The Right to Die with Dignity: How Far Do Human Rights Extend? (European Union and its Neighbours in a Globalized World Book 6) 3031045165, 9783031045165

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Jiazhuo George Wang Shuo Qin Allison Wang

Yes Logo Uncovering the Recipes of Branding Success in the World’s Largest Consumer Market

Yes Logo

Jiazhuo George Wang · Shuo Qin · Allison Wang

Yes Logo Uncovering the Recipes of Branding Success in the World’s Largest Consumer Market

Jiazhuo George Wang Lucille and Jay Chazanoff School of Business College of Staten Island, City University of New York New York, NY, USA

Shuo Qin Business Civilization Research Center of China Shanghai, China

Allison Wang Guest Writer and Copyeditor Berkeley Heights, NJ, USA

ISBN 978-981-99-6607-3 ISBN 978-981-99-6608-0 (eBook) https://doi.org/10.1007/978-981-99-6608-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Paper in this product is recyclable.

Preface

About 10 years ago, when an editor at Springer talked with me regarding a book series proposal about Small and Medium-Sized Enterprises (SMEs) in China, I readily agreed, as SMEs represent a unique space in Chinese markets and are a critical subject for understanding the phenomenal economic growth in China since the 1980s. In China, SMEs are largely synonymous with privately owned enterprises and occupy a separate category from the large, state-owned companies that are typically the dominant players in key industries in China, such as energy, utility, telecommunication, transportation, and commercial banking. In contrast to those companies, SMEs and privately owned firms are typically players in consumer product-related industries, covering the entire rest of China’s business map. The significance of SMEs in China can be illustrated by five key figures, represented by 56789. That is, SMEs contribute over 50% of tax revenue, more than 60% of GDP, over 70% of technological innovation, over 80% of urban employment, and comprise over 90% of the total number of enterprises in China.1 These SMEs represent the true driving force behind what is known as the “economic miracle” in China of the 2000s and 2010s, as they are demand-driven, customer-oriented, innovative, and competitive. They can only survive and grow by continuing to satisfy consumer needs through their products and services, and, as a result, have to constantly innovate and develop even more creative products and services to sustain their existence. In particular, while many state-owned large corporations could gain a dominant position through non-market factors, all present-day privately owned industrial giants grew from SMEs through market competition. The editor and I have identified three fields to focus on for the proposed book series: finance, branding, and business ethics. In the past few years, four books have been published in the finance field, focusing on the business models of listed SMEs in China’s stock market and the emergence of new financial products for SMEs, such as micro and small loans, chattel mortgage loans, P2P online lending, private placement bonds, supply chain financing, venture capital, reverse mergers, and crowdfunding. While these books discussed in detail the “fund source”, where privately owned firms 1

https://baijiahao.baidu.com/s?id=1739779590606362296&wfr=spider&for=pc. v

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obtain their funding, what remains unexplored is the ultimate use of their funds-how these companies choose to invest the capital they’re given to develop new products and services for the millions of consumers in the Chinese market and beyond. This book aims to delve deeper into that aspect. In the early stages of its economic development, when China was just stepping out from its centrally planned economy of the 70’s, China was widely viewed as an economy with a shortage of products. During that period of time, private ownership had not yet obtained its legal status, and production capacity was the decisive factor in the success of a company. As long as a company could produce, there would be demand, and the complexity of the market landscape was limited to that. Due to price control enacted by regulatory agencies, the price level of products at the time matched the relatively low income of mass consumers. With economic reform, however, also came the amendments to the Constitution that favored a much freer market.2 Private ownership became legitimate, and prices became subject to supply and demand in the marketplace. As a result, a decades-long economic expansion with high growth rates followed. During that period of time, low operating costs, rather than production capacity, became the winning formula for SMEs. As China’s GDP continued to grow, especially after China’s entry into WTO in 2001, the Chinese economy gradually transformed from a shortage economy into an over-supplied one, and the Chinese market evolved from a seller’s market to a buyer’s market. Combined with the emergence of the middle class, these elements redirected the focus of consumers toward the quality and features of the products produced by Chinese companies. Innovation-driven products began to flourish in the market, and advertising became an increasingly critical factor in the success and failure of a product in the marketplace battle, as companies now needed to find a way to distinguish themselves from their many competitors and persuade their customers to choose their products. In particular, branding, as a critical component of marketing activities, became the focus of companies targeting the highest echelons of the marketplace. The concept of branding as a form of advertising solidified in the 80s and 90s with the rise of companies like Apple and Nike, which began the inexorable trend of selling ideas and aspirations as much as goods. Unlike a physical or digital product, which satisfies some needs or wants of the customer through its various physical or practical functions, a brand is a perception that a company creates in the customer’s mind about the company and its products. The importance of branding lies in its psychological impact on consumers to influence their purchasing decisions, which is beyond the technical functionalities or features of a company’s offerings. It is built upon the physical features but surpasses it, aiming to target the emotions of consumers. Branding can also be viewed as a “moat” for a company’s products, as Kevin Keller pointed out: “Although competitors can often duplicate manufacturing

2

Amendment to the Constitution of the People’s Republic of China (1988), http://www.npc.gov. cn/zgrdw/pc/XWZX_1/5/200701/t20070131_1347.htm.

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processes and factory designs, it’s not so easy to reproduce the strongly held beliefs and attitudes established in the minds of consumers.”3 In this book, we have carefully curated a selection of some of the most noteworthy brands from several representative industries in China today. Through these cases, we delve into how companies evolve from small and medium-sized enterprises into leading brands, whether they were start-ups, niche players, or unbranded manufacturers and service providers. We explore how these brands were established, their growth trajectory, and what strategies and tactics they utilized in the pursuit of their business and marketing goals. The brands featured in this book are all prominent corporations that have made their marks on the Chinese consumer market, including Xiaomi, Nongfu Spring, Haier, ANTA Sports, BYD, WeChat, DingTalk, and Douyin, all of which are domestic brands founded in China. In addition, we have included two notable foreign brandsStarbucks and L’Oréal-to provide a more comprehensive picture of the consumer market landscape in China, the largest consumer market in the world today.4 Xiaomi is a smartphone manufacturer that saw breakneck growth from the years 2010 to the present day, especially in its early years of operation in 2010, 2011, 2012, and 2013. It is a start-up company that captured success by maximizing the power of the Internet. Nongfu Spring is a drinking water producer and distributor whose remarkable venture best exemplifies the essence of branding and marketing. And Haier is a famous electronic and household appliance manufacturer that began as a refrigerator maker on the brink of bankruptcy; it is now a global leading provider of “solutions for a better life.”5 Meanwhile, ANTA is a sports goods producer whose journey from a local shoemaker to a leading sports brand competing shoulder-toshoulder at the level of Nike and Adidas in the Chinese market can be considered truly remarkable. And BYD is a new energy car manufacturer whose future potential was noted by both Warren Buffett and Charlie Munger.6 WeChat, DingTalk, and Douyin are three of the most popular social media brands in China today, developed by Chinese Internet giants Tencent, Alibaba, and ByteDance, respectively. While WeChat has transformed from a social media app with basic messaging functions into a lifestyle super app that covers almost every aspect of a user’s life, such as travel, shopping, and payment transfers, DingTalk offers a more work-focused product and provides customizable solutions for companies and their employees. On the other hand, Douyin, a rising star and a later entrant into the social media space, is still growing and gaining notable market share year over year as of 2023, both as a social media app and a platform offering marketing services. Through its extremely popular short-form video format, it has capitalized 3

