This post is Part 2 of a two-part series that examines the C2M trend in China. Part 1 looked at the state of C2M in China, including the driving forces, key players, and benefits of C2M. In Part 2, I will share some key takeaways on the challenges and future of C2M in China.
1. E-commerce giants are invested in C2M to tap into the wallets of consumers from lower-tier cities.
China is not a homogeneous market. There are generally four different tiers of cities, each with unique economic profiles and spending patterns. Tier 1 and 2 are referred to as “higher-tier” while Tier 3 and below as “lower-tier” or “下沉市场” in Chinese.
The higher-tier cities dominate existing e-commerce retail GMV. In 2018, Tier 1 and 2 cities made up about 64% of the total GMV (Figure 1).
However, the lower-tier cities are catching up quickly as online penetration and consumption power continue to gain momentum. The lower-tier cities are expected to deliver 35% CAGR from 2019 to 2021 to make up 43% of total e-commerce retail GMV in 2021. Therefore, e-commerce players need to find ways to secure this up-and-coming market segment and further stimulate its demand on a large scale.
With basic needs fulfilled, consumers in the lower-tier cities are in the “consumption upgrade” phase and becoming more discerning of their purchases. While they want more customized and good-quality products, they are still conscious of price.
C2M is a differentiated way to deliver low-cost products to price-sensitive consumers in lower-tier cities. C2M presents a cost advantage to target these consumers by removing supply chain intermediaries and compressing price margins. As the population base in the lower-tier cities is large, the cumulative spending is significant, even if individual purchases may be small.
Pinduoduo’s C2M “New Brand Initiative” is an interesting case in point. Jiaweishi, a robot vacuum manufacturer, studied consumer preferences based on data collected from Pinduoduo. It redesigned the vacuums and changed the randomized cleaning route to a more orderly process (Figure 2). The customized vacuum was offered to consumers at RMB 288 (~USD 45), a quarter of the non-C2M price. Out of more than 300,000 vacuums sold between end-2018 to 1H 2019, a majority was to consumers in the lower-tier cities.
2. C2M will continue to gain prominence in China against the backdrop of the government’s push for industrial internet and dual circulation.
Operationalizing C2M requires factories to have smart manufacturing capabilities, for instance, rapid prototyping based on 3D printing and digital design platforms to reduce the design process and offer customized designs. These technologies make up the base infrastructure layer. On top of that, factories need to maintain supply chain visibility to facilitate process tracking, seamless connection with e-commerce platforms and consumers, quick responses to the market, and risk management.
Industrial internet is the “brain” and “nerves” that enable smart manufacturing and C2M (Figure 3).
China is betting big on industrial internet to upgrade its manufacturing sector and navigate the country towards a more sustainable development path. Industrial internet dovetails with many high-profile national strategies, including
· Internet Plus (in this case, internet plus manufacturing) — integrate mobile internet, cloud computing, big data, and IoT with manufacturing to increase productivity and economic growth
· Made in China 2025 — upgrade manufacturing capabilities and achieve technology self-sufficiency
· China Standards 2035 — set global standards for emerging technologies, including IoT, and become the global leader in high-tech innovation
· New infrastructure (新基建) — ramp up construction of “digital, smart, and innovative” infrastructure, including industrial internet, to drive post-pandemic economic recovery and high-quality development
C2M and the industrial internet mutually reinforce each other. While C2M provides a setting for industrial internet to be applied, the development of industrial internet, in turn, promotes the proliferation of C2M.
In addition, C2M and the upgrading of China’s manufacturing sector serve another critical function — boost domestic consumption and build a more resilient economy. This is precisely what the “internal circulation” of the Dual Circulation Strategy (DCS) aims to achieve (Figure 4).
Under DCS, domestic consumption will play a leading role, while international trade and investment will act as an extension. In the 14th Five-Year-Plan released in March this year, the government called for the proactive enhancement of domestic circulation, in particular boosting domestic production, distribution, circulation, and consumption of goods and services.
With DCS and industrial internet high on the country’s development agenda, one can expect C2M to continue gathering steam.
3. There are existing challenges with supply chain and quality control in C2M, and China is still far from broad-based customization.
The “C” in C2M represents demand discovery and analysis, while the “M” represents agile manufacturing to meet the tailored demands. The latter requires factories to upgrade supply chain capabilities and effectively integrate supply chain resources to preempt or respond rapidly to changes in demand. However, two critical challenges exist.
