The China syndrome

The early part of my career was concerned with new product development. As a product manager I conducted the whole process from initial concepts and market research, through design and development, into manufacture and eventually a product launch. Our b-2-b marketing clients today generally do not have a product development process. Either they are providing a service or marketing products where the design decision is taken remotely – typically in another country. As a consequence our marketing role has become far more focused on communications, so it came as something of a surprise when one client mentioned that the source of a top selling product was ceasing manufacture and supplies would soon be exhausted. Interestingly another client had rapidly withdrawn a product for a similar reason, in their case the basic component that made the thing work was no longer available. It caused me to stop and think. When was the last time we had included anything about new product development in a marketing plan for a client? Not because we forgot to ask, but because they had no plans. My thoughts soon strayed to another client inspired remark made to me about 6 or 7 years ago concerning a meeting in China. To his amazement he was shown products used for scientific purposes similar to those produced by his own company, which subject to testing (subsequently confirmed by independent laboratories as very accurate) appeared their equal. His USP was based on years of research, materials selection, manufacturing development, quality controls and skills of the work force. Volumes were not high so cost and price reflected this and such a device cost maybe $200 to manufacture. When asked for a price the Chinese contact seemed not to know the cost and suggested $3 would suffice. Why tell this story? Firstly it is not an isolated example, secondly the whole economics, new product development and marketing rationale were stood on their head. From a position of semi exclusivity, expertise and a ‘black art’ process that produced these devices, suddenly they were available to anyone at give away prices. Soon there were importers entering the market which still commanded a price premium, but what the importers could not offer was input into the application development. But here our client faced another problem. In order to get a product specified the company had traditionally worked with engineers working on a prototype so that when the product entered production their device would automatically be specified. But now buyers substitute the cheapest alternative, or production is offshore and sourced locally, so the development process rather than a marketing cost should really be a chargeable activity. It is possibly the only charge or sale the company will be able to make. Our client has yet to fully make this transition but a major rethink seems inevitable. When product development becomes product sourcing much is lost in the understanding of what the market needs. The other big issue to my mind is cost. As a product manager producing a product at a cost commensurate with a price that we judged the market would stand and achieve returns on investment and earn good gross margins was always a challenge. The low cost of Chinese products that does not truly reflect materials and other costs in the example my client cited cannot be sustainable in the long run. Already China is forcing up world commodity prices due to the sheer volume of world production whilst contributing to pollution on a heroic scale which prompts the question, is building a business on extremely low cost imports viable longer term. And what happens to that accumulated knowledge and black art if people like our client should completely opt out of manufacture?