Ignore China's Low End Market At Your Peril. Oh, And Don't Forget The High End Either.
The other day I did a post, entitled, "China Business. Which Comes First The Wealth Or The Low End?" on a discussion I had with Jack Perkowski regarding China's low end products market, how huge it is, and how foreign companies should not simply concede it to local companies. At the end of my post, I asked whether China's playing field (I mostly focused on the tax/legal field) precludes foreign companies from succeeding on the low end and whether that market even makes sense for foreign companies.
In a post entitled, "Competing in China's Local Market," Jack weighs in with some excellent responses. His main point, with which I completely agree, is that whether you are going to compete in China's low end market or not, you had better know about that market and how it might impact your product. Jack's thesis (I am basing this as much on our meeting as on his blog post) is that eventually, most of the Chinese companies that are now strictly low end will be bumping up against or even entering your high end market and you had better be ready for that:
Whether a company chooses to try and compete with Chinese companies in the country's low-end market or not, it should clearly understand that this market exists, and it should have a clear view as to how its future development may threaten the profitability and future potential of its existing business in the high end. Make no mistake about it: it will have a major impact.
Jack also makes the point that even in the low end market, the winners are not necessarily the absolute cheapest producers. Affordability is at least as important as price:
Although cost is an important factor in China's local market, there is ample room for foreign companies to compete successfully and differentiate their products from the local competition in terms of quality, technology and service-as long as the prices of their products are affordable. Even in the highly cost-conscious local market in China, many customers prefer to buy better quality products that are affordable, and will shun shoddy products, although they may be cheaper.
On the flip side, Shaun Rein is quoted in a Forbes Magazine article on how foreign companies need to increase their focus on selling to China's increasingly wealthy and free spending 30 and under crowd.
I agree with both Shaun and Jack and I do not see their views as conflicting. What do you think?
Comments (10)
Read through and enter the discussion by using the form at the endAllroads - April 16, 2009 9:07 PM
Dan
I think this is an issue that is being grosly oversimplified - a great way to suck in some comments!
First, this entire thread is based on the premise that EVERY firm in EVERY industry offers a high end/ low end. that to compete in one, you must either sacrifice or make significant price point/ product changes.
A theory that Coke and Pepsi prve the opposite. They get product placements at the Ritz, and in the farthest reaches of China's hinterlands. At the same price points.
Sure, there are going to be differences in who they compete with and how much of a market they have, but they do compete.
Second, I would also disagree with the fact that firms must ALWAYS sacrifice the high end when producing a "low end" product.
Pharmaceutical and medical equipment firms are great examples of this. In these markets, not only are there regional differences (Shanghai hospitals have better budgets than Inner Mongolian), but even within the city (Shanghai Children's Hospital vs. other) that will dictate whether or not a top end MRI is sold.. or something 3rd gen.
3) Aside from this, it is also important to remember that there is a huge difference between retail and industrial markets as well. that while the Average Zhou may not want to spend 10% more for a foreign product, there are manufacturers who will because the quality of the product/ service is far higher.
Looking at the food industry, flavor and starch firms from overseas have done well in this area because their ability to add a much higher level of technical assistance is simply unmatched by the local suppliers.
Anyway, a few things to consider when trying to slice and dice the local market. I have worked with firms who are simply not able to understand the fact that (depending on their product) they do not have to sacrifice their global brand position or pricing.
Sure, there are categories (luxury retail & cars) where you cannot get around it, but in many areas the opportunity to develop distinct products at different price points for different markets does exist.
Louis Brands Savage - April 16, 2009 9:37 PM
I do not think Shaun and Jack's views are conflicting either. And it seems to me that Jack's point about affordability being just as important as price is analogous to the way Target competes with Wal-Mart in the States. Target competes on affordability while Wal-Mart competes on price, but both do well because sometimes people want a bit of quality and sometimes people just want the cheapest product.
In China, we can see this in the way Guomei competes with electronics markets. Every city has a few of these giant buildings filled with tiny stall operators selling all kinds of electronics and competing strictly on price. But Guo mei is able to charge a bit more by having their own clean stores and a better quality product.
Now, Guo mei is a Chinese company, but this same idea holds true for foreign companies because foreign companies don't even have to work to create the air of quality they just have it by virtue of being foreign. So as long as foreign companies are making an affordable, quality product, then they should be able to compete quite well in the Guo mei/Target market.
Hang - April 17, 2009 1:22 AM
"Whether a company chooses to try and compete with Chinese companies in the country’s low-end market or not, it should clearly understand that this market exists, and it should have a clear view as to how its future development may threaten the profitability and future potential of its existing business in the high end. Make no mistake about it: it will have a major impact."
I agree with the above 100%. China has a burgeoning middle class population. Though the middle class population is already large, it accounts for only a very small percentage of China's total population. Those Chinese companies in the low-end market are growing. I'm sure that many of them will not be satisfied with the low end and will set foot on the high end, possibly with a better understanding of customers' needs. Because they are growing together with a would-be middle class population who are mainly consumers at low end now but will be consuming at the high-end market. However, some of those companies may not neccessarily give up the low-end market when they move to the high end. When you are growing with your consumers, your understanding of consumers deepens. There will not be a disconnection of understanding of consumers' needs during the move from low-end to high-end market. I think these Chinese companies will have a major impact on the existing business in the high-end market. Let's wait and see.
Mao Ruiqi - April 17, 2009 6:31 AM
Continuing from the first comment: I humbly nominate the 80%/20% rule of customer-centric feedback iterations. By concentrating on innovating to the 20% that yields 80% of your profits (not revenues), the likelihood of maintaining the techno China Wall between your upper-end and the lower-end direct competitors will be maintained.
