China: Two decades of change (part three)


After twenty years of market creation in China, profound changes have taken place that affect how international companies need to operate there. The last in our three part series examines how selling has become an important business function.

As we have discussed in the previous parts of this article, China has demonstrated with its explosive growth since 1992 that there are advantages to allowing market forces to make decisions. That two decade period has been marked with remarkable change, as business-to-business markets have been created and markets have begun to transition from local to national. For Chinese firms, perhaps the most demanding change has been the requirement to develop new competencies related to sales and distribution, which have become important business functions. Like the other changes previously discussed, this one is still evolving, with key questions to be answered by firms looking to do business in China. Will China’s sales models continue to involve a complex tiered-distribution structure, one that we have seen creating difficult management challenges in many industries, or is China in a transition to something very different in terms of how products are sold and delivered to customers?

In the China planned economy of the 1980s, the role of enterprises was to perform production to plan and get the products to the assigned location, without the need to have any understanding of markets or customers. The business cards of company heads said “Plant Manager” not “CEO” and that was an accurate description of the assignment. China is a very large place, with challenges galore in supplying consumers and factories, and the role of physically moving products to meet customer needs is a critical one. Understanding the historical focus on making and moving products rather than marketing and selling to customers helps to put the current state of sales and distribution into context.

As “plants” became “companies” and “production quotas” became “sales plans,” market penetration gained importance for the first time. We met the person in China’s textile industry who was the first to have the title “Head of Marketing and Sales” in that industry at a workshop in the mid-1990s. The challenge she faced in her new job became evident when she explained: “We have had two types of sales. One has been to deliver products to the clothing factory according to the plan. The other is that we sell to an agent in Hong Kong. We have never actually met with a customer and we do not know the names of any, or what they make from our products…or even what they pay. Can you help us?”

The years since then have seen enormous changes. Consumer product companies and some business-to-business suppliers first opened branded storefronts to demonstrate and sell products across China. Many were company-owned, but gradually independent multi-tiered distribution systems grew up to cover China. Distributors (dealers) often were those who transitioned from providing transportation and selling services under the old system to taking title to products and selling. Typically, a tier 1 distributor in a major city (provincial capital) is appointed by a manufacturer and that distributor recruits tier 2 distributors, who recruit others etc. We have seen five-layered tiers of distribution networks for products such as computers and consumer electronics.

In cities, auto parts and MRO (hardware) dealers congregate in street malls. Individual dealers, many selling identical products, are found side-by side. Some of these malls have developed into indoor locations, but with the same bargain-shopping look and feel. Business-to-business customers come to the dealers and buy from a large variety of options in one location. Products that also are purchased by consumers like computers are largely sold in the same way, but in nicer and more convenient surroundings. Still, there will generally be multiple Lenovo or Asus dealers vying for business. The plethora of sellers ensure a fair price, but developing a relationship with one dealer guarantees reliability and after-sale service. The factors that drive success for such distributors and dealers have thus evolved considerably.

The tiered-distribution structures are superb vehicles for reaching across a complex geography at a low cost to the manufacturer, but are difficult to manage. Even for larger purchases like construction equipment, where reaching beyond major cities is essential, we have been told that few manufacturers know anything about their dealers below the first tier and that cutthroat price competition among dealers selling identical products is the rule. Messages about value are nearly impossible to drive down through the tiers.

For even complex business-to-business products, like elevators or large climate control systems, the dealers’ focus is not necessarily on product, service, or even price, but rather on relationships with customers or guanxi.[1] We have interviewed hundreds of dealers of all kinds of products over the years asking about what contributes to their success in the marketplace, hoping to hear product-service-price messages. The comment of one seller of climate control systems in an interview several years ago is representative of their frequently-stated belief that none of that is very important. “There are three things that determine a distributor’s success in the market: the first is guanxi; the second is guanxi; and the third is also guanxi.” The relationship between suppliers and customers is a strong bond in a country where contracts and the legal system do not provide insurance. Relationship is the main way that customer satisfaction and after-sale service is ensured. Service is, then, largely a dealer responsibility, lending even more power to the strength of the “dealer’s brand” as opposed to the “manufacturer’s brand.”

