Educational toys on display.

The Beijing International Toys and Preschool Tools Exhibition included companies which used to be exporters but are now chasing domestic sales.

One Hong Kong firm, which declined to be named, was taking part in a Mainland trade fair for the first time - and was not too happy with the result.

The company's representative said that while many visitors were interested in its products, those who made enquiries were small retailers instead of large, wholesale distributors, which meant losing out on volume orders and therefore margins.

As small quantity orders translate into high costs, they don't make for particularly good business.

Moreover, the company was concerned about payments. In export trades, payments are typically set so as not to exceed 120 days. But in the domestic trade sector, settlements usually take a while longer.

On the other hand, the company indicated that in the long run it has to develop the domestic market and won't be going back to exporting overseas even after the financial crisis is over.

Inventories key for Mainland business

Unlike export trades, which involve large quantity purchases and low inventories, Mainland business relies on smaller scale supply chains.

Orders from buyers tend to be very scattered, bringing pressure on suppliers' inventories. Another Hong Kong company at the fair (which also preferred not to be named) pointed out that to engage in domestic sales, firms have to be prepared for such pressure. This company started on its domestic sales strategy two years ago and has encountered the same problems as a number of Hong Kong firms.

For instance, importers haven't ordered sizeable batches of goods for distribution. So the company has to act as its own distributor on the Mainland, accepting smaller orders and building up inventories that fit its business plan.

By contrast, yet another Hong Kong company (which we'll call company Y) has been very successful in its domestic sales operations. Its manager says success can be attributed to an effective market study. Y spent three years studying the Mainland market before starting domestic sale two years ago.

At first, in order to test market response, Y offered its products for sale at a shopping mall in Dongguan. But it turned out that the products didn't sell. Then it found out that parents generally like to buy DIY toys for their children.

So, Y decided to develop new offerings and sell them through shopping malls on a consignment basis, while also offering them for sale at supermarkets. This turned out to be a more profitable approach, so the firm then opened its own retail outlet in Shenzhen.

Y's manager said export profit margins are getting lower and lower, by comparison with Mainland sales. When the manager visited Germany, he found that a product with a wholesale price of US$2 could only fetch Euros14 in Germany.

By comparison, by developing Y's own products on an ODM basis and selling them in the Mainland market, profit margins have grown higher than the equivalent business in Germany.

Y mainly relies on export profits to meet basic factory expenditures, while relying on Mainland sales for the bulk of its profits.

Y's sales in Guangdong are now considered stable and the company plans to expand into the northern China market. That explained why the company participated in the Beijing show - in the hope of finding agents for the northern China region.

Points to watch in switching to domestic sales

In export and domestic sale, while the products are more or less the same, there are big differences in terms of sales strategy, operational mode and the sales process.

For a start, raising capital is a challenge. Where it comes to exports, the manufacturer is only responsible for the inventory in the course of production. But in domestic sales, the manufacturer has to take responsibility for the inventories of raw materials, semi-finished products, packaging, finished products and sales channels.

Many export enterprises are unaware of this, especially where it comes to inventory replenishment for sales channels.

There's also the question of branding. In the past, virtually no export enterprises had their own brands. That's now extremely important. Yet, brand building takes on average at least five years and that investment is not small. While it's possible to leverage through franchising brands, these procedures are extremely complex.

Another problem is talent. To engage in domestic sales, it's vital to have good sales, marketing and branding teams. Currently these are what are lacking among former toy exporters.

In the past all they needed to do was take the orders, follow up and then participate in exhibitions. The versatility of the domestic market is not something to be easily handled by a sales department which is accustomed to such a simplistic operation.

Finally, there's the product line to be sold on the Mainland. The export trade is characterised by small product ranges and large volume orders. Very often a single product or a few products can generate profits for a whole year.

But in selling to the Mainland market, a wide variety of lines and small quantity orders are the norm. There are also stringent after-sales requirements.

Despite the fact that difficulties abound on the road to switching from export to domestic sale, some Hong Kong companies have succeeded in transforming themselves.

Firms wishing to break into the Mainland domestic market should definitely conduct market studies and spend time in their chosen market. It's likely to be a painstaking but rewarding undertaking.

from Guo Wen, Beijing Office

(Image courtesy of Xinhua News Agency)