Govindraj Ethiraj: From knock-offs to knock-outs

DOUBLE EDGE

Having done this before, I approached the matter with the air of a practised professional. "How much for this shirt," I asked the young girl in the shop. "200 yuan," she said, hammering out the numbers on a large display calculator. Okay, I thought, divide that by four and start. "50 yuan," I went. "Nooo sir," she said. "Okay, 75 yuan," I said and waited. No response. "How's 100 yuan," I said, now comparing with Indian store prices for branded shirts.

"Please sir, this is designer shirt selling for 300 yuan in a Hong Kong store. This is not a fake. You have to give better price."

Now I was a little confused. I thought everything sold here was either an outright fake or some export reject and priced so. Looking at the shop girl's demeanour, evidently not.

I had arrived at Shenzhen Railway Station earlier in the day from Guangzhou, up the Pearl River Delta. And walked into the Lo Wu Commercial Center alongside the station. Lo Wu is a giant mall bustling with thousands of shoppers on any day. On weekends, it resembles a madhouse.

Most shoppers usually come here from the opposite direction though, from Hong Kong, passing through a fairly strenuous regime involving Hong Kong emigration check as well as, obviously, Chinese passport control.

As I trawled the mall, I noticed that shops had got much better organised and well laid out. But there were other things which I didn't quite recall in my previous trips.

The ground, first and maybe second floors had rows of shops stocking mostly moderate to cheap Chinese made fashion accessories, electronics and of course the fakes.

An aside; even the fakes have moved up. Earlier, you could examine three grades of fake Rolex watches (placed on a tray) before buying one. Now, an energetic salesgirl thrusts a classily printed colour catalogue of watches at you. It's not just watches, catalogues are available for sunglasses and hand bags as well""all fakes.

On the third floor, as I try and reprice my bid for the shirt, I am wondering what's changed since I last came, or noticed.

After a while it strikes me. In the value-added pecking order, the higher floors are selling top-end or designer clothing and fashion accessories which are neither advertised as or being touted as fakes and knock-offs.

Even the shops are different, tastefully laid out with muted and spot lighting as opposed to the bright fluroscent lamps below. This is the real thing, at lower prices. So while the lower floors are selling knock-offs, the higher floors are selling, what I could call knock-outs!

A little over a year ago, in Shenzhen, I visited the Great Wall Computer Group Corporation. The Government-owned firm (looked quite private to me) makes an interesting mix of products, ranging from computer monitors (one of the world's largest) and ATMs to digital TV sets and remote-control electric meters""a batch for Reliance Energy was being processed as I was being walked around.

The Great Wall Computer PC is branded while many of the company's other products are not, in a retail sense.

This is a struggle that plays out across most manufacturing companies in China""between being a contract supplier to a distant multinational to being a big brand that commands a premium. And somewhere down the line are the knock-offs and pirated goods.

China watchers will tell you that China is yet to scale the brand ladder because it lacks the sheer managerial and original design capability for scale marketing innovation.

Also, most enterprises (at least in these parts) were built to supply overseas""from computer parts and toasters to leather bags and furniture. The supply chain works wonderfully when, let's say, a batch of flash memory chips have to travel from Shenzhen to Seattle in 48 hours, but not necessarily Tianjin in 24 hours. Though this is more due to soft rather than hard roadblocks.

The domestic market has lagged but purely in relative terms of course. Glancing at the number of BMWs and Audis in Shanghai or Beijing, you would hardly think that will be a problem for too long.

In contrast, export margins are thin and product margins huge. An electronic product that retails in the US for $30 will leave China at around $3. The $3 may seem small but it goes a long way in China in terms of employment and opportunity, as it would go in India.

Even within a market like the US, the same product will retail differentially, going down to $17, depending on whether you buy the branded one or not, online or in the store.

Inevitably, the equations are shifting. Many Chinese companies, including a textile major I visited last year, have spawned strong domestic labels in recent years. Sometimes the flagship stores are in the same corporate office or factory premises. The domestic brands are being marketed aggressively, like Great Wall PC hoardings are common in Shenzhen. And possibly this will mean even more business and job opportunities, for home and the world.

Back in Lo Wu, the shops on the higher floors represent the success in bridging the gap between $3 and $30. My sense is that Chinese entrepreneurs (even if they lack the marketing talent) are getting smarter and smarter. While the lazy ones (intellectually) will continue to make knock-offs till the law closes in, the smarter ones will increasingly move towards knock-outs.

The domestic market will help them, as will newer markets across the world, including India. Which means that the next time I visit Shenzhen, I better be ready to start bargaining at 20% less rather than 20% of the price. Or better still, wait till the stuff begins to arrive in the local stores.

govindraj@business-standard.com