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China's economic miracle benefits from the demographic dividend, while the miracle of Chinese enterprises benefits from the channel dividend. As a macroeconomic factor, the demographic dividend has been widely discussed, but the channel dividend that created the miracle of Chinese enterprises has received little attention, and few even recognize its existence.
The demographic dividend and the channel dividend are related, both connected to China's vast rural areas.
The demographic dividend can explain two economic phenomena: first, China's ability to attract foreign investment over the long term; second, the strong international competitiveness of "Made in China." However, the demographic dividend cannot explain the rapid growth and expansion of Chinese enterprises. That is, the demographic dividend explains the macroeconomic miracle but not the microeconomic miracle. The fact that weak Chinese enterprises could grow quickly in the face of powerful multinational corporations is largely due to the channel dividend that Chinese companies exclusively enjoy.
Demographic Dividend and "Institutional Outsourcing"
Generally, a country's attractiveness to foreign investment depends not only on labor costs but also on the investment environment. Although China had a demographic dividend, its investment environment was poor at the start of reform and opening-up. Why was it so attractive to foreign capital? Because no other country had such a demographic dividend capable of supporting rapid growth for over 30 years (or even longer).
China's demographic dividend is not only due to the large proportion of working-age population but also to the vast "hidden unemployment" in rural areas. Experts estimate that at current agricultural productivity levels, only 100 to 150 million agricultural workers are needed to produce the same amount of crops, yet China's rural population peaked at 900 million.
Rural surplus labor provided a continuous, low-cost labor force for China's urban economic development. Chinese migrant workers actually hold dual identities: because they haven't left rural areas, they have agricultural income; because they work in factories, they have wage income. It is precisely because of these two incomes that migrant workers' wage demands are incredibly low.
It is because of the huge and persistent demographic dividend that economists' phenomenon of "institutional outsourcing" emerged. Although China had a demographic dividend, poor investment environment and low employee quality offset its attractiveness, and improving the investment environment and training personnel is a long process. "Institutional outsourcing" refers to foreign investors "spontaneously" investing in China, helping to improve the investment environment, and foreign enterprises completing the training of Chinese employees—this is "institutional outsourcing."
The demographic dividend is actually a "public asset." All foreign investors in China, including multinational corporations, benefit from it. The comparative advantage of the demographic dividend is that companies investing in China have stronger competitiveness than those that did not, because they benefit from it. Thanks to the demographic dividend, "Made in China" also has strong competitiveness worldwide. "Made in China" is not a label exclusive to Chinese enterprises but a label for all products manufactured in China or OEM-produced there, whether multinational or Chinese brands. It has nothing to do with the investor or brand, only with the place of origin.
China's Channel Dividend
China's accession to the WTO and the attractiveness of the demographic dividend attracted numerous multinational corporations to set up operations in China, not only building factories but also targeting the Chinese market.
More dauntingly, many multinationals treated China as a strategic investment country, some even prepared to sustain losses for 10 or 20 years to cultivate the Chinese market. This may not be bad for China's macroeconomy, but it is certainly not good news for Chinese enterprises.
Chinese officials, experts, and entrepreneurs once worried about how Chinese companies could survive when facing multinationals that held absolute advantages in almost every field. Thus, WTO negotiation representatives faced immense pressure. Indeed, in capital, technology, products, brands, employee quality, management, and scale, Chinese enterprises were not on the same level as multinationals. To be honest, this was unfair to Chinese companies because the starting lines were different—like asking elementary school students and college students to take the same exam. In the early days, there were fears of "total annihilation," such as the "water flooding seven armies" in the beverage industry, which worried the nation. Even some multinational executives thought many Chinese companies should not exist. How could private enterprises with almost no resources survive and grow? This was indeed a serious problem.
Over 30 years later, reality did not follow the predicted path. Although there were low points and some industries still dominated by multinationals, Chinese enterprises achieved beyond imagination. Some multinationals performed exceptionally in China, such as P&G, Coca-Cola, McDonald's, Apple, and Wrigley, but the failure rate of multinationals in China was higher than their success rate.
