Here's an excerpt from a book I read a while back, Poorly Made in China. Given the growing importance of China to the world, I had felt I needed to know more about doing business in the country, even if I actually am not in the business line. The unexpected finding was seeing how this explained some observations in Singapore. If you've ever wondered why visitors from places like Africa come to Singapore and buy massive amounts of goods from Mustafa or Sim Lim Square, here's the answer.
(If you want to know more about Poorly Made in China, click on the link on my Currently Reading list on the right.)
Excerpted from Poorly Made in China:
Why would a Chinese manufacturer willingly make a product for a dollar and sell it for only a dollar? Chinese manufacturers did not have the same concerns for covering their fixed costs as their counterparts in capitalist countries had. Could it be that this was all part of a long-term strategy and that “profit zero” was economically efficient?
Americans somehow imagined that Chinese factories existed to manufacture merchandise only for the United States, but this was not the view from China at all.
From China, the world appeared divided into two parts. One half of the world was made up of countries where intellectual property rights enjoyed wide protection. Because patents and trademarks were honored, there was, not coincidentally, a great deal of investment going on in the area of product design and marketing. Order sizes in this first market – which included the United States and Canada, as well as a number of Western European countries – tended to be larger. Chinese manufacturers favored importers from these economies, not so much because of their volume, but more for what they could lend in the way of design and marketing. Manufacturers gave considerable discounts in order to entice the first-market importers to place orders in China.
The other half of the world was made up of secondary economies where intellectual property was not well protected. In this second market, not coincidentally, investment in product design was low. China still wished to do business with this other half of the world because while their volumes were low and they did not provide much in the way of design, they tended to pay higher prices for goods out of China.
One of the features that characterized China’s export market in the first decade of the twenty-first century was the way in which it took advantage of being at the very center of the globalization phenomenon. China was at a crossroads of international trade, and importers were arriving, not just from places like the United States, but also from Latin America and the Middle East – economies where trademark and copyright were not observed. Manufacturers that produced products using unique, original designs provided by importers realized that they were perfectly positioned to take advantage of the situation by moving designs from one part of the world to the other, while earning a premium in the process. This was not customer segmentation, but an arbitrage opportunity.
The United States was one of the wealthiest economies in the world, and yet Americans paid less for their products than consumers did elsewhere. It was in fact one of the great ironies of the global economy. Products that retailed in the United States for only $1 in a U.S. dollar store could be found in the developing world selling for $2 or $3, and it was one reason why tourists from poorer economies took their trips to the United States as a shopping spree (just like in Singapore; my emphasis).
Many of the manufacturers with whom I worked realized about half their revenue from just one or two customers from this first market. These customers were either from the United States or Canada, or they were large customers from leading economies such as Japan, Germany, or France. The balance of their business was made up of anywhere from 50 to 100 smaller importers, and many of these were from the second market. First-market importers might generate no profit at all, and a manufacturer’s entire bottom line could, instead, derive solely from second-market customers.
An example in counterfeiting illustrates how some manufacturers took advantage of the arbitrage opportunity in an outright sense: A manufacturer accepts an order for 500,000 pieces from a first-market importer that produces a unique design. Rather than merely filling the order, the supplier keeps the machines running and its people working until it produces a total of 700,000 pieces. The original customer gets his order for a half-million pieces, and then the factory sells the surplus of 200,000 pieces at a considerable markup.
For manufacturers willing to engage in an illicit practice of this kind, it made sense to agree to produce the original order at close to cost. The margin that could be earned on surplus product in some categories easily exceeded 100 to 200 percent, and trying to earn a modest 10 percent profit on the original order might mean losing out to a competitor who would bid lower.
Intense competition was a major driving force in China, and any manufacturer that actually attempted to work out a profit margin for itself on an original order might find a competitor pricing the initial order at cost or sometimes below cost. The uniqueness of the product was what mattered most, and it had everything to do with how aggressively some factories quoted. Some of the smarter importers I have met, those who actually understood how the game worked in China, went out of their way to suggest that their product was unique – in other words, that they had something that might be counterfeited and sold through other channels.