The following article describes the rise of China International Marine Containers Group (CIMC) from near bankruptcy in the 1990s to dominant global leader in the manufacture and sale of ocean containers, with an estimated 60% market share worldwide.
By Ming Zeng and Peter Williamson
Forget the idea that the rise of Chinese competitors simply means cheap, low-quality imitations flooding world markets. Chinese companies are starting to disrupt global competition by breaking the established rules of the game. Their tool of choice is cost innovation: the strategy of using Chinese cost advantage in radically new ways to offer customers around the world dramatically more for less. Cost innovation has three faces:
The cost innovation challenge presented by Chinese companies is disruptive because it strikes at the heart of what makes many businesses in high-cost countries profitable today. It threatens their ability to earn high margins on high technology. It undermines their ability to extract a price premium by offering customers more product variety and greater customization. And it means that even if they use their specialist knowledge to move upmarket into niche segments—above the fray of low-cost competition in the mass market—they risk being blown away as the Chinese explode these niches into volume.
The dynamics of how cost innovation can be used to displace established competitors from the core of a market, and the consequences that follow, are nowhere better illustrated than in the case of China International Marine Containers Group (CIMC).
Already global number one in terms of volume in 1996, today CIMC is six times larger than its nearest competitor, dominating the world of shipping containers with more than 55 percent global market share. But far from being just a low-end, volume producer, it has penetrated every segment of the container market. Driven by its corporate slogan “learn, improve, disrupt,” CIMC has captured one segment after another, including products with sophisticated refrigeration, state-of-the-art electronic tracking, internal tanks, folding mechanisms, and customized features—all niches that specialist European container makers believed they could defend, despite their high costs. In 2005 it bought up 77 patents from a bankrupt competitor Graaff—ironically the German firm from which CIMC licensed its first refrigeration technology back in 1995. One year earlier it acquired a 60 percent shareholding in Clive-Smith Cowley, the British company that invented the proprietary “Domino” technology that allows empty containers to be “folded” for ease of back-hauling
As a result, CIMC is now a major force in setting the new global standards for container transportation. The company’s new goal is to repeat its successful strategy as it diversifies into a range of modern transportation equipment, including the trailers used by trucking companies around the world.
Most of the emerging dragons begin by establishing a strong position in China. Because the China market is typically fragmented into too many competing firms due to China’s system of protectionist provincial governments, pulling ahead of these numerous rivals is no easy task. Those who rise to the top, therefore, have already experienced a baptism of fire. This means they already have well-honed skills in paring down costs and squeezing the maximum benefit from limited resources.
CIMC is no exception. Its first container rolled off the line in 1982, but a combination of inexperienced management and a downturn in the market led the company near disaster; in 1986 production was shut down and most of its employees laid off. CIMC was subsequently restructured, but even by 1990 it was a minor producer, making less than ten thousand containers a year. It found itself competing with more than twenty other container producers that had sprung up across China, attracted by the high margins on a business with low barriers to entry and a breakeven on only a few thousand units.
When Mai Boliang, the current president of CIMC, was appointed in 1991, he set about an aggressive expansion plan that would enable CIMC to pull away from its Chinese competitors. Taking advantage of new regulations that opened the way for initial public offerings (IPOs) in China, he floated the company on the Shenzhen Stock Exchange in 1993 and used the money to buy up Chinese competitors that were struggling as the demand cycle suffered a downswing. These acquisitions enabled CIMC to expand to five massive plants; by 1996, it was number one in China. Given the huge size of the China market, this already made it one of the largest players in the world—large enough to gain the economies of scale necessary to become cost competitive in manufacturing compared with its established global competitors.
Like most of its Chinese cousins, when CIMC set out to expand its market share abroad it looked for a loose brick in established competitors’ defenses. CIMC found a classic loose brick in the combination of standard, low-priced containers and the way its rivals accounted for profits.
As global competition in the container market intensified, prices plummeted; a standard container that had sold for $2,850 in 1995, for example, netted only $1,300 by 1999. In consequence margins on sales were squeezed to only 3 percent. CIMC recognized a silver lining in this otherwise dismal picture—its international competitors, mainly in Korea and Japan, must be suffering even more severely.
It was here that CIMC identified a loose brick. It knew that its Asian competitors were almost all part of diversified conglomerates that regularly reassessed the relative returns on investment across their businesses. CMIC could be almost certain that its rivals’ head-office accountants would be telling their bosses that standard containers were unprofitable “dogs” in their portfolio, and it wouldn’t take much more pain before these companies exited the market.
CIMC therefore set about stepping up the competitive pressure on the business line it guessed its rivals regarded as the least attractive to defend—a loose brick it had a chance to dislodge. CIMC focused its innovation efforts on an all-out push to remove cost from every activity in its business. By streamlining its processes for procurement of raw materials, benchmarking and rationalizing the activities in each plant, accessing international finance to cut its cost of capital, and looking for more efficient ways to transport containers, it was able to squeeze 33 percent out of material costs and 46 percent out of its manufacturing and overhead costs. More efficient transportation alone saved $5 million per annum.
