Searching for Markets

The following is a speech given by Milton Kotler at The Wharton School of Finance, University of Pennsylvania on February 21, 2009.

Introduction
•I have only ten minutes to tell you where companies in China are searching for customers in this global recession.
•I will not waste time telling you how bad things are.
•I will limit myself to:
–Where Chinese companies are going to market in China
–Where Chinese companies are going to market internationally
–Where foreign companies are going to market in China.

Chinese Companies in China
•There are three “ Going to Market” roads for Chinese companies in China:
–Follow the “stimulus” program.
–Expand the consumer credit market
–Add value to consumer products
–Penetrate the countryside

Stimulus Market
•Infrastructure
–Dilemma
Only super-size infrastructure is controlled by the Central Government and can be measured for stimulus efficiency.
Big infrastructure will benefit SOEs.
Local infrastructure is decentralized. The Central Government cannot control “pork” allocation and corruption beyond normal means. (Much like giving stimulus money to the States in the U.S.). Hence, little stimulus efficiency.
Private companies will struggle for local development “relationship” deals.
Bank lending will double this year over last year to capitalize both levels of infrastructure.
•Supply side industry subsidies
–Export industries will get cost reduction subsidies to capture more export market share in declining global trade.
–Loans for retail expansion
•Social benefits and welfare
–Health care companies will benefit from health care expansion and upgrade. The government needs new NGO social service groups to serve the poor.

Consumer Credit
•The Central government is encouraging consumer spending with more loans and tax incentives
–Bank loans for auto and household durables purchase, mortgages loans
–Purchase tax incentives
–Trying to contain credit supply within the state owned banking structure. This will not work.
•China will have to extend consumer credit credit supply to private retail channels.
–This is the crux of demand side stimulus
–People will not spend their savings; only spend credit.
–The government banks and private lenders needs data and systems to expand consumer credit.
–Major entrepreneurial opportunity for Chinese companies that can service the growth of this industry..with data, systems and media promotion.
–The government will have to promote a public campaign….It is Glorious to Spend!

Brand Trend in China
•The Chinese brand trend is different than the Western trend
–The Western trend is down-brand
–The Chinese trend is a mix of up-brand and value brand movement
–Depending on the depth of the Chinese slowdown there may be a convergence.
•Price-only goods dominate the Chinese domestic mass market.
•Rising worker and farmer earnings are moving shoppers to value brands
–Galanz is changing is lowest price strategy to a value brand with added features
•Aims to compete more forcefully with Midea
•The middle class is moving from value brands to standard brands
–Rowe in autos; Hisense in Appliances
•Foreign makers own the premium, performance and luxury brands
–But they are moving down-market with standard and value brands

China Brand Challenge
•Continue competitive advantage in price-only and value brand production for the domestic market and global export.
•Move domestic branding from lowest price to value brands
–Block foreign brands from invading value market.
–Foreign makers are trying to move into this high volume market and capture urban worker and rural purchase.
•Move forcefully to capture the domestic standard brand market.
–This is a new brand level market for China’s middle class.
–The Chinese middle class wants to move from value to a higher notch of quality and status. As the middle class matures, standard brands will take over.
•Don’t try to compete with foreign makers in the performance, premium and luxury brand levels.

Penetrate the Countryside
•The government is putting a lot of its stimulus into the countryside.
–To reabsorb unemployed urban workers who are returning to their towns and villages.
–A lot of the old farm land is gone
–Policy requires rural development: town and village development.
•Small scale local enterprise assistance
•Micro-financing
•Better education and training
–Chinese companies are moving more small scale production and distribution and sales into the countryside.

Chinese Companies Internationally
•Protection is an operating assumption; therefore:
–Focus export on developing countries where China has enough political leverage to prevent doors from shutting.
–Develop production, assembly and distribution in foreign markets.
–Acquire foreign value brands

Diversify Export
•China will increase export to developing countries to offset declining export to developed markets. China will:
–Use its past decades of political relations with developing countries in Africa, Mideast, SE Asia and Latin America to prevent protectionist exclusion and optimize access.
–Leverage its resource and infrastructure investments in these countries for consumer export access.
–Use highly flexible overseas Chinese communities and labor deployment programs.

