October 9, 2014
Josh Gardner, CEO & Co-founder at Kung Fu Data
China Connect : Which misconceptions do westerners still have in 2014 when it comes to expanding their online businesses in China?
Josh Gardner : I’m not concerned with misconceptions as much as adaptability, a trait that is a prerequisite for success in China. Personally, I’ve had my fair share of misjudgments. In 1995, I was a new ethnographer doing fieldwork on minorities in Yunnan, China. I didn’t understand restrictions on visitors to China’s minority regions, common food-borne disease (I nearly died of Typhoid fever!), ethnic dialects or government interference. Mine is a typical China story…and the lessons are the same regardless of what you are attempting to do here. With that in mind, below are the 5 most common pitfalls that I see with Western firms expanding online in China
1) Unqualified people in control of outcomes
In May, a prospective client (COO of a Western firm) hired his friend to lead an ecommerce project. The friend lives with the COO and has no experience in online marketing. He has limited China experience. Worse, he’s never run an ecommerce store – let alone one in China. Subsequently, they hired a market research firm to conduct a feasibility study. But the firm has no experience optimizing storefronts either. When we saw the launch strategy, we realized that the entire program – from product selection to pricing – was completely off the mark. The analysis didn’t account for SERP competition (search engine results pages).
2) Weak bench – understaffed and overworked
At the top of every corporate pyramid is a talented group of foreigners and their Chinese counterparts. They are all “A” players — thoughtful, diligent, strategic and competent. But they are horribly understaffed and overworked. And their online businesses suffer. The problem is systemic: Western brands come to China and treat it like an outpost of their own private Roman empire, instead of as a primary market. They do not provide adequate funding or resources to their entries on the ground. They would never take such a reckless approach to the USA or Europe…so why act differently in China?
3) Haphazard vendor selection process
Westerners still look at China as a “black box” instead of a simple research challenge. In a race to seize the dream or meet arbitrary deadlines, they choose service providers like friends in high school: (1) run with the cool kids or (2) find nice people who make them feel less like stray cats. A typical decision tree includes some combination of flashy presence, brand name association, likeability, casual endorsement or unsubstantiated authority. The “circle of trust” is controlled by the cool kids: firms led by those who have been here the longest. The longer they’ve been here, the more seniority they have. But that does not imply competence. You still need to check the facts.
4) Underestimate competition, cost and complexity
Westerners face many complex procedures when establishing an online business in China. So they continue to rely on offline channels to handle online business. But Chinese distributors prefer to kidnap brands and earn short-term profit at the expense of brand equity and market share. At best they harvest what a Western firm has already built (but may be unaware of) online in China. They rarely invest in advertising. In effect, they become squatters. More glaring errors involve grey market arbitrage. Chinese resellers are artful negotiators who know many ways to retail at a lower price than you can (on your OWN products). And Chinese consumers are very well informed. Ask any of my junior staff the price of brand name shoes in New York and Shanghai and they can rattle off prices. Retailers simply cannot get away with regional price differences and expect there will be no consequences in the Chinese market.
5) Fixed mindsets and a monolithic approach
Fixed corporate mindsets deal fatal blows. The best example is an American firm that treats local service providers poorly. They may be a behemoth in the West, but in China they are not a third again as big as the firm running their online flagships. But they treat them like dogs. And the result is that they have less than 5% market share of their own products sold online in China. On the other hand, Western firms that adapt to local conditions make real strides. We have clients from smaller countries that treat China as their #1 market. They have respect for the situation and hire long and deep. They take their time. They make data-driven decisions with carefully chosen partners. They keep a tight leash on distributors and minimize channel conflict. And most telling, if something doesn’t work, they drop it and try something else.
China Connect : Which business sectors, categories, do you think will be leading the biggest piece of Ecommerce in the next 5 years?
Josh Gardner : As data analysts and optimization professionals, we deal with hard facts and reality. I’m not one for speculation. Based on current growth rates applied to traffic and conversion volumes, we’d bet on: (1) apparel, (2) consumables, (3) electronics and other digital products, (4) travel and leisure, (5) sporting goods and in the near future (6) home furnishings.
China Connect : You’re advising brand owners on their ecommerce operations, what are the key learnings of the past 5 years or so, and what should brands prioritize in the next 5?
Josh Gardner : The easy days are gone. In most categories, competition for free and paid traffic is fierce. A few years ago you could launch a flagship brand and have maybe four or five hundred competitors. Now there are thousands competing with you, sometimes tens of thousands. If you try to enter a category like “canvas shoes,” you’ll find that +84% of traffic and conversions are locked up by four brands. So you need to be data driven and very specific. You need to reverse engineer your offerings by understanding the Internet real estate available FIRST and what it will cost to own it. A/B testing is critical with rising media costs and lower ROI. If you can optimize for mobile devices, traffic is plentiful and inexpensive. And that’s not to say that success is out of reach. Having a well trained, dedicated resource that knows traffic and conversion optimization is your lifeblood. But few Western brands know how to find, recruit or hire this talent in China. So it’s a huge opportunity for the ones that DO.
Laure de Carayon
Founder&Ceo China Connect