Chinese firms’ new challenge: Sell to Chinese

Jack Yin and other factory owners find it's not easy to sell to their countrymen.

By , Correspondent

DONGGUAN, CHINA – Jack Yin’s Western hopes are fading. He founded his small bath-products factory three years ago in a lonely industrial area on the outskirts of Dongguan with visions of Americans and Europeans snapping up his soaps, shampoos, and body lotions. When the economic crisis hit, 70 percent of his export orders evaporated.

“The impact has been huge,” Mr. Yin says. So he’s shedding his cut-rate offerings, betting heavily on lines of high-quality hair-care products that he hopes will turn Bath Concept Cosmetics into a brand that people learn to know and trust. Yin’s target market? His fellow countrymen.

“When the foreign markets don’t work, you have to change,” he says.

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All across South China’s manufacturing heartland, entrepreneurs like Yin are turning inward. As Westerners buy less, Chinese companies are trying to sell their goods to a surging domestic marketplace that often doesn’t even know they exist. It’s a key to rebalancing a world economy that’s dangerously out of whack, economists say. It’s also hard.

Long accustomed to producing foreign-designed goods cheaply, many manufacturers are clueless about selling to their own compatriots. Or they’re stuck with product lines, like toasters and sports bras, that have little appeal here. In January, the government estimated that around 20 million workers lost their jobs as foreign orders dwindled since the global downturn took hold. Dongguan alone has lost more than 500,000 jobs – 10 percent of its workforce – in the first half of 2009 compared with the same period a year ago. Exports are down nearly a quarter during the same period. A few high-profile factory closures – such as last year’s sudden shutdown of Smart Union, a huge toymaker that supplied Mattel and Disney – have fueled fears that China’s export-heavy economic engine was grinding to a halt.

“The larger challenge for China, and everyone says this, is shifting towards domestic consumption,” says Marshall Meyer, a management professor and China specialist at the Wharton School of the University of Pennsylvania in Philadelphia. “The big issue is the dependence on exports…. It’s a real vulnerability.”

Wrenching change

Transitioning to a domestic market sounds great to Hu Guohui, who manages the Guangzhou Shenglong Electronic Technology Company. But wrenching his firm away from the simple, foreign-driven ways of the past hasn’t been easy.

The sprawling factory produces digital cameras, mobile phones, GPS units, and dozens of other products for a range of international name brands – high-end products that fill store shelves abroad but pointedly omit the name Guangzhou Shenglong Electronic Technology Company.

“People are always joking with us: ‘Foreigners are always thinking about the Chinese market. Why aren’t we Chinese thinking about our own market?’ ” Mr. Hu says. But “Chinese spending habits and those of Americans are really different. America has a culture of spending.”

His factory has taken the ambitious step of launching its own brand – UAT – directed at the Chinese consumer. The company hopes that in a few years this just-created brand will make up 40 percent of company revenues. Already, the new brand has pulled in around $3 million in one year, up from zero before the financial crisis, he says.

But launching a brand from scratch – in a market already dominated by the foreign brands his factory was supplying and thick with competition from lower-end local manufacturers – has required ingenuity and faith. UAT is developing a string of late-night infomercials to make contact with customers directly, the Home Shopping Network approach to battling the Canons and Sonys of the world. It’s using online resources, like Alibaba, to get its name out. Sales agents are fanning out across the country, tracking down corporate clients and trying to persuade retailers from Beijing to Chengdu to stock the unknown cameras.

Wooing China's Wal-Marts

Big-box retailers like Wal-Mart do exist in China, but their numbers are small. Selling one’s products often means negotiating with countless small, local operators in second- and third-tier cities.

Hu’s problems are common ones, which will ultimately limit the extent to which China can turn from its export focus, says Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland in Hong Kong. For all of the hype surrounding the untapped China market, he says, there is no replacement for the mature, high-spending markets of America and Europe. “These export manufacturers are trying to sell to a market one-tenth the size of the foreign market and growing at half the rate. In short, I think companies will struggle.”

The government has been trying to reorient its focus to encourage domestic consumption, offering subsidies to rural residents who buy major appliances, altering tax rules, and easing loans to businesses to stave off more closures. Getting those new policies to effect actual change in companies’ strategies has been slow, says Lin Jiang, a finance professor at Sun Yat-Sen University in Guangzhou. “The government is pushing firms to explore the domestic market, but no one really knows how to do that, so it’s not so easy.”

In Dongguan, the center of the export industry in China, the government is also organizing huge meetings between large retailers and factories to encourage domestic sales, says Cai Kang, vice director of the Dongguan Bureau of Foreign Trade and Economic Cooperation. The first such meeting happened in June, with hundreds of factories from the city attending as well as huge buyers, such as Wal-Mart.

“We can’t say that all entrepreneurs will succeed in doing this,” Mr. Cai says. “Entrepreneurship is a very complicated thing.”

Trade implications

The degree to which China succeeds in this shift has large implications for international trade – affecting not only the degree to which companies can profit from the burgeoning Chinese market, but also trade deficits; the value of the dollar and that of the Chinese currency, the renminbi; and, ultimately, the role of China on the world stage.

The most immediate challenge is righting the serious US-China trade imbalance. As Americans bought Chinese goods with money they didn’t have, the Chinese government helped finance their borrowing by buying up huge amounts of US debt. Now, US consumers are tapped out and China is stuck with piles of US Treasury notes that it can’t sell very quickly without threatening the value of the dollar and, thus, its Treasury investments.

The way out of the mess, economists say, is for the US to begin exporting more and China importing more by concentrating on its growing domestic market. That way, both countries can grow while unwinding their debt imbalance.

Managing this transition well could lead to a healthier US economy and a much leaner China, making itself felt on the international stage as a taste-shaping buyer instead of a cut-rate manufacturer.

“With the global economy likely to keep treading water for the rest of this year, China is rapidly gaining relative strength,” notes a recent report by the Boston Consulting Group. “The new Chinese economy will be less trade dependent, but it will be more competitive in global markets than ever before.”

At Bath Concept Cosmetics, business is already starting to pick up as the Chinese discover high-quality hair salons and the economy picks up. Yin smiles when asked about the challenges ahead. “In two to three years,” he says, “we’ll be famous.”

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