In summary, a distribution system based on transportation has been replaced by one where success is defined by the sales model and service competencies. That is a revolutionary change in a short period of history. But a combination of intense competition and dealers who sell on personal relationships has limited the ability of anyone in the marketplace to really distinguish their offering, allowing the dealer to hold all the cards. For Chinese manufacturers, who didn’t have a history of thinking about the market anyway, it has made product differentiation very challenging.[2]

In some business-to-business markets, customers have deliberately begun to reduce the importance of relationship in choosing vendors. We have seen that with some real estate developers, for instance. Modern management education has pushed in that direction, for companies that are focused on the bottom line. In other cases, especially where government and their companies are the customers, guanxi is still paramount.

Big box stores have also emerged, with names like Gome and Sunning in electronics and Home Depot and B&Q in hardware. They offer reliability in the supply chain (no fake products) and pleasant surroundings, but not the confidence of a good deal that comes with haggling among multiple sellers and choosing one with which there is a trusting relationship. So, once again, a gradual transition continues.

That is the China market that our clients are often entering. The challenge is that to be profitable they need to deliver value messages that are far different from what the customers are used to hearing, working within a market structure that is set up to diminish the power of those messages in favor of price competition and dealer guanxi. The best solutions often involve a channel driven business model, but with a strong manufacturers’ sales support organization to provide content and technical support to end customers during the pre-sale and post-sale operations phases of a relationship.[3]

The company sales support organization must go beyond end customer support, often needing to first overcome dealer resistance. They must convince the dealers that their role is support for sales at better margins, not an effort to learn about and supplant dealers in their relationships—a challenge not unfamiliar in the relationships western manufacturers have with distributors who jealously guard end customer relationships and knowledge. Since China’s dealers have few assets beyond their relationships, it is hardly surprising that they guard them perhaps even more fiercely than is the case in the west.

Marketing and selling have become critical competencies in China, and the mastery of those functions is a differentiator in culling out the winning firms from the long roster of aspirants. And while the evolution of the distribution function has enabled Chinese manufacturers to reach broader markets, many of them recognize the handicaps associated with the current distribution structure. They are now trying to understand Chinese-style channel management, hoping to create relationships in which the dealers are creating value through service and partnerships with the manufacturer, enabling both firms to win because of factors other than price. So, once again, the journey is underway, and we can expect the evolution to continue for many years to come and at an uneven pace across industries.

In twenty years, China has successfully transitioned from a planned, centrally dictated economy to a market economy. It has created markets across a broad range of products and channels and across a very complex geography. Business-to-business markets, national suppliers, and competent sales models can now be observed in many industries, and experiments are underway in all three of these areas in many other industries.

In many cases, China’s markets are still in their infancy in terms of producing the right incentives to meet customer needs, but in others, markets are close to mature. As we look ahead, we can predict that change will continue and that the evolution will produce results that are a blend of what has worked in the west and what has been the history within China. The business environment will continue to evolve differently in shape and over time across China’s markets. The opportunity and the challenge have both just begun, and the dimensions of both befit the scale of China’s market.

[1]Guanxi or relationship is a complex aspect of business in China. Relationships are both multi-dimensional and highly personal, as we have discussed in The Unwritten Rules of China cited above.

[2]Foreign suppliers of the most complex business-to-business products have often relied on direct sales. While that solves the problem of managing distributors, it is not a solution to the need for local relationships in selling. Using a direct sales model when distributors are the primary market channel has placed many companies squarely in a small super-premium niche of the market that is so demanding that many buyers are willing to deal with the unconventional business model of the supplier.

[3]Atlee Valentine Pope and George F. Brown, Jr., Supplier Driven and Channel Driven Business Models, Blue Canyon Partners, Inc., © 2006

 

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