Obviously, if a competitor is fortunate enough to build from the low-end into a techno leap frog position, the hindsight notion of having had a product lining rearguard may make sense; but the odds are against such serious challenges. In reality, such a rearview mirror strategy will only consume resources that seriously distract from advanced, new product development.
Chris Carr - April 17, 2009 10:58 AM
Good posts.
To me, one of the lessons of the current economic situation is that the West must learn to and become better at selling to poor people (the low end market).
This is especially true if the world population continues to grow as many expect it will, as most of those people will not be high end customers.
There is much the West can learn from China in this regard.
For example my friend in the Peace Corps in Africa tells me when the village water pump goes out, they buy without hesitation the $7.00 Chinese made and sold water pump to replace, not the $24 dollar German made pump.
So in my view the Chinese "get" this side of business and economics.
Cheers.
ScottLoar - April 17, 2009 6:16 PM
I agree there is a low-end market often ignored by Western manufacturers who primarily produce and distribute for their large domestic market, but increasingly less so in a global economy. Nevertheless, is the US$7.00 China-made water pump in efficiency and use-life the equal or only slightly less than the US$24.00 German model? Will the China model last at least four or five times as long as the German one? Large-scale production with limited SKU's having ecomomies of scale through large purchases of basic componentry available off-the-shelf, practicing "lean" manufacturing, and with markets world-wide are in contrast to those manufacturers who only by "skimping on labour and stinting materials" (偷工減料) rely on price to sell. Sure, everyone looks to price at first, but sooner or later the difference between price and value usually becomes apparent. And, to move up from price to quality is a high hurdle for most low-price manufacturers.
Twofish - April 18, 2009 11:46 AM
Two points:
a) low end doesn't mean low quality, low service, or even low margins. The classic example of this are Japanese cars which were able to enter the US market by offering cheap cars with excellent quality and service. McDonald's is another example of a low end business that specializes on high levels of service and consistent quality (i.e. a Big Mac may not be "high quality" but you know exactly what you are getting). Coca-Cola is a "low end" business that makes huge margins.
b) Business is a world of constant change. Even when you successfully make money, this won't continue forever, and it *shouldn't* continue forever.
ScottLoar: Nevertheless, is the US$7.00 China-made water pump in efficiency and use-life the equal or only slightly less than the US$24.00 German model? Will the China model last at least four or five times as long as the German one?
Maybe not. Sometimes it matters and sometimes it doesn't. For example quality and reliability matters a lot for cars, even low end cars. It matters a lot less for things like low end DVD players, where you are going to be buying a new one in a year anyway.
Chris Carr - April 18, 2009 12:04 PM
ScottLoar,
My buddy tells me the Chinese water pump actually lasts longer than the German one. So it's cheaper, and, last longer.
That said, I am sure one can find examples on both sides where the Western product is more expensive but also better on other criteria, and examples of cheaper Chinese products that outlast their Western counterpart. I.e., not saying the single industry item of a water pump is indicative at all.
Yet, the import is that 10 years ago, no such example could be given or found while now we see more and more of them.
ScottLoar - April 18, 2009 6:30 PM
Correction:
Of course I meant to say, "Will one Chinese model last at least a quarter as long as the German one?" and so justify its lower price.
James G - April 19, 2009 7:34 AM
The water pump example: the Chinese weren't somehow shrewd enough to go for the low-end, in fact China's specialty is and has always been low-end products. This specialty didn't develop out of some visionary business model, it was simply a matter of having hundreds of millions of fairly unskilled people who needed work; people who were accustomed to labor-intensive work. The Chinese water pump may indeed last longer than the German made one, but for Chinese products in general - and in public perception, which is more important - that is simply not the case.
There is currently a clamor in Africa about the low quality of Chinese products. Despite not having been in "Africa" (sweeping but on-point geographical generalization here) for long, Chinese products already have a bad reputation overall. It's not just local manufacturers who are pissed about losing out, it's people needing to rely on these products and who, though they really like the price, detest the weak quality. Nigeria and Cameroon are the places I am certain about, but I remember reading news items about strong rumblings of discontent from Senegal and Kenya as well.
Thinking of Africa still, comparing products like generators and water pumps to products like colas, that's not a good comparison. One is a luxury - though a cheap one - for starters. Coca-Cola and Pepsi carry incredibly strong name status around the world, that is the reason for their popularity. I seriously doubt most people can name more than 3 Chinese manufacturers.
Like the first poster was getting at, I think the reasons people buy Chinese products differs wildly depending on a countries stage of "development", and what we do in the first world has a lot more personal choice than necessity involved. Of course even within a certain market, one can make this same claim.
That said, I can somewhat see a point where China might possibly occupy the low and high end markets. But it will be very difficult to do without establishing strong name brands, which so far they haven't been successful at, and just as important, having a successful advertising and product placement campaign.
When Japan first came over to the U.S. the market was a lot different. Much less competition, and there was more than a little arrogance on the part of the big boys in Detroit, who had been helped along by an overly generous govt and enjoyed a captive audience. That could never happen again, and not just in the car market. If you look at a country as a brand, Japan has established itself as a country (high quality) and also asa place where quality brands come from. Thats a nice double play. Japanese products also hasn't had the widely publicized consumer scares, with toys, infant formula, drywall, etc, that China has. It will be difficult for "China" to overcome that, and if the first Chinese companies out of the gate continue to go for the low end, they may find themselves somewhat stuck there for awhile.