Export Production
•Prolonged global recession will require more cheap goods
•China is the master of cheap goods production
–State policy models – SEZs (Special Economic Zones)
–Industrial operations, labor resources and risk culture
–Supply chain management
•China will follow the pattern of the U.S. to export production, assembling and distribution to foreign markets.
•Local production in foreign markets adds brand value..meeting local quality and safety standards.
•Protectionism trend will accelerate a multi-national trend for Chinese enterprise. We will see Chinese economic development zones in the U.S.
–Chinese SEZs will support their enterprises to locate abroad to protect and expand their market access and retain tax revenue from these enterprises.
•Shenzhen has an industrial zone in Vietnam.
•TEDA (Tianjin Economic Development Zone) has a SEZ in Egypt
–Chinese production and distribution enterprise will be accommodated (grudgingly) in foreign market for employment and local tax generation.

Acquire Foreign Value Brands
•It the current global recession, good global brands are for sale and are “dirt cheap”
–Lenova paved the way with IBM’s Think Pad.
•The company is struggling for its global foothold and other Chinese enterprises are watching to see if they can make it.
–Sichuan Auto is talking about purchasing Hummer from GM
•We may see Chinese purchase of off-loaded U.S. carmaker brands
•Dying brands in the West, like Buick, seem to succeed in China.
–Esprit died in the U.S. and is now a big hit in China.
–Haier made a play for Maytag
•As China becomes more “global” and more confident in its business management, they will buy foreign brands for brand premium and distribution margins.

Foreign Companies in China
•China will pressure foreign companies in China to prevent protectionism in their home countries.
•As the recession deepens and unemployment grows in the home countries this may not work; therefore:
–Become more Chinese!
•Sell more corporate bonds and equity to Chinese investors and companies.
•Acquire Chinese companies
•Strategic alliances with Chinese companies
–Promote consumer credit in the China market for foreign goods
–Penetrate the major urban markets with value and promotion
•Local politicians will make it hard to penetrate the countryside for foreign goods

Diplomatic Load
•Profit from China operations and sales is the life blood of many foreign companies.
•China will press foreign companies doing business in China to pressure their own home countries to play down currency manipulation allegations and protectionist threats.
•This business diplomacy will struggle to transcend WTO channels and seek bi-lateral agreements. It may not work.

Acquire Chinese Companies
•As Western domestic consumer markets shrink, foreign companies will have to expand their China portfolio.
–It is the only large growth market without high debt and instability downside.
•New inventive financing for these acquisitions
•New forms of China partnership deals
–Help advance China privatization policy
–Application of skilled Western technical and management talent to China
•IBM offers option to lay offs to move to new sites in China and India.
–Changing the global business model of foreign companies
•Wal-Mart is opening more stores in China than in U.S.
•Etc. for Starbucks, YUM, and many other franchises.
•Acquisition strategy will require bi-lateral political negotiation and agreement.

Strategic Alliances
•The key to strategic alliance for foreign companies with Chinese companies for market position is:
–Technology transfer
–China acquisition rights in home countries
–Increased DFI
–Shouldering political burdens for China
–Sharing distribution rights and margins

Consumer Credit
•The smartest thing for Western companies to do in China’s consumer and B2B market is to advance consumer credit.
•Western consumer companies should take the initiative to promote and facilitate consumer credit
–They have the technical and marketing skills to advance these systems
–They have a larger global framework for risk management.
•Cooperate with the China government banks to advance this frontier for domestic growth.

Sustain Position in Urban Markets
•Western products enjoy the confidence of quality and status in China’s urban markets.
–This is the essential competitive advantage of Western products in China.
–Chinese companies and brands are trying to catch up.
–If Western companies soften their quality and prestige by countryside downgrading, their value will decline.
•Don’t make the Mercedes A Class mistake.
–There is still great room for penetration in the sophisticated primary and secondary cities.
–Apply resources to strengthen brands and penetration urban markets, rather than endanger advantage through rural distribution.

©Milton Kotler, Kotler Marketing Group