LESS AFFULENT Business Opportunities in China

Pia Polsa, Ph.D.,

Shanghai 22nd June , 2010

School of Management at Fudan University

HANKEN School of EconomicsNordic Centre at Fudan

AGENDA

• Neglected CONSUMERS• Bottom-of-the-Pyramid research field

• Neglected PRODUCERS• => Are they a business opportunity?

• BUSINESS MODEL: case of Tikau

OBJECTIVES of the presentation

» Describe the neglected consumers and their market potential in China

» Describe the neglected producers and a market potential of their products outside China

» Foreign competence and imports to China

» Chinese neglected competence and exports from China

Neglected consumers

» LESS AFFULENT whom are not supposed to have purchasing power

»Purchasing power per capita is tiny but population is large

»For example in China:»55% of Chinese population lives in countryside (2007)»59% of Chinese population lives OUTSIDE growth provinces (2002)»About 100-130 million Chinese live as migrants in large cities (Croll, 2006)

HOW are they neglegted?

» They are invisible because

»products are not designed for them

»Their consumer behavior is not researched => we do not know what types of products or services they need or desire

»Some research attention from Prahalad, Hart, Karnani and so on called Bottom-of-the-Pyramid

» They are not seen as ACTIVE ACTORS but passive receivers of aid

Bottom-of-the-Pyramid• Term of endearment for world’s poorest 4+ billion across Africa, Asia and South America (Hart 2007: Prahalad 2005).

•Advocates market-based solutions to problems of development, premised on view that business is more efficient than government:

• Empower poor to be entrepreneurs• Increased income = inclusive capitalism

• BoP Strategy….seeks to bring the world’s poor into the global market place by way of business enterprise…

because …..

OBJECTIVE

STILL, current BoP strategy focuses on transforming the poor into consumers for Western goods and services, which tends to reserve an imperialist

hold on the poor.

Our objective then is to propose an alternative (supply-focused) BoP

perspective that allows for ”inclusive capitalism”

Inclusive capitalism = the poor on the demand side as clients and customers, and on the supply side as employees, producers and

business owners at various points in the value chain

Such ”inclusive capitalism” seeks to alleviate poverty at the BoP through focused attention on reducing what Stiglitz (2002) identified as

the persistent income gap that perpetuates global poverty.

IMPORT and neglected consumers

» Foreign competence in basic social services:

1. Imports of health care systems and programs

2. Imports of day care systems3. Imports of Scandinavian education systems

(at all levels)4. Use of modern technology to prevent

poverty and to create possibilities5. Products that less affluent need or desire

» Imports to neglected consumers requires innovation

Neglected producers

» Masters of traditional local knowhow

» They do not have modern education if any education but they are educated in tradition

» This knowhow lives still but not very long in the countryside and among the elders

» = CULTURAL CAPITAL (cf. Ger, 1999), that locals do not always appreciate

HOW are they neglected?

» They are invisible because

»Industrialised and developed regions concentrate only in low-cost production of their own products

»Developed regions concentrate only in giving aid to less developed regions

»Developed regions concentrate only in selling their own products

» Few try to develop and sell products from less affluent producers

Chinese traditional crafts

» 1865 recognized handicrafts in China out of which

»13 % is endangered»6 % have virtually disappeared

» Since 1979 365 masters have been granted an official status out of which

»200 remain today

China Daily/ March 26, 2010

POTENTIAL PRODUCTS

Kolla www sidor för HOPE och GUANGCAI • Bamboo fly cover• purchased in Rong Shui

(Guangxi province) 1995 from a local producer

• POTENTIAL: as a fly cover

• Bamboo basket could be sold well as most fly covers in West are plastic, i.e. non-environmental and non-beautiful

POTENTIAL PRODUCTS

• Bamboo basket • purchased in Anyang 1990

from a local elderly female farmer

• POTENTIAL: as a shopping bag

• Bamboo basket can be used as:

1. Shopping bag2. Fruit container3. Toy container4. Etc.

POTENTIAL PRODUCTS

» Bamboo basket » purchased in Guilin 1995

from a local small retailer

» POTENTIAL: as a laundary basket

» Bamboo basket can be used as:

1. Laundary container2. Fruit container3. Toy container4. Etc.

POTENTIAL PRODUCTS

» handmade porcelain pearl necles

» purchased in Guilin 1995 from a local farmer

» POTENTIAL: as a fine handicraft

» hand painted small porcelin items can be used to other products such as:

1. Buttons2. Furnitures3. Toys4. House decorations

POTENTIAL PRODUCTS

» heater, heated coal covered by basket

» seen on a countryside road between Guilin and Wuzhou 1994

» POTENTIAL: heater or insect remover in gardens or summer cottages

» Background information:•Almost 50% of families own

summer cottages in Finland, some of these places being without electricity•People eat and socialise

outside in their gardens despite colder climate and moscitos

CASE: Suzhou CobblersCASE: Shokay Flagship storeCASE: Qiang Embroidery

» 19 Fuzhou Road, Shanghai

» Designer Denise Huang» suzhou_cobblers@yaho

o.com

» No 9., Lane 274, Taikang Lu

» Owners Carol Shyau and Marie So

» www.shokay.com

» Qiang Embroidery http://www.ventureavenue.com/project_qiang.htm

Foreign markets and neglected producers

» Foreign business competence can be used:

1. Develop forgotten producers’ products to BRANDS and DESIGN products

2. To choose right and EXCLUSIVE distribution channels

3. Use exports of forgotten producers’ products to remove poverty and create hope and possiblities

4. EMPOWER the less affulent people

CASE: Tikau in Finland

TIKAU CO-OPERATIONTo promote community trade, Tikau works together with artisans and with several NGO´s  (non-governmental organizations) and trusts, whose input, consultancy and valuable work with sustainable community development are notable. The commitment to transparency and long-term relationships is shared by all parties.

http://www.tikau.com/

SUMMARY: Business model

BoP micro producer

MNC

Income from sales

Enchansed skills and

products to global

standards at the BoP

Networked entrepreneur

MNC access to innovative

BoP products and skills

Global value for BoP skills

and products

Preservation of local

culture/skills

Corporate profitabilit

y and innovation

Higher BoP

incomes and

innovation

Investments on

community for

improved wellbeing

Trusting relationship

between parties

Multi Stakeholder Co-operation

• To link and combine the myriad of skills at the global arena network of multiple stakeholders is needed (Arnould & Mohr, 2005)

–Owners of innovations, i.e. local producers–Brand creators, i.e. MNCs–Local governments and authorities at different levels–NGOs–Brokers and other middlemen

• Business partnership between the stakeholders

Local Products by Local Producers

• In contrast to earlier BoP strategies our model proposes sales of local products produced by local producers that

–Emerge in local culture–Emerge in local entrepreneuship–Emerge in everyday life/domestic affairs–Are part of the community’s history–Are embedded in local skills

• In contrast to no local innovation our model calls for full, limited, shared local innovation

Luxury Brands and Design Products

• In contrast to the earlier BoP strategies our model proposes branding of BoP products as luxury and design

–So far most products from the BoP markets are limited to low cost or Fair Trade types of positioning

–Extra premium gained from the high-end positioning generates extra income that can be used both for

–MNC profits–Poverty alleviation through collective repatriation of profits to the local community

SUMMARY

» Foreign competence:»Imports to less affluent in China»Social services NOT social welfare system

(health care, day care, schools, pension programs, micro-loans) and suitable products

» Forgotten competence of China:»Alternative exports from China»Development of neglected producers’

products to high-end BRANDS and high-quality DESIGN products

»FAIR TRADE product development