Every so often, a client will remark on how there is “no way” its Chinese competitor can be selling a particular product at such a low price. We then talk about all the ways the Chinese company does manage to sell the product at below what it costs my American or European or Australian client to make it.
We usually set out the following as the Chinese company’s cost advantages:
- Lower rent
- Lower salaries
- Lower benefits
- Lower taxes
- Lower transportation costs
- Government subsidies
The conversation usually concludes with my client saying there is no way they can even hope to compete on price, but that they are making really good inroads by competing in value.
There’s a story I often tell regarding China pricing. Co-blogger, Steve Dickinson, is long time friends with a very successful Chinese factory owner in Shandong Province. Steve visited his friend at his factory one day and his friend complained about how noisy his fans were and how they were always breaking down. Steve commented on their incredibly poor quality and the owner noted that they cost about USD$10. A few months later, Steve gifted the factory owner a $250 top-of-the-line American fan.
A few more months later, the factory owner told Steve how that one fan had increased worker productivity because his workers could now hear their music. And every few months for years, this factory owner brags to Steve about how well the fan is working and how long it has lasted. It is no exaggeration to say this one fan taught this factory owner the benefit of not buying strictly on cost.
I also sometimes borrow the following from Jack Perkowski, analogizing how Americans treat USD$100 bills with how Chinese treat 100RMB notes:
In order to describe China’s different and lower cost perspective, I tell audiences that when Americans come to China and see a 100 RMB bill, they automatically divide by 8, the approximate exchange rate between the U.S. dollar and the RMB for most of the time that I have been here, and really see the equivalent of $12.50. However, when Chinese see that same 100 RMB bill, they see something more like $100.
The different way in which Americans and Chinese look at the same 100 RMB bill explains so much about China’s cost structures, pricing and markets that I devote a whole chapter to it in my book, Managing the Dragon. This different cost perspective is so ingrained that I still divide RMB prices by 8, even though I’ve been in China for nearly 20 years. While I might think to myself “what’s 12.5 cents anyway” in discussing price with a local vendor, my Chinese colleagues, no matter how wealthy they may be, will negotiate very hard over every yuan.
To illustrate my point, I always carry around two bills: a 100 RMB bill with a picture of Chairman Mao, and a $100 bill with a picture of Benjamin Franklin. Holding them both up for the audience to see, I point out that the two bills are treated exactly the same way in their respective countries.
“You can’t get a bill larger than $100 in the United States, or a bill larger than a 100 RMB in China,” I explain to audiences. Continuing to make my point, I tell them, “When I go to the Wegman’s supermarket near my farm in New Jersey and pay with this (holding up the $100 bill), the cashier puts it under a light to see if it’s counterfeit. When I go to Pacific Century Plaza across the street from my apartment in Beijing and pay with this (holding up the 100 RMB bill), the cashier will feel it and look at the serial numbers to see if it’s counterfeit.”
The China Business Blog recently did a podcast, entitled, The China Price [link no longer exists], focusing on foreign companies competing on price in China. It consists of Kent Kedl discussing whether foreign companies can “compete head to head on pure cost here in China”. His answer is they cannot:
They can’t. And so the only way that you can compete is to be disruptive. And that’s either to offer a value proposition that’s currently not offered, to bring in something that doesn’t exist, to bring in a technology, to bring in a scope that doesn’t currently exist. But to try to emulate what’s already being done Chinese companies will come in with a whole unique balance sheet structure. They’ve got legacy costs of equipment and building and land. Chinese companies will always be better at hiring and paying their people, retaining them. Foreign companies always pay more for their people.
He describes Chinese companies as “just so incredibly good in their cost-down programs, from rolls of toilet paper to turning the lights off — their ability to control cost is mind-boggling.” Chinese companies are also willing to accept a gross margins that would not come close to satisfying the typical Western company.
So what’s a foreign company to do? Kedl’s advise is to focus on the following:
- underserved markets
- niche products
- identifying the “things that you can actually get paid for. So, design, tooling, consulting, usability… soft side of programs typically don’t get paid for.”
- understanding the particular pricing model for what you are selling
He then discussed how difficult it is to sell “on the basis of value:”
It’s a very tough sell, and there’s two aspects to this. One is that it’s a value proposition and here’s how it’s going to save you money. And I, over the years, have realized that there’s another set of tasks and that is building credibility. So in your sales cycle, if you’re not focusing on building the relationship where you can actually convince your potential Chinese buyers “why this really works,” then you’re just another sales guy making another sales presentation. And it may look good to you on paper, but if you haven’t established credibility regarding the ROI on what you’re selling you will just sound like another sales scheme.
Kedl goes on to say that a number of Chinese companies are “looking to compete in the world and those companies are oftentimes “looking at leaning out their inventory, they’re looking at creating more of a pull model. And so to do that, you’re going to move more toward a lower-volume, higher-mix, higher-margin but better service. And so anticipating where the companies are going to need to go, and being able to provide a service to them that is more of a low-mix, high-volume, you’ll be able to out-maneuver and maybe out-compete some of your customers on that cost basis.”
Kedl then talks of how foreign companies can cut their costs and increase their competitiveness by bringing in “half-pats” instead of expats and by attracting and retaining the best people. He also talks of how foreign companies can benefit by using their existing overseas supply chain and he specifically mentions a company that was able to leverage its global buying power in nickel to secure a cost advantage over local Chinese companies. Kedl posits that foreign companies should look at “how can I integrate the needs and supply chain of my China organization into my global, or even my Asia operation, and gain some efficiencies that my local competitors might not be able to get?”
According to Kedl, the only way to win in China “is to be disruptive” by offering a product or service with differentiators that the Chinese market truly perceives a valuable.
What do you think?