Only a few days ago, Chinese Central Television received new record-breaking bids for its auction-based prime time advertising slots. This year CCTV's total advertising take will reach 3.31465 billion yuan RMB. The previous rapid downfall of former "bid kings" seems to have had no deterrent effect on both old and new bidders. Reportedly, this year has seen the entry of a great number of multinational representatives at the auction, in addition to the old time traditional bidders from Chinese enterprises.
Since the early 90's, Chinese TV has adopted a bidding method to sell advertising slots on the prime time slots after the daily early evening nationwide news programs. Many of the previous successful bid kings seeking the short cut to national prominence for their products ultimately went bankrupt within 2 to 3 years.
As I reported last year at this time in Santa Claus comes to Dragon Town - China's Advertising Bid Kings and TV's by the Kilo early successes of big spenders on TV advertising in China led to a superstitious fanaticism about advertising among yearning Chinese enterprises. As a result, while some rose from rags to riches, many went from "bid kings" to "broke cons". Ai-duo VCD went almost directly from a front-page news story reporting on its top bid for the CCTV slot to financial difficulty. The nearly 300 million yuan it pledged was more than its annual production capacity in a tightly-contested market among no less than a dozen key players. Qin-chi white wine, another former bid king, eventually had its trademark seized by the creditor through a court order to pay for its debts.
However many of the more cautious and rational runner-ups did manage to gain household brand recognition together with significant sales without the massive time prime exposure. The painful experiences of the winner's mass market building taught both the winners and losers that advertising in China is necessary, but not sufficient. Without stable distribution systems, many ran into a mountain of trouble trying to recoup their profits and collect sales revenue from the unruly wholesalers.
While local enterprises were struggling to out-advertise their competitors, government and industrial associations tried to create local "name brands" in various products by gaining certification and reinforcing this with intensive advertising. However this strategy often failed to halt rising market share of the multinationals. For MNC's, the name of the game has been "Distribution Network Building".
The fate of Jian li bao - a canned lemon flavored beverage prominently endorsed by the Olympic gymnastic champion Li Ning, is a typical example of the rude awakening. Despite endorsement and heavy advertising, the product achieved less than 16% market share in a competitive market. When they became aware of their local and foreign competitors grassroots coverage of the market, Jian li bao belatedly announced a "Hundred trucks, thousand men and ten thousand outlets" campaign in an attempt to recoup share from their market share-stingy competitors.
When the Thai energy drink Red Bull launched into the China market in February 1996, it found that most of its 100 million yuan national television advertising budget benefited imitation products and competitors - simply becuase it was not easy to cover this 9.6 million square kilometre market in a short time. Starting with production in the Southern Chinese cities of Shengzhen and Hainan, Red Bull quickly encountered difficulties in delivering its product to North and Northwest China where the best sales volumes were to be had. Several years, several 100 millions yuan in advertising, and several dozen of sales offices later, Red Bull discovered the grand truth of the China market - that there are many distinctive worlds in one China. People are so different accorss China in their income level, education, culture and also in the local social and political atmosphere in which they live, work and consume, that market segmentation and targeting is crucial.
A further hard-won lesson was that reliable and capable logistic and national distributing companies were non-existent in China. Most of the early distribution companies were either sections of some governmental supply system or newly-born private enterprises. Their marketing reach was usually limited to their immediate geographical locations and payment for purchases were generally difficult to assure. When different distributors were appointed in different cities or even in the same city, they tended to engage in the only sales tactic known to them - namely price-cutting. When confronted with the manufacturer's requirement for sales volume, they generally engaged in further disorderly conduct such as cross-territory sales, kick backs, and indefinite credit terms. Some of the early foreign firms using the typical "incentive" schemes from the Western world's textbooks, found themselves losing at both ends in much the same way as Zhou Yu1 of The Tale of The Three Kingdom fame. A classical case example from Procter and Gamble is presented later in this article.
The two alternative choices was to focus on certain geographical areas or to build up one's one national distribution network. Those who took the action a step ahead were rewarded by a huge hunk of the markets.
Again, as recounted in my previous article on the television bid kings, "San Zhu" grew within 3 yeards from a 300,000 yuan investment into a 4 billion yuan enterprise with more than 150,000 sales persons before suffering a setback from its own doing. Today, looking back, San Zhu did offer a hint on the way to establish a foothold in this vast country with the largest population in the world. Prior to its fall due to "publicity poisoning", San Zhu organized its sales efforts according to the principle of "Countryside Surrounding the Cities" promulgated by Chairman Mao Zedung. They controlled 200 subsidiaries at the regional level, 1980 district (township) level branches controlling 6890 village level work stations and 150,000 to 200,000 sales people.
Although San Zhu suffered from ineffective policy coordination, its methods did demonstrate a strategic path for others to a follow in doing business in China i.e. reliance on its own marketing network and distribution channels rather than the middlemen. This has given it the advantages of wide coverage, deep penetration and a firm grip on significant market share in their markets. The downside was ineffective coordination, high costs, and lack of financial controls down the line.