Chinese marketing has long been criticized. Many impatient people urged Chinese companies to learn from multinational benchmarks, hoping they could surpass multinationals in their areas of advantage. My feeling is like hoping children to surpass adults—understandable but unrealistic.
Despite rapid growth, Chinese enterprises remain weak. Even Haier, with over 100 billion in revenue, is still seen as a "slightly larger small enterprise" in the eyes of multinationals. Chinese companies continue to face criticism for "not living up to expectations," yet one indisputable fact is that Chinese enterprises are generally successful, and their growth rate exceeds expectations.
Chinese enterprises, constantly criticized and questioned, are generally successful, and those criticisms are pertinent and reflect reality. So, how to explain the success of Chinese enterprises?
Each enterprise certainly has its unique aspects, but the overall success of Chinese enterprises must have common patterns. Behind so-called miracles, there is usually a widely unrecognized law. I believe this is the channel dividend.
Chinese Enterprises Exclusively Enjoy the Channel Dividend
The demographic dividend is shared by all "Made in China" products, including foreign companies. So, can the channel dividend be shared by all enterprises?
I believe China's channel dividend has two major characteristics: first, it is exclusively enjoyed by Chinese enterprises; second, it continuously releases market space for the development of Chinese enterprises.
Chinese marketers divide the Chinese market into two distinct markets: one is the terminal market, centered on major cities, dominated by modern retail terminals (hypermarkets, chain supermarkets, etc.); the other is the channel market, centered on rural areas, dominated by traditional channels and traditional terminals.
In the urban-rural fringe of central cities, the channel system still dominates. According to surveys of second- and third-tier cities, the sales volume of the channel system is roughly equivalent to that of the terminal system.
Not only is China's economy a dual-structure economy, but the Chinese market is also a dual-structure market. The channel market and the terminal market are two separate markets, each following different marketing logic.
China's channel market has two characteristics: first, it is jungle-like; second, it is fragmented.
The jungle-like nature of China's channels stems from China's vast territory, dispersed rural population, semi-self-sufficient traditional economy, underdeveloped transportation and communication. The Chinese market is infinitely segmented by county, township, and even village units, forming local market fiefdoms.
In the jungle-like channel market, small and medium-sized enterprises can form regional monopolies through intensive cultivation of local markets, with adjacent counties or even townships divided among different brands.
Just as the biodiversity of a primeval forest is more complex, the survival state of the jungle-like channel market is also more complex. "Coexistence of large, medium, and small" is a basic feature of the channel system. While brand concentration is evident in the modern terminal system, the channel system remains relatively fragmented.
The fragmentation of channels refers, first, to the small scale of traditional terminals, and second, to the fact that channel distributors are mostly specialized operators, with few comprehensive distributors. This fragmentation makes it difficult for multinationals' management and services, built on scale, to be effective.
To cope with the jungle-like, fragmented channel system, Chinese enterprises have built the world's largest marketing force. By occupational classification, marketing personnel rank second in number, after industrial workers.
To use an analogy: luxury cars like BMW and Mercedes-Benz are comfortable, safe, and fast on highways and city roads, but on rural dirt roads, they not only have no advantage but may not even move. However, agricultural vehicles like "Benma" and "Shifeng" have a vast market in rural China and are very suitable.
The Operating Logic of the Channel Market
Currently, marketing theories and ideas originating from the West share a common implicit assumption: they apply to the terminal market.
Multinational marketing systems pay special attention to two points: first, the product—consumers naturally won't reject good products; second, the brand—branding is essentially consumer education.
Few people question this, even considering it natural.
However, the above assumption requires support from two aspects:
First, consumers must be able to effectively receive information from manufacturers, so that good products are accepted and consumer education is effective. The channel market, however, makes this difficult.
Second, consumers' independent choice. In central city hypermarkets and supermarkets, self-service is the basic shopping method, while the channel market still has three-foot counters, where the terminal owner's recommendation outweighs multinationals' consumer education.
