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TODAY’S STORY
16 Nov
,
2022

Made in China

Stoa Daily Challenge #19

boAt is a consumer electronics and lifestyle brand founded by Samer Mohan and the flamboyant shark Aman Gupta.

In 2021, they peaked their net profits by 60% and have now hired a Cheif Business Officer to double down on their best performing product lines in abet to scale bigger before their rumoured IPO in 2023.

In this challenge, you will play the role of Prejith, the Chief Business Officer, and decide on segments to invest & divest in for the next fiscal year.

Play the challenge here.

Now, to today's issue.

____

For many, Chinese goods are synonymous with low-quality goods.

In Hindi, there's a common saying:

"Chale toh chaand tak, nahi toh raat tak."

("If it works, it may take you to the moon. If it doesn't work, it'll probably stop working tonight.")

But it's not like China cannot manufacture high-end equipment.

They can. Both their engineers and factories are perfectly capable. It's just that their customers don't ask for it. And the unit economics incentivizes them to produce a lot of something cheap versus a little of something high-end and expensive.

Would you rather make $50 per unit on 100 units, or $5 per unit on 100,000 units?

Yes, so would they.

Niche applications are not of interest to most manufacturers, especially in China, because marketing to high-end audiences isn't as easy for them.

They mostly operate on a B2B model focused on high-volume orders. A major reason for that is switching production lines from product to product is costly. They would rather make 10,000 of something mainstream and fast-moving than 10 runs of 1,000 that may or may not sell for a high price.

Many can do either. But they just prefer larger contracts over smaller ones.

Ironically, the thing that actually drives the sentiment, "Chinese products are low quality" is actually the customers.

I remember being at an electronics expo in Bengaluru a few years ago and there was a middle-aged man who walked up to an audio-manufacturing company booth and asked:

"Show me your biggest speaker. Biggest and cheapest. I want, BIG, CHEAP and LOUD."

What's funny is the booth actually had legitimate hi-fi audio offerings. This man represents the mainstream consumer very well: technologically challenged and looking for the most obvious features at the cheapest price.

There's also a kind of barbell effect that happens in the Chinese markets, where people either buy the cheapest value products or they buy the best products.

So, if you are spending tonnes of money in R&D and making a high-end product, you will also need to spend an equivalent amount or maybe even more marketing it, because the market for high-quality products is very small.

And when a small, relatively unknown brand spends money on marketing, they generally need to make the money back in short order. They don't have huge cash reserves to reinvest in marketing from their profits, like the global giants with well-established brands do. And to spend money on running performance ads instead of making more units is self-defeating. They would rather manufacture more units at a cheaper cost for the masses who are easy to find than make fewer high-quality units and then spend on marketing to find this small niche of customers.

In such markets, there is no reward for making an incrementally better product; you either make the cheapest product you can at high volumes or you make the best product you can at low volumes.

The consumer would rather get a replacement and sellers in China are equally happy replacing defective products several times. It's not an issue. So, manufacturers try cutting as many corners as possible. They get creative with optimization instead of getting creative with quality control.

There's also the issue of economies of scale in production. Factories that are willing to do small runs of high-end products are often less established and therefore can often run into QC issues. This, combined with low quantities, increases the price of small batches of products even more. Niche products are more expensive in large part because the cost per unit goes way up when you fall below a certain minimum order size of units — say 10,000 or 50,000 — depending on the industry and the product in question.

So, yeah. It's not like the Chinese can only manufacture low-quality, use-and-throw goods. They're just making whatever the market demands and is sustainable for their business.

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