4. Analysis and comparison
4.5 The comparison of handset channel patterns in mainland china
Furthermore, there are more reasons why the price of the shanzhaiji handsets can be very low.
The following table shows the summarized 10 major reasons of low cost on the Shanzhaiji handset in detail.
Table 4.2: 10 major reasons of low cost on the Shanzhaiji handset
1 By directly coping or duplicating from branded phone
2 By using none-brand or similar brand logo to confuse the end users 3 Manufacturing the product in bad production environments
4 By adopting low cost and quality components 5 No verification on prototype handsets
6 Phone is not sent to authorized department for TA 7 Shorter channel layers
8 Industry cluster density is high to lower transportation cost
9 Utilizing a variety of way legally or illegally to lower cost of after service 10 Underground production and trading leading to avoid tax burden
Source: 杜舟 (2008) 山寨机疯狂内幕调查
4.5 The comparison of handset channel patterns in mainland china
In the handset business competition, the channel is the most crucial element to gain the market share. A good channel strategy was the one of the reasons that the Chinese domestic branded companies succeeded during 1999 to 2003 when competing with foreign branded companies.28 Actually, those Chinese domestic branded companies had experience in
channel of white goods businesses rooted in tier-one cities to tier three cities for a long period of time assessing those markets easily.29 On the contrary, the international branded handset companies did not have such kind of advantage during that time. Thus, Chinese domestic
28 程平芳 (2004) 渠道在國產手機成長中的作用
29 杨志伟 (2005) 我國手機市場營銷渠道模式比較研究
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branded companies took the advantages on building up the channel into tier-two and tier-three cities gaining market share from 3% to 56%.30
Any handset companies who engages in channel campaigns have to consider three aspects at least which are building and managing channel cost, operation efficiency of channel and dominance of channel. In mainland china, the channels models are various. Thus, the
following samples are taken as the examples due to they are running good business and they have brand recognition in mainland china. There are 4 kinds of model of market channel.
First, the Motorola is adopting the distribution channel of multiple regional agents (區域多家 總代理制). Second, Ningbo Bird Corporation (波導) is aiming at the distribution channel of direct sale (直銷為主的分銷模式). Third, TCL Corporation is applying the distribution channel of deeply sale involvement (深度營銷導入渠道模式). Fourth, the shanzhaiji handset developers are doing its special distribution ways. Finally, comparison of channel strategy of respective models is summarized.
The distribution channel of multiple regional agents is that it is the best way to get into a market when the international branded handset companies want to enter the market which they don't have good understanding on a particular region.31 The structure of distribution channel of multiple regional agents is discussed as following. First, the phone producers sell the products to some regional agents. Second, the regional agents distribute the goods to province agents. Third, province agents allocate the handsets to local wholesale agents.
Fourth, local wholesale agents deliver the handsets to the terminal retailers. Fifth, the terminal retailers sell the phone to the end users. Most of the international branded companies are adopting such distribution channel in mainland china due to they are not
30 程平芳 (2004) 渠道在國產手機成長中的作用
31 曾昊 (2005) 國內手機市場分銷渠道模式探析
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familiar with the Chinese handset market. Therefore, they need the Chinese local agents’
channel expertise.
Nonetheless, the distribution channel of multiple regional agents was an excellent strategy for the international branded companies to dominate the entire Chinese handset market before 1998. The distribution channel of multiple regional agents offered the lowest cost of channel build up and the highest distribution speed in Chinese handset market assisting from Chinese channel distributors. In 2001, the distribution channel of multiple regional agents was
transformed due to competition was becoming drastically from Chinese domestic branded companies. Thus, the international branded companies were losing competitive advantages.
The following diagram shows the structure of the distribution channel of multiple regional agents before 2001.
Figure 4.4: The distribution channel of multiple regional agents before 2001
Source: 杨志伟 (2005) 我國手機市場營銷渠道模式比較研究
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The international branded companies have started to reform their distribution channel pattern by extending more channel functions to deal with fierce marketing competitions from
Chinese domestic branded companies. They have established some branches and offices in the mainland china to promote the handset directly to regional agents, telecomm operators as well as terminal retailers. Those extending functions do not mean the self-established channel.
Those international branded companies are still relying on the Chinese distribution channel they previously cooperate with. Thus, by adopting this pattern, the efficiency has increased.
The following is the figure of the distribution channel of multiple regional agents after 2001.
Figure 4.5: The distribution channel of multiple regional agents after 2001
Source: 杨志伟 (2005) 我國手機市場營銷渠道模式比較研究
Motorola utilizes the distribution channel of multiple regional agents to penetrate into the Chinese handset market because of unaware of the Chinese handset market and Chinese local
International branded companies
Terminal Retailers
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agents’ distribution channels and capital supports. This model provides the cost effectiveness of channel establishment and fast distribution of goods to take the majority of tier-one cities.