In the terminal market, bestsellers may be "first-choice brands" and "promotional items," which are marketing appeals targeting consumers. In the channel market, bestsellers may be "first-recommended brands," i.e., brands that terminal owners are willing to recommend.
"First-choice brands" rarely become "first-recommended brands" because their high awareness leads to high price transparency and small profit margins for terminals. Terminal owners seldom make consumers' "first-choice brands" their "first-recommended brands."
Coca-Cola sells little in the channel market, not because no one buys it, but because no one is willing to sell it. In the channel market, there is often a phenomenon of "hiding well-known brands," where famous brands are not put on shelves or recommended. If a customer insists on buying, the terminal owner reluctantly sells it.
The community relationships in the channel market are traditional Chinese community relationships. Channel distributors have high familiarity and interaction with consumers, and terminal owners' recommendations are usually accepted by customers.
Promotions in the terminal market primarily aim to pull consumers, so hypermarkets have "promotions every day, changing every week." However, promotions in the channel market primarily aim to "push inventory," which cannot be transmitted to consumers.
In the terminal market, terminal promotion is an important and effective way to educate consumers and increase sales. However, such promotion methods are only suitable for A-class terminals in central cities; even B-class terminals cannot be fully promoted. The terminals in the channel market are basically D-class terminals, where multinationals' promotion methods are useless. However, if we change our thinking, replacing "consumer-oriented promotion" with "terminal-owner-oriented promotion," and "opening the door to sales" instead of "increasing sales," then promotion in the channel market can still be done, possibly with higher efficiency.
The still widespread existence of secondary distributors is another major feature of Chinese channels.
Secondary distributors are typical "brand killers." If first-level agents are brand agents, secondary distributors are category operators. Their specialty is category combination, using famous brands to pressure prices and drive sales of other brands. Because famous brands are underpriced, profits are low, so they refuse to promote them.
The channel market's operating logic differs from the terminal market, causing multinational brands to "stop at county towns" and "cannot cross secondary distributors." "Stopping at county towns" is because county towns usually have modern terminals. "Cannot cross secondary distributors" not only means secondary distributors care greatly about profit margins but also that they are difficult to overcome in the short term.
When multinationals use terminal market logic to cover the channel market, they find that the "high-profile, high-impact" model of the terminal market doesn't work in the channel market, thus allowing Chinese enterprises to exclusively enjoy the channel dividend.
Multinationals' "Collective Misjudgment"
If it were only the jungle-like, fragmented nature of the channel system, that alone wouldn't justify Chinese local enterprises exclusively enjoying the channel system. The "collective misjudgment" of multinationals is the most important reason.
Multinationals often treat the channel market as an extension of the terminal market, or as a low-end terminal market. Operating the channel system with terminal marketing logic is difficult to succeed.
I once conducted research with the head of a multinational's China operations. I found that with their inherent thinking, it was hard for them to understand the operating logic of the channel market.
Take the agricultural materials industry as an example. Abroad, agricultural materials are typical means of production and should follow the marketing model for means of production. However, China's channel market operates exactly according to the consumer goods model, which offsets multinationals' huge product advantages due to operational incompatibility.
Another example is the instant noodle industry. Master Kong and Uni-President hold dominant positions in urban terminal markets and sell well in southern townships with high urbanization rates. However, in rural channel markets, Hualong and Baixiang thrive. Master Kong once tried to enter the channel market with its low-end brand "Fumando," but failed. Later, it acquired "Zhongwang," which did well in the channel market, to enter via a backdoor, but still failed. Uni-President, which focused on urban terminal markets, experienced eight consecutive years of decline after 2000. Only when a locally grown manager took charge of the instant noodle business did they understand the channel market's operating rules and become a multinational brand successfully entering China's channel market. This phenomenon is rare.
Because they treat the channel market as a low-end terminal market, many multinationals think channels just need lower quality and lower prices. Reality is completely different.
Take P&G's "three trips to the countryside over ten years" as an example.
