New Product Development and the Adaptation Curve Part II

In our 4 part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product.  Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.

What You’ll Need to Start: Ample Capital  

Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer.  Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.?  You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget.  While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.

Inventory Financing / Purchase Order Funding / Factoring

There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise.  Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee.  The caveat is that the invoices must be to reputable clients, i.e. Walmart to be considered.

Advantages

These can be good options that allow you to purchase greater quantities thus commanding volume discounts.  Another benefit is that you don’t have to give up equity to outside investors.  Many times the factories’ terms require money down at the time of placing the purchase order.  IFGs make it possible to abide by these terms.  These companies will want to know:

  1. Your sales and marketing strategy (refer to Part I of the series) and about your team
  2. The quality of the products produced
  3. Your margins
  4. Inventory turns
  5. Your credit worthiness and track record

Disadvantages

Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records.  They may also not take a chance on a new client—one who has no real balance sheet to speak of.  Another downside is that these lenders charge interest rates that can be as high as 40% annually.  Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.

 

Crowdfunding

In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public.  To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.

Advantages

Crowdfunding is catching on and becoming more accepted as a means of raising capital.  Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead.  Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit.  Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted.  On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth.  The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.

Disadvantages

Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.

Seed Capital / Angel Investors

Advantages

The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses.  These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt.  Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan.  Seed investments are less administratively complex with less formal corporate contracts and governance.

Disadvantages

Seed capital usually comes at a cost—Equity. There is risk on both sides.  The investor may never recover their investment or you may give away too much ownership.  Usually the latter results because it is just so tempting for the inventor to commence their dream.

Read Part III of New Product Development

Diving into the China Pond

Diving into unknown waters

Many have asked me what it’s like doing business in China.  I’ve always said that if you are doing it by yourself it can be as dangerous as swimming with croccodiles.  I finally came across a photo that captured the essence of this concept.

What’s Next for Manufacturing in China?

What is something you can think of that can’t successfully be outsourced in China?

Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph.

It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?

If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”

Rising Labor Costs in China

 

rising labor costs china

In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”

In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.

In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.

A Shift By Coastal Manufacturing Regions

The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says “pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading.”

Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “

The Role Of Appreciation In Chinese Currency To U.S. Job Creation

Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.

Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it’s an issue. But the reality is that jobs from China won’t come to the U.S. They’ll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”

Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”

China as a Market

Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.

In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.

Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?

Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”

The Next 5 Years

China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.

David Alexander is President of BaySource Global www.baysourceglobal.com

Can China Prove Itself to be a Leader in Product Innovation?

Throughout the scope of history Imperial China was known as a civilization of high culture and the world’s epicenter for scientific and technological advancement. Fast forward to a modern context, the Middle Kingdom has not reveled the reputation of being a technology driven leader fueled by innovation. Due to a series of foreign invasions followed by economic collapse, and closed door economic policies for most of the twentieth century China had lost its propensity to lead the world in these areas of development. More recently, China has been notoriously known as a culture of “copy cats,” possessing a mastery level of replicating existing ideas and inventions, but lacking the ingenuity to create and innovate into the future.

 

Today, we have witnessed another story unfold throughout the far-east. As the ink on the early pages of the twentieth-first century begin to dry the world has seen globalization and a series of gradual economic reforms transform China from an agrarian society to an industrial based super power. As the story of China continues to evolve its beginning to metamorphose from a low-cost and quality manufacturing center to an innovative, value-added provider in the global economy.

 

In the last couple years China has placed a greater emphasis on innovation, invested heavily in research and development, and drastically improved its technology. Although China has laid the foundation to be an ideal location for new product development, can it ultimately prove itself to be a global leader in product innovation? Let’s explore some key aspects of development that China has improved upon to become a stronger leader in innovation.

 

Manufacturing Capabilities Spreading into New Industries

As the world’s largest manufacturer, China possesses an array of factories whose manufacturing capabilities and product offerings span across a wide range of industries. In order to thrive amidst today’s global economic challenges, China has begun to embrace new sectors and strategies for growth in order to maintain its comparative advantage. China is in transition from a highly labor intensive, commoditized, and lower-skilled manufacturing base to a more innovation-driven economy that utilizes knowledge, innovation design, IT, software, and marketing. The sectors driving China’s “next wave” of growth are focusing on more specialized and innovative production in the following areas:

 