First is the problem of supply chain ownership and flexibility. Factories need to source inputs, such as raw materials. They typically work with other suppliers, and few have ownership over the entire supply chain. If products change constantly, the logistical challenge of managing the inputs will be very complex.
In addition, it is challenging to achieve supply chain flexibility. In the ideal C2M scenario, the factory has a flexible production line that can be activated on-demand to produce customized goods. However, few factories are willing to commit the financial resources to reconfigure their existing supply chains. After all, C2M is still a relatively nascent phenomenon.
Second is the problem of quality control (QC). A brand is a mark of quality, and it has procedures in place to perform stringent QC. Products like cars and electronics undergo rigorous testing to ensure adherence to safety standards. In C2M, where products are essentially brand-less or take on the new brand of the factory, the manufacturer may not have the capability to ensure consistency in the quality of goods, especially if products change often.
Given the challenges with C2M, it is unsurprising to note that the current modus operandi of C2M seems to involve factories collecting data from e-commerce platforms and then producing goods that they are more confident will have high hits. The case studies illustrate batch productions to meet the demands of consumers as a collective group rather than as individuals.
Industry experts, however, opine that broad-based customization for the individual consumer may be possible in the long run with modular customization. For instance, factories can dissect the demands for a product into “standardized” and “customized” parts. Each component can have a dedicated supply chain pieced together to form the overall C2M product.
E-commerce platforms are in the best position to work with factories to realize mass customization for individuals. These platforms have the necessary data to offer factories insights on segmenting demand and modularizing productions. With more data and continuous iteration, modular customization for C2M may be within reach.
4. Not all industries are suitable for C2M. To reap the most gains from C2M, manufacturers need to balance the cost competitiveness with quality control.
C2M can lower inventory costs for manufacturers and compress the price margins by eliminating intermediaries. However, manufacturers also need to reconfigure their supply chains to support C2M. They may also need to pay service fees to the e-commerce platforms. Manufacturers need to weigh the overall cost competitiveness of C2M before embarking on it.
Industries with many supply chain layers or chunky supply chain parts to be potentially eliminated will stand to gain more from C2M. The furniture industry is an example of an industry with high inventory carrying costs. If there are few supply chain layers from manufacturing to sales and the overall cost of production is relatively manageable, then C2M may not deliver the expected cost advantages.
Another important factor when assessing the feasibility of adopting C2M is the manufacturer’s ability to maintain QC. Suitable industries are those where applying C2M will not compromise the product’s quality and safety.
Take the automotive industry as an example. Even minor tweaks may affect the car’s functionality and safety. Therefore, every new car model must pass stringent tests before they are released (Figure 5). If manufacturers cannot deliver the robust QC with C2M, customization may be limited to the product’s aesthetics only.
C2M will also work for industries where consumers care more about individuality and quality and relatively less about branding, for instance, in certain fashion categories. Manufacturers can then offer an alternative solution while building their brand.
For the industries that adopt C2M, does it make intermediaries such as distributors redundant?
These intermediaries are certainly at risk of disruption in the long term. However, they also hold valuable resources, such as client networks, and more importantly, data on client profiles and transaction histories. With the increasing adoption of C2M, these intermediaries may gradually take on a more service-oriented role to supplement the manufacturers. For instance, some may provide technical or warranty support and financial services.
What does C2M mean for brands?
C2M is unlikely to displace reputable brands overnight as consumers may have an emotional attachment to them. However, there is no room for complacency for brands, especially for the industries where C2M can work.
Interestingly, some brands are also finding ways to leverage the C2M trend. Italian designer brand Sergio Rossi referenced JD’s big data analysis and co-designed a new style of short boots popular with consumers on JD. The unique style was launched exclusively on JD with the 2020 A/W collection.
5. C2M, at its core, is about a more precise and efficient matching of demand and supply.
In traditional e-commerce, intelligent algorithms ramp up consumer traffic to create demand for ready-made goods. In C2M, e-commerce platforms generate consumer insights into demand and production orders. On the supply end, design and production according to actual consumption optimize resource allocation.
C2M re-examines the relationship between demand and supply and enables a more precise matching, thereby reducing wastage and inefficiencies.
We are living in an increasingly consumer-centric era. Big data and AI technologies are becoming more advanced, supply chains are becoming more flexible, and consumers are demanding more “value for money” products. While there are existing challenges with supply chain and quality control, C2M is an unstoppable trend that will disrupt offline and online retail models.