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Trade War Hit Chinese OEMs Looking At The Domestic Market For Business

Trade War Hit Chinese OEMs Looking At The Domestic Market For Business
The trade war between the United States and China has hit numerous original equipment manufacturers (OEMs) of China. This has also turned out to be a turning point for such Chinese companies which had so far thrived by supply products to Western companies and the business model involved the Western companies rebranding the products for selling. This had given China the accolade of being the “Factory of the World”.

However the trade war between the two largest economies of the world has turned the tables for these OEMs of China and they are now looking more to tap into the domestic market of the country. 
According to a news report in the news agency Reuters, Chinese OEM firm Matsutek had become the second-largest maker of robotic vacuum cleaners in the world by supplying the products to big Western brands which included the likes of Philips and Honeywell. The products manufactured by it in China were sold by these brands all across the world.
However currently, the trade war has hit this Taipei-headquartered firm.  
The 25 per cent import tariff imposed by the US on Chinese goods has resulted in the sale of the company to the US firms dropping by one fifth and the company has consequently been forced to close down two of its 11 assembly lines located in China.
Since the tariffs were imposed in December last year and the consequent drop in sales, the company has now shifted its focus to its own “Jiaweishi” vacuum cleaners and is now putting up the products on e-commerce platforms like Alibaba’s Tmall and Pinduoduo. Even though this brand was created in 2015, the company had done very little with the brand so far.
 “This was our wake-up moment. We realized we couldn’t rely on overseas markets alone, rather we should build our own brands in China,” Terry Wu, general manager of two Matsutek units in Shenzhen, told Reuters.
For a number of Chinese companies such as Matsutek, the trade war has forced them to completely change their business strategy while other companies have started to create and promote their own brands that are specifically targeted at the domestic Chinese market.
“Being an OEM is like being a peasant counting on a good year of rain. Why shouldn’t we build our own brands, lower the price a bit and offer products that have the same quality as foreign brands,” Wu said.
Apart from these strategies, many companies are also starting ot shift their production to other nearby countries. 
And according to analysts, in the longer term, this strategy by Chinese companies to develop their own brands would lead to more competition from Western companies.
“Chinese companies that used to be business partners and suppliers are becoming rivals,” said Jason Ding, partner at consultancy Bain & Company, and added that foreign companies and brands in the Chinese market would have to consequently also become more aggressive. 
Another Chinese company that hast been forced to rethink its business strategy because of the hit form the trade was is Anhui Deli which manufactures wine glasses and other glassware and has an average annual revenue of 800 million yuan ($113 million.
“The U.S. was our main growth market until this year but due to the trade war, clients have become hesitant to put in an order, and many orders from the U.S. have been canceled,” Cheng Yingling, the company’s marketing director, told Reuters. He added that the current tariff rate on products of the company in the US is at 40 per cent after the US administration increased tariffs this month.
For the company, some of the hit due to the trade war has been cushioned by e-commerce sales at home. After the company partnered with Pinduoduo, its sales has hit about 50,000 units a month, which is three time more than the sale of similar products through stores. The company now plans to set up a factory in Pakistan and expects the production unit to start production by January next year.
The e-commerce company Pinduoduo is targeting those Chinese companies that desire to make their mark in the domestic market quickly. The platform launched a program in December that offers consulting services for product development for the local Chinese market. 
“Pinduoduo reached out to us and said they want to have a manufacturer-to-consumer business model. Considering they are doing very well in lower tier cities and have fewer partners in home appliances (than other e-commerce firms) we decided to work with them,” said David Fang, vice president of MTC.
“We think there are great opportunities in China. The penetration rate of robotic vacuum cleaners in the U.S. market is 17%, while in China it’s only 1.5%,” said Wu. “At the end of the day, there are more than 1 billion people here.”

Christopher J. Mitchell

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