Kevin Keller, Strategic Brand Management, Pearson, 2013. China is estimated to be the largest consumer economy as measured in Purchasing Power Parity (PPP) terms, and the second largest by retail sales of consumer goods, next to the United States. https://www.mckinsey.com/cn/our-insights/our-insights/five-consumer-trends-sha ping-the-next-decade-of-growth-in-china; https://english.news.cn/20220725/24af50b5f04c462489 2e4a3d3ac07af8/c.html. 5 https://www.haier.com/in/about-haier/news/20230413_208630.shtml. 6 https://fortune.com/2021/03/02/warren-buffett-investments-berkshire-hathaway-byd. 4

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on modern social media trends to make a name for itself in China. Our focus is on how they grew up from infants to giants, from SMEs and niche players to dominant leading brands. In the Chinese consumer market, foreign brands have also played a significant role in certain industries, especially in the 2000s and early 2010s. They have not only brought in new products and services, they have also introduced to Chinese consumers new methods of consumption, new concepts, new ideas, and a view into different lifestyles. The two foreign brands we have selected for this book are Starbucks, the global coffee giant, and L’Oréal, a leading name in the cosmetics and beauty world. As not all foreign brands of their size have succeeded in China, we think their achievements in China can provide valuable insight into successful localization for other international brands. Corporations in China’s early-stage market economy had no choice but to embrace advertising and branding in such a highly competitive market, as many companies in well-established market economies learned before them. The concept of branding was created from the marketplace where both producers and consumers need an identity to help distinguish one company’s product from numerous others. Over the years, this concept was also added emotional and psychological components in addition to the physical features of the products, as the trust, preference, and satisfaction that consumers received from the consumption of the physical products are, indeed, emotional and psychological phenomena. Therefore, this book intends to discuss brands in the “post-branding” era and delves into the discussion of successful brands in China to showcase the power of branding and marketing strategies in a competitive market. However, the authors remain mindful of the possibility of the over-leverage of some well-established brands and their potential controversial impact beyond the business and market, as highlighted in Naomi Klein’s indispensable 2009 book.7 Nevertheless, while Klein primarily examines the activities of large corporations after their branding has been established, this book focuses on the efforts and activities of SMEs in the “pre-branding” or “branding” stage as they seek to establish their brands in the market. As of the year 2023, China’s economy has entered a new phase and a new normal, and its era of phenomenal growth over the past few decades appears to be coming to an end. However, the leading brands that emerged during that period of time remain to dominate the marketplace, even as China and the world face increasing degrees of economic uncertainty. These brands, iconic for their imprint on Chinese consumer society, continue to serve as benchmarks for companies that still hope to succeed in the Chinese market today. This book aims to document this fascinating period of market activities from the specific angle of branding, explore the stories behind the brands, and uncover some previously undisclosed branding and marketing strategies. This book could capture the interest of a broad range of readers, including executives of global brands, owners of small and medium-sized businesses looking to

7

Naomi Klein, No Logo, Flamingo, 2001.

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expand their reach in the global market, branding and marketing professionals, financial investors and analysts, business professors and researchers in universities and colleges, as well as graduate and undergraduate students. Executives of global consumer product brands might find this book relevant and informative, as China still represents the largest consumer market in the world today. This book provides various insights into the unique features of the market and the characteristics of Chinese consumers and showcases several marketing tactics that have been tested and proven effective in the Chinese market. Similarly, small and medium-sized business owners who are interested in expanding their reach to China may find this book intriguing as well. With globalization and the increasing maturing of the Internet as a means to commerce, conducting business across country borders and geographic distances is now almost perfectly accessible, and this book could help SMEs and start-ups better understand the dynamics of a large foreign market. Branding and marketing professionals could also benefit significantly from this book, as it explores some of the most exciting brands from the world’s largest consumer market. Financial investors and analysts could also find this book useful, as it provides the business logic behind the financials of these companies. It not only explains what has been observed but also why it happened. Business professors and researchers in universities and colleges can utilize this book as a useful supplement to their case study collections and as a reference book for their teaching and research. In addition, graduate and undergraduate students studying marketing and related subjects can also benefit from reading this book to improve their understanding of branding in practice. In general, this book can be a valuable resource for anyone seeking to understand the dynamics of China’s evolving economy and the critical role that brand curation and stewardship have played in the companies that succeeded there. New York, USA Shanghai, China New Jersey, USA

Jiazhuo George Wang Shuo Qin Allison Wang

Contents

1

Xiaomi: An Internet-Driven Miracle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Xiaomi’s Phenomenal Emergence . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Customer Engagement: From B2C to C2B . . . . . . . . . . . . . . . . . . . 1.3 The Critical 5th P: Post-Sales Services . . . . . . . . . . . . . . . . . . . . . . 1.3.1 “Tip-Oriented” Service Model . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Make Xiaomi’s Shop a Customer’s Home . . . . . . . . . . . . . 1.3.3 Non-standardized Service Above the Standard . . . . . . . . . 1.4 Offline Retail: Turning Xiaomi Home into Retail Stores . . . . . . . . 1.5 Xiaomi’s Product Ecology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 “The Internet Way of Thinking” . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 6 11 12 12 13 15 19 21 26

2

Nongfu Spring: Down to the Soul of a Brand . . . . . . . . . . . . . . . . . . . . . 2.1 Dynamic Positioning to Make a Differentiable Brand . . . . . . . . . . 2.2 Challenging Market Leader, A Strategy for Fast Approaching the Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Digging a Moat, Protecting Its Positioning: Nongfu’s Four Moats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 30

Haier: A Brand that Started with a Smashed Fridge . . . . . . . . . . . . . . 3.1 Where Does Market Power Lie?—Identifying Customers’ Potential Needs and Improving Continuously Their Consumption Experiences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Aim High: Targeting High-End Sectors . . . . . . . . . . . . . . . . . . . . . . 3.3 The Age of Scenario Consumption: An Offering Portfolio Customized by Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Triple-Wing Bird . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Food Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 Mr. Laundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4 Ririshun Supply Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 An Integrated AIOT Ecosystem Platform . . . . . . . . . . . . . . . . . . . .

