中国Retail and Consumer Products SCM in China

Matthew A. Waller, PhD

中国

中国Why China?

Macro data indicates the importance of China in the global economy• Population: #1 in the world at 1.3 billion • Concentration: there are more than 170 cities with

over 1 million population• Trade: 4th in the world in total trade - $1 trillion

annually • Growth: Since 1993, GDP has increased more than

570%• Web users: #2 behind the US in internet subscribers –

94 million and growing every minute (42.8 m broadband users)

• B-School Grads: 86 in 1991 – over 10,000 in 2005• Cell phones: More than 300 million subscribers• Autos: In three years, annual car production has

increased from 230,000 to 2.2 million• Big Macs: In the last decade, the number of

McDonalds has increased from 1 to 560Source: Technomics Asia

中国Why China?

• China is now the world's largest producer of coal, steel and cement, the second largest consumer of energy and the third largest importer of oil.

• China's exports to the United States have grown by 1,600 percent over the past 15 years

• U.S. exports to China have grown by 415 percent

• The European Union's exports to China have risen 600 percent in the past 15 years

• A Morgan Stanley report shows that cheap imports from China have saved American consumers more than $600 billion in the past decade.

• China has grown around 9 percent a year for more than 25 years, the fastest growth rate for a major economy in recorded history. In that same period it has moved 300 million people out of poverty and quadrupled the average Chinese person's income.

China is becoming a very important player globally as well:

Source: Technomics Asia

中国Opportunities and Threats

• High economic growth• Significant foreign

investment• WTO participant• Low labor rates• Burgeoning middle class• Olympics in 2008• World Expo in 2010• Major exporter/importer• Largest economy in world

by 2050 (Goldman Sachs); currently 4th largest

• Overcapacity/price wars• Corruption• Poor infrastructure• Protectionism/nationalism• Intellectual property

infringement• Weak legal system• Looming banking crisis• Unpredictable risks (e.g.

SARS)• Political instability• Righting historical wrongs

Source: Technomics Asia and other research

中国The construction of interstates from 1995 to 2005

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

km

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

% increase

kilometer up by previous year(%)

Source: China Logistics Development Report *the data of 2005 is estimated

中国Logistics Costs as a Percent of

Total

0 20 40 60 80 100 120

total cost

inventorycarrying cost

transportationcost

logisticsadministration

U.S.

China

Sources: China Logistics Information Center, CSCMP

中国% Cost by Mode

0 20 40 60 80 100

Rail

Motor

Water

Air

Pipeline

U.S.

China

中国Provincial Governments

• Each province has its own trade barriers against other provinces

• Many products must be sourced within a given province due to these trade barriers and due to local tastes

中国China’s Top 12 Retailers 2005

Annual Revenue (Billions of Yuan)

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

Bailian Group *

Gome

Suning

Vanguard

Wumart

Carrefour China

China Paradise (Shanghai Yongle)

Trust-Mart

Parkson China

Lotus

Wal-Mart China

B&Q China

Source: China Chain Store and Franchise Association

中国China’s Top 12 Retailers 2005

Sales Per Store (Thousands of RMB)

￥0 ￥50 ￥100 ￥150 ￥200 ￥250 ￥300 ￥350

Bailian Group *

Gome

Suning

Vanguard

Wumart

Carrefour China

China Paradise (Shanghai Yongle)

Trust-Mart

Parkson China

Lotus

Wal-Mart China

B&Q China

Source: China Chain Store and Franchise Association

中国China’s Top 12 Retailers 2005

Percentage Growth in Stores and Sales

Source: China Chain Store and Franchise Association

0 50 100 150 200

Bailian Group *

Gome

Suning

Vanguard

Wumart

Carrefour China

China Paradise (Shanghai Yongle)

Trust-Mart

Parkson China

Lotus

Wal-Mart China

B&Q China

Sales

Stores

中国RETAIL MARKET GROWTH IN CHINA (in billions)

2001

2002

2003

2004

2005*

2006*

2007*

2008*

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900

Source: A.T. Kearney Inc.