These initiatives across the entire range of activities meant that CIMC extended its cost advantage far beyond the differential in wage rates, so that even when competitors begun to move their manufacturing to China to take advantage of lower labor costs, they couldn’t produce a finished container as cheaply as CIMC. As CIMC won orders, its total volume expanded, kick-starting a virtuous cycle in which growing economies of scale continued to reinforce its cost advantage. By 1996 it was churning out 199,000 units—about one in five of every new container manufactured in the world—and became global number one by volume.
Having secured its scale and cost advantages in the production of standard containers, CIMC’s strategy was to use cost innovation to move upmarket and carve out a large share of more sophisticated products.
Its chance to break out of the low end came when the Asian financial crisis hit in 1997. CIMC’s diversified rivals, especially the Korean companies, were hard hit and needed to offload noncore businesses. Their unprofitable container operations were high on the list for disposal. The specialized competitors in Germany, meanwhile, were seeing their business dry up because the crisis eliminated their customers’ ability to pay premium prices. CIMC took full advantage of this situation.
CIMC began by investing $50 million in a new subsidiary, the Shanghai CIMC Reefer Containers Co., Ltd, to manufacture reefers. It then entered into a licensing agreement with Graaff Transportsysteme GmbH, a specialist producer of refrigerated containers that had innovative, proprietary, and widely accepted technologies for the manufacture of the insulated panels used in reefers.
CIMC paid Graaff license fees on 12 patents used in the new operation. In addition, Graaff received 2 percent equity in the venture and $750,000 for selling one of their existing production lines, to be dismantled and shipped to China, along with, the services of Stephan Teepe, a recognized German expert in the sector who was appointed chief engineer of the new Shanghai plant.
But CIMC’s objective went far beyond imitating an established player. Instead its strategy was to use its lower cost design and engineering resources to improve on the technologies it had acquired as well as to apply them to create a broader product range than its global competitors. In short, cost innovation to deliver technology at low cost and variety at low cost.
CIMC quickly absorbed the German technology and then set about scaling it up and making improvements. According to Teepe: “When the production line was imported from Germany it had a capacity of 10,000 TEUs [twenty-foot equivalent units] per annum. Over the next five years CIMC technicians fundamentally reengineered the manufacturing process four times, applying advanced technology borrowed from the auto industry.” This allowed CIMC to gain a technological edge on its established competitors while still reducing its costs further.
Having brought advanced technology at low cost to the reefer business, CIMC began to drive hard to increase its market share in order to kick-start a new cycle of cost reduction through scale economies and learning. Again taking advantage of the after-shocks of the 1997ian financial crisis, it was able to acquire Hyundai’s plant in Qingdao at a bargain price—under $20 million. Through this deal CIMC gained production facilities with an estimated replacement value of $180 million, an additional line for producing reefers, and effectively removed a major competitor from the market. CIMC then expanded the capacity of its newly acquired facilities by 150 percent to 25,000 TEUs. But even in the seemingly routine task of expanding an existing plant, CIMC found ways to innovate on cost. While former owner Hyundai had budgeted $30 million to increase capacity, CIMC leveraged the experience it had gained through the Shanghai plant and used innovative approaches and low-cost engineers to get the expanded line up and running in less than six months, at just 50 percent of the cost—$15 million less than what the Korean company had planned!
CIMC then set about its next round of cost innovation: finding a way to replace the expensive aluminum used in refrigerated containers with much cheaper treated steel. It licensed steel-treatment technology from Germany and used its army of engineers to improve performance to the point where treated steel could match the performance of aluminum. CIMC then targeted the customers of the Japanese reefer suppliers who were using aluminum as their raw material—and won the business.
The impact of CIMC offering this new low-cost technology and finding a loose brick at which it could be targeted was devastating for CIMC’s competitors. One by one the established Japanese players exited the market so that within eight years the last Japanese producer had closed down.
Between 1997 and 2003 CIMC expanded production of refrigerated containers sevenfold to 63,500 TEUs to become the global leader, accounting for 44 percent of the world market.
Having gained dominance in the reefer segment, CIMC set its sights on extending its product line to include a wide variety of even higher-end products: containers with tanks, folding containers, and other special-purpose models.
Over the 1990s the tanker container industry had come to be dominated by South African companies. Led by Consani Engineering, Trencor, and Welfit Oddy, the South Africans controlled close to 50 percent of the world market in 1999. Established since 1928 and winner of several awards for technology excellence and export achievement, Consani alone accounted for 22 percent of world production in 1999.
In attacking these incumbents, CIMC again deployed the strategy of cost innovation, but this time focused on offering potential customers a wider variety of specialist models at lower cost. It began by signing a technology-transfer agreement with a British container specialist, UBH International Limited (UBHI), owner of an innovative technology (the Universal Beam Tank) that enabled the weight of tank containers to be reduced. At that time, UBHI supplied 1,800 TEUs per annum—almost 15 percent of the global market.
