As even Taobao and JD.com expand into rural areas, can Unilever, the most down-to-earth FMCG giant, afford to stay put in first-tier cities? On WeChat Moments, Zeng Xiwen, Vice President of Public Affairs for North Asia at Unilever, once said: "We went to the Min River in Meishan, Sichuan, and drew a circle. This circle can be implemented because it holds huge consumption potential." Now, that "circle" has become an important base for Unilever. In January 2015, the Unilever (China) Sichuan Meishan production base, which took eight years from project initiation to completion, officially started operations. This production base is no small matter—it primarily supplies the western China market and will gradually develop all product lines under Unilever China. Its capacity and scale will surpass Unilever's Hefei global factory in East China. In terms of product distribution, it can achieve rapid response, with products reaching end consumers in the west within 24 hours of coming off the production line. China, as Unilever's most important emerging market, has always seen significant investment. Over the past decade or more, Unilever's development trajectory in China—from relocating from Shanghai to establishing the Hefei global factory in Central China, to the current start of the Sichuan global production base—shows a clear strategic layout: "following China's rhythm." This is also the choice many large multinational corporations are making as they shift channels. However, due to the characteristics of regional markets, "going rural" poses considerable challenges for companies. China's "Gradient Transfer" Unilever's bet on China's western market is based on solid reasoning. Since the 2008 financial crisis, with structural changes in economic growth, the central and western regions have clearly outpaced the eastern market in growth trends, making them a battleground for future business. "The economic and trade status of western key cities will become increasingly important, and market performance more active. We must leverage this locational advantage to win a marathon," Zeng Xiwen told Sino-German Management. Indeed, fighting the "emerging market" battle must be based on a long-term strategy for the next 10 or 20 years, not just short-term profits! When foreign companies were generally struggling and withdrawing from China, Unilever, in the fiercely competitive daily chemical industry, saw its 2014 growth rate drop to single digits for the first time. Despite this, its investment enthusiasm for the Chinese market did not wane. The decline was only a short-term phenomenon, mainly due to Unilever's "inventory reduction" processing for distributors in 2014. Although sales volume decreased, market share did not shrink at all. For Unilever, China has long been an important base, not just a sales market. From establishing an R&D center in Shanghai in 2000 to investing in a production base in Hefei, Anhui in 2002, Unilever took steps toward a "gradient transfer" in China—moving some products originally produced in Shanghai to regions with lower land and labor costs. This is a common logic for all foreign companies to cut production costs. Now, the layout in the western market is Unilever's most practical choice: the first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, which have driven growth for years, are seeing slowing growth. In terms of sales channels, the dominance of large supermarkets like Carrefour and Walmart is also being challenged. Instead, growth from second- and third-tier markets and county-level markets is rising rapidly, with a growth rate of over 10% in 2014. For Unilever, "going downmarket" is necessary to find new growth momentum. "In the future, we must pay more attention to expanding channels in third- and fourth-tier markets to meet the demand in Southwest China," Zeng Xiwen said. Tackling "Localization" However, China's county-level markets are vast—how can they be easily conquered? The successful experience in the Indian market might be worth trying. In India, Unilever entered early and achieved significant success through localization. Even the poorest slums are filled with the scent of Omo washing powder. In fact, Unilever's choice to place its third global production base in China's western market is precisely to achieve localized production and nearby consumption. With this layout, due to the closer distance to the southwest and northwest markets, products from this base will reduce transportation distance by nearly 1,500 kilometers, greatly saving transportation costs and enabling faster service to the western market. This is a very rational choice for FMCG companies. For example, if washing powder is transported over long distances, costs will be high and profits will be diluted. As Zeng Xiwen said: "Currently, washing powder produced at the Hefei factory sold to Xinjiang is at a loss because transportation costs are equivalent to product gross margins. But for market share and national layout, we must sell at a loss." However, a turning point appears with the western production base: 70% of washing powder raw materials are Glauber's salt, produced in Xinjin, Pengshan, and other places in Sichuan. Building a factory here is very beneficial for raw material utilization and reducing transportation and logistics costs. Unilever's global operating "rule" is that each country market operates independently, but production will gradually concentrate in several large production bases. "With the rise of consumption in western China, we also need to build factories close to consumers. This is our principle," said Marijn van Tiggelen, President of Unilever North Asia. Moreover, with Unilever's entry into Meishan, Sichuan, most major suppliers of washing powder raw materials and packaging materials have also moved into the Tianfu New Area, and will locate near Unilever's production base. As a result, the linkage effect of the upstream and downstream value chain will surely emerge. The Big Test of Channel Deepening However, channel sinking into regional markets does not necessarily mean market acceptance will naturally follow! More than a decade ago, Unilever naively believed that treating China as a single market and making a comprehensive breakthrough would suffice. "Like many multinational companies entering China, there is a calculation: if one family uses one tube of toothpaste, you can sell hundreds of millions of tubes. So it's just a simple addition or multiplication. In reality, many of the maladjustments of multinational companies in the Chinese market stem from a lack of understanding of the complexity and regional differences of the Chinese market," Zeng Xiwen's calculation is also one of the reasons for Unilever's slow expansion in the Chinese market in the past. "In the past, we thought many universal products could be applied, but now we realize that Chinese consumers have their own characteristics," Zeng Xiwen said. The consumption habits of Inner Mongolians and Cantonese are no less different than those between Italians and Germans. In China, whether consumers, markets, or business models, they differ across regions. The eastern and western markets, first-tier cities and county-level markets, all require different promotional strategies. For example, in terms of channel selection in the future, as large supermarkets close stores in first-tier cities (such as Carrefour), it may be better to take the route of small chain stores. In fact, in the past two years, Unilever's hair care brand Dove has sold better in Watsons than in Walmart, which is a channel model worth promoting. "If a company wants to expand, it must fit China's characteristics, expanding market by province and region, and understanding consumers," Zeng Xiwen knows this is key to deepening regional markets. But in the future, Unilever's attempt to "capture" the western market will face challenges no less than a marathon. Management Commentary: Future channel deepening will definitely be highly localized. In recent years, a channel has been thriving in the central and western markets, which could become a breakthrough for Unilever: daily chemical specialty stores. Although not as hot as a few years ago, they have helped build local brands like Chando, Proya, and Meifubao. In today's e-commerce era, daily chemical specialty stores can still leverage their "small boat turns easily" advantage by offering personalized services and flexible product combinations to win survival space. Therefore, cooperating with regional chain specialty stores with brand awareness can quickly open the market. At the same time, e-commerce is also a force that cannot be ignored. With the production base, logistics and distribution in the west is a major advantage. Unilever should use this to vigorously develop regional e-commerce. The so-called victory or defeat depends on the last mile. If you can arrive two hours faster than competitors, you may solve her/his washing and care needs, and a good reputation will naturally form. (Commentator: Lin Yue, founder of Guangzhou Lingyan Management Consulting Co., Ltd.) 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