Nonetheless, auspicious days did not last long for Motorola on the model of the distribution channel of multiple regional agents that Chinese domestic branded companies started to take the market share. Motorola had lost the market share so it had reformed the channel strategy to reduce the layers of consignees and to broaden the handset channels. The following is the Motorola’s transformed channel pattern as following.
Figure 4.6: The pattern of distribution channel by Motorola
Source: 杨志伟 (2005) 我國手機市場營銷渠道模式比較研究
Advantage:
The regional agents are familiar with the Chinese domestic handset market with professional channel expertise and practical experience. They normally have the regular clients so that
Local wholesale agents
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they can push the handsets into market with high covering rate. International branded handsets companies can leverage the capital risk to minimize due to the agents provide the capital support and channel distribution. Furthermore, with multiple agents, International branded handsets companies’ negotiation capability can increase because those agents compete with each other.
Disadvantage:
The competition among those agents increases gradually because of interests conflicting respectively. The cost war can occurs in the channel leading to disturbance of market price of handset. Such kind of chaos can results in brand recognition damaged. Those agents in order to gain the rewards do anything necessary to boost the sales volume forecast. It is highly possible to result in the tremendous stocks. Furthermore, if the handset price and goods distribution are not manipulated well, it may cause wholesale agents and terminal retailers losing their faith on a handset brand. In fact, the handset producers and regional agents often have asymmetry information on a target market. Handset producers usually aim at brand campaigns so they have less control powers on retailer and less knowledge on the end users’
tastes comparing with local agents or telecom operators.
The distribution channel of direct sale is adopted by Ningbo Bird Corporation due to Ningbo Bird Corporation has the excellent understanding on Chinese domestic handset market.
Ningbo Bird Corporation has created highly vertical pattern of direct sale. Adopting this pattern, Ningbo Bird Corporation can cooperate with terminal retailers closely as well as provide the goods to those terminal retailers by Ningbo Bird Corporation’s established branches in the targeted regions. Ningbo Bird Corporation in order to build up the
distribution channel of direct sale spent over one year and 400 million RMB to establish 28
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provincial sale branches with over 300 offices. In the entire channel, there are over 4000 sales and service personnel, over 15000 local wholesale agents, over hundred of thousand terminal retailers from remote rural areas to tier-one cities as a net covering the entire mainland china.32 Such pattern brings Ningbo Bird Corporation competitive advantage. The following is the Ningbo Bird Corporation’s channel pattern.
Figure 4.7: The distribution channel of direct sale by Ningbo Bird Corporation
Source: 程平芳 (2004) 渠道在國產手機成長中的作用
Advantage:
Via the self-established distribution channel of direct sale covering entire handset market, the handset producers can promote the new products quickly. Thus, penetration power to market is high to establish the brand recognition and market share. Because of closing to market, the handset producers can gather the competitors’ information and then to react agilely.
Furthermore, the handset producers can make the strategically marketing policy to ask the
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terminal retailers to follow suit effectively. The control powers of channel facilitate the handset producers to manipulate the market price and obtain efficient goods distribution.
Disadvantage:
The establishment of the channel leading to high maintenance cost. When in the low season or product line insufficient, it can result in wasting channel resources. Moreover, the cost of channel establishment is magnificent resulting in higher operation cost so the terminal retailers’ margin decrease because of cost transfer. The risks such as goods distribution and after services are taken by the handset producers.
The distribution channel of deeply sale involvement is adopted by TCL Corporation. The idea of this channel pattern is to increase good relationship with goods distributors in order to get good supports. The channel structure of TCL is sophisticated that there are 23 branches, 7 sales offices, 156 local sales offices and 546 strategic business units in mainland china.33 TCL Corporation cooperates with all agents such as supporting local wholesale agents to expand their retail nets, assisting local wholesale agents to engage in advertisement
campaigns to promote the brand recognition and arranging sales representatives or promoters to terminal retailers to present TCL products face to face. Furthermore, TCL is acting as a coordinator among those provincial agents, wholesales agents, and terminal retailers to facilitate the channel efficiency.
33 程平芳 (2004) 渠道在國產手機成長中的作用
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Figure 4.8: The distribution channel of deeply sale involvement by TCL Corporation
Source: 程平芳 (2004) 渠道在國產手機成長中的作用
Advantage:
The handset producers can explore and manage a regional market deeply and allocate the resource to target market effectively. The regional agents, local wholesale agents and
terminal retailers can get supports from the handset producers’ marketing units. The handset producers establishing the mechanism of provincial distribution platform and utilizing the channel agents’ capital can lower distribution cost, inventory cost, capital risk and operation cost. Due to the handset producer’s branches or offices only focus on marketing promotion as well as channel establishment and maintenance, this increases the operation efficiency for all players.