45

3

35 38 43

47 50 53 53 55 57 60 62 xi

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Contents

3.4.1 Tsingdao Beer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Qingdao Zhenghe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.3 Qingdao Ruihua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.4 Yingkang Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . What’s Behind the Brand? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 RDHY, A Design for Double Optimization . . . . . . . . . . . . 3.5.2 Open Technology Innovation Platform . . . . . . . . . . . . . . . . 3.5.3 Localized Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62 63 64 65 67 67 69 72 75

Anta Sports: Rising with the Recreation of Global Brands . . . . . . . . 4.1 Retail Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Integration of Global Brands with Domestic Positioning . . . 4.3 From Offline to Online with E-Commerce and Digitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The DTC Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77 79 82

3.5

3.6 4

85 87 88

5

BYD, A Disrupter of the Emerging Market . . . . . . . . . . . . . . . . . . . . . . 91 5.1 The First Disruption: Innovations in Process and Cost . . . . . . . . . 92 5.2 A Disruptive Car Maker: Vertical Integration . . . . . . . . . . . . . . . . . 95 5.3 The Third Revolution: All-In New Energy for Cars . . . . . . . . . . . . 100 5.4 Build a Brand Based on Innovative Technologies . . . . . . . . . . . . . 103 5.5 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

6

WeChat: A Way of Life in the Information Age . . . . . . . . . . . . . . . . . . 6.1 From Zero to One: Before the Birth of WeChat . . . . . . . . . . . . . . . 6.2 WeChat’s Product Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Public Account: Empowering Even the Smallest Entities to Have Their Own Brand . . . . . . . . . . . . . . . . . . . . 6.2.2 WeChat Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 Mini App . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 WeCom, An Enterprise Version of WeChat . . . . . . . . . . . . 6.2.5 Video Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 The Secret of WeChat’s Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 The Closing Remarks: Even Ordinary Individuals Can Make Their Voices Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

107 109 112

DingTalk: The Digital Way of Working in China . . . . . . . . . . . . . . . . . 7.1 How Was DingTalk Born? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 DingTalk’s Journey Towards Digitalizing Enterprises in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 A PaaS Provider Serving Digitalization of SMEs . . . . . . . . . . . . . . 7.4 The Power of Low-Code Software . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

127 128

7

112 113 116 117 120 122 124

131 137 138 143

Contents

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The Ocean Engine: A Front Runner in Digital Marketing . . . . . . . . . 8.1 Why Was Douyin? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 A Top Digital Marketing Platform in China . . . . . . . . . . . . . . . . . . 8.3 O-5A Model, the Methodology of the Ocean Engine . . . . . . . . . . 8.4 The Power of Digital Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 You & Pure: How Does a White-Label Product Become a Brand? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.2 Bosideng’s Approach to Grassroots Marketing . . . . . . . . . 8.4.3 miHoYo: From Player Community to Mainstream . . . . . . 8.5 Innovation is Still on the Way: Some Ending Remarks . . . . . . . . .

145 147 151 153 156

A Lifestyle in the Third Place: Starbucks’ China Journey . . . . . . . . . 9.1 A New Dish on the Menu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 A Drive Fueled by Continuous Creativity . . . . . . . . . . . . . . . . . . . . 9.3 Starbucks’ “Third Place” Concept . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Starbucks’ Expansion to the Digital Space . . . . . . . . . . . . . . . . . . . 9.5 Some Ending Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

165 166 168 170 176 179

10 Creating the Beauty that Moves the World: L’Oréal in China . . . . . . 10.1 “Glocalization”: Putting Lipstick in the Hands of Every Chinese Woman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Empowering Beauty Through Digitalization . . . . . . . . . . . . . . . . . . 10.3 Beauty Technology: Moving Beyond Digitalization . . . . . . . . . . . 10.4 Some Ending Remarks: Building a Global Metropolis of Beauty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

183

9

157 159 161 162

184 189 193 198

11 Closing Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207

About the Authors

Dr. Jiazhuo George Wang is a professor of Finance and the chair of the Department of Accounting and Finance at the Lucille and Jay Chazanoff School of Business, College of Staten Island, CUNY. Prior to his academic career, he worked in the corporate world as a lead analyst at Bell Labs and AT&T Corporation for a decade. He is an author/editor of 9 other books, as well as many article publications in leading business and economic journals in the USA, Europe, and China. His research interests have been in the fields of business cycle research, business and economic forecasting, business models, business ethics, Internet finance, inclusive finance, and small business research. Dr. Wang is a frequent speaker at various national and international business conferences and events and has been interviewed by many media outlets, including ABC News in the US, Financial Times in the UK, Le Monde in France, Exame in Brazil, and International Business News in China. Dr. Shuo Qin holds a B.A. in journalism from Fudan University, a MPA from California State at Northridge, and a Ph.D. in management from Sun Yat-Sen University in China. He began his journalism career with Nanfengchuang (South Wind Window) in Guangzhou in 1990 and was appointed an editor-in-chief in 1997. Under his leadership, the magazine became a leading provider of political and economic news in China. In 2004, Dr. Qin helped start China Business News and served as an editor-inchief. He was also named the General Manager of China Business Network (CBN), China’s most comprehensive and influential finance-focused media group, in 2009. His most influential works include Brainstorm, How to Succeed in Communications, Touch China, American Show, Great Changes, and Say No to GDP Worship.

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Chapter 1

Xiaomi: An Internet-Driven Miracle

On April 6, 2010, a startup called Xiaomi was quietly born in an office building in Beijing. The company’s name was as nondescript as its beginnings: Xiaomi, Chinese for “millet,” was named as such for the batch of millet porridge the team had eaten in the morning of the company’s inception, a gift courtesy of one of the co-founder’s father. Though a group of ambitious entrepreneurs and talented tech engineers, Xiaomi’s team initially had grounded and realistic expectations for the company. In the short span of approximately five years, however, Xiaomi would achieve a level of success that felt unthinkable on that early April morning. Xiaomi would emerge from a relatively unknown late-comer to become one of the largest cell phone makers in China, on par with Apple and Samsung.

1.1 Xiaomi’s Phenomenal Emergence Xiaomi was largely the brainchild of Lei Jun, who was born in 1969 and had been a student in the Computer Sciences Department of Wuhan University. One evening during his freshman year, Lei Jun would end up reading the book that he claims changed his life. Written by American IT authors Paul Freiberger and Michael Swaine, The Fire of Silicon Valley,1 which told the stories of big-time entrepreneurs like Steve Jobs and Bill Gates, “inspired [Lei] to believe that if you have a dream, you might as well give it a try. Maybe you can really create a world-class company.”2 The book left such an impression on the college student that he professed to not be able to sit still. Instead, he spent the night pacing the campus and playgrounds 1

Freiberger, Paul and Michael Swaine, “The Fire of Silicon Valley: The Making of The Personal Computer”, McGraw-Hill Education, 1984. 2 Jiang, Hongjun, “Lei Jun: Doing the Right Thing at the Right Time”, Science Press, 2013, https:// zhuanlan.zhihu.com/p/94782001. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_1