  • High-value machinery and components:China is likely to become a regional hub for machinery production. Similarly, a shift in electronics components has caused a rapid increase in trade of higher-tech products and components.
  • Mobile technology: Now the world’s largest consumer of mobile phones. Chinese innovation in mobile gaming, communications, e-commerce, and shopping software and services holds enormous potential to boost the nation’s competitiveness and spur new mobile-specific industries.
  • Logistics and other services:Shifting to innovative and specialized manufacturing creates opportunities for companies to capture new value in the aftermarket for goods after production. Adding cloud computing and data analytics to business practices has tremendous potential to propel the distribution sector to one of the fasting-growing industries over the next two decades.
  • Energy:China’s rapid growth and development has created a demand for more innovative and environmentally-friendly energy policies. Demand for China to become more environmentally conscientious is creating opportunities for China to address growing ambient air pollution and greenhouse gas emissions while fueling economic growth.

 

Better Product Solution Providers

The Chinese and project managers have been known to be quite literal when taking instructions, not veering “outside the box” or thinking creatively. Much of this is culturally engrained. The Chinese have always followed a clear hierarchical mindset in family, community and business.  Someone is always in charge whether the leader of the PRC, a family patriarch or factory boss and one wouldn’t dare challenge that authority or buck the system. The same goes for reading and following written direction. “Paint the train blue” means paint the train blue. It doesn’t infer teal, sky blue or aqua. It doesn’t say anything about parts per million in allowable lead content.

 

The last two decades have provided exposure to working in tandem with the West and through a little osmosis and collaboration, the Chinese are now seeing that creativity, initiative and assertiveness are traits that can be rewarded. One client of ours had us produce aluminum mailboxes as in the plain, arched U.S. Mail receptacles found across the land from sea to shining sea. They would easily fill a 40 foot container with 3,000 mailboxes at around $1.50 per piece in freight cost. One day our project manager was watching the boxes get loaded and had an idea. If the client could accept a slight smaller model as well as the existing one, they could fit 6,000 units on a container and cut the freight costs in half–something no one had ever suggested before.

 

Improved efficiency

As Chinese manufacturers face declining profit margins from rising labor costs, Factory owners are brainstorming ways to produce more with less. The result? Chinese factories are capping costs and improving efficiency by using automation to raise productivity. This allows manufacturing companies in China to maintain their market positon by remaining cost competitive. Just because wages are rising in China doesn’t mean that sourcing managers are ready to throw in the towel yet.

 

The robotics industry is on the cusp of revolutionizing the way business is conducted in China and the world. China is expected to have the most industrial robots operating in production plants worldwide within the next few years. The ratio of industrial robots to workers in China is still relatively low, but that is swiftly changing. Although China has been long known as a source of low-cost manual labor, as the cost of automation drops and wages increase, industrial automation is looking increasingly attractive. The growth in the robotics industry isn’t merely a tool to hedge against rising wages, but functions as a catalyst of putting China on the map as a world leader in advanced manufacturing innovation.

 

Creativity transferring into Improved Packaging

Asian packaging has always been easy to spot. Corrugate that almost cracks apart when opening a carton and packaging graphics famous for wildly colorful kittens, characters with only pupils for eyes and in all some pretty tacky artwork. Investment and sophistication have brought about an evolution in Chinese packaging capabilities.  Thanks to technology it is possible to get the same digital quality art illustrator (AI) files printed on a wide variety of media.

 

Harnessing the Technology Learning Curve

Over the past couple decades China has keenly observed, studied, and adopted the influx of technology that has poured into the country through years of licensing agreements, joint ventures, and FDI by western corporations. The Chinese government has also placed an enormous emphasis on scientific and technological advancement through funding and reform placing a heightened societal status on science and technology. China has made rapid advances in high-tech manufacturing, patents, and commercial applications and is now seen in some areas as a world leader.

China’s next move is to increasingly target indigenous innovation as it aims to target remaining weaknesses in technological development. Traditionally, when Chinese companies face severe competition they first look to purchase foreign technology rather than investing in developing technology. China’s hierarchical, top-down society where authority is greatly respected and feared has been argued to stifle creative development. China has been successful in making small, innovative improvements to existing designs. This may not create ground breaking products or make headlines but it does illustrate that the country is making a serious commitment to improving technology and innovation in its product development capabilities.

Michelle Scheblein is China Business Analyst at BaySource Global. She has a B.A. in international business from the University of South Florida and has studied abroad, interned, and worked in China between 2011-2014. She can be reached at mscheblein@gmail.com