20 Dec 2016 15:59 IST

China’s new strategy: sell direct

How China is managing to sell products directly to customers at throwaway prices

That China is a manufacturing powerhouse is little disputed. The best companies in the world rely on its extensive supply chain to bring the latest electrical and electronics goods to customers.

For example, Apple iPhones are actually made by Foxconn, the largest private employer in mainland China with over 1.4 million workers. So dominant is China and so large is the scale that some products — like mobile phones, TVs and low-end computer accessories — are largely made in China (and Taiwan), and nowhere else.

Foray into retail

Until a few years ago, China’s involvement with the world economy ended at the last point in the assembly line, when the branded logo was stamped on a product. The product would then travel the high seas to company warehouses and store shelves, where the only link to China would be in the form of a line — “Made in China”.

Not any more. With China becoming a powerhouse in retail too, tens of thousands of unknown Chinese manufacturers are selling products directly to customers around the world. Ali Baba is the best known online mall but small-time, unheard-of Chinese companies are increasingly using eBay and even Amazon to directly ship products to the customer’s home.

The Dell direct approach

By cutting out the middleman — a retail store or a warehouse — Chinese companies are now perfecting the Dell direct approach. It was Michael Dell, a young student at the University of Texas in Austin, who revolutionised the computer industry when he began selling products directly to customers from his dorm room. This was a serious development, one that had profound consequences for the world’s economy.

I recently bought a new smartphone and was looking for a drop-resistant skin cover. A local store at a mall had a few styles and the price, on sale, was $14.99. When I returned home and searched online, I found many US outlets offering it for $8.99. But when I sorted the list by price, I found a Chinese company offering it for $1.59, inclusive of shipping costs, direct from Shenzhen! The delivery would take 20-22 days, but I was in no hurry, so I went ahead and placed my order. (I checked to see the price for India and it came to $1.39).

The costs of production and shipping are important elements in a product’s price structure, but they are not always the largest slices in the pie. Design and marketing expenses can sometimes be larger than the costs of production. Other so-called value added elements — such as warehousing, retailing and brand premium — make the product dearer and help form the sticker price.

Unbranded cost

In the customer direct model, the design costs are borne by the manufacturer. There is not a whole lot of technology involved in designing a skin cover for a mobile phone, and many phones have identical shapes and sizes. So the tooling used to stamp out a cover for one phone manufacturer can easily be used for other manufacturers too. Note also that the factory making the phones is probably located in the same industrial area, so collusion between the two companies is easy.

These are unbranded covers, so there is no marketing involved. By eliminating warehouses and retail stores (and their bloated costs which add little value), the manufacturer ships directly to the customer, which results in huge savings for the buyer.

China’s growth story

Squeezing every ounce out of the value chain is the only way to keep prices low. China has proved to be a master at this, unlike other countries. Multinationals were initially attracted to China because of its low labour costs, cheap land and loose environmental laws, all of which helped keep production costs low.

As China became wealthier, its workers began to demand more. When labour costs became too expensive to bear, Chinese companies started to invest in automation, or they moved out into the hinterland where labour was less expensive.

Now, China is aggressively opening factories in poorer nations (Africa, Southeast Asia) to keep its production costs even lower than what they were 15 years ago. When companies with such a single-minded devotion to costs are able to sell directly all for the additional price of postage, the world economy can be turned upside down.

Caveat emptor

However, buying from such unknown manufacturers has several disadvantages. For one, it is not patriotic to encourage foreign manufacturers, especially Chinese companies; this view was strongly expressed by numerous people on social media in India recently.

But this, to a certain extent, is hypocrisy. People tweeting out these patriotic messages were probably doing so on a Chinese-built keyboard on a Chinese-built computer or from a Chinese-built mobile phone. If the choice is between buying a Chinese product direct or one through an Indian retailer, many would chose the former if it lowered the overall price.

Second, it is difficult to get any kind of support or customer service from companies which are that far away. Time differences, communication difficulties and language issues all make it nearly impossible to resolve problems after a sale. Platforms such as eBay provide buyers with some protection (you can return a product if it is defective and claim a full refund), assuming you don’t mind the hassle.

For relatively inexpensive and non-branded items, therefore, buying directly from China may well be the new way to shop. If this trend catches on to higher value items, domestic brands such as Micromax and retailers such as Flipkart will slowly be edged out. Not a pretty picture.

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