1

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1 Xiaomi: An Internet-Driven Miracle

of Wuhan University, forming the ideas that would later constitute his career, ideas about trends, the internet, and web-based technology. In his senior year of college, he and his classmates attempted to start a software company, Three Colors Software, but, unfortunately, it failed. Lei then joined Kingsoft after graduation, a company known for developing office software, specializing in Word Processing Software, but felt hindered there, too, by various factors. Lei Jun himself rose to become the company’s president and chairman, taking it to an eventual IPO in 2007, but rounds of failed attempts at going public, as well as the difficult environment around IP protection laws and software piracy in China at the time, disheartened him. He left to pursue venture capital. A few years later, already a successful angel investor by the age of 40, Lei nonetheless still felt the pull to start “a world-class company.” He felt that his previous company, Kingsoft, had missed the boat when it came to seizing on critical trends and opportunities in the internet sector. And thus, Xiaomi was born. When Google released its open-source mobile operating system Android in 2009, Lei Jun felt for certain that the era of the smartphone and mobile computing had arrived, and, having become convinced that a company’s success depended in huge part on its ability to capture the trends of that era, he was determined to ride that wave to success in his own ventures. As he believed, “Even a pig could fly in a storm”.3 Although he had never made hardware products before, he decided that his new company would produce high-quality, affordable smartphones for the mass market. The pace of Xiaomi’s growth since August 2010 has stunned observers, whether academic or casual. Only four months after its inception, Xiaomi launched its first testing version of Android ROM, MIUI–on August 16th, 2010. Based on the Android operating system tailored to the habits of Chinese mobile users in particular, Xiaomi designed MIUI 2.3, a software meant to produce a “much better experience” for users than the other products on the market. Whether improved designs on the compass, the weather, the calculator or text messaging, music, notifications, and photos, MIUI 2.3 was designed to be more user-friendly for Chinese customers than anything else on the market at the time. Since August 16th, MIUI has been upgraded from its original version 2.3 through MIUI V4, MIUI V5 to the current MIUI V6, each time with significant improvements on the last version. Users of MIUI now come from China, the UK, the US, Germany, Spain, Italy, Australia, Russia, Holland, Swaziland, Brazil, and India, among other countries. The total number of MIUI users worldwide in December 2012, December 2013, May 2014, August 2014, and February 2015 was 10 million, 30 million, 50 million, 70 million, and 100 million, respectively.4 On December 10th, 2010, Xiaomi developed its Android version of an instant communication tool, MiTalk, an app that works across all mobile phone operating systems such as iOS, Android, and Windows, allowing users to communicate across phone types in the form of voice, data sharing, easy photo sharing, and text communications. MiTalk allowed users free instant communication across operating systems via mobile networks such as WiFi, 3G, 4G, and GPRS. The iPhone version and 3 4

https://baijiahao.baidu.com/s?id=1688915918396963445&wfr=spider&for=pc. https://www.jiemian.com/article/236217.html.

1.1 Xiaomi’s Phenomenal Emergence

3

Symbian version of MiTalk were launched on December 23rd, 2010, and January 12th, 2011, respectively. On July 12th, 2011, Xiaomi officially announced its entry into the cellphone market with the formation of its founding team. Since then, the cellphone became one of the three pillar products of Xiaomi, along with MIUI and MiTalk. On August 1st, 2011, Xiaomi’s online community would be formally set up, and the first version of the Xiaomi phone was launched on August 16th. On September 5th, 2011, Xiaomi opened online orders for its cell phone and received 300,000 orders within a half day.5 On December 18th, 2011, the first generation of Xiaomi smartphones was officially launched for online sales. The number of orders surpassed 400,000; however, due to temporary limitations in the supply chain, only 184,600 units were ultimately sold.6 On June 26th, 2012, Lei Jun, then Chairman and CEO of Xiaomi, announced the completion of another round of financing of USD $216 million from an unnamed top international investment bank, with the company valued at USD $4 billion. About two months after the round of financing was complete, Xiaomi announced the launch of its second generation of phones on the anniversary of the first launch, August 16th, 2012. Like last time, whopping sales were recorded. Xiaomi opened sales for one batch of the phone on November 19th, and 100,000 MI2 were sold in 2 minutes 29 seconds, and 300,000 MIS youth-edition phones were sold out in 12 min and 2 s. A few days later, on November 25th, 200,000 8th-round 1S youth-edition cell phones were sold out in 18 min and 12 s. On November 29th, 150,000 third-round MI2 phones were sold out in 1 min 43 s, and on December 7th, another 200,000 were sold. In the last month of the year, 100,000 Xiaomi cell phones MI2 were sold out in 2 min 17 s, and another 100,000 1S youth editions were sold out in 14 min 55 s. Three days before New Year, 250,000 cell phones were sold in 16 min and 9 s to mark the end of the year 2012.7 In the year 2013, Xiaomi made more moves. On March 19th, Xiaomi launched a completely new product separate from cellphones, a high-resolution internet TV box priced at only RMB 299 yuan. On June 8th, Xiaomi joined “The War of Etraders” with 15-day promotions. On July 31st, Xiaomi announced its entry into the “Thousand-yuan Smartphone Market,” the lower-end mass market for phones. Over 9 million consumers put orders for the Xiaomi’s Hongmi (Red Millet or RedMi) cell phone through QQ. On August 12th, 100,000 RedMi phones were sold out in 90 s.8 On August 23rd, Xiaomi received another round of funding with a firm valuation of USD $10 billion, and on that day became the fourth largest internet company in China, trailing only BAT (Baidu, Alibaba, and Tencent), the big three. Possibly encouraged by the news, four days later, 50,000 RedMi cell phones were sold out within 3 min and 39 s. And on September 5th, Xiaomi announced the launching of 5

Fan, Haitao, “Unstoppable”, CITIC Publishing Group, 2020, https://baijiahao.baidu.com/s?id= 1684773433841241467&wfr=spider&for=pc. 6 http://hn.ifeng.com/c/8G4T3gwc5fi. 7 The Chronicle of Xiaomi, https://web.vip.miui.com/page/info/mio/mio/detail?postId=9131921& app_version=dev.20051. 8 Ibid 7.

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a new version of the cell phone MI 3 and MI Smart TV with a super narrow frame. On November 11th, Xiaomi for the first time joined the “Double 11” promotion on T-Mall of Alibaba with 110,000 MI 3, 110,000 MI 2S, and 110,000 RedMi cell phones sold.9 Entering 2014, Xiaomi continued to expand its product offering and engage with its fanbase. On March 16th, 2014, Xiaomi launched the RedMi Note cellphone in QQ Space, a 5.5-inch large screen, 8-core CPU phone. Eleven days later, Xiaomi announced its plan to work with KingSoft to jointly set up a high-tech park in Beijing’s Haidian District to form a complete supply chain for its mobile internet business. On April 8th, Xiaomi released its sales results from its Mi-Fan Festival: In 12 hours, Xiaomi received 2.26 million orders, and sold 1.3 million cell phones (including 100,000 in Hong Kong, Taiwan, and Singapore), totaling a sales revenue of over RMB 1.5 billion yuan. In total, 15 million consumers participated in the Mi-Fan Festival.10 On April 22nd, Xiaomi started to use its new domain name: mi.com and converted all web visits from the old domain name “xiaomi.com” to the new one. One day later, Xiaomi held a news conference to announce the release of a mini version of Xiaomi’s router, and an augmented version of the Xiaomi Box, which supported 4K outlets. The selling prices were only RMB 129 yuan and RMB 399 yuan, respectively. In addition, Xiaomi released its Xiaomi flat panel with Tegra K1 192 core Frame GPU and 7.9-inch screen and an optimized version of the MIUI system. In 2014, Xiaomi also expanded internationally. In July 2014, Xiaomi announced its entry into the Indian market, a market which Xiaomi continues to consider its most important, second only to China. On August 28th, Xiaomi entered the Indonesian market, selling the mass market RedMi phones through Indonesia’s e-commerce website Lazada. On October 22nd, Xiaomi said that it was considering producing smartphones in India. On October 30th, 2014, Xiaomi surpassed Lenovo and LG to become the third-largest smartphone maker in the world only after Samsung and Apple. Towards year-end 2014, Xiaomi was becoming active in the capital markets. On November 6th, Datang Telecom, one of the major telecommunication firms in China, signed an agreement to transfer its SDR1860 platform technology to a Xiaomifinanced firm, Beijing Pineal Electronics Co., Ltd. On November 19th, Xiaomi’s equity fund, Xiaomi Shunwei Capital, acquired shares in Iqiyi, a leading internet video broadcast platform in China, worth USD $300 million. On December 14th, Xiaomi acquired 1.288% equity in Midea, a leading electronic appliance maker in China. In one of their busiest years, 2014, Xiaomi sold more than 61 million cell phones, growing 227% over 2013, with a sales revenue of RMB 74.3 billion yuan, a growth of approximately 135% on a year-over-year basis. 2014 saw Xiaomi unequivocally become the cellphone maker with the largest market share in the Chinese market.11 9

