Cracking Chinese Market Tricky, But Potential is Huge

Published in UT San Diego, November 3, 2014

Rule No. 376

Never bet against the macro, and learn to love egg rolls.

How do you get to China? And don’t tell me to take an airplane. China is a monstrous market, but figuring it out — understanding the ecosystem and who the players are — is exceedingly complicated.

The numbers are staggering — 202 million middle-class households in China by 2020 — which will make it the largest group of middle-class consumers in the world. Every company in the world wants to reach these consumers. Yet, trying to sell to these consumers is overwhelming, complex and daunting, particularly if you are a small San Diego company with 45 employees. How do you succeed in a country that is 6,000 miles away with a vastly different culture and set of regulatory issues?

Cosmederm Bioscience faced this dilemma when it wanted to sell its Tricalm anti-itching skin-care products in China. Because of the extensive air pollution and dry climate, they believed their product had potential. “We have found that in China, consumers will pay a premium for products made in the United States because the quality is perceived as better,” said Sean Edwards, CEO of Cosmederm. Tricalm is produced in San Diego by a local contract manufacturer and then shipped in bulk to Hong Kong, where it is put into individual tubes with both English and Chinese labeling.

Edwards turned to a Chinese expert, Jack Bell, managing director of Pantek Partners, for help. Bell conducted focus groups to learn about pricing and positioning. Cosmederm also made a commitment to put five employees in China to work on marketing and regulatory issues. The company signed a distribution agreement with Nepstar Chain Drugstores, which has over 2,000 stores in more than 70 cities.

But Edwards realized that the online channel could be more powerful because the population is so dispersed. The company is selling two products — Tricalm Hydrogel for general itch, and Tricalm Lotion for sensitive skin — on several Chinese e-commerce sites. Edwards said sales are increasing every month, although he declined to provide specific numbers. In September, Amazon China selected Tricalm as one of the “Top 5 best-performing products” during the summer. The product sells for about $10 in the U.S. and is priced higher in China.

Before offering Tricalm in China, Cosmederm had to obtain approvals from the Chinese version of the U.S. Food & Drug Administration that limited the anti-itching claims. Instead, the message focuses on moisturization and skin smoothing. Now, Cosmederm is preparing for Nov. 11, the Chinese version of Valentine’s Day (it’s called “Single’s Day”), which Edwards says is the largest e-commerce day in the world.

To learn more about doing business in China, we talked with David Michael, co-author of “The $10 Trillion Prize: Captivating the Newly Affluent in China and India,” based on his firsthand experience advising businesses across Asia. Michael, a senior partner with The Boston Consulting Group, recently moved back to San Diego after more than a decade in China. He graduated from University City High School in 1983, and earned degrees from Harvard and Stanford before joining BCG in 1992. At BCG, he founded its Beijing office in 2002 and ran its Greater China practice for several years. Among the suggestions in the book:

• Adopt a “paisa vasool,” or money’s worth strategy. The premise is that Chinese and Indian consumers will want more than they can afford so companies should develop a comprehensive, low-cost business model.

• Focus on “local, local customization.” This means that you may need to change how the product or service is designed, packaged and sold in each market.

• Segment and target consumers, not only by income but also by region, city, rural and gender.

• Plan for the “boomerang effect,” which the book describes as inflation in supply-constrained resources, price volatility and possible scarcity of some resources.

• Be aware that the “hit-the-wall-scenario” could develop. This means that the current growth rates could be derailed due to political instability, natural disasters, or corrupt institutions.

Neil’s note: And most important — get a guide. Get an expert. Beware that charlatans exist in all businesses. You will need more than an airplane ticket to really get to China.

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Rule No. 376

Never bet against the macro, and learn to love egg rolls.

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