The Second Mice Are Coming

    Jan 24, 2019

    We recently wrote about the “fast learner” economy in China using the saying: “The early bird gets the worm. But the second mouse gets the cheese.”* The Chinese have finely honed their second mouse skills and they are downright proud to be fast followers. Having someone call their products “Me-Too” is sometimes considered worthy of posting on their web site.

    In fact, the ability to quickly learn and copy products and technologies developed elsewhere has already propelled numerous Chinese firms to global stature. These firms and many others will soon become a force in the U.S. and other global markets.  Examples of China’s ability to learn span multiple industries. The most telling reflection of this progress comes from looking at Fortune’s Global 500. In 2005, only 13 Chinese firms made the list, with only three of them among the top 200. Just five years later, in 2010, 46 Chinese firms were on the list, including 14 among the top 200 firms.  Alongside the large companies that are becoming global brands, like Haier in consumer appliances and Huawei in telecommunications, are literally thousands of medium-sized companies that have ambitions to serve consumer and business-to-business markets in the U.S.

    The large majority of these companies are in business only because they understand better than their competitors how to be the second mouse. They have learned from the experiences of other firms what to produce; they employ low Chinese manufacturing costs to their advantage; and they make incremental improvements in products, especially ones focused on taking out costs.

    These firms are going to be strong competition for your current customers. The way they compete will be especially challenging to your current customers because their message will not be the familiar “We are better than our competition” but rather “We are nearly as good as our competition but at a much lower price.” They will do their best to copy your best customers’ products, at least in function. Sometimes their prices will be so low that their potential customers find it almost irresistible to give them a try, as quite a few firms learned during the recent recession. They might and probably will change the face of your customers’ industry forever. How you respond to their requests will shape your future.

    Second Mice Need Friends Too
    Second mice must be clever and quick to take advantage of opportunities. After all, if they end up as the third mouse they avoid the trap, but achieve nothing positive. They are adept, but the emerging fast-follower companies also need help from like-minded suppliers in order to accomplish their feats of speed and performance at a great price point.

    The requests that they make to suppliers often seem outrageous, but they are only what should be expected under the Chinese second mouse business model. Cutting-edge creativity is not part of the mix, but creative cost reduction and ways to verify quality and prove it to their prospective customers are critical.

    Some recent examples include:

    • “We want you to sell us exactly what you supply to (your best customer).” (Regarding a highly customized and previously jointly developed component of a consumer electronics product).
    • “We will buy the exact same part as (your best customer) at the standard price minus development expenses, because, after all, you already developed it.”
    • “We want to buy that exact part, but made from lower grade materials to cut the cost, since we don’t give a long warranty like your other customers do. You don’t need to do any testing; we know what we are getting.”
    • “We want to use your name in our advertising, to prove that we use the same components as the foreign competition.”
    •  “We want to use you in our advertising, named as the supplier to (your best customer), to prove that we are just as good.”

    Responding to such requests, whether simple or outlandish, creates a conundrum. No supplier is ever eager to turn away an eager new customer. But while the “normal customers” that suppliers have been serving would usually rather have an “exclusive”, the requests that these new second mouse customers make will raise a supplier’s potential for conflict with existing customers to a whole new level.

    The ideal situation for a supplier, but one that creates the toughest quandary, is where the fast-follower will be severely disadvantaged by not having you as a supplier.  That gives you a say in defining the future for both your existing and potential customers.

    Should One of Those Friends Be You?
    Suppliers who experience these discussions must ask themselves: “Do we really want this business?” and “How far are we willing to go?” Specifically:

    • “Are we willing to sell to a fast-follower who will use us to compete with our best customer, possibly alienating them in the process? Or is the fast-follower competition to our best customer inevitable, so that we would be relegating ourselves to a shrinking market by refusing to work with them?”
    • “Are we willing to sell at a lower price to a new entrant who makes only me-too demands of us, putting our best customer at a disadvantage? Or is the advantage of a ‘second mouse’ overwhelming in any event? Or are the ‘early bird’ markets of our traditional customers so distinct from the ‘second mouse’ markets served by these fast followers that we can play in both?”
    • “Are we willing to sell to a fast-follower who will inevitably use our reputation as part of their sales pitch? Would we be giving up a once-in-a-lifetime opportunity to become indispensable to the future market leader if we refuse?”

    And, finally, the supplier considering a new relationship with a fast-learner firm from China or elsewhere must answer two other key strategic questions:

    • “If we supply this fast follower, will our win be temporary, as they or other firms in their supply chain implement the same second mouse competencies on our products that they have used to get into a position to challenge our traditional customers?”
    • “By supplying the new competitor, are we forever changing the economics of the customer chain in a way that will tend to commoditize our customer’s product and eventually push price pressure back on us as well?”

    These Decisions Should Not be Made Lightly
    Especially when still emerging from recession, it is tough to turn down new business.  And it’s doubly tough when the second mouse firm offers a “package deal” including as a sweetener access to China’s dynamic and fast-growing domestic market along with participation in their efforts to enter global markets. But, the implications of supplying a fast learner company in competition with an established customer base need serious thought. Loyalty and history aside, hastening the time when competition in your customers’ industry is more price-based and possibly challenging for you is a distinct possibility.

    When we are helping our clients make these tough decisions, the most significant factors that we consider include:

    • Is the new customer coming in anyway, with or without our help? What are their chances of success, with and without our help? There are so many examples of instances when even the best intentioned industry leaders couldn’t stop structural changes in their industry that the burden of proof should be on those that argue that not working with the fast learner firms will change the medium-term outcome.
    • If we help the new customer get established, what actions will guarantee that they continue to need us for the long haul? If we do not help them now, which supplier will? Will there be a chance to replace that supplier later? Linking your company to a rising rocket is far better than to a sinking ship, and often tough choices have to be made as to which customers will be the eventual winners in the battle for global leadership. And implementing some forecasts involve negative short-term consequences even though the long-term implications are the best available.
    • How important is our product to our customers’ successes? Is that importance visible to the customers’ customers? Is our brand visible to the customers’ customers? Can it become so? Firms that are able to establish end customer preferences for their ingredients are in a far better position to work with multiple competitors than those whose contributions are invisible. If this isn’t already the situation, firms considering relationships with fast learner customers must examine whether they can quickly get to that position as a tool to ensure stability in such new relationships.
    • Can our company continue to be successful if we don’t retain our traditional customer relationships? In many industries, especially those that emphasize “early bird” leadership in technology, customer relationships are of significant importance to firms in their supply chain. Not every supplier can make the shift to participating only in market segments involving fast learner competencies.
    • After the shock waves flow through the customer industry, will what is left be an attractive market for us? Is there anything we can do now as a supplier to help ensure that it is? Sometimes new market entrants simply generate a new roster of winners among the competitors and their suppliers. In other instances, new entrants create a pool of excess capacity that yields price pressures and a future in which no one makes any money. Times of change such as this therefore always require a reexamination of earlier decisions as to the attractiveness of an industry.

    In most cases when the opportunity to work with a new customer from the fast learner countries emerges, there is a mix of opportunity and risk. Considering all aspects of the decision and formulating answers to the key questions above can at least make the decision one that is deliberately taken with a clear understanding of all the implications of the direction chosen.

     *George F. Brown, Jr. and David G. Hartman, “The Second Mouse Gets the Cheese,” Sales and Service Excellence, May 2011.