Ibid 7. Ibid 7. 11 Prospectus of Xiaomi, https://www.sgpjbg.com/baogao/65986.html; https://www.nytimes.com/ 2014/12/15/technology/the-rise-of-a-new-smartphone-giant-chinas-xiaomi.html. 10

1.1 Xiaomi’s Phenomenal Emergence

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On March 2nd, 2015, Xiaomi launched a new non-cellphone product: The Mini Ant Sports Camera. On March 18th, Xiaomi announced a collaboration with Microsoft that would allow M4 to use the Windows 10 operating system. On May 6th, Xiaomi released a high-end version of the Mi Note, a sleek piece of technology with an 8-core-64-digit processor, 4 GB of memory, and a 2K screen. In the short span of fewer than 5 years, Xiaomi emerged amazingly from a newcomer to the mobile internet market to become the largest cellphone maker in China, the third in the world, offering a portfolio of products that serve all market segments. Since then, however, Xiaomi’s push to grow has only continued. In 2017, Xiaomi’s revenue exceeded RMB 100 billion yuan, of which the revenue from internet-related businesses was RMB 9.9 billion yuan.12 On July 9, 2018, Xiaomi was listed on the main board of the Hong Kong Stock Exchange (1810.HK). On July 22, 2019, Xiaomi became a Fortune Global 500 company for the first time, ranking 468th.13 The journey from the small office on a nondescript spring morning in Beijing to Fortune 500 took only nine years. According to the 2021 financial report, the total revenue of Xiaomi Group reached RMB 328.3 billion that fiscal year, with an adjusted net profit of RMB 22 billion. The total global shipment of smartphones was 190 million units.14 According to Canalys data, Xiaomi’s smartphone shipments were the third highest of all companies in the world in 2021, ranking first in fourteen separate global markets and in the top five in sixty-two global markets, achieving a total global market share of 14.1%. Sales revenue in 2021 coming from outside China was RMB 163.6 billion, making up 49.8% of Xiaomi’s total revenue.15 Among all smartphone brands in the world, one of the unique features of Xiaomi is its extensive product portfolio. Over the years it has expanded from software and mobile phones to ancillary products related to the mobile phone, to intelligent hardware products covering all areas of modern living. It is what can be considered Xiaomi’s ecology of products; its ecological chain. Xiaomi calls this their “mobile phone × AIoT (AI & IoT) strategy.”16 By December 31, 2021, the number of Xiaomi AIoT-connected devices, excluding smartphones, tablets, and laptops, had reached 434 million. Customers with at least 5 devices connected to the Xiaomi AIoT platform, again, excluding smartphones, tablets, and laptops, have reached 8.8 million. In December 2021, the number of monthly active users of Xiaomi’s artificial intelligence voice interaction device “Classmate XiaoAi,” for example, Xiaomi’s own AI Smart Assistant, individually reached 107 million users. Classmate XiaoAI can be installed on Xiaomi mobile

12

Ibid 11. https://www.gizmochina.com/2019/07/22/xiaomi-breaks-into-the-fortune-global-500/. 14 Xiaomi’s 2021 Financial Report, https://www.sgpjbg.com/baogao/71835.html. 15 Ibid 14. https://techblog.comsoc.org/2021/10/16/canalys-global-smartphone-shipments-fell-6in-3q-2021. 16 https://cntechpost.com/2020/08/16/xiaomi-announces-its-core-strategy-for-next-decade-is-mob ile-x-aiot/. 13

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phones, Xiaomi AI speakers, Xiaomi TVs, and many other products on the Xiaomi ecological chain. Mijia App, an e-commerce platform under Xiaomi, also reached 63.9 million users in December 2021. 17 In 2021, the global shipment of Xiaomi smart TVs reached 12.3 million units, and the number of paying users of Xiaomi TVs reached 4.9 million. Xiaomi’s smart air conditioner shipments exceeded 2 million units, and Xiaomi also entered the refrigerator and washing machine markets. In 2021, Xiaomi’s IoT and consumer product business revenue reached RMB 85 billion. Xiaomi’s Internet service revenue reached RMB 28.2 billion yuan, with an advertising business revenue of 18.1 billion yuan. By December 2021, MIUI had 510 million monthly active users. In March 2021, Xiaomi announced its entry into the field of intelligent electric vehicles, expanding its presence in the smart home and smart living segments. It is estimated that USD $10 billion will be invested into smart living within 10 years, with RMB 10 billion yuan invested in the first phase.18 From personal devices to smart homes, smart offices, and smart travel, Xiaomi is building a wide spectrum of leading technology ecosystems to provide consumers with an enjoyable all-around, all-scenario smart life. How can a company that has never made hardware products before achieve such phenomenal success in the era of mobile Internet and AI-augmented Internet of Things in such a short period of time? In Lei Jun’s view, “Xiaomi has done only one thing in the 12 years since its inception: using way of Internet thinking and methods to transform traditional manufacturing, practice and enrich the ‘Internet + Manufacturing’ strategy, and promote the efficiency revolution of the business.”19 Today, Lei Jun has become one of the most famous entrepreneurs in China, known for his sharp business acumen and bold innovation, and Xiaomi has become a worldclass company with smartphones, smart hardware, and an IoT platform as its core business. Over the past decade, Xiaomi has achieved remarkable success and has become a household name in China and other parts of the world. In the remaining part of this chapter, we will explore what Lei Jun’s “only one thing” really means, and how it was accomplished and achieved, and delve into details of the extraordinary journey of Xiaomi, a company that has changed the face of the smartphone industry, and the way we think about technology.

