All the strategic insight in the world is useless if multinational corporations (MNCs) fail to understand the operational realities and business potential in China. So, when we assess the viability of long-term partnerships with MNCs, we force ourselves to ask six handy questions:
Has the China volume potential been overstated?
The glittering panorama of the Bund, a riverfront avenue boasting colonial Shanghai's finest architecture, is seductively impressive. But, behind the façade, things get gritty. Penetration levels are low; for example, only 5-6 percent of babies wear disposable diapers. And limited disposable income places an iron lid on household consumption. The Shanghai Carrefour at Wuning Lu once boasted the world's largest footfall - and the smallest per-person sales. Although China now has over 300 million mobile phone subscribers, the average revenue per user is less than $15, compared with $80 in Japan.
The only way to overcome a low volume ceiling is by "standing in front" - i.e., grabbing the category benefit and effectively "owning" a fundamental motivator to get a big slice of a small pie. In China, "scale" is king. "Big" means both domination of both distribution networks and consumer respect.
Is a "Gold Rush" corrupting decisions?
Competition is pervasive and ruthless. The PRC, awash with overcapacity, is plagued by supply-driven commoditization and falling prices. The annual demand for TVs in China is 35 million sets while the capacity is 50 million. Most consumer durables have low utilization--e.g., refrigerators (51 percent), washing machines (44 percent) or air conditioners (34 percent). FCMG goods are often trapped in the same vicious cycle. In 2001, there were 278 shampoo brands. By 2004, that number had been culled to 231.
To establish a profitable foothold, MNCs can adopt one of three strategies: (1) acquire local business to build scale/distribution rather than investing in new capacity, (2) form strategic alliances, or (3) step up imports or outsourcing.
Are price points too high?
Multi-national companies often fail to recognize that a majority of the population is poor. For example, in most countries, Pantene (China share: a low 6 percent) is priced at market average; in China, it's more than 40 percent above. Ariel detergent foists a premium of up to 100 percent on a penny-pinched public; its share is under 5 percent.
In the face of cutthroat prices, MNCs are launching "second tier" brands as volume generators. P&G carries both mass market Tide (global name but cheaper cost of goods (COGS)) as well as premium Ariel. Within Nestlé's culinary portfolio, Maggie (190 price index and 6 percent share) skims the surface while Taitaile (88 price index and 43.6 percent share) bites out a sizeable chunk. Similarly, Colgate Palmolive has leveraged a powerful brand by extending the equity of Colgate Total to embrace no-frills Colgate Strong and Colgate Herbal (combined share of more than 20 percent).
Is a product compatible with consumer demand?
In a land of instant noodles and health tonics, too many global giants impose Western tastes on a Chinese public. Cheese, ice cream, chocolate, and breakfast cereal are simply not natural fits with local preferences. Instead of pushing water uphill, MNCs are moving into local product categories either through acquisition (e.g., Danone and Wahaha AD calcium drink) or introduction of familiar concepts under global brand names (e.g., Heinz Babao congee, Knorr MSG).
Are above-the-line (broadcast advertising) costs unaffordable?
Due to high media rates, heavy clutter, and difficulty in reaching discrete targets (i.e., unavoidable media "wastage" or "overdelivery"), building equity is expensive. Advertising-to-sales ratios in China are high. Regrettably, this is a fact of life and must be confronted with deep pockets or a (realistic) tactical approach encompassing below-the-line, gradual distribution expansion, or brand extensions.
Is Your Advertising Culturally Tone Deaf or Too Complicated?
The Chinese, proudly nationalistic, will demand copy that is tailored to reflect who they are, what they believe and how they lead their lives. To boot, their relative lack of experience digesting brands and communications means that all copy -- in both glittering Shanghai and in rural towns -- must be simple, simple, simple.