Procter and Gamble, Coca Cola and Pepsi Cola, were among the early birds in putting effort into building local marketing networks. They focused on competition for retail outlets, displays, product lines, logistics, and point of sales promotions to keep their names and products within the sight and reach of as many consumers as they could. Mr. Pan Wang Bo, the General Manager of McKinsey in Beijing once said: "...You must control the end-outlets in order to increase your sales. Controlling end-outlets is costly, but not controlling them is even more costly. If you lose a prospective buyer, he is not likely to comeback..." Having experienced the carpet bombing advertising of Jian li bao but unable to find the product at his local retail outlet, the Chinese consumer is not likely to buy two cans of "jian li bao" the next time he finds it.
In its struggle against Coca Cola, Pepsi Cola established two big teams, the WAT (Wholesalers' Assisting Team) and the DS (Direct Sales) teams. These teams traveled on motorcycles and were expected to cover 50-60 outlets each per day bringing Pepsi's products to department stores, mass retailers, wholesalers, government agencies, offices, schools, armed force stations, hospitals, nightclubs, and street stalls. They promoted, monitored sales, checked stocks, put up displays, and provided personal support for their customers. Literally, these frontline men from Pepsi acted as their distributors' own sales and service persons. The down to earth approach of these "sales terminals", while giving Pepsi up-to-the minute data on the market situation and controls, the relationship it cultivated with distributors and retailers left practically no gap to be penetrated by its arch rival. Hence, Pepsi was able to hold its firm grip on some of China's key cities such as Shanghai on the East coast and Changchun in the North East.
Television manufacturer TCL regarded the high cost for establishing the distribution network and selling points as irrelevant. The only thing in the mind of President Mr. Li Dong-shen's mind was how to exceed his competitors and have TCL displayed in every store on every street of every village. They have accomplished just that. That's how they managed to sell more televisions than their competitors.
TCL, being a local enterprise, is well aware of "turn coat" distributor behaviors. Thus, the instruction to their regional general managers was to build strong linkages with their customers and retailers. They called these links the "concrete banked channels" as compared to the traditional instable "muddy banked canals" that relied on discounts and administrative influences. In one case, the surprised buyer of TCL's new flat wide screen TV commented, "I have found this kind of good service only in Japan before" TCL insist upon linkages with the top retail distributors in each target city. By developing its own team of sales promoting staff and services personnel, like Pepsi's WAT team, TCL was able to provide high quality customer information and achieve high sales volume and excellent client and customer relations.
When the Taiwanese food leader President Foods entered the Chinese market, it discovered the market for one of its key products, the instant noodle, already dominated by Kang-si-fu, originally an outsider to the instant noodle business in Taiwan. In the following decade, President Foods found it hard if not impossible to dethrone Kang-si-fu which claimed over 2.2 million retail outlets for its products in China.
When Xi-ri-sheng launched its bottled tea product in Beijing around 1994, no one saw any future in this innovation. Most Chinese then, and even today, normally keep a glass bottle filled with tea leaves at home and took advantage of boiled water refilling services that are available practically anywhere in the country. Why would anyone spend 3 yuan buying Chinese tea in a bottle when he can already carry one around? In 1996, the Japanese firm, Suntory spent 30 million yuan on advertising to introduce bottled Chinese tea to Shanghai successfully. In 1998, Xi-ri-sheng, became the envy of the Chengdu Spring Beverage Show when it claimed 3 billion yuan in sales.
In 1998, amid the great ongoing market passion for bottled drinking water, Kang-si-fu decided to do away with drinking water and chose to enter the bottled tea market. Helped by its huge market network, it rose from the No. 2 position in 2000 to overtake President Food as the market leader for bottled tea with 47% market share compared to President Food's 37%. In 2001, riding on the success story of its market distribution network, Kang-si-fu still spends heavily on advertising in order to assure its grip on the dizzily growing market for bottled Chinese tea. From 800,000 tons total sales in 1999 to 3 million tons in 2001, bottled tea drinks production is expected to reach 10 million tons annually in the next few years.
The pretty movie stars presenting Uniliver's products in Chinese TV advertisements remind me of those famous Hollywood stars doing testimonial advertising for Lux soap in the days of my childhood. There is nothing wrong with that. The Chinese consumer still enjoys movies and follow their favorite movie stars, making celebrity endorsements a valid advertising strategy. However, they did not seem to help Uniliver in closing the gap to market leader Procter and Gamble. As of 2001, Procter and Gamble's sales in China still more than triple those of Uniliver. Why?
Procter and Gamble's decision to use lovely, lively, young student models to market its products to the younger generation of the Chinese consumers could be one reason. And Proctor and Gamble's public relations in the form of their contributions towards education may also have helped some.