1.2 Customer Engagement: From B2C to C2B The story of Xiaomi started as many stories involving the internet these days do–on an online community forum. As a new fish in the tech products and software pond in the year 2010, Xiaomi faced a market of fierce competition, brands with entrenched user 17

Ibid 14. Xiaomi Corporation’s Board of Directors’ Resolution on March 30, 2021, and Lei Jun’s Announcement at the Press Conference. https://www.sgpjbg.com/baogao/71835.html. 19 Lei Jun (Oral Account) and Xu Jieyun (Editor), Xiaomi Entrepreneurial Thinking, CITIC Publishing Group, 2022. 18

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bases, and companies with a long history of successful product development. Xiaomi was competing with household names like Apple, which in addition to providing products, was an inspiration to many users. To differentiate itself, Lei Jun identified two major operating principles from the very start: (1) Innovative product design; and (2) “Customer engagement,” which he defined as “Satisfying the consumer’s need for a positive experience”.20 Early on, Lei Jun was especially focused on the latter of the two guiding principles. MIUI, the first product developed by Xiaomi, also became Xiaomi’s first front in implementing its consumer engagement tactics. After the MIUI OS was developed, the Xiaomi team set up a proprietary online forum intended to attract what they called “mobile phone fans and enthusiasts” from around the Chinese web: tech enthusiasts with a particular interest in mobile phones, and the adventurousness needed to become an early adopter of various tech. At first, with the forum, Xiaomi was essentially scoping for beta testers. The team posted an announcement with a call for beta testing on a variety of different social media platforms, all directing them back to Xiaomi’s own forum, and encouraged “volunteers” to “swipe the machine” on MIUI and download it onto their phones. After the initial release of announcements, 100 users were willing to take the chance on MIUI, and these 100 users became the very first wave of Xiaomi MIUI beta testers. These original 100 volunteers were later named “the 100 dream sponsors” by Xiaomi. Xiaomi’s own team was said to have been taken aback by the reception they received from these 100 volunteers. The proof, as it were, was in the pudding. These volunteers overwhelmingly loved MIUI. Through word of mouth alone, with Xiaomi having invested nothing into advertising or further promotion past their initial call for betas, 100 users turned to 200 in just one week. That number increased again by a magnitude of two in the third week–to 400 users. After that, MIUI’s user base only continued to grow and grow. To handle the volume of new users, as well as to cultivate feedback and respond more efficiently to it, the Xiaomi team set up a community event on their proprietary forum called Orange Friday, a day of discussions specifically dedicated to MIUI during which users could post comments, complain about bugs or issues, and suggest improvements. These comments were turned into an improvement/new version release cycle that remains in operation to this day. In real-time, Xiaomi took in suggestions from Orange Friday and churned out updates with as many relevant fixes and improvements as possible. On Tuesdays, participating forum members would submit an Experience Report, detailing their experience with last week’s version of MIUI. On Wednesdays, Xiaomi would announce an upcoming upgrade based on customer feedback. Thursdays, Xiaomi conducted internal testing, and the design for the new version was released on Fridays. More than a decade after the first updated version was released, Xiaomi still follows the same release cycle and continues to harvest feedback through Orange Friday. Through user feedback, Xiaomi is able to summarize which functions of the 20

Ibid 19.

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Fig. 1.1 Xiaomi’s version 13 smartphone. Source Yuming Ren/China Business Network Ltd., Shanghai

previous week’s design were most favored, which ones most needed to be improved, and which features customers most looked forward to seeing added in an upcoming update. Xiaomi’s core design team is only about 100 engineers, but along with the passion and dedication of the 1,000 members of their internal testing group, all of whom have a strong technology background, the 100,000 active users invested in Xiaomi’s products and the 60 million of regular Xiaomi phone users who contribute also to the feedback pool, Xiaomi has been able to continue the pace of these weekly updates to this day. The only thing that has remained static over the many years of MIUI’s life cycle is Xiaomi’s visually arresting orange logo (Fig. 1.1). In a tribute to their original beta testers and in appreciation of the impact they had on the early days of Xiaomi’s success as a company, Xiaomi displayed their forum IDs on the loading screen of the first officially published version of MIUI. Charmingly, user complaints and suggestions were also integrated into Xiaomi’s internal review process and its weekly assessment of its engineers and employees. For the most praised features each week, the responsible product manager and his or her design team would receive the Popcorn Award–a lovely large cup of popcorn, made fresh on-site, for all members of the team. The employees who had worked on the features with the most bugs, or the features most complained about, weren’t so lucky. They earned themselves a big photo of the pig head from Angry Birds, which would be hung above their workstations until the week was over. The key to the early success of Orange Friday was that Xiaomi’s community forum had managed to garner the interest of some of the most active mobile phone

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enthusiasts in China at that time, and Xiaomi’s original team, some of whom had never developed a cellphone product that had made it to market before, were able to glean from the community wisdom of those fans. Orange Friday also allowed Xiaomi to see which way the wind was blowing, informing their decisions in real-time and ensuring each new update would be exactly what the majority of their user base wanted. The priority in which new features were released, down to the song used for the system’s default ringtone, was all determined by user voting. Xiaomi later segmented community members based on their degrees of participation, with each group receiving different levels of access to Xiaomi’s product development process. A core group of “great enthusiasts,” who made the most contributions to the forum and demonstrated the highest levels of professional knowledge, was given access to the internal testing version as updated in real-time. The second tier of community members, dubbed “general digital enthusiasts,” were privy only to the upgrade released every Friday, per the Orange Friday calendar. The stable version was updated in a one-to-two-month time frame, and available to the general public, released with mobile phones. Users’ participation, coupled with the development model with the Internet, allowed the MIUI team to actually have a product design and development group with a scale of 100,000 persons, making MIUI the fastest improved mobile operating system and creating many excellent product solutions. For example, before MIUI, if a call requires recording, a third-party call recording software needs to be installed, but the service was not stable. MIUI set up a “Record” option, and after clicking it, the system can record information, such as a phone number, in the form of a note. The user could also click “Record” to record the call directly. In this way, without any external resources, zero promotion, and having started in complete anonymity, MIUI managed to gain upwards of 300,000 users in just one year. These 300,000 people later became an ever-growing fan club, that would follow Xiaomi through all its future ventures in mobile phones, intelligent electric vehicles, and smart home furniture. One noteworthy detail in this story is that Lei Jun often communicated with users on social media directly. From 2011 to the first half of 2022, he published more than 13,000 “blogs”, analogous to “tweets” or “comments”, 3 per day on average, and continued to do so almost every day over that decade. He was known to have personally penned each one of these comments, not his social media or PR team. Lei Jun called on his colleagues to participate in a similar vein. As a result, many of Xiaomi’s employees engaged directly with forum members, chatting with them, replying to their comments, and engaging them in casual conversation whenever possible. Lei Jun was especially tolerant of his colleagues saying something occasionally controversial or what he called “mischievous.” He believed in the personal touch, imperfect as it might be. As he put it, “If we are afraid to communicate honestly with users because we are afraid of making mistakes, it would be like picking up sesame seeds while losing watermelons.”21

21

Ibid 19.

