1.3 Billion of Chinese Consumers or its Top 5%

To Realize What True Advantages of International Companies Are in China

       For many international companies entering China’s market, especially in consumer market such as retail and restaurant chain, are attracted to China’s 1.3 billion of consumers when their market strategies are actually to target its top 5% or even top 1% of consumer group. As said of a popular Chinese wisecrack, their strategy is to ‘turn on right light, but make left turn’.  For some of luxury brands, it may work; but for most of others, their chance to succeed is slim.  After all, it is 1.3 billions of customers are really what they need, and not everybody is LV bag.

The ubiquitous manifestation for this kind of practice is these companies’ high pricing strategies. Nike is more expensive in China than in US, so is Starbucks.  Both of them would lose to domestic brands if they don't realize it is 1.3 billions they want.  Before Gap, people bought things in Woolworth.  China’s real per capita GDP today is only equivalent to American’s in their 1955. It is important to reshape the way of thinking – whenever international companies think of China, they should think of America 100 years ago but with higher real estate.

The problem for the international companies is that they may not realize what their advantages really are.

The strengths of foreign companies are not just their brand, especially not their current product lines, but their management depth, financial capability, innovation, know-how and supply chain.  They have the mighty power to sell good products at very reasonable and acceptable prices to a large percentage of urban Chinese, especially these pocket-low middle class.  Their brand name and financials can secure them the most profitable locations when most of domestic or small players have no chances on competition.  Their management can weather one of the most challenging market environment, China.

       Supply chain is another advantage.  Most of China's domestic companies  is limited in scale (as new comers) and don't have much leverage in buying power, reputation and buying channels.  For most of established domestic manufactures, they also prefer export to domestic channels for the simplicity in dealing with foreign companies even for fewer margins but fewer headaches too. When you can buy cheap, why not sell cheap and sell a lot?  Woolworth would be working the best in China today though it died in American market 20 years ago.  Assumption is that international companies want that 1.3 billion consumers to buy them for next 100 years. Nowadays, the quality is always a relative term, but used repeatedly as an excuse for high price by many companies, foreign or domestic.

Another true advantage for international companies is innovation and the conveyance from innovation to the consumers. Chinese companies would lose the battles because they simply give up on the innovation and prefer to copy all the way. Technology, design and business model innovation are the unchallenged fronts in China.

International companies in the consumer market have unchallenged advantages in China, but those advantages are not in their products or their brand name, but their know-how, management, supply chain, and innovation. They have to think China as 1.3 billion people with a shallow pocket.  No matter what, 1.3 billion is still 1.3 billion.  Also, they have to think the way as Americans think in 1955.  Because of China’s domestic political environment, it provides the best market entry for established international companies.  It is up to international companies to realize their advantages.