November 2004 - Uncovering the Chinese Market

Part 2

Companies dissect the many intricacies of the Chinese market-from the media landscape to the manufacturing infrastructure to cultural differences.

By Vitisia Paynich

In October’s feature, “A Closer Look at China,” U.S. manufacturers’ reps, distributors and direct marketing companies discussed the many advantages as well as challenges of conducting business in China. In this second installment, Electronic Retailer examines the DR culture in the country and what U.S. or multinational direct marketers should consider before jumping head first into this market, including the media landscape, infrastructure with regard to backend services and simple competition among local Chinese manufacturers.

“TV penetration [in China] is one of the highest in the world at 87 percent, [which reaches] across to 1.3 billion people,” says Ralph Miller, founder of the China Shopping Network (CSN) in Shanghai. “So, you’ve got quite a few TV sets out there.” However, obtaining contracts for airtime is not met without some challenges.

“China has something in the order of 130 cities that have over 1 million people. Many of these markets have their own television stations, which may or may not be government-controlled,” points out Peter Saltz, COO of Allied Communications in Boca Raton, Fla.

According to Miller, “As far as the government’s involvement, there are exceptions to the purchase and sale of airtime in China.” For example, foreign media buyers are not allowed to purchase airtime directly, nor can they form a partnership with a TV station to purchase programming. Therefore, foreign companies must seek assistance from a Chinese partner that could contract the airtime from television stations, which are authorized to buy and sell media.

Satellite television has actually opened up new doors to foreign direct marketers, especially if they hope to get their products on-air. “There are satellite [channels] like Star TV that are doing satellite broadcasting out of Hong Kong,” notes Miller. These cable stations will contract with satellite stations to run programming. For example, a cable station in Guangzhou might want to include a Star TV channel as part of its channel programming offerings. This would then present an opportunity for DR programming, which, Saltz points out, has some television stations seeing dollar signs.

“The television stations have looked at this [DR] space and said, ‘Gee, I should be in this business.’ And, you’ll find that the television stations are your direct competitors,” Saltz says. Beijing TV, for example, sells products on-air and has even established its own telemarketing operations. China Central Television (CCTV), a government-controlled station, has also been known to dip its toe into the DRTV waters. The station has even visited DR companies in the United States in search of growth opportunities. “Five years ago, [my associates and I] met with CCTV executives because they were looking for products,” adds Saltz.

The types of product that find their way onto China’s television channels are housewares, personal care items, jewelry and small electronic devices for computers.

Television Broadcasting and Satellite Stations in China
Beijing TV (BTV)
Chengdu TV Station
China Central Television (CCTV)
China Education Television (CETV)
Chinese Television Network (CTN)
Guangdong Television
Hainan P&T CATV Ltd. Co.
Hainan TV
LiaoNing Cable TV
LuoYan Cable TV
Shanghai TV (STV)
ShenZhen TV
Wuhan TV
YangZhou Cable TV

What is the preferred DR format? For now, short form is the preferred type of programming for television and cable stations that have not run DR programming before. Miller says it’s common for networks to clear 10- or 15-minute blocks of programming at different times of the day to allow multiple short forms to be placed.

“Long-form programming has come into play within the last couple of years, with more stations willing to block out half-hours, [and even] two hours for DR programming. Nobody is really doing 24-hour nationwide shopping channels, although some stations are playing six to eight hours worth of [programming]-mostly late at night,” he adds.

For U.S. and multinational direct marketers who want to air their long- and short-form programs in China, it’s not uncommon for English-speaking programs to be dubbed or edited, if necessary. Sometimes, a different introduction will be filmed and then integrated into the original program. However, the government tends to scrutinize all content before airing, especially material they deem offensive. Miller recalls, “We were reprimanded once for having cheerleaders with midriffs and without leggings. There are cultural sensitivities that can’t be masked by a simple graphics redo or overlay.” Thus, Miller had to reedit the program and take out the offending material.

“Six years ago, it was very difficult to get things that we [as U.S. businesses] looked at as commodities such as telemarketing and fulfillment,” says Saltz. He adds that telemarketing centers were just cropping up about five years ago but things have certainly improved since then.

He adds there are two parts to the fulfillment issue that should be addressed. The first is the warehousing of the products and the other is the delivery process, which could be an issue, especially when shipping delays could mean lost customers. However, global shipping companies like FedEx, DHL Express and United Parcel Service (UPS) are aggressively vying for a piece of the Chinese marketplace.

