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March 30, 2015

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Innovate or face going down pan of history

FORGET luxury handbags, diamond watches and haute couture, the latest must-have item to capture the imagination of Chinese consumers is... a Japanese toilet seat.

But this is no ordinary toilet seat. For the press of a button by the user reveals its bidet-esque properties — unleashing a jet of warm water.

Seen as emblematic of good hygiene and a good lifestyle, Chinese tourists traveling to Japan have been snapping these water jet toilet seats like crazy, despite them being bulky and heavy.

While lucky purchasers may feel flushed with success, controversy has followed, as many of the toilet seats were revealed to have actually been manufactured or assembled in China.

But while many Chinese have scoffed at their compatriots for paying over the odds in Japan for a domestically produced item, business columnist Wu Xiaobo has picked up a different message. “This (toilet seat story) signals the emergence of a Chinese middle class, who place a greater premium on a product’s quality and usability,” Wu said at a recent forum at the Shanghai National Accounting Institute.

A direct result of this evolving consumer needs, says Wu, will be the gradual disappearance of so-called “cheap yet quality” goods.

Today, many a flamboyant IT professional is given to pacing onstage — reminiscent of late Apple boss Steve Jobs — during promotional campaigns that tout their handsets as a product made of the “finest” steel casings, with the “finest” cameras, the “finest” chips and other “finest” accessories. Yet all those “finest” parts may amount to a price that is a third of the cost of an iPhone.

What is considered “value for money” as advertised in such gimmickry is not just outmoded, but patently wrong, said Wu, because a genuine good buy has to be matched with an appropriate price.

And a business’s innovation capacity is predicated on profits, essentially obtained through higher prices — the higher the better, added Wu. “Historically, not a single industry has achieved progress on the basis of being only ‘cheap’,” he said, adding that “being cheap,” a big selling point for “Made in China” in the past, is actually a curse in disguise.

‘Razor-thin’ profits

For a long time, China’s real economy, or in Wu’s words, the old manufacturing- and exports-led economy, has been characterized by this ill-informed strategy. By leveraging economies of scale, Chinese companies keep expanding their operations to knock out competitors through considerably lower prices. Meanwhile, their profit margins become “razor-thin,” Wu told the forum.

He remarked that Chinese corporations have come to grab a bulk of the market shares in industries ranging from white goods to garments, beverages to handsets, at the expense of depressed prices and accepting the smallest margins. Now that costs are higher, the dynamics underlying the boom times are no longer there.

The steep rise of labor costs is a big concern for businesses. Wu conducted a survey years ago of franchise businesses, such as McDonalds and Metersbonwe — a homegrown casual wear brand — and found that frontline employee wages had risen by 11 to 13 percent over five years. In contrast, to remain competitive, businesses couldn’t afford to let prices of finished products grow at the same rate.

In addition, cuts in government tax rebates and the awakening of popular environmental awareness have combined to increase the financial burden on manufacturers, blunting their competitive edge, said Wu.

In his view, the way out of the current predicament is one that departs from the usual model of competing on low costs and prices. The moment it materializes will be a watershed between old and new economies.

How C2B works

Another hallmark of the new economy is that the usual B2C (business-to-customer) business model will be steadily reversed and replaced by a C2B model. This requires a complete makeover of the business process, from selling directly to customers to customizing goods according to consumers’ specific needs and desires, said Wu.

He elaborated by citing the example of a furniture maker in Shenzhen, in southern China’s Guangdong Province, which supplies each of its store employees with an iPad.

Working with the customer, staff use their iPads to create renderings of home decor suited to the customer’s needs, followed by adjustments, further adjustments, before, hopefully, the placing of a order.

As a result of this overhauled and streamlined business model, the company has emerged as an industry leader, with an increase of about 30 percent in market shares.

The advent of customizing makes life harder for traditional retail merchandisers. They prospered in the past by playing the card of what Wu called “information asymmetry.” In traditional forms of commercial activity, consumers had no way of knowing the production costs of their purchases or getting around the middlemen who profit from complex supply chains.

An item of clothing that sells for 100 yuan (US$16) on a wholesale garment market could fetch a price a dozen times higher by the time it has made its way to a department store, said Wu.

The revolutionary “point to point” business outreach, namely, C2B, promises to flatten the production chains and management processes, rendering the many wholesalers and distributors redundant, as well as passing on savings to customers.

“This will be a significant game changer and companies need to embrace it to stay in the game,” said Wu.


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