But more than anything, it was the more effective market distribution network that really counted. Uniliver, with its early mover advantage of it's prescence in Shanghai before the Chinese Communist's take over, also suffered due to its relatively complex and unconcerted investment structure. This conflicting structure also prevented Uniliver from being able to more effectively control, manage and develop its marketing network. While Procter and Gamble were already penetrating deeply into the consumer grassroots level to promote its products to the unfamiliar rural Chinese consumers, Uniliver still remain rooted in cities and urban areas. Procter and Gamble, like Wahaha, the beverage giant that owns scores of joint ventures with Danone, won the market with the establishment of their own market distribution network and their firm control of the retailers as well as their own teams.
Amidst the brutal competition for market share in this strange and complex Chinese market, even some of the grand trade gurus make mistakes. In 1999, in an effort to win royalties and boost sales, Procter and Gamble promised its distributors an incentive prize of a brand new model Buick if they sold more than 100,000 cases of its already famous female sanitary napkins. Almost overnight, the target was achieved by almost all of its distributors. Unfortunately, these distributors used a nearly identical method of reaching the required sales volume. They calculated the value of the new car of about 350,000 yuan into their costs and relayed the extra benefits to their sub-distributors. Due to differences in the sizes and locations of distributors and their sub-distributors, the extra discounts to the retailers varied. This resulted in a chaotic market with the retailers competing for lower costs by acquiring their supplies across the prescribed sales territories and then dropping retail prices, in order to fight for more sales or just to maintain their normal sales. Definitely, this kind of disorderly market stained the high image that P&G had tried to maintain. When they tried to overcome the problem by repackaging the new product lots in another color, this effort too, was hampered due to overstocks from its own previous sales promotion campaign.
What took place in the remote mountainous province of Guizhou resembles a classical legendary Chinese warfare story right out of Sun Wu's "Book of Warfare". However, until recently, many outsiders were never aware of those tactical, brutal, and intelligent maneuverings that underlies much of Chinese business.
Until 1997, Ling feng had Guizhou province's battery market all to itself. This mountainous province is famous its description - "The sky is never dry 3 days in a row, the ground has no flat land over 3 inches in length".
In this treacherous and soaky terrain, batteries are quite naturally a necessity. Being relatively poor, 1500 kms from any sea coast and with limited good roads to or within it, Guizhou is rarely a target market for most key market players. The skepticism of the local inhabitants against "outside" products further added to the reasons for the absence of competitors for Ling feng.
As you would expect, Ling feng was manufactured by a state enterprise with typically outdated production facilities, lowly motivated production staff, and a team of unpleasing management. Despite all this, being able to lay a hand on Ling feng during the high selling season from October to March would mean sure profits. Supply shortages and refusal to consider new distributorships developed a huge desire for alternatives. As usual, some private entrepreneur saw the opportunity and moved in on it.
Banking on the accumulated dissatisfaction against Ling feng, a new battery factory went into production in September 1997, luring no less than the No. 2 man from Ling feng to its ranks. The new factory sold its full capacity almost immediately, leading the original monopoliser to halve its production for the year. Liu, the boss at the original factory, after visiting some of its former allies and having learned about the newcomer's SWOT, implemented a strategic plan called "Using Retreat As a Means of Pushing Forward" and "Setting Free In Order to Capture Later," two famous lines from Sun Wu.
First, he cut back his own production in half in order to reduce the damage from the impact of the newcomer. He also made public the extent of his firm's suffering at the hands of the newcomer, thus boosting the confidence of the new comer. Then, he pretentiously cut off his long time relationship with two of his largest distributors. This resulted in the shifting of the newcomer's market focus from its original allies to the bigger distributors. At the same time, supply irregularity and the newly unstable relationship made the distributors more cautious.
Liu Lu reasoned that the newcomer, being a private entrepreneur with limited financial resources, would be strained by its fixed investments and would have difficulty obtaining bank loans for its working capital. Thus, by retreating, he was actually luring the newcomer to commit more deeply into its limited resources, hence, reducing its ability to react to or to survive from any future market competition.
The following year as Ling feng continued its low profile and pretended an idle state, Rain Flower Stone - the new battery factory, launched confidently a "Production during the low season to fulfill demands during the peak season" strategy. It put its factory into full production and shipped its batteries to its distributors with generous "Pay after sales" terms.
Around July that year, Ling feng announced a huge price reduction sales promotion, insisting upon cash only. Without any obligation on the stock from Rain Flower Stone, the distributors opted for the higher profits and faster sales of the "established" brand thus leaving most of the Rain Flower Stone on consignment unpacked. The new factory whose finances were already strained had invested in two new production lines after the end of the past selling season and was immediately confronted with cash drain. It went into decline and bankruptcy followed very quickly.
Notes: 1. Zhou Yu was the top general of Wu. In his effort to contain the popular Liu Bei, he set up a trap to lure Liu Bei with the younger sister of his own boss Sun Quan. As Liu Bei proceeded under advice of the famous Kong Ming (also Zhu Ge Liang, the "Sleeping Dragon") he managed to win both a new wife and also several contested cities during the contests. Zhou was eventually overcomed by disappointment died of anger hearing Liu's army chanting continually - "Zhou Yu lost the bride and lost the battles."