So just HOW do those darn Chinese do it?
This is a legitimate biz question (although not directly related to our industry), but it's still wildly puzzling to me, maybe one of my friends here could shed some light...
I'm just curious how Chinese manufacturers/sellers/resellers can sell things for what just HAS to be a loss?
Case in point from today...
Every Halloween at my house I have what I call the Frightober Spooktacular Scare-a-bration (I should trademark that). Bascially it's a bunch of spooky stuff to scare the bejeezus out of Trick-or-Treaters... fog machines, creepy lighting, anamatronic zombies, flying ghouls, etc. You know the drill. I control it all from my living room command center control board, the ScreamMaster9000 (should trademark that as well).
I have different music cuts and sound effects (lightning, screams, etc.) that happen. Last year I appropriated various phones, tablets, iPods and such as all my playback devices that were plugged into the ScreamMaster9000. It was a little unwiedly, and I didn't want to do that this year.
So I hit trusty eBay and bought a bunch of these little .mp3 players, they arrived today from Hong Kong about a week after I ordered them, and they seem to work great...
Here's the thing... they were $1.51. Yes, a BUCK FIFTY-ONE! With FREE SHIPPING...
How can they conceivably do that? There was no way to tell how much the postage on the envelope was, but the shipping alone had to be more than that.
And this isn't an isolated incident. Feel free to call me un-American but I buy things like that pretty frequently online with similar pricing. True, these are often "throwaway" items in cases where I'm not really concerned about quality... but a little need-it-once gadget, an umbrella holder, a knob for some widget I have... sure, I'll do that.
We just can't figure out how it works around here. It doesn't exactly seem like a business model that should function. Or stay afloat.
Anyone have any wisdom?
Fantastic Plastic Entertainment, Inc.
For the product itself I'm going to say, reverse engineering (so little/no R&D), readily available parts considering the location, low quality parts, workers that only make a few bucks an hour (but kick out hundreds, if not thousands, of units per day), low over head (no marketing, no physical store, no OSHA, etc.,).
For the shipping though... I dunno... they put all the shipping costs on a stolen credit card? ;)
I was going to say pretty much the same thing, but with more emphasis on the lack of oversight and thus costs on things like environmental compliance, worker hours, pay, health and safety, product testing, i.p. and patent payments. Add the artificially weak currency exchange rates and the over-supply of shipping and shipping containers headed our way, and you can sell in high volume and make money. I get these little barrel-shaped waterproof MP3 players (with FM tuner) on ebay for my swimming pool workouts and they're under twenty bucks when the next better model by anybody is more than double that price.
Also, when you have a home market of over one billion people, volume business takes on a whole new meaning. The domestic sales probably underwrite the foreign marketing.
come on - make this a relevant topic - how does Blackmagic Design do it ?
Rescue 1, Inc.
I'm not at all sure that Chinese domestic sales factor into this at all. I suppose for some things, but for example, Apple will tell you that their business in China is very little compared to almost anywhere else on earth. Not that Apple's stuff is cheap mind you. Just cheaper than they could make it anywhere else.
The same was true when I was at Avid, not just for the expensive stuff, but for the consumer electronics stuff that was like 99 bucks. Nary a one sold in China. M Audio speakers same deal, they cost nothing, were actually quite high quality, and never sold any in China.
I don't know how often this is the case in China, but it's also not uncommon elsewhere for goods manufactured in that country to not be available for sale in that country at all.
(This works in weird ways in every market of course. For example, you can buy raw almonds in America, just not ones grown here. American growers export gazillions of tons of raw almonds to Europe, but all the raw almonds in the US are from Europe. Don't ask me to try to explain that again.)
It also makes sense to me that Chinese brands of consumer electronics in particular are much cheaper than brands that are based in Japan Korea etc. I also wouldn't be surprised to see the "buy Chinese" movement even stronger than than the "buy American" movement in the US.
By the way if you are an electronics nerd, or a phone nerd in particular, take a look at the Chinese phones making their way into European and US markets. I'm genuinely impressed. Very creative thinking in evidence, I suppose to counter what they know is a market position well behind the rest of the world. And yes, insane bang for the buck.
