How we want to transact is important too: Chinese companies as market disruptors.


Market Disruption


Much continues to be made of the rising tide that is “CHINA”. Regardless of which lens you use to view this country, they are a power in every sense, and much of the current discourse focuses on how it will evolve in the next 50 -100 years.

This morning I read an article by the London Business School called: Making the leap into developed markets which discusses in great detail the process by which Bottom of Pyramid companies (companies who make cheap goods cheaply) have historically tried to disrupt the incumbents. In the context of this article the focus is on how companies in India and China might disrupt their Western counterparts in the future, as Japanese companies have done.

You can read the article for yourself to get all the details, but there was one aspect that wasn’t addressed and that is the psychology and philosophy of business and how we transact and more importantly want to transact. Speaking from personal experience, as I sit here in Guangzhou China, the primary focus of the vast majority of Chinese companies is to extract as much profit as possible while giving as little as possible in return…thereby maximizing profit.

Examples of this abound but here is a personal one: I paid 4000RMB for my gym membership. The gym opens at 10AM and closes at 11PM but management refuses to turn the air conditioners on until 5PM during the peak hours. The same applies to the lighting. They only turn 30% of the interior lights on during the day because from their perspective if the gym is only 25% full, they are wasting money keeping it cool and well-lit. The change room is always kept at a sweltering 29 degrees. Despite repeated complaints over a six month time frame, nothing changes because customer service isn’t viewed the way we do in West. They simply do…not…care…

This isn’t just a casual observation either. Driven by frustration after having attended two different Chinese owned Gyms I did a little research and found a report by Deloitte on the state of the Fitness industry in China which highlighted several problems.

The reality is that many gyms are in trouble, chasing short-term cash flow and churning members. All
too often in China, the default tactic for attracting members is to compete and differentiate on price.
This may bring short-term gains, but in the long-term damages the revenue model and erodes both
brand equity and member loyalty.

This is but one example, but the mentality of business owners is the same from the mom and pop level all the way to the biggest organizations. You could buy your fruit from a local vendor down the street on a weekly basis, engage in wonderful conversation, tell them you live just across the street and plan on recommending all your friends, and then find out that the vendor has been charging you 3 times the market price.

Yes I know as a foreigner this is part and parcel with the territory so maybe it isn’t the best example, but Im trying to get at the psychology of the matter. Rather than seeing long-term benefit from the fact that I live across the street, will become a regular customer and will tell all my friends in exchange for good service and a fair price, the vendor sees short-term dollar signs by charging me 3 times the going rate despite the fact that I now wont go back.

Now look at the global market as it stands today. Chinese consumers flock to Western brands because of the perceived quality and integrity of the products (as well as status of course). Whether or not its a conscious decision or not, the honesty and transparent way in which most Western companies operate surely helps. If you don’t like something, or it isn’t up to your standards, or you changed your mind about something, the industry leaders will go out of their way to make it right.

So, am I saying that things wont change or that Chinese companies wont adapt? No, more likely than not, they’ll hire foreign talent and expertise and attempt to adjust to what the foreign markets demand. The reality is however that when you buy something you get more than the tangible. You also get a story, a feeling, and a degree of service, things that are much harder to replicate when customer service doesn’t come naturally. Therefore any discussion surrounding the likelihood of disruption by BoP companies must also include a measure of philosophy if we are to get a proper understanding of the factors which lead to market disruption.