Disadvantage:
Due to TCL dispatching sales representatives or promoters to the regional agents, local wholesale agents and terminal retailers, the qualified professional talents are needed in order to present handset products that those talents are required sales, management and
coordinating capabilities. In addition, adopting provincial or regional agents can decrease the TCL
Small region agents / Provincial agents National agent
Local wholesale agents
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conflict among agents by allocating product line properly but when handset producer’s product line is very few, unbalance among agents can be foreseen.
The channel pattern of Shanzhaiji handset is unique and simplified. Normally, the Shanzhaiji handset producers hold plenty of exhibitions as forums in the Hotels surrounding
Huaqiangbei area in Shenzhen.34 In the exhibition, it is the opportunity to get in touch with potential partners among the Shanzhaiji handset producers, regional wholesale agents, local wholesale agents and terminal retailers...etc. Those wholesale agents and retailers are mostly from tier-two and tier-three cities as well as rural areas who seek for cooperation
opportunities with Shanzhaiji handset producers. Once they have connection, the partnership can be long-term for the sake of minimizing the risk from new players as well as securing long-term interests for the players in the loop. Furthermore, all business activities of Shanzhaiji handset are cash only so that there is no accounts receivable issue. There is no commercial advertisement for Shanzhaiji handset so that the cost is saved. The following is the channel structure of Shanzhaiji handset as followings:
Figure 4.9: The channel pattern of Shanzhaiji handset
Source: self compiling
34 夏勇峰 (2008) 山寨機產業鏈解析
Shanzhaiji handset producers
Region wholesale agents 1 Local wholesale agents 2
Terminal retailers
Agents n...
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Shanzhaiji handset producers adopt the distribution channel of directly selling to the regional wholesale agents, local wholesale agents and terminal retailers that the layer of consignees is minimized. Shanzhaiji handset producers do not have their own stores, sales staffs or logistics networks as well as promotions. Shanzhaiji handset producers leave enormous profit margins to the regional wholesale agents, local wholesale agents and terminal retailers as the
incentives to sale harder on the Shanzhaiji handsets leading to the sales volume increased.
Moreover, the regional wholesale agents, local wholesale agents and terminal retailers have very localized sales channels which are helping Shanzhaiji handsets into small towns and remote villages. Those retailers and agents are very familiar with the end users’ demands in their respective local markets so that Shanzhaiji handsets can quickly penetrate into those markets especially in the low-end segment. There is little or no cost for building up the channel to Shanzhaiji handset producers. The risks to them are low because regional
wholesale agents, local wholesale agents and terminal retailers have taken the majority risks such as inventory risk but with enormous profit margins.
Disadvantage:
Higher profits incentive takes higher risks. The majority risks are taken by the regional wholesale agents, local wholesale agents and terminal retailers as the Shanzhaiji handset producers sell the products without after service and leave inventory risk to those agents.
Those agents have to rely on their own.
The Shanzhaiji handset producers have fewer the layers of consignees comparing with Chinese domestic branded and international branded companies. Thus, the Shanzhaiji handset producers have cost effectiveness on channel-wise. There are no competition issues
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and cost war among those agents as Shanzhaiji handset producers have been securing long-term interests for the players in the loop. In addition, there are no cost issues on the channel establishment and channel maintenance that all of them rely on Shanzhaiji handset regional wholesale agents, local wholesale agents and terminal retailers. Shanzhaiji handset producers have no advertisement champions on their handsets so the cost saved is left to the regional wholesale agents, local wholesale agents and terminal retailers. Thus, the sales volume can increase under those aforementioned points.
As 4 kinds of patterns which are the distribution channel of multiple regional agents adopted by Motorola, Ningbo Bird Corporation adopting distribution channel of direct sale, TCL Corporation adopting distribution channel of deeply sale and the Shanzhaiji handset channel, the following is a comparison among 4 channel patterns as a comprehensive summary.
Table 4.3: The comparison diagram of handset channels
Channel pattern sale involvement
The Shanzhaiji
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Weak Strong Very strong Very strong
The control of channel from handset producers
Weak Strong Very strong Very weak or none
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Channel cost of consignees
Very high Very high High Low
Phone producers' capital risk
Low High High Very low or none
Handset producers’
negotiation capability to retailers
Weak strong strong Very weak or none
Handset producers' promotion capability to retailers
Weak strong strong None
Source: 程平芳 (2004) 渠道在國產手機成長中的作用 and self compiling