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The reach of fan influence on Xiaomi’s company decisions slowly expanded from product feedback to corporate governance. It started with Orange Friday, but, little by little, Xiaomi fans were incorporated into the fabric of the company itself. Lei Jun began a yearly tradition in which he and a team of top executives from Xiaomi broke bread with chosen Xiaomi fan representatives on the Lunar New Year holiday. Before the Spring Festival in 2020, Lei Jun and his colleagues held five special preparatory meetings in advance of the luncheons, with Xiaomi’s community relations team preparing for nearly two months for the event. Through an internal selection process within the user community, a total of nine Xiaomi fan representatives were chosen to meet with the team. Before the meal itself, Lei Jun and the company’s top executives spent half a day listening to the user representative’s questions and suggestions, and then discussed those issues with them. The entire meeting was streamed live and broadcast to all Xiaomi users. The inquiries and suggestions carefully prepared by the user representatives involved a wide spectrum of topics related to Xiaomi’s products, such as technology R&D, new business development, and corporate structure. A Xiaomi fan representative expressed to Lei Jun that he had spent half a month surveying and collecting user opinions, changed his draft five times, and then submitted this document to Xiaomi. The collected feedback was then distributed to various departments and underwent preliminary sorting. All relevant departments were called on to provide a series of preliminary answers and solutions. Then, the cycle repeated, with users responding to this first wave of company replies. Then, Lei Jun and the team would discuss with users at the meeting and listen to their further feedback. After the meeting, Xiaomi would review again and disclose in writing the responses and improvement plans towards the inquiries and suggestions of user representatives, which were disclosed to all users. In Lei Jun’s view, the goals behind the engagement of customers are two: first, can we make products that make users scream, so the users are willing to queue up to buy; second, after users use our products, are they willing to voluntarily recommend it to friends. He believes that the best result should be that users do not have to care about the price, do not have to worry about the quality, as long as Xiaomi has the product they need, they can simply “close their eyes and buy.”22 Customer faith in businesses these days is rare in general, and blind faith is nearly unheard of. But when Xiaomi decided to enter the field of electric vehicles in 2021, a fan had said in full earnest, “If you dare to make it, I will buy it.” Lei Jun credits this fan as having helped him make up his mind to continue in his production of electric vehicles. Xiaomi entered into this market at a time when it didn’t possess the strongest funding source, was somewhat late to the game, and did not have the reputation in the industry to carry them. But they had customer faith. In the summer of 2022, Lei Jun said: “Today, there are more than 500 million users of Xiaomi mobile phones, and more than 9.5 million users have more than 5 Xiaomi smart devices. As long as

22

Ibid 19.

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1% of Xiaomi core users are willing to buy, Xiaomi’s cars will have a great chance of success.”23 And boy, did they buy. The level of customer engagement in Xiaomi’s product design changed their business model from the traditional high-tech B2C (Business to Customer) model to what essentially qualified as a C2B (Consumer to Business) model, while a B2C model saw producers design the products, then sell them to consumers for consumption. However, in an ever-changing and quick-changing hightech industry, the biggest risk for the producers would be the technologies they used cannot be updated quickly enough and/or the updated technology cannot meet the customers’ changing needs. Engagement of customers in product design successfully resolved this issue by not only upgrading the technology at a fast pace by weekly customer feedback but also guarantying the technologies used meeting customers’ most updated needs. Consequently, it fundamentally changed the business model from B2C to C2B, and under this new model, the new products come from customers and finally go back to customers. Customer engagement in product design also enables producers to receive more accurate customer information than the regular “big data”, which typically mixes “true signals” with “noise”, and requires a filter to extract the needed information. In Xiaomi, however, the design engineers are able to know exactly what functionality and screen layout are preferred by different consumer segments such as female users or senior citizens, and then, can design the phones accordingly. Customer engagement breaks down the two-way asymmetric information barriers between producers and consumers, where producers don’t know exactly what consumers need, and the consumers don’t know what functionality is technically available before the products are designed and produced. As a result, customer engagement provided room for the possible cost savings that were caused by better two-way communications between producers and consumers. Functionally, what Lei Jun was doing with Xiaomi (or mi.com) at the time was creating the beginnings of a Xiaomi fan club. This fan club would go on to carry Xiaomi through its ventures from phones to cars to smart home tech. In this chapter, we might often refer to Xiaomi users as fans, largely because that is what many of them would consider (and call) themselves. Asked to describe themselves and their relation to the company, Xiaomi users on the whole would say the same. There are brands that people depend on; brands that people gravitate to. Xiaomi’s great success is that, in addition to all that, Xiaomi is a brand that people love.

1.3 The Critical 5th P: Post-Sales Services In the classical marketing mix of the 4Ps, a product is considered king. The conventional logic goes, just as the first digit of a number such as 10,000 or 100,000 would be no number at all without the “1,” no matter how many zeroes are added to the 23

Ibid 19.

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end, no level of promotion, pricing strategy, or channel place without a sellable, well-designed product behind them. Branding strategies, of course, look beyond the stage in which the product is developed and focus on the rest. A new 5th P has also emerged in modern marketing: Post-Sale Service. It is the follow-through that pushes companies not just to hook customers, but to retain them for the future.

1.3.1 “Tip-Oriented” Service Model One of Xiaomi’s distinguishing features has always been its post-sale services. Xiaomi positions itself as a producer of mass-market products: low cost, low margin, high volume. As a result, the largest room to expand its competitive advantage is through customer loyalty and brand attachment. Lei Jun describes Xiaomi’s model as a “small restaurant” model: the tip is a critical part of the business’ income. If Xiaomi serves its customers well, the customers will feel inclined to tip, and it will be on those tips that Xiaomi, as a company, will succeed.24

1.3.2 Make Xiaomi’s Shop a Customer’s Home Companies interested in rapid expansion often turn to third parties for assistance in post-sales services. This consideration is usually undertaken due to post-sales services being required across many geographical locations, and outsourcing in such situations tends to prove efficient. Xiaomi instead took an against-the-traffic approach. Though it does now collaborate with a limited number of third-party franchises, the primary bulk of its post-sales services is still conducted through its own proprietary shops, called Xiaomi Homes. Originally created solely as customer experience hubs that provided support to Xiaomi users for a miscellanea of cellphone and not-cellphone-related issues, they now also double as brick-and-mortar Xiaomi product stores. The original Xiaomi Homes served somewhat different functionalities than they do now. Many of Xiaomi Home’s original services are still in place, but Xiaomi has slowly transitioned the spaces into offline shops. The most basic original function of Xiaomi Home remains in place today: help desks offering customers assistance. On the most basic level, Xiaomi Homes offered help desks that assisted customers in learning about the Xiaomi phone’s functionalities, provided troubleshooting, upgraded devices, and answered FAQs and perhaps less frequently asked questions face-to-face. But beyond the traditional help desk services, Xiaomi Homes were also meant to serve as a real home away from home for many Xiaomi “fans.” Xiaomi Homes gave their space 24

The response of Lei Jun during his interview with CCTV2 in 2019. https://baijiahao.baidu.com/ s?id=1629342241072263658&wfr=spider&for=pc.