My theory with Blackmagic is that Grant's goal is to burn the industry down to the ground. LOL In a good way. LOL
He has said many times that one of the things that made him want to get into this business as a manufacturer is his experience as a customer, that all this stuff costs too much. If your business model is to make a whole lot less money than you could if you charged more, it can apparently be done. Anybody else could do it if they wanted to, right? LOL
Which still doesn't explain how they can make so many different things, so well, update them so quickly, and show signs of acceleration, not slowing down.
How's the exchange rate for the Australian dollar affecting the amphetamine trade? Or are they able to produce that domestically? LOL
Tangentially relevant to your phone example and American prices. Been doing some oral history recordings lately with the former attache' to the Ambassador to Cairo, Egypt.
While he was giving great anecdotes about the Egyptian people, one thing came up: The Egyptians could not wrap their heads around the fact that their mobile phone plans, with full data and all the modern features, cost the equivalent of five US bucks a month in Egypt, for the same or worse speed service we pay hundreds for in America.
And yet WE invented the mobile phone as we know it, while in may African continent nations never developed much of a copper based national phone network, but instead, leaped straight to wireless cel phone infrastructure, when it became available.
It all makes at least a degree of sense to me (although not a great deal). Yes, I know I paid a buck and a half for this little .mp3 player, and if produced in batches of many thousands or many tens of thousands it probably doesn't have more than $1.50 in costs.
But I still can't wrap my head around the shipping, which was free. The problem with this particular item, I can't tell exactly how much the postage was....
...but... that's not true of everything I've bought that was shipped from China or Hong Kong... sometimes I can see the cost of the shipping (and wish I had saved some of the envelopes). There have been numerous occasions that I have bought a little item for a dollar or two (with free shipping), and it arrives in an envelope with at least three bucks worth of postage on it, sometimes more.
Maybe it's a business model a little like the old (very well done) SNL filmed piece for "First Citywide Change Bank," a bank that does absolutely nothing but make change...
How do they make money when they are losing cash on each sale? Volume.
No, wait... that doesn't work.......
Fantastic Plastic Entertainment, Inc.
I did a good bit of work (and a dozen or so videos) for my largest national client on the topic of Supply Chain Management.
An organization that owns a robust and functioning supply chain (think Amazon,UPS,Fed Ex, Walmart, etc, etc, etc) have a HUGE profit generation machine at their disposal. One so efficient, that the use of it to transport even low margin items (whether or not each and every item makes a profit) - is not the relevant metric.
Your tiny MP3 players may or may not earn back their cost. They may be a test product being closed out - or just a way to explore a new sound chip and deploy it cheaply to get generation 1 out of the pipeline and get on to generation 2. And that manufacturer may have other products that DO generate enough margin to support a dozen small things that don't. Perhaps the play is merely to establish VOLUME of shipments into the distribution pipeline in order to get volume shipper discounts?
Brave new world out there. Where the game we used to know, isn't always the game anymore.
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[Bill Davis] " And that manufacturer may have other products that DO generate enough margin to support a dozen small things that don't."
Amazon's play in a nutshell. Create reflex ordering, so that, in your mind, the gap between a couple of sponges for the kitchen and a 60" TV for the wall becomes virtually non-existent. Throw in Prime so you can watch Transparent, and the illusion of free shipping reduces the friction even further.
It works for me. I have indeed bought both sponges and TVs from Amazon, and I order from them often enough that they're losing money on my Prime membership. But the margin on the rest of it more than covers the difference. They're making plenty from me as a whole, even if not on every single product.
It's also the model for Kindle, and I'd guess for Echo (which they should have named Alexa!!!!) too. Spread the loss across the company to offset by a million other transactions.
This is nothing new of course. Hence the concept of "loss leader." There are indeed entire companies built this way.
Supply chain is an especially interesting window on this. Part of the object of the game is to disrupt the other guy's chain.
One way this played out was with New Coke. Supposedly a flop, it did several things at once. First, it could use things like Max Headroom to deflate Pepsi's image as "hip" without leaving Coke's admittedly square traditional audience behind. More important, it took up shelf space, pushing other vendors (including Pepsi) off those shelves. And once New Coke went away, its space was taken by other Coke products....
...making New Coke one of the greatest successes in the history of grocery retail.
With all this stuff, you have to know which game you're looking at to know who's winning.
I always thought the real story of New Coke was that it was cover for changing from sugar to HFCS. When they "went back" to the "old recipe", enough time had passed for people to not notice the new difference going forward.