Which is best: Selling commodities, parts or brands in China?
BYD (Build Your Dreams) has rapidly become the poster child of Chinese industrial success, surpassing former tech darlings like Alibaba, which faced a heavy crackdown from 2020. BYD’s rise - along with much of China’s EV industry - exemplifies Beijing’s strategy of “picking winners” and intensifying support for them to propel the economy into higher-value sectors. This will help transition China to a developed-world standard of living for large swaths of its population.
Despite geopolitical tensions, tariffs, and the hiccup with the website selling sex toys, BYD’s rise shows no signs of slowing. Over the past five years, the company has experienced hockey-stick growth. In the last quarter, BYD celebrated two of its most significant milestones yet: selling over 1 million cars in a single quarter (1.13 million, to be exact) and surpassing Ford in global sales. Ford - the emblem of American industrial might that once brought motoring to the masses - has now been overtaken by a brand whose name evokes more of a 90s self-help mantra than a global automotive powerhouse.
Innovation Meets Efficiency
BYD’s success stems from a combination of engineering prowess and technological innovation. The company has developed impressive vertical integration and efficient manufacturing processes, but it is also producing innovative high-end products, such as its U8 with its tank-turn, crab-walk and water-driving capabilities.
However, BYD faces challenges in building brand heritage and embedding its reputation globally. As a result, it often competes on a value-for-money proposition, like many Chinese brands, relying heavily on price competitiveness.
China’s manufacturing cost advantage has further improved since 2020. This isn’t just down to the efficiencies of China’s production scale and logistics, but also because the country has largely avoided the inflationary pressures that have increased the cost of doing business in other parts of the world.
Shifting Market Dynamics for Foreign Brands
The combination of lower cost structures and increasing innovation, risk-taking, and marketing acumen from Chinese brands has left many foreign companies struggling to compete. In response, some of them have pivoted from brand-building to becoming suppliers to Chinese brands.
For some businesses, this shift makes sense - especially for those that lack the structural agility to thrive as consumer-facing brands. However, for others, focusing solely on commodities, white labelling or supplying parts could be a short-sighted strategy, leaving significant opportunities to add value untapped.
Risks of a Commodity-Driven Strategy
While commodities might appear lucrative during periods of high prices, they expose businesses to the volatility of fluctuating markets. Furthermore, as China’s Belt and Road Initiative strengthens connectivity with developing countries, it becomes easier for these nations to provide alternative supplies at lower costs, further eroding the profitability of commodity-driven strategies.
Similarly, for those supplying white labelling or parts to Chinese brands, their customers’ reliance on price-driven strategies carries its own risks. Chinese companies, known for their sharp business practices, often renegotiate prices - even on seemingly locked-in contracts. Just last month, BYD demanded that suppliers cut prices by 10% within five weeks, highlighting the pressure suppliers face in price-focused relationships.
The Case for Brand Building
While selling a consumer brand is undoubtedly more complex and multidimensional than supplying commodities or parts, it offers greater opportunities for adding value, trading on what is special about your brand, inputs, innovations and origin – all leading to higher margins. Strong brands can weather the volatility of commodity prices and better resist the pressure of blanket price squeezes.
For foreign companies operating in China: while it may be tempting to play it safe by focusing on supplying commodities, white labels or parts, investing in brand-building can unlock greater long-term potential and profitability. In addition, it better prepares brands to compete against Chinese brands as they increasingly enter other export markets. Getting it right in China, means that global prospects look far better overall.
