Second Mouse Opportunities For Distributors

We have used the saying “The second mouse gets the cheese” as an analogy for what is happening today in China’s “fast learner” economy[1].  The ability to quickly learn and copy products and technologies developed elsewhere has propelled numerous Chinese firms to global stature.  Many such firms will soon become a force in the US.

Examples of China’s ability to learn span multiple industries.  The most telling reflection of this progress comes from looking at Fortune’s Global 500.  In 2005, only 13 Chinese firms made the list, with only three of them among the top 200.  Just five years later, in 2010, 46 Chinese firms made the list, including 14 among the top 200 firms.  Alongside these large companies that are becoming global brands, like Haier in consumer appliances and Huawei in telecommunications, are literally thousands of medium-sized companies that have ambitions to serve consumer and business-to-business markets in the US.

These companies are in business only because they understand better than their competitors how to be the second mouse.  Such firms have seen successful products and technologies, and figured out how they can evolve them to reach a broader market.  China is the ideal learning environment for firms to make such a transition, with its huge emerging middle class hungering for products previously unavailable to them.

These “second mouse” firms in China have learned from the experiences of other firms what to produce; they employ low Chinese manufacturing costs to their advantage; and they make incremental improvements in products oriented towards acceptance in the broader market, especially ones focused on taking out costs.  These firms are going to be strong competition for the “usual suspects” now included on the roster of competitors for most western firms in western markets, and that time is not far away.

But what these emerging Chinese competitors don’t know is our markets and how to get their products to market.  This reflects to some extent their heritage in the government-run economy of China, when factories were told what to produce and where to ship it.  And to another extent, it reflects the complexity of the elements of go-to-market strategy in the US and other western markets, a reality that any firm who sells through US Big Boxes or national distributors will quickly verify.

Use of distributors was familiar to a limited number of Chinese manufacturers, namely those that did export.  These firms were selling simple products such as textiles that were made to order supplying a trader in Hong Kong.  They regarded that trader as their customer.  That trader, in turn, was usually a former Hong Kong manufacturer who saw the chance to source from China at low cost instead, but his relationship with one customer or a small group of customers remained his stock in trade.

In figuring out how to profit from the second mouse mindset of Chinese companies in a more systematic way, Wal-Mart was the early bird a decade ago.  Wal-Mart went to China, found the suppliers, taught them which products were in demand and how to make them (often with a Wal-Mart brand), became the customer, and built the entire system themselves to get the products to our local Wal-Mart or Sam’s Club in the US.  Finding quality potential suppliers themselves was no mean feat, in a country with the expanse of the US, a set of regionally isolated markets, and a manufacturer mindset to produce low-cost, low-quality products for unsophisticated customers.

So, Wal-Mart had to create its own distribution system.  Historically in China, distribution was a necessary part of the manufacturer’s operation, but focused entirely on moving the products to the customers.  Factories owned or created multi-level distribution networks reaching out from the factory to nearby regions and, only in rare cases, beyond.  China was, thus, a country made up of regional markets and distribution was mainly about rather straightforward logistics.  When modern Chinese retailers with national ambitions, like Gome and Suning, arrived on the scene, they learned from Wal-Mart and began operating their own systems for developing their supply chains.

In a few short years, many things have changed in China.  Incomes have risen dramatically and the local market has become robust.  But one thing that hasn’t changed is the challenges of distribution and the customer-facing elements of go-to-market strategy for Chinese firms with global ambitions.

It is true that Wal-Mart has been joined by a diverse group of other retailers and distributors like Staples, Grainger, and NAPA in bringing Chinese products to US customers, but such organizations have largely relegated the Chinese firm to the role of contract manufacturer, often with no brand identity visible to the end customer.  Finding low cost Chinese supply sources has become a major element of the strategy of such retailers and distributors.  But many Chinese firms aspire to more than this.

The opportunity here is also different from that associated with the ongoing practice of many western manufacturers to source in China.  In such instances, once again, the manufacturer continues to manage all of the elements of its go-to-market strategy.  The only difference is that it must manage sourcing operations involving Chinese manufacturers.  All of the other elements of its strategy, including distribution, remain largely unchanged.  In past years, Chinese manufacturers were delighted to have the opportunities to produce on behalf of western customers, as that was, after all, about the only market through which they could earn an income.  But as China’s own markets have grown over the past decades, many Chinese firms have established local market stature, and are eager to move beyond serving only Chinese customers and being contract manufacturers for export.  Like the Europeans, Japanese, and Koreans before them, they see the profit potential of the US market.

The future opportunity for distributors is that of becoming a valued partner to the Chinese firms that themselves want to participate in the US market and be listed among the leaders in various industries, with stature like that enjoyed by Haier and Huawei.  To achieve that position, Chinese firms will have to complement their product and manufacturing competencies by either developing or partnering with firms that can bring go-to-market savvy, access to western consumers and business customers, and service competencies relevant to the product line in question.  For most Chinese firms with such aspirations, a relationship with a strong distributor will be the quickest route to that end.

The message for the professional distribution industry is one of opportunity as such firms can become valued partners to both US customers and Chinese suppliers, linking them together with the full power of fast learner economics and enabling the Chinese firms to realize their aspirations and abilities to compete in western markets.  As China forces a reexamination of many long-held business concepts and strategies, it opens the door of opportunity in distribution.

We conclude with one final note on this opportunity.  The impact of the emerging “second mouse” competitors from China will be quite different between western manufacturers and western distributors.  For western manufacturers, the prospect is largely threatening, as new Chinese competitors will place considerable pressure on the firms that they will challenge.  Meeting this challenge will require proactive steps on the part of such western manufacturers.  On the other hand, for western distributors, new Chinese entrants will provide additional options for their catalogs, often ones that have enough differences in features and price points to be of interest to the customers that are being served.  Distributors that carry the lines of emerging Chinese competitors are almost sure to face criticism from some of their existing suppliers.  Such pressures are unlikely to keep Chinese suppliers from the market and the distributor that decides not to carry the products of such Chinese firms may find themselves at a disadvantage to their own competitors.  Nonetheless, pressures from western manufacturers must be considered by distributors looking at the opportunity to collaborate with Chinese firms in entering western markets.

Authors: George F. Brown, Jr. and David G. Hartman

[1] George F. Brown, Jr. and David G. Hartman, The Second Mouse Gets the Cheese, Blue Canyon Partners, Inc., Evanston, IL, © 2011.

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