While cultivating sales in the domestic market is an enticing possibility, most China manufacturers are still bent on expanding their export reach through the next five years.
Encouraged by the success of a few suppliers, an increasing number of China makers are looking at branching out to the domestic market. Many companies feel taking this step can help raise their bottom lines, what with the numerous challenges that make it difficult to achieve higher gains in the export sector. Among these are the weakening purchasing power in the US and the EU, trade sanctions and the yuan’s appreciation.
China’s growing middle class has attracted large international brands to set up retail stores in the country. Zhu Chang Ling, spokesman for the China Furniture Association, said even second and third-level markets have become more competitive this year. Data gathered by the association show retail sales have been increasing by at least 15 percent annually.
Thinking that they would have an advantage over foreign companies, export manufacturers followed suit. Richard Brubaker of All Roads Lead to China, a blog that discusses trends and macroeconomic issues in the country, said such makers believe selling to the domestic market would be easier for them. This is because they know the culture of doing businesses in China, transportation costs are lower and there is the perception that customer expectations are not as high.
But companies realized quickly that penetrating the local scene is not that easy. This is true particularly for purely OEM businesses. Many such suppliers do not have the capability to create and market their own designs, even for domestic consumption. Payment is one major drawback. Unlike in the export business where suppliers requiring payment via TT can receive their money in full after products are delivered, it takes as long as a year for local distributors to remit. The duration depends on how established the agents are. In most cases, manufacturers can receive payment between one and three months, especially if they are dealing with large distributors.
Building a stable distribution network is key to achieving success in selling to the domestic market, but it is difficult to find a suitable agent. Both sides have to assess the benefits of forging partnerships. Makers also have to gauge whether the distributor’s network and marketing capability are sufficient for their needs.
But once this is formed, cultivating domestic sales becomes easier and certain advantages can be enjoyed. For one, the yuan’s appreciation will have no impact on pricing and manufacturing costs. Moreover, sales will not be influenced by import policies and trade sanctions.
From being a purely export-oriented company, Wenzhou Shengli Healthcare Equipment Co. Ltd was able to develop a solid distribution network and now has 600 retail outlets selling its massagers line across China. It also has more than 10 stores overseas, including South Korea, the Middle East and India.
Taking baby steps
Most suppliers are now taking a two-pronged approach. They are still taking steps to penetrate the domestic market, but are continuing to rely mostly on overseas sales to boost their bottom line. Many are even planning to increase export destinations in the next five years.
Purely OEM-oriented maker Foshan Shunde Jaeyong Hardware Co. Ltd started opening up production lines for domestic sales in 2000. The supplier has since seen a return on its investment. But as higher raw material and labor costs kept eating into profit margins, Foshan Shunde said increasing domestic sales and reducing OEM transactions is the best solution for the company. It is now planning to set up a local retail store for selling in-house lines. But the maker remains realistic about expectations and knows it can take at least 10 years before the endeavor becomes successful.
Apparel manufacturer Jiaxing Mengdi Import & Export Co. Ltd has expanded to the domestic market as well, driven mainly by the yuan’s appreciation and thinning export profits. General manager Tom Zhu said the company lost some overseas clients because the 25 percent cost increases led to prices being 10 to 15 percent higher this year. But the supplier does not intend to shut down its export business, and is planning on balancing domestic and overseas sales in the years ahead.
Some export-oriented companies that want to launch OBM lines internationally have decided to test the reception in the domestic market first. Foshan Shunde Jaeyong, for instance, is planning to sell its RKD-branded wheelchairs at its retail store in Foshan, Guangdong province. Eventually, the supplier is hoping to market the in-house line to both domestic and overseas markets.
LED maker Guangzhou Hongli Opto-Electronic Co. Ltd launched its Hongli Tronic brand in 2008. Since there were no language barriers and cultural differences, it was easier for the company to market the brand in the domestic market. Now, Hongli Tronic-branded LEDs are used in various local projects, including in Guangzhou Metro and BYD’s auto meters.
Although several businesses have launched branded lines to the domestic market, there are more companies that are wary of doing so. J&F Furniture Co. Ltd’s sales manager Frank Fan said the export and local markets require completely different designs and price points. Further, targeting the domestic market needs substantial spending on advertising and distribution-network building. It may sometimes be even more expensive than participating in trade shows, and advertising in print and online trade publications. Moreover, suppliers do not want to risk losing both their overseas and domestic business in case the latter fails.
Apart from these reasons, stickers, keychains and magnets maker Wenzhou Success Group Co. Ltd has no plans to expand to the domestic market because the return of investment is longer.