CIMC’s second step was to reduce costs below those of the established competitors by driving for scale advantage. Within fifteen months it had built a new plant capable of producing 6,000 TEUs of tank containers per annum—almost three times the size of the incumbent global leader. Having won a large volume of business on the basis of low costs, the next step was to use its competitive Chinese design staff to expand the product line and offer more models and customization services. Key to offering this extra value added while keeping costs down was its innovative redesign of the production line to increase flexibility. CIMC was able to reduce the setup time to change models from twenty minutes to five minutes, allowing it to produce a wider variety of tank containers more cheaply than its competitors.
By 2003, CIMC had captured 30 percent of the world market in the tank container segment. In 2005 it expanded production again to become the world leader in this segment as well. The South African companies that had dominated what they viewed as a safe, high-end niche had been toppled.
In our experience, shifting focus to high-end segments is the most common strategy managers in high-cost countries are planning to adopt in response to the new competition from China. But the story of the formerly dominant South African players who found themselves competing with CIMC suggests the need for extreme caution in using this approach. The fact is, their attempt to escape the Chinese challenge by moving to successively higher-end market segments ended in dramatic failure. Tencor ceased production of dry freight containers in 1999 to focus on tanks, but by 2004 it ended manufacture of tank containers as well. Consani was placed into liquidation in January 2005. Meanwhile, UBHI was effectively forced to enter an alliance with CIMC in order to maintain the viability of its “focus on the high-end” strategy.
In 1997, having secured a large share of the volume business, CIMC could afford to establish its own R&D center. CIMC has since consistently invested over 2 percent of its revenues in research, so as its sales volumes and revenues have continued to expand, so has its total R&D budget. In an industry generally populated by medium-sized specialists with limited resources, and aided by the relatively low cost of Chinese engineers, CIMC’s R&D capacity now swamps that of any of its competitors. A powerful new competitive weapon—the ability to back large-scale investigations into new technology—has therefore been added to CIMC’s arsenal.
Paradoxically, therefore, the company that started out as a rock-bottom competitor, relying in cheap labor to win over the basic, volume business in standard containers, now has a greater R&D capability than its volume-starved rivals who tried to move upmarket to escape CIMC’s growing penetration of the low end. CIMC was able to use this new advantage in R&D capability when a shortage of the tropical hardwood used in floors of containers drove the cost of wood up to 15 percent of the total cost of making a container. In the face of declining supply from the world’s rainforests, it could be anticipated that this problem would continue. So as it struggled to procure the half-million cubic feet of hardwood it used every year, CIMC began to focus its R&D capability on finding replacement materials. Many in the industry believed the problem was intractable. But after many rounds of experimentation to get the right combination of functionality, quality consistency, production efficiency, customer acceptance, and cost, CIMC came up with a suitable manmade substitute. Today it has replaced tropical hardwood in 25 percent of its container output and sees the manmade substitute virtually taking over in the future.
CIMC’s R&D capabilities have also allowed it to extend the pattern of successive expansion into higher-value segments to the market for foldable containers. The panels that comprise these containers can be folded down in a “chain” onto their bases so that when containers have to be returned empty, they can be collapsed down to 20 percent of their original volume for easy transport. CIMC used its large-scale, low-cost R&D capacity to develop an alternative to the industry standard technology used for the fold-chain mechanism.
Despite being the leading company with 70 percent of the world market in “foldables,” Britain’s Clive-Smith Cowley got the message: as a medium-sized, specialist company it simply didn’t have the resources to win a long-term race against CIMC, even with its initial technological lead. Before CIMC even finalized a prototype, Clive-Smith Cowley offered to do a deal with its Chinese rival. Such was CIMC’s track record in sweeping through other high-end segments that Clive-Smith Cowley agreed to sell a 60 percent share in its business. This gave CIMC access to the “Domino” chain technology, along with an existing production line that was relocated to Guangdong.
CIMC’s rise from struggling entrant into the bottom end of the shipping-container business to unrivalled global leader in virtually every segment of the market—in volume, value, and technical sophistication, and R&D capability—is a wake-up call to those who still believe that moving upmarket ahead of the Chinese is the way to counter disruptive cost innovation from China. Because the Chinese are using their cost advantage across a broad swathe of activities, including R&D, design, and customization, not just in volume manufacturing, moving to successively higher-end segments is just as likely to result in bankruptcy as it is in salvation.
It is clear from these statistics that CIMC’s impact on the global container business is not a one-off. Chinese companies across a wide spectrum of industries and heritages have begun their assault on the global market.
As the Chinese dragons’ relentless pressure to obsolete the conventional wisdom of global business gathers strength, few businesses will be immune. Sooner or later, the emerging dragons will come knocking on the door of your industry, whether you are in low tech or high tech, a mass-market or a specialized niche. The questions every manager needs to be asking, therefore, are: