expansion into China:

There exists few companies in the Phoenix area that are quite as unique,

imaginative and wholesome as philosophy. Founded on the aspiration to

"bridge the gap between what was offered in doctors' offices and retail,"

philosophy features products like "shower for

the cure" and "hope in a jar," reflecting its

charitable and inspirational characteristics [4].

Using all lower case letters, and classic retro

style pictures of children, philosophy

symbolizes the simple things in life [4]. It

would come to no surprise that such a

company, based on strong moral values and quality products boasting

excellent consumer satisfaction, might have its eye on growth and

globalization. China, with its booming economy and increasingly connected

consumers, might be just the place to stage philosophy's expansion into the

global market.

the business environment

economy

China is the world's third largest economy and is predicted to takeover Japan

in a number of years [1]. When it comes to foreign direct investment, China

has the second highest inflow in the world and fifth highest outflow. Specific

to the cosmetic industry, China has become the

second largest cosmetic market in Asia and eighth

largest in the world [2]. If philosophy were to

enter China, it would be competing with over 4,000

manufacturers, including over 1,200 multinationals

and at least 400 state-owned enterprises [2]. Although there are many

domestic firms competing in China's cosmetic industry, multinationals claim

80% of the market share [2]. With such a competitive market, companies

need to be able to differentiate their products and connect with the

consumers, and having timely market information is key.

 

Although the Chinese cosmetic market is already large on a worldwide scale,

the economic growth in China has increased not only the population's

income, it has increased awareness of their appearance, and is expected to

continue in this trend. For this reason, the cosmetic market has larger

growth potential than many other industries in China [2]. So, not only will it

grow steadily with China's growth, the cosmetic market has yet to see its

consuming potential fully released.

 

Large, multinational companies benefit from their advantages in quality and

flexibility in capital spending, and currently dominate the market share.

However, local firms competing on price and utilizing their thorough

understanding of the culture and complicated marketing channels cannot be

overlooked [2]. Future success may rely more and more on a deeper

understanding of the Chinese market and market segmentation, and less on

advertising spend.

 

culture

Cosmetic companies in China are inevitably different

than those in America. One factor is that Chinese

women prefer skin whitening effects in their cosmetics,

while Westerners tend to favor the tanned skin look [2].

In this regard, philosophy's gentle formulations would fulfill the preferences

of the Chinese people with few, if any, modifications.

Chinese consumers, like a growing number of Westerners, prefer natural

ingredients to be used in their cosmetics [2]. For this reason, China's

consumers are likely to embrace philosophy's results-driven, medically-

based, "good-for-skin" products.

 

Aside from the products, philosophy's company culture would pique the

interests of Chinese consumers and workforce. Symbolism and subtlety are

values the Chinese people have, and these come through in various places,

including companies they own and operate. The lower-case lettering and

sweet pictures of children used by philosophy symbolize the simple

pleasures in life; they inspire better days and the belief in miracles and

beauty in everyone [4].

 

The philosophy, and products, of philosophy seem to be “China-compatible”

because the products are subtle, use healthy ingredients, and appeal to the

cultural love of symbolism. One additional aspect philosophy could benefit

from would be products and manufacturing processes in line with traditional

Chinese medicine. Traditional Chinese medicine and herbal medicine have

been prevalent in the Chinese culture for thousands of years, and is making

a comeback in recent times as an alternative to Western science and

medicine.

 

laws

Since China opened its doors to international commerce in

1978, the country has steadily promoted reform and

welcomed foreign investment. In 2001, China entered the

World Trade Organization, and in doing so, reduced its import tariffs, further

encouraging multinational firms to do business in China. China's tax policy

was adjusted in 2006 to levy higher taxes on energy consuming products

and luxury products, and remove consumption tax on daily necessities such

as shampoo and bath lotion. The tax for some premium cosmetics was

increased to 30% (from the original 8%) [2]. This was aimed at boosting the

development of China by favoring the low and mid-range cosmetic

companies. Although the higher consumption tax on premium cosmetics

causes the prices to increase, target consumers of high-end cosmetics are

less price-sensitive and thus the tax is not expected to significantly reduce

demand for such products.

 

One obstacle philosophy will have to overcome is in certifications of imported

cosmetics. Specifically, they would be required to obtain a certification from

the Ministry of Health and another from the General Administration of Quality

Supervision, Inspection and Quarantine. The two issuing departments do not

consult each other on certification standards, so a product can pass in one

department and not in the other [2]. With all the redundant and ill-defined

regulations, the process can easily take over six months. Partnering with a

Chinese company or developing good relationships in China may help to

overcome these hurdles.

 

the state of the industry

The most successful companies in the

Chinese cosmetic market are

multinationals, including L’Oreal, P&G,

Shiseido, and Estee Lauder [3]. While

some local companies, such as Shanghai

Jiahua United Co. and Jiangsu Longliqi

Group, are holding their own in the market, China has yet to contribute a

cosmetic company with a global reach [2]. Only recently, a cosmetic brand

in Jiangsu Province, Xiefuchun, entered into an agreement with Wal-mart.

The 179-year-old brand hopes to sell its products in around 150 malls.

Growth can be seen in another cosmetic manufacturer, 147- year-old

Kongfengchun, based in Zhejiang Province, as it has opened over 70 stores

since 2008 [2]. In Beijing, Miqi is now finding success in its homeland after

enjoying a strong export market in Japan for some time [2]. With such a vast

consumer base and low per capita consumption of cosmetics, the cosmetic

market in China has plenty of room to grow, and is expected to grow faster

than the Chinese economy as a whole. Other influences will accelerate this

growth, such as increasing influence of the western world, rising purchasing

power and an escalating consumerism culture. If philosophy wants to

capitalize on this growth, this is the time to get in, before the market

explodes.

 

potential partnerships

Shanghai Jiahua United Co. is the leading

domestic cosmetic company in China, and "is

considered to be the only local cosmetic

company that can compete with

multinationals." General manager Jiannin Qu

attributed the company's success to strong

market segmentation. Shanghai Jiahua’s well-

known brand "Baicaoji" makes claim that it

practices traditional Chinese medicine and

uses ingredients based in herbal medicine [2]. The functional cosmetic line,

with functions such as repair, cure, maintenance, care and isolation, fit well

with philosophy's line of products. It would be easy to see a line extension in

philosophy's future to include products based in the principles of herbal and

traditional Chinese medicine.

 

Another possible partner would be Jiangsu Longliqi Group, whose claim to

fame is its channel construction. A survey of more than 20 villages with a

population ranging between 100 and 1000 showed that about 50% of the

stores sell Longliqi's products [2].

 

While its premium, high quality products will face heavy competition from

the local, low-end companies, understanding the market channels and

further channel construction in China will give philosophy a huge competitive

edge on the other multinationals. For this reason, partnering or entering in a

mentoring relationship with one such firm would be pivotal in philosophy's

success in China. In addition, such a partnership would enable philosophy to

develop products with herbal ingredients or based in traditional Chinese

medicine, appealing to even more of the local markets, and potentially to

global markets as well.

 

recommendation

The cosmetic market in China is poised to burst in the very near future, with

huge growth potential for all players. Furthermore, a company that can

leverage its capital to spend on advertising will go far.

Quality products in the high-end segment, aligned with the

desires of Chinese consumers, will also contribute to the

success of cosmetic companies. These factors will primarily

benefit multinational companies. However, a thorough

understanding of market segments and channel construction

in China will be crucial to the success of cosmetic companies in this highly-

competitive market. While local companies are best suited to compete on

price, this knowledge would be of great benefit to a company competing in

the high-end segment like philosophy.

 

The recommendation, then, is to enter China with a partnership or mentor

relationship that will help philosophy build the localized knowledge it needs

to succeed. The products and company culture of philosophy, as we've seen,

need to be tailored very little to fit the demands of Chinese consumers,

although a line extension to include traditional Chinese medicine may also

increase philosophy's success.

 

 references

[1] "Economy of the People's Republic of China". Wikipedia.

http://en.wikipedia.org/wiki/Economy_of_the_People's_Republic_of_China

[2] "Chinese Cosmetic Market Overview". 14 Nov 2006. Frost & Sullivan.

http://www.frost.com/prod/servlet/market-insight-top.pag?Src=RSS&docid=86897413

[3] "Essential and Illustrative Report on the Chinese Cosmetics Market out Now". 10 July

2008. BusinessWire. http://www.businesswire.com/portal/site/home/permalink/?

ndmViewId=news_view&newsId=20080710005508&newsLang=en

[4] “philosophy official site”. Accessed 7 May, 2010. http://www.philosophy.com

Personal Reflection

I believe it was Doug Cougle who said that when Americans come to China for the first

time, they think they know everything; when they come a second time, they are ready to

write a book; and when they come a third time, they realize they don't know anything.

This being my second visit to China, I must have skipped a step somewhere, because I

found that I came back with more questions than answers. I attribute this to my

exposure to the variety of educational resources; from the movies, books, class

discussions and case studies, as well as my personal mentors. I think I was more

prepared to learn what it is I don't know than most visitors to China.

 

While I thoroughly loved and enjoyed what I saw of Beijing, Suzhou and Shanghai, it

seems as though each city has its own histories, traditions, dialects, flavors, perhaps

even their own cultures. The four cities I have visited (Dengfeng being the other city I

visited previously) in two visits to China barely represent the tip of the iceberg. There

are so many booming cities, and each of them have their own culturally significant

historic sites, stories and customs. It’s almost overwhelming how much there is to learn

about China, and this is just one aspect that I intend to focus on.

Economy of China

Whether you look at the numbers, listen to the stories or visit the companies of China, it

is clear that the economy is growing at a rapid pace. The real GDP growth rate has

been between 8% and 12% since 2000 (1). Doug Cougle at Intel cited that there were

800 million residents of rural China and only 200 million were needed to maintain the

agriculture business. So China is basically attempting to urbanize 600 million people.