中国China vis-à-vis USA

• Super Centers only have about 25,000 SKUs in China versus over 100,000 in the USA

– Longer lead times to the stores requires more safety stock in the stores– Consumer products market still in development

• Sam’s Club has about 6,000 SKUs in China versus less than 5,000 in the USA

• More transactions per consumer per week in China but less revenue per transaction (over 3 store visits per week for the average SuperCenter customer in China)

• Food is the driver of business in China: 60% of revenue in China versus 40% in USA

• Wide isles since there are so many people; another unique strategy for Wal-Mart in China

中国Consumers

• 70% walk to the store

• Less than 1% drive a car to the store – this is changing rapidly!– Fleets of vans are parked around the city to bring consumers to stores– The Beijing store has 150 parking spaces; many times the spaces must

be underground; Sam’s Club in Beijing has 300 spaces; this is a facet being ignored by the competition

• Wal-Mart has an in-house market research team that studies potential new store locations; Endowed a “China Retail Research Center” at Tchinghua University

• Customer service survey showed Wal-Mart is currently #2 in China

中国Consumers Continued

• Purchase decisions made by elderly and children at home (Grandparents take care of children while parents work)– Product safety classes– Food preparation classes– Community events

中国10 Year Gallup Study of Chinese

Consumers• Size of market in China is not as big as

number of people would imply—many are still poor

• Word-of-mouth communication heavily influences purchases among the wealthy

• Consumers willing to pay more for style than for function

Source: “Inside the Mind of the Consumer,” Harvard Business Review,March 2006, McEwen, Fang, Zhang, and Burkholder.

中国Chinese urban householdsby annual income % of total

Source:Mckinsey

中国AC Nielsen

• 10 year exclusivity agreement

• 80 retailers and 700 stores participate

Source: CCFA

中国Key WM Competitors

• Carrefour

• Metro

• Lotus

• SO Supermarkets

中国Transportation

• Between 1991 and 2002, the value of goods transported in China increased by about 20% per year

• 84.6% of the goods transported were industrial goods

• SOEs: COSCO, SinoTrans, China Post, China Rail

• Multinational forwarders: UPS, TNT, Maersk, FedEx, DHL, APL

• Private Chinese companies: PGL, Haier

“PGL: The Entrepreneur in China’s Logistics Industry,” Asia Case Research Center,University of Hong Kong, Benjamin Yen, 2004.

中国One Threat to Banking System

• In the past couple of years housing prices in major cities have doubled

• 80% of families own their own housing (not too long ago this was close to zero)

• Housing price / disposable income– Beijing = 15.3 years– Shanghai = 17.98 years

• 3 to 6 years is “safe”

Source: Dr. Zhou, Fudan University

中国Unofficial Policy Toward SOEs

• Hold on to the big and let go of the small

• Top 10 largest companies SOEs

中国Privatized SOEs

• Same people

• Similar processes

• Not as different as we often think

中国Private Chinese Companies

• Many of the managers were trained in SOEs

• Many of the processes and even departmental names are reminiscent of SOEs– Department of Propaganda– Department of Militia

中国Openness

• Lowest import barriers of the developing world

• Most accommodating of FDI

• One of the most open to cultural influence

中国Challenges

• Legal system not well developed

• Firms’ accounting statements next to meaninglessness

• Pollution out of control

• Tax evasion rampant

• Provincial competition and conflict

• Egregious corruption in the government

• Loan default high

中国GDP Depends on Exports

• 66% of GDP depends on exports

• From 2002 to 2004 the GDP doubled

• 90% of the exports are made within a 150 mile stip along the coast

• Largest recipient of FDI among the developing nations

Source: Dr. Zhou, Fudan University

中国Resources

• Over 40% of iron ore shipped via ocean carriage goes to China

• Price went up 20% last year

中国IPR is a Big Problem

• Undertake legal precautions (not primary defense)

• “IPR protection should be a task for the entire organization, from design … to … distribution.”1

• “Design … in a way that will make it difficult to copy. If you fail to do that, your staff’s creativity and considerable R&D investment may come back to haunt you, embedded in the product of a lower-cost rival.”2

1. Oded Shenkar (2006), “The Chinese Century” Wharton School Publishing, p. 183.2. Oded Shenkar (2006), “The Chinese Century” Wharton School Publishing, p. 183.

中国A Few Important Points

• “[C]ommercial negotiations in China often carry the weight of national aspirations, focused government planning, and, often just below the surface, the belief that you as a barbarian owe China something for past transgressions” (McGregor p. 24)

• “[T]he Chinese system today is almost incompatible with honesty” (McGregor p. 96)

• Successful negotiations require your arguments to be … “wrapped around what is good for China, not what is wrong with the Chinese government” (McGregor p. 128)

• Moa: Gu Wei Jin Yong, Yang Wei Zhong Yong, “Make the past serve the present, make foreign things serve China.” (McGregor p.20)

James McGregor, “One Billion Customers,” Wall Street Journal Books, 2005.