China Business

Competing on Price With Chinese Companies

Walking-the-China-tightrope

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?

9 responses to “Competing on Price With Chinese Companies”

  1. Perkowski’s point makes no sense to me. At least near Hong Kong, people don’t treat 100 RMB notes as anything like $100 notes. The cost levels might be very different in the interior, but that’s something quite different.
    People will check carefully if 100RMB are counterfeit, but I’d attribute that to the fact that counterfeiting is more rampant in China than in the US, and people routinely use cash more in China than in the US. One other thing reason that people will check money rather carefully is that the 100 RMB is confusingly similar to the 100 HKD note. (Interestingly in HK, no one will look twice if you pay with a 100 HKD note, but people are extremely reluctant to accept HKD1000 notes for counterfeiting reasons.)
    Conversely people in the US will check credit card transactions a lot more closely than in China (i.e. I’ve never had someone ask for my ID for a CC transaction in China). One reason for that is that China has a much newer credit card infrastructure than the US so that most CC’s and readers have smart chips.
    I’ve also seen a lot less haggling than Perkowski seems to imply exists.
    There are differences in how cash is treated, but it’s really hard for me to attribute this to price levels.

  2. Crandell: Chinese companies will always be better at hiring and paying their people, retaining them.
    This also makes no sense to me. Foreign multinationals tend to be “nicer” to Chinese employees than local companies, so one thing that you do see a lot is local people moving rapidly from company to company and no corporate loyalty at all, and one reason for this is that local companies tend more than foreign companies to “nickel and dime” their employees.
    Crandell: According to Crandell, 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.
    I tend to discount statements in business and economics when someone says that the “only way to do X is Y.” Economic and business systems are complex enough so that there are usually a dozen ways of making money (who knew that you could make hundreds of millions of dollars selling chicken feet).
    Also, you will get into trouble if you are too disruptive. If you change the rules too much, too quickly, you’ll usually find enough of a backlash that you’ll get shut down.

  3. Have to agree with Twofish on this one.
    China is still very much a cash-based society and the 100RMB note is simply more ubiquitous in China than the $100 notes in the States. In fact many stores will simply not except $100 notes in the States and I for one would not carry around these notes for everyday transactions; I cannot say the same about RMB100 notes in China. I am not convinced that the perceived value of these notes in their home countries is comparable.
    Retention problems transcend both MNC’s and local companies. I have not seen data comparing attrition rates between local firms and MNC’s but I suspect that the firms that have formal retention initiatives in place would likely be MNC’s and would also have less attrition as a result.
    Sara Lee competes on price with their Golden Rooster brand of shoe polish; granted it was acquired through a JV with a local firm but the product is certainly not disruptive and one way to enter the market not discussed above is acquisition. It may be possible to find efficiencies, as Crandell points out, that might in fact bring your costs in line with the local players so that you can compete on price.
    And Twofish is right: be cautious of the one size fits all strategy for China. We have a natural tendency of looking for golden rules or precepts because generalizations are easier to work with than specifics. It’s one of the first expectations I have to control with my clients: your business is not the same as the business of the guy you met on the flight over here.
    That being said, Crandell and Kedl have point in that for many MNC’s one excellent strategy may be to establish credibility while developing a value/price point model that is appealing and unfulfilled in your intended market here. But it’s not the only way to be successful.

  4. I find that when I’m in Mainland China or India I find myself upset about having to part with an extra kuai or rupee. Alternatively, when I’m in HK or the U.S. I spend far more on the same products/services and think nothing of it. The reality is that what is more concerning to me than how much money I spend is whether or not somebody ‘got’ me.
    For me, I believe the heart of the matter is bargaining prevalence. If I am in an environment where I am mentally prepared to bargain with people, I approach every transaction with a weary, penny-pinching mentality; alternatively, if I am in an environment where there is 100% price clarity, I tend to be a more carefree spender.

  5. I would agree that in some regards, a 100RMB note is treated in China the way a $100 note is in the US. At least for me (from the US, visits China often). Whle I rationally do the conversion in my head and know that a nice scarf or decent meal costing 400 RMB in China is not that expensive (relative to US prices), I still wince. And using a 100 RMB bill to pay for a 20 kuai coffee in starbucks sometimes will get you the same annoyed look as when you use a $100 bill to pay for a $7 latte in the US (I know, the proportions are not equivalent).
    Like I said, logically I know 100 kuai does not equal $100 but I do think it has a lot to do with it being the highest denomination available. And perhaps some of it has to do with my western perception that most things still should be shamefully cheap (again, relatively) in China.

  6. The authors of Dragons at your Door pointed out many case examples where foreign competitors were outplayed not only in price but in capability as well. The example of the chipping containers is classic. They recommend 3 possible counter-tactics …http://www.iveybusinessjournal.com/article.asp?intArticle_ID=796
    which basically boil down to fight, flight or f*ck (to put it crudely). Either do the same cost disruption in china, make a deal to cross-sell and not enter respective markets, or buy them out.
    To me they all have weakness so the 4th way (which is non-trivial) is to acquired additional technology/expertise and reframe the market. Examples include GE not selling plane engines but combining servicing to offer flight hours. Instead of slugging it out in the fast train market, focus on operations with minimising lost passenger hours. I suspect the whole consumer market segments might be lost as firms sell out to the chinese (if anyone still wants the US dollar).

  7. The $100 anecdote is a good one, seemingly revealing and insightful, but Twofish is right. I’d say (hopefully he is just using it this way) that it is intended as a story meant to convey monetary shrewdness and not to taken literally.
    For Chinese and foreigners, The 100 RMB is ubiquitous, the sparrow in the park. When cashing out or getting paid, no one asks you what denomination you want. No one wants a pocket full of nappy 20’s and such. Hundys it is! But. $100’s are baller money: breaking one involves a small bit of psychic pain; the case of the sum of it’s part’s not feeling nearly as comforting as the whole.

  8. Very interesting article. Will this eventually get better for foreign companies or do you see it staying the same or even worsening?

  9. Conspiracy – 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.

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