Before I briefly described my proposal for hardware startups to enter the Chinese market, I would like to say that many entrepreneurs outside of China misunderstand the Chinese market, just like many politics pundits misunderstand China as a country overall.
A typical entrepreneur's comment on China as a consumer market usually goes like this: the Chinese market a very big one but it is very sensitive to prices. While the "big" part is obviously correct and one that no one can miss, the "sensitive to prices" part is over-generalized and, if taken broadly, could lead to disastrous pricing strategy for the hardware startups.
Note that like any developed country, China's consumer market is developed enough that there's a substantial part that's not very price-sensitive. When I said substantial part I am not dividing Chinese consumers by income. In fact, just like in US, EU and Japan, one same Chinese consumer could randomly view certain products as commodity and go for extreme price-performance optimization but he or she would turn around and just buy something very expensive without doing much thinking.
Take luxury goods for example. 10 years ago it's common to run into street peddlers selling fake Luis Vuitton or Prada bags on the streets of Beijing. Today China has become one of the largest markets for these luxury brands and consumers' sentiment toward certain brands constantly shift. Luis Vuitton itself famously went from "the bag that bosses buy for their extramarital lovers" to "the bag that the secretaries of the bosses buy for themselves", triggering the famous designed slow-down of sales LVMH Chairman Bernard Arnault in 2013.
Note that this diversification and sophistication of taste among the fast rising Chinese consumers apply not only to the luxury sector, but also to fashion, furnitures, dining, automobiles and even consumer electronics.
The fact that majority of the consumer electronics products are manufactured in China also means that there are ample white-label copycats products flooding the local markets. This gives a false impression that to compete in the local market, a foreign CE brand has to also compete on prices.
This cannot be further away from the truth.
Let's examine the following facts:
Having been copied and mimicked in both design and marketing by Xiaomi, Apple’s revenue in China grew to $12.51 billion in Q3/2015 from $6.29 billion in Q3/2014 – that’s an almost 100% YoY growth. Note that this is with Xiaomi selling at less than 1/2 the price of iPhones with comparable specs.
Despite many copycats ranging from major brands such as Samsung and Xiaomi to various white-label low-cost competitors in China, GoPro claimed in its Q3/2015 Financial Report that "Based on the first nine months of revenue, China is the fastest growing market in GoPro's history."
Despite being a late comer compared to Fitbit and Jawbone, Misfit actually outsold Fitbit in China in the 18 months leading up to this report, having 1/3 of its 2M units to China. Note that the hugely popular Misfit Shine retails at US$69 on its US website while its price on JD.com, one of its Series C investors in December 2014, is RMB¥499, which is about US$75 so a tad more expensive than its US price and it’s in a market that’s flooded with Xiaomi’s US$12 (RMB¥79) Mi-Bands.
Isn’t Chinese market supposed to be very price sensitive and foreign brands should suffocate in the face of the cheap local copycats? How could these stories be true? Even if we rule out Fact 1 using the all-too-convenient “Apple is an exception” excuse, it still doesn’t explain the other two facts about GoPro, a very young brand that didn’t go IPO until 2014, and Misfit, a much smaller startup that was only 4 years old.
The truth is: no consumers make purchase decisions completely out of rationality. In fact, the more developed an economy, the more its consumers make shopping decisions irrationally. And this of course also applies to consumer electronics in China.
Apple iPhones, though markedly more expensive than comparable Chinese or even Korean brands, are a symbol of status in the Chinese market. After Xiaomi successfully “educated” Chinese middle class that they deserve to own a high-end smartphone, the supposedly “price-sensitive” consumers now accept spending 2~3 months worth of salary to own an iPhone as a pleasure. In other words, they buy iPhones not purely for the function – note that Xiaomi’s phones have much better localized services than the “Designed in California” iPhone – but mostly for various other emotional reasons.
Likewise, Chinese consumers aspiring to “American life” might initially pick up a Xiaomi Action Camera in an attempt to fulfill that desire. However, it remains a fascinating fact that most of GoPro buyers probably never go sky-diving or cliff-climbing themselves. The brand has become a strong association with such life experiences without requiring its users to actually do those extreme sports. In that sense, most people buy GoPro for “association” with extreme sports, not for the extreme sports itself. In this kind of purchasing decision, there’s no point of buying a brand that is not called GoPro, since that association will be completely gone and you’re left with a camera that will shoot sports that you will never practice anyway.
And compared to Apple and GoPro, which are both extremely famous brands already, the achievement of Misfit in China is even more fascinating and inspiring.
There’s really no good reason for Chinese consumers to buy Misfit instead of Xiaomi Mi-band. They probably won’t be able to show off to friends like they show off a iPhone. Misfit also isn’t strongly associated with any particular emotional activity.
In other words, Chinese consumers buy Misfit because of its design, branding and probably because it’s from the United States. And this actually happened before Misfit officially entered China! This is why Misfit decided to do a Series C in December 2014, specifically with Chinese investors such as GGV and JD.com to help them expand their already vibrant market in China.
And this would actually be my suggestion for foreign hardware startups to enter the Chinese market. To make it clear, I’ll summarize in bullet points below:
- Focus on selling products and creating a focused brand image in US, Europe and/or Japan.
- At the same time, take some time every week to monitor Taobao.com or any cross-border e-commerce platforms in China. See if your product is being bought and resold in China without you officially entering the market. Cross check with the orders you receive from China to verify the momentum.
- If there are copycats, it’s even better. You could observe how copycats are priced and compared to your “original” offerings.
- If the oversea direct orders from Chines resellers are steadily rising, the consumer feedbacks are generally positive and your copycats can’t seem to keep up with your pricing, that means you have a very good chance to expand into China as a foreign brand.
- At this moment, you could choose to remain cautious and first expand into early adopter channels such as JD Smart Powerup, also a partner with the Hardware Club.
- If you believe your product could achieve much more growth in China (based on analyzing the available cross-border sales data), then it’s time to bring in Chinese investors (VC or e-commerce corporates) in an additional round or as co-investors in your current round. Use the extra capital to develope a complete strategy and build extra inventory, coz’ if China comes, it’s gonna come huge!
- Last but not the least, you should NEVER EVER lower your price to sell in China. Always keep it on par or higher than your US/EU/Japan retail prices. If you can’t sell your products at the original list price in China, that means you’re not a good fit to the market or you can’t inspire the perceived values in its consumers. In this case, lowering the price won’t help – there will always be cheaper copycats – and you might as well just stay out of the Chinese market and focus on US/EU/Japan.
Note that these guidelines are by no means hard rules. However, I believe they’re the best practices in terms of risk and resource managements at this moment in this fascinating market.
On the other hand, if you are lucky enough to have enough funding in Series A, you should really consider testing the Chinese market. Whatever you do, do not count the China market out. Grabbing merely 1% of the 1% upper middle-class market is still a 100k+ volume per year. It could potentially be your stepping stone to an M&A exit – see how Misfit successfully sold itself to Fossil Group less than 1 year after the official Chinese entrance – or it could even propel you to an IPO!