The other issue to consider is payment methods. “I would say in the last six months, the penetration of credit card is under one-half of 1 percent nationally,” says Miller. The payment [process] internationally is complicated by that and further restricted by the exchange. So, very few people could purchase [product] directly from Hong Kong for shipment into China,” notes Miller.

Saltz agrees and adds that COD is one of few alternatives at the moment. “The other form of selling that they use is pick up. In a big city, a customer will call and want the product and you’ll say, ‘Well, come to this address and you can pick it up,’ which could be a warehouse or retail store-and that’s a challenge,” he says. Saltz adds that this changes the whole metrics of the DR business.

Miller subscribes to this same belief and notes that “relationships with local distributors, such as Guangdong TV or Guangzhou Cable, would then have a distribution component, where Guangdong TV DR operations would actually be the importer and then do the distribution from its [facilities] under its auspices.

“Basically, all of these segments are very distinct and separate functions that have been purposely kept separate by the government and regulations. So, the functionality of the DR chain is [guided] by the structure requiring a series of intermediaries, depending on which functional block you’re looking at. There are a few groups that can provide multiple intermediate levels to create the connection between them, but that is an area that’s growing,” he says.

If you’ve paid a visit to your local retail store, you might have noticed more labels from China on store shelves. However, can Chinese brands compete with popular U.S. brands? “In terms of technology, Chinese brands can definitely compete with U.S. brand names, especially in the area of consumer electronics,” contends Ivan Lee, export manager for Connex Solutions Ltd., a Chinese electronics firm. “Nowadays, when technology development is so fast, product differentiation, in generic terms, is actually very thin.” He adds that if you look at two different brands today, you can’t tell which one is the U.S. brand versus the Chinese brand.

Lee says, “As everyone knows, China is now the factory of the world. They have the technology, cheap land and cheap labor, while [nearly] every brand seeks China as an OEM. After all, it’s the marketing effort that makes a particular brand outstanding. The undeniable fact is that U.S. companies are very strong in total marketing but their counterparts in China are still lagging behind, at least five years apart. The marketing difference can be told from product design (appearance) and the whole marketing campaign.”

Many Chinese companies have been looking to the United States, specifically on the DR side, to produce Western-quality promotional materials and programming. Miller contends that these companies will begin to take a larger share of [the market], because, naturally, they have a price advantage when it comes to manufacturing products. U.S. companies don’t have the same leverage going into China as Chinese companies have in the United States.

For direct marketers who are considering the market in China, it’s important to acknowledge the business landscape. Miller explains that China is a country that takes the foreign-based brand and the premium that comes with the brand.

“What we’ve done is introduce foreign product into China through a domestic distributor, with the branded products for the first two months and then [those brands] are released, and then we can effectively compete with ourselves by releasing a Chinese branded product [that is] identical but at a different price,” reveals Miller. He explains that it’s common practice to use the original programming but re-branding it so that it’s changing from a foreign product to a domestic product. However, he’s quick to point out that the manufacturer is paid for that distribution, yet the company is paying a much smaller premium on the royalty side, because of the change in the branding.

He realizes that these kinds of strategies may seem odd in a Western DR world and lead U.S. direct marketers to believe that it’s worth rejecting a market that will frequently produce its own knock-offs within a very short period of time. However, he says it’s not uncommon for a group distributing DR products using a Western program to really be selling a Chinese product. “So, it’s an intent to stave off that kind of greed of the brand and the greed of the profit by shifting focus and basically working within the system to do that,” he contends.

“The U.S. companies are facing a dilemma here,” says Lee. “On one hand, they want to have the manufacturing in China for cost-savings or easy entry into the China market. On the other hand, they export the technology or business concept, which attacks keen competition. This is real obvious in today’s consumer electronics market.”

As mentioned previously, U.S. and international direct marketers would benefit greatly by seeking a Chinese partner, especially if they hope to gain a foothold in that marketplace. Miller believes it’s beneficial to find local distributors and local importers to partner with and who are specialized in their respective areas. These local firms can also provide support on the backend, including fulfillment and customer service. Most importantly, the risk will be shared between the foreign and domestic players in such a way that the process is generated through each mutual interest.

“If you move [too] quickly and jump at opportunities in China, people will chase their own tail,” he says. “The vertical pipeline really doesn’t exist in a streamlined way as one would expect in the States. And until you’ve been through that pipeline and gone back to the start of the process again, you’re not really going to have a good sense of how all the pieces fit.”

Please send your comments or questions to [email protected].


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