The first trip was "roadshows," which were successful in the US, Egypt, and India, once creating sales miracles. Roadshows involve product display, promotion, and sales. Not to mention whether the channel system could understand the unfamiliar term "roadshow," but does the channel system really not know P&G and need roadshows? The channel system is actually too familiar with P&G and unwilling to recommend it.
The second trip was building networks, donating vehicles, and jointly implementing rural coverage plans. This was another misjudgment of the channel system, because the channel system's problem was not lack of capability but unwillingness.
The third trip was participating in the "Thousands of Villages, Ten Thousand Townships" project, which also showed a lack of understanding of China. This project ultimately fizzled out.
The key to operating the channel system is not brand, price, promotion, or quality, but rapid product updates. Multinationals are accustomed to making classic products, which is precisely unsuitable for the channel system. Product updates in the channel system are updates for channel distributors, creating more profit space for them. So, we see that Uni-President and Master Kong have more classic products than Baixiang and Hualong, but Hualong and Baixiang update their products faster. Mobil, a world-famous lubricant brand, has over 100 SKUs worldwide, while Uni-President Lubricants has thousands of SKUs in China.
It's not that multinationals don't want to do the channel market; many have tried, but few succeeded.
I've always been puzzled: with multinationals' abundant talent and strong financial resources, couldn't they figure out the channel market's operating logic? Couldn't they poach talent suitable for the channel market?
Multinationals' top executives are either foreigners or overseas returnees, always educated in Western marketing thought, which reflects Western marketing environments where terminal markets dominate. Multinationals' marketing in non-Western countries might work with the terminal model.
China's difference is that it is a large country, a highly complex one. Mao Zedong, in "A Single Spark Can Start a Prairie Fire," explained why China's revolution could achieve "regional armed separation": "Corresponding to the strange thing that only China has long-term internal strife among the ruling classes, there is another strange thing: the existence and development of the Red Army and guerrilla forces, and the small red areas growing up amidst the white regimes (there is no such strange thing outside China)."
"There is no such strange thing outside China." This is a very important conclusion. First, it is a strange thing, an unusual one, which cannot be thought of by conventional logic; it has its uniqueness. Second, it is a strange thing only China has; foreign countries don't. Why only China? It is determined by China's characteristics.
There are very few multinationals like Uni-President Instant Noodles, where locally grown marketers fully dominate mainland marketing. A multinational from Taiwan that talks most about Mao Zedong's military thought might be an outlier. In fact, only Mao Zedong and Deng Xiaoping understood China's national conditions most thoroughly.
The essence of marketing is "adaptation," and Chinese enterprises are precisely doing this. To put it bluntly, multinationals are "reforming" and "waiting." "Reforming" means educating consumers; appropriate education is necessary, but comprehensive education is wrong. "Waiting" means waiting until the market matures and meets requirements before acting.
Chinese enterprises grew up precisely during multinationals' long "reforming" and "waiting" processes. Chinese local enterprises that accumulated resources in the channel system now have the resources to compete with multinationals in the terminal market.
Chinese enterprises exclusively enjoy the channel dividend, which is actually the result of multinationals giving up.
The Continuous Release of the Channel Dividend
After the 1997 Asian financial crisis, Chinese enterprises collectively fell into crisis. What led Chinese enterprises out of the crisis was precisely the continuous release of the channel dividend, i.e., the sinking of market focus.
The release of China's channel dividend is determined by the depth and imbalance of China's channels, including three aspects: first, the sinking of market focus; second, regional market imbalance; third, industrial development imbalance. The term "deep distribution" may also be a Chinese characteristic.
Before 1997, "provincial agents" were the mainstream channel distributors; after 1997, it sank to "city agents"; after 2000, it sank to "county agents." Each channel sinking drove a 20% increase in sales for three consecutive years—this is the release process of the channel dividend.
China's regional economy rises in blocks. First, special economic zones; second, coastal and border opening; third, western development; fourth, northeast revitalization; fifth, central China rise. Each block's economic rise provides energy for the release of the channel dividend.
