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Perils of Trading in China
(Marketing Memo, February, 2003)

Early entrants into Chinese markets may profit initially, but many will end up with excess capacity and excess inventory as competition increases and customer tastes and preferences evolve. If you are eyeing China and other emerging markets, first obtain up-to-date market intelligence. Here are some lessons that other enterprises have learned when trading in China:

Plan on long lead times. Avid Technology of Tewksbury negotiated with Television Broadcast Limited (TVB) of Hong Kong for almost two years before signing a contract to provide its editing technology to the Chinese broadcasting company.

Expect heavy local and international competition. TVB considered a number of competitors before selecting Avid (Note 1). However, identifying competitors may not be easy. In 1996 global TV manufacturers found they were competing with each other, with Chinese producers, and with entrepreneurs who made remanufactured TVs out of discarded parts. The supply soon exceeded the annual demand (14 million TV sets). Car manufacturers could experience the same phenomenon (Note 2). Think of the ancient U.S. cars kept alive in Mexico and Cuba with used parts!

Cater to local tastes and preferences. American products may not have the cachet they do in other countries. In KFC's 800+ restaurants in China, mashed potatoes and rolls have yielded to soups, porridge, and rice. Yum Brands, owners of KFC, authorizes local managers to design menus that appeal to the local palate. In addition, Danone and other successful companies manufacture under local brand names (Note 3).

Adhere to local high tech standards. We provided a telecom company with the standards for a particular telecom protocol in China and other emerging countries.

Become familiar with local regulations. Many countries have recently privatized the telecommunications and utilities industries, creating both opportunities and competition.

Expect extreme price sensitivity. Coca-Cola eventually switched from cans to reusable plastic bottles in rural areas, reducing the per serving cost from $0.30 to about $0.12 (one yuan), which was more acceptable to Chinese consumers (Note 3). In addition, major car manufacturers found a special $5,000 vehicle was more appropriate for poorer consumers than large US-style sedans. Danone sold $908 million worth of bottled water in China in 2001, but it expects prices of new drinks to plummet by 50% within three years (Note 4).

Periodically check assumptions about the market. China may have a population of 1.27 billion; nevertheless, even in China business opportunities have limitations. Perhaps one of the biggest opportunities in China and other new markets lies in providing accurate information on market conditions, including competition, consumer demand, price sensitivity, and product substitutes!

Notes:

1. Resende, "Avid Inks Deal with Hong Kong's TVB," Mass High Tech, 1/10/03.

2. J Kahn, "Chinese Markets: Big, But Often Saturated," WSJ, 8/5/96.

3. Chang & Wonacott, "Adapting to Chinese Customs, Cultural Changes, Companies … Find Profit," WSJ, 1/9/03.

4. Legett & Zaun, "World's Car Makers Race to Keep Up… Looming Capacity Glut," WSJ, 12/15/02.

Winett Associates provides market research and writing services.

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