

Who will win depends on who could make the full use of their advantages and overcome their shortcomings.

The best assets of the foreign giants are their brand value and quality, something they should stick to.

But as they penetrate smaller cities, they must somehow play down their high-end image. After all, the purchasing power of users there is not as high as in big cities. To do better, they may need to create more sub-brands for those markets.

In addition, they must be aware of the extra costs spent to build sales networks in small cities, where maintaining relations with local distributors could sometimes be higher than in first-tier cities.

Local players' advantages lie in their flexibility and strong ability to build relationship with dealers and distributors. But they must spend more to build their brand to win the hearts of young users.

To achieve this, low price is no longer necessarily an advantage. They have to invest in research and development, and marketing.

They should try to make their presence more visible in upscale shopping malls, and hire young and international stars to endorse their products, although it will cost them a lot initially.

To make a bold prediction, I believe homegrown cleaning products companies will grab more market shares from foreign giants because they are better at mitigating costs and expanding networks at the home market, and that they will be quick in building their brands with rather affluent capital bases.

The rivalry between Chinese and foreign companies is expected to be extended to foreign marketplaces before long, when Chinese firms begin to sell their products overseas under their own brand names.

The author is an analyst specializing in the fast-consuming sector at Shanghai-based Universal Consultancy.