He related this to building a city of Chicago every month for several years. That kind of

growth is difficult to comprehend, and the social implications are even more so.

 

The visit to COFCO was eye-opening in many ways. One of the questions asked was

in regards to plans for exporting COFCO's wildly popular brand of wine, The Great Wall.

From an American perspective, it seemed like a fair question to me, but Mr. Chi

responded that China was growing so rapidly, they couldn't even keep up with the

growing demand for wine in China. He emphasized they first must be able to meet the

Chinese demand before considering exports. I got the same impression from Fosun

Pharma; that if China is one of the largest markets in the world and growing, then the

focus is on China, and rightfully so. It was as if, to these companies, globalization

doesn't mean multi-national; to globalize and grow is to be in China.

Key Learnings 

One big take away from this class is that Chinese companies are much more than a

place of work to their employees. Historically, we learned that the danwei, or work

groups, assigned living accommodations, and even had the right to approve or deny

marriages and having children (2). While the new capitalist China has diverged from

this tradition, with many young professionals buying their own homes now, Chinese

people are still much more connected to their employers than in America. Bob Boyce,

the owner of Blue Frog exemplified this when he talked about how, after contemplating

what to do about his high turnover rate, he developed a method of managing his

business he called family style management. The keys to this management style were

a sense of belonging, discipline, opportunity and a place of home. His employees

needed to feel valued in the organization, and they needed to know that there was room

to grow with it and within it. They also needed to have standard processes and rules to

abide by, rules that were enforced. And because many of them were from rural cities,

the company took a more involved approach to their personal lives by planning trips and

events to make them feel more at home. He said that the people they work with were

their only friends in a lot of cases, and this was their new family and their home away

from home.

 

A common theme in the company visits was that retaining talent, especially in the mid-

or senior management level, is one of the biggest challenges companies in China face.

This seems especially true of companies in the Suzhou Industrial Park; both Emerson

and Honeywell speakers stated that their middle managers are often offered positions

for two or three times their current pay. Ericcson, also, talked a lot about talent

development. Intel noted that there was a gap between junior managers and people

capable of being senior managers, but that this problem was not limited to China.

My Career

As a relatively ambitious person, I had my education and the first few years of my

career pretty well charted out early on. But beyond a few years after graduating with my

MBA, my plans are not set in stone. I've envisioned myself doing many things, from

rising up the corporate ladder in a big company, to starting my own supply chain

consulting firm, and even wilder dreams like creating a home furnishings design

company or developing a TV series on business concepts. I never seriously considered

permanently moving to another country, but after this trip, I am inspired to do so. There

are a lot of things to consider, and a lot of research for me to do, but this trip may very

well have changed the course of my career.

 

Perhaps opening a supply chain consulting company in China would be more

successful than in the US, for example. Afterall, the market in China is nearly infinite,

and the US market is already saturated with consulting companies. What's more,

Chinese companies are still developing and could greatly benefit from such services,

whereas some consulting companies in America have given the industry a bad

reputation. This is one opportunity I may consider for my own career, recognizing,

however, that more experience and studying Mandarin are pre-requisites for such a

pursuit.

There is also something to be said about the sophisticated, modern tastes displayed in

companies like Li Ning and COFCO. I could do very well by developing my design

brand in China, bearing in mind the growing industries and modern architecture, and the

growing population of Chinese with discretionary incomes.

My Cultural Intelligence

As I mentioned, I returned from this trip with more questions than answers, and I think

that exemplifies my increased awareness. That is not to say that I lack knowledge

about the Chinese culture and other cultures; I feel I have learned a great deal about

both China and the world, but much of my education has been through books, films,

articles and case studies. From my experiences in China, I have created a list of even

more topics that I would like to read up on and learn more about. Also, it has become

very apparent to me that, since China is growing so quickly, material can become

outdated faster than normal, so I recognize the importance of continuing to read and

learn about business and news in China.

 

In terms of mindfulness and awareness, I'll be the first to admit that there are still times I

was caught off-guard because I went into "auto-pilot", and was rudely awakened when

things weren't as I expected them. The concept of personal space is one such concept

I've made assumptions on. People in China seem to have a very different concept of

personal space, so it was easy for me to think they were being rude when they pressed

against me in crowds. I don't know the background on this difference, but I suppose it’s

not hard to understand that, with millions of people in several cities, and perhaps a

scarcity of resources in rural areas, people are eager to get where they are going, and

their concept of in-group and out-group makes them a little more indifferent to strangers

than westerners.

 

Putting my knowledge and mindfulness to work, I believe I've developed behaviors and

skills to accommodate cultural differences, during this trip and previous trips to Asia.

Learning the language would definitely help me fit in better, but even beyond the

language barrier, I have so much more room to grow.

 References

 1 GDP growth in China 1952-2009. 27 Dec 2009.

http://www.chinability.com/GDP.htm

 

2 Seligman, Scott D. "Chinese Business Etiquette". 1999.