IBM Report: Winning China’s Mass Market

Wednesday, April 4, 2007 11:51

Last week, IBM published a report in cooperation with the Economist Intelligence Unit entitled Winning in China’s Mass Markets. At 25 pages, this is definatly one of the better free-bees I have seen in a while that possessed decent information that would enable the readers to gain some understanding of just how difficult it will be to structure for the mass market.

Without retyping the report word for word, I found a number of areas and a number of their insights particularly interesting:

1) The history of foreign companies can be broken into three periods:

  • Market entry (1979 – 1992): Limited domestic sales, limited operational control, and low profitability
  • Market Skimming (1992 – 2001): Premium-end segments; increasing operational control, moderate profitability
  • Market Penetration (2001 – Future): Diverse product portfolio, significant operational control, and strong profitability (but under pressure).

  • On the whole, I would agree with the time frames and even the general characteristics, but I believe that the picture they have painted is a bit too rosy when discussing the last phase. Many companies do have a large portfolio now, but those portfolios have some real dogs in them, and the product mix tends to change very fast. In addition, strong profitability for many only came in the last 2-3 year.. However, profits are definately under pressure for those who are facing threats from Chinese manufacturers

2) The most successful companies usually had three characteristics that differentiated themselves from lower performers:

  • Scale
  • Duration
  • Low Operating Costs
  • Again, I agree, but to that I would also add:
    • Sinofile Managers – and they will be critical when going to the 3rd, 4th, and 5th tier
    • Strong regional distribution partners
    • Start with manufacture-to-export
    • Pushed themselves into the market before they were pulled
    • Strong HR policies, with particular strengths in retention
    • Able to localize products, marketing, and management

3) The mass market is:
4) companies must focus on the mass market, and to succeed, they must do three things:

  • Must create sales and distribution channels that push product down the pipeline while pulling market data up
  • Develop products tailored to the mass market
  • Must create a “scalable” labor force that can support the expansion
  • Again, I agree, but to that I would add:
    • Placement of incountry tech support teams that work with local distributors
    • Regionalized sourcing and manufacturing – Eventually
    • Focus on centralized purchasing transactions and development of partners

4) To create sales and distribution network, the report correctly identifies that thre are too many layers, and that firms will need to squeeze out middlemen to reduce costs and increase potential for sales. some of the platforms they have identified that enable to to occur are:

  • Online and Telesales
  • Manufacturer-owned Retail
  • Direct Sales
  • Direct to Retailer
  • Within this context, they also stated that companies need to move away from guanxi relationship and focus on sales while outsourcing logistics to “the specialists”

Again, I would agree on the structure and the need for logistics support, but the fact to remove distributors or middle men, one needs to have relationships with those downstream that are stronger than they have with the middlemen… and thus, guanxi will always be important.

One example that IBM highlighted that was very interesting was of Anheuser Busch’s web-based platform for its 160 distributors in China dubbed “Budnet” that provides delivery date details, promotional information,and other tools that aided in reducing.
inventory.

Taking that a step further, I recently met with a manufacturer that linked all distributors together on a trading platform so that distributors could prevent stock outs by buying product through the platform from other suppliers at the same cost.

5) A focus on labor was vitally important

  • the study revealed that soft skills and English capabilities were traditionally the top two limiting requirements
  • In penetrating the mass market though, HR issues included:
    • Recruiting large numbers of employees
    • Keeping employee salary levels consistent
    • Physically expanding into tier 3 to 5 cities
    • Building the needed management pool
  • In the end, IBM suggested there were 2 strategies that could be helpful
    • Build instead of Buy talent once mass has been reached. buying talent is always a risk proposition, and attrition rates can be high. so, it is better to build a team
    • Localize Team
  • Again, I would agree on all points, but would add the following
    • The most important factors when bringing staff on will be their local knowledge of the market and the channels
    • Using English as a bar to evaluate future prospects will lead to many missed opportunities
    • Few, if any 4th or 5th tier cities will require significant numbers of managers. Regional Directors and Middle management will sit in the provincial capitals, not in the field offices

During a meeting with a water executive, I was told that the companies that win the hinterland win the game, and I would tend to agree with that. The most recognized brands in China, and some of the most profitable institutions, are Wahaha water, China Post, and others that have penetration into the depths of the Chinese market.. and it only makes sense that this will convert into higher brand awareness over time as new products are developed for higher product categories.

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2 Responses to “IBM Report: Winning China’s Mass Market”

  1. Y A Li says:

    May 14th, 2007 at 10:13 pm

    This report is evidence that business people dealing in China (not the China watcheers) are congealing their experiences and knowlegeable enough to really work the Chinese market. I find the report and your comments instructive.

    The need to regionalize is somewhat unique. Historically China was regionalized, eg The Three Kingdoms. After founding of the People’s Republic it was national policy to establish regional centers to the extent that each center could be self sufficient. Even now you can source most of supplies locally.

    Down to the third and fourth tier English language is not operative any more, requiring uper level management to be sinofile.

  2. rbrubaker says:

    May 15th, 2007 at 1:41 am

    YA Li,

    Thanks for the input. I totally agree that in the third tier English is an issue and to operate effectively you will either need a Sinophile (Halfpat) or a local who can operate. BEsides language, they just need to be comfortable living in cities that are not full of creature comforts and are happy doing business per local conditions.

    As far as regionaliztion is concerned, the past version of regionalization has too much fragmentation and what we are moving to is regionalization with coagulation. East, Soutwest, Central, etc. Transportation, buying, manufacturing, etc are more scalable and each region is still able to retain their own flavors.

    Once that occurs, I think China will see real savings gains as the amount of resources that go to waste will begin to decline.

    Thanks for checking in, and I hope to see your comments on other posts.