China's industrial development is also extremely uneven. Some industries are basically in line with the world, while others are still primitive. Each industry's breakthrough also provides energy for the release of the channel dividend.
Channel-Driven or Brand-Driven
China once witnessed a marketing debate over whether channels or brands should take priority. Those with the discourse power naturally advocated brand priority. This is indeed true in the terminal market.
However, some excellent Chinese enterprises balanced both, using the banner of brand to seize channel resources. For example, a well-known dairy company, famous for its branding, actually does its best work in the channel market without publicity. Doing branding is to please the public, who understand brands but not channels; doing channels is for sales volume and tangible benefits.
Professor Chen Chunhua, in her influential article "Channel-Driven or Brand-Driven?" said: "One mistake we make is treating 'brand' as a 'resource.' In fact, brand is not a resource; brand is a result. Brand is not a cause; you can't say because I have a brand, I can do anything. Another mistake is treating 'brand' as a 'goal.' Brand is also not a goal; it is still a result."
Professor Chen's statement is an overcorrection. In the terminal market, it is indeed brand-driven; without a brand, survival is difficult. In the channel market, it is still channel-driven.
Multinationals coming to China did not start from zero; they had accumulated assets, which manifest as brands. Their brand power in China is not the result of their performance in the Chinese market but the result of their performance in international markets. This is precisely what Chinese enterprises lack. Multinationals indeed use brands as resources, but Chinese enterprises do not have such resources.
Because multinationals have brand resource advantages, they naturally should strengthen their advantageous resources. However, the channel system precisely "shields" against their brand resources. Where multinationals' advantageous resources are hard to exert, Chinese enterprises happen to have advantages, making the channel dividend a resource exclusively enjoyed by China.
How Much Channel Dividend Is Left in China?
After the channel dividend is fully released, the resources exclusively enjoyed by Chinese enterprises will also disappear. In the future, China will transform from a dual-structure market to a unified market, and the jungle-like market pattern is gradually disappearing.
Currently, companies thriving in China are "amphibious" enterprises with advantages in both terminal and channel markets—brand resources in the terminal market and channel advantages in the channel market, such as Shuanghui and Yili. Some enterprises have encountered difficulties when transitioning from the channel market to the terminal market. For example, Hualong entered the terminal market with the Jinmailang brand, but Hualong's performance was affected.
China's terminal market is penetrating the channel market: the renovation of "urban villages," hypermarkets entering county-level markets, and supermarkets going to villages—all have significant impacts on Chinese enterprises.
Rural urbanization and channel terminalization are trends. Nevertheless, after channel terminalization, the terminals will only upgrade from D-class to C-class or B-class. Multinationals are still only good at A-class terminals. So, in the future, whoever is good at B-class and C-class terminals will truly "dominate."
According to the spirit of the Third Plenary Session of the 17th Central Committee, China aims to achieve "urban-rural socio-economic integration" by 2020, which means the gradual shrinking of the traditional channel market. Economist Lin Yifu, after stepping down as World Bank Vice President and returning to China, proposed that China's economy can maintain high-speed growth for another 20 years. When the traditional "troika" driving the economy slows down, China's largest market space is in rural areas. The expansion of the rural market is not a simple scale expansion but a structural change, i.e., transformation from a channel market to a terminal market.
The shrinking of the channel market is becoming an irreversible trend. With the "new rural construction," the shrinking will accelerate. Local enterprises that rely on the channel dividend to resist multinationals' brand advantages must complete marketing transformation in the shortest possible time.
When the channel dividend disappears, Chinese enterprises and multinationals will truly compete on the same stage, and only then can the final winner be determined.
In the past, when Chinese enterprises were weak, we worried about local enterprises. Thanks to the channel dividend, their performance exceeded imagination.
Now, when Chinese enterprises have accumulated certain advantages and we are confident in local enterprises, the disappearance of the channel dividend is what deserves the most vigilance.
Source: Sales and Marketing
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