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to customers who wanted to host birthday parties. They offered free umbrellas to customers passing by the shops on rainy days. Free Wifi internet was given to anyone who wanted to hang around at Xiaomi Home kiosks. Some Xiaomi customers even came to Xiaomi Home to print out their graduation theses. Xiaomi Homes even observed major holidays on the Chinese and international calendars. Each year, on Women’s Day, March 8th, female customers were welcomed into Xiaomi Home stores with a gift of fresh flowers. In the lead-up to the Chinese New Year, Xiaomi hosted a New Year’s Eve party for Xiaomi customers who were unable, due to whatever circumstances, to go home; with dumplings and hot pots, Xiaomi Home proclaimed itself a gathering place and second home for fans of Xiaomi products. Ever true to their brand of encouraging customer feedback and integrating it into their operations, Xiaomi Homes also had a “Drop off” system, allowing customers to suggest and “drop off” innovations for making the “Home” better. Service employees at Xiaomi Homes were also encouraged to propose suggestions and comments on suggestions made by customers. For example, a service representative suggested using fragrance to make the “Home” smell differently every day, and the suggestion was adopted. Xiaomi Homes are typically located in office buildings. Their locations are usually unremarkable, without even a street-facing view, but they are in fact carefully selected for their convenience and proximity to public transportation. Metaphorically, too, however, these distinct consumer experiences provided by Xiaomi Home made it an important window facing Xiaomi’s customers. Through these Homes, millions of Xiaomi fans were more closely connected with Xiaomi, more consumers were engaged, and more word of mouth was spread among the existing and potential Xiaomi product consumers.

1.3.3 Non-standardized Service Above the Standard Traditional customer service training, especially in the tech industry, typically trains representatives to face customers on a series of pre-prepared standard answers in anticipation of all possible questions. Oftentimes even the smiles are standardized (and mandated by company guidelines). But Lei Jun believed that service representatives in this kind of environment would become little more than glorified machines. As these representatives were dealing with humans, it was imperative to him that they are allowed–even encouraged–to act like humans. An early example of Lei Jun standing by this philosophy was the freedom he allowed his team in dealing with Orange Friday users. When it came to calling centers, service hubs, customer-facing salespeople, and other service employees, Xiaomi rejected a classical, standardized attitude towards customer service and instead promoted a culture in which Xiaomi servicepeople focused on personalization and listening–non-standardized service above the standard. As part of their training, Xiaomi required its representatives to listen to the recorded conversations between reps and customers every day, before, after, or in between customer-facing

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duties, and held debriefs in which service representatives and team leaders discussed ways to improve. Team leaders were hands-off when it came to giving “guidelines” on behavior. They encouraged representatives to find their own solutions to customer problems and come up with their own answers to customer questions. The Xiaomi service representatives trained in this culture proved to be more personable, more open-minded–even more generous–than what many who’ve interfaced with tech customer service before had come to expect. A few of the more notable interactions between Xiaomi service people and customers even made it into the press. In one story, a Xiaomi representative, one day at a Xiaomi Home, saw a woman coming to fix her broken phone and sensed that she was feeling bad. In addition to fixing her Xiaomi cell phone, this rep wanted to cheer her up and gifted her a phone case with a hand-drawn picture of a tree in the back. Touched by the gesture, the customer made a point to return to the store, even though her phone had already been fixed, to give the service representative a gift in return. In another story, a 70-year-old man in Beijing wanted to buy a Xiaomi cell phone for his grandson as a birthday gift but lacked an online banking account, and up until then had never used the internet to purchase anything before. At the time, Xiaomi hadn’t yet opened their Xiaomi Homes to sales and still sold solely through e-commerce. He called Xiaomi’s service department for help and told them about his problem. The Xiaomi representative assigned to him was said to have immediately used her own online banking account to order a phone for the elderly man. Surprised and deeply moved, the gentleman came by foot to the local Xiaomi office in search of “Good Representative Miss Wang.” He paid her the bill for the cellphone with cash and thanked her in person. When asked, naturally, whether or not she considered that the old man could have been a grifter or fraudster, the representative replied that, at the time, her sole concern was solving the problem of the customer. Thinking about it further, she said something rather revealing about the corporate culture in the Xiaomi customer services department: If that man had been a fraudster, she said, she believed that she would still be fine, as her boss would not allow her to bear the financial loss alone. Xiaomi was able to generate a positive circle of trust. Service representatives for the company trusted their leaders, and in turn, customers trusted the representatives who interfaced with them. Above-standard service requires quality of service as the foundation. It seems to Xiaomi, the core competence in service is speed. No matter it is for delivery, answering questions, or resolving a customer’s problem, the common requirement is “quick”. For achieving these goals, Xiaomi has increased its warehouses from 6 to 10 to support its 24-h delivery in core cities. They also set up a “One Hour Fix or 20 Yuan Penalty” procedure. If Xiaomi can’t fix the customer’s problem within 1 hour, they will pay the customer 20 yuan as compensation for a “longer” waiting time, or allow the customer to participate in a “dice” game. Depending upon the number the customer rolls, different small gifts will be provided. As a matter of fact, Xiaomi is the first cell phone firm that provided 7 × 24 services in the industry. Xiaomi’s story clearly indicates that, in the internet age, post-sales service plays an increasingly important role, and in some cases, could even become a game changer.

1.4 Offline Retail: Turning Xiaomi Home into Retail Stores

15

When a customer bought a product and got out the door of shops, or received a product through deliveries, it is not the end of the relationship with customers for the producers, indeed, it is the beginning of another chapter of the game or a beginning of a new game. The length of customer relationships now is, in general, much longer than before. Lifetime customer relationships are becoming a new norm. The product or brand only with technical advantages may not be the one that can sustain. Instead, only these “love marks” will become the final winners. From the beginning, Xiaomi considered service their core competitive competence. Unlike many tech firms in which customer representatives are often treated poorly, paid pitifully, and given minimal to no say in their office environment, Xiaomi invested in its service department and its customer representatives. Xiaomi reps were paid 20–30% more than the industry standard. Xiaomi also allocated capital to invest in larger office spaces for their customer service representatives, which were more readily customizable if the employees chose. For anyone, including service representatives, who worked in Xiaomi for over 6 months with decent performance, the stock options were provided. In addition, Xiaomi set up a Xiaomi School to train the employees. All these efforts are intended to generate a sense of belonging for customer service representatives. They were treated with the same dignity that Xiaomi’s top engineers and executives were. As a result, the turnover rate for several hundred customer service team leaders in Xiaomi was less than 5% in 2013 and 2014 for two consecutive years.25 Xiaomi’s service representatives tend to love their jobs, which pushes them to go the extra mile.

1.4 Offline Retail: Turning Xiaomi Home into Retail Stores When Xiaomi first began, Lei Jun believed he could–and intended to–develop the company through e-commerce alone. Cost-friendly and proven to be effective, ecommerce offered Xiaomi the attention of customers while only requiring them to pay shipping fees to distributors–nothing else. Lei Jun also liked the direct-sale aspect of e-commerce in which the company was able to maintain a relatively compressed structure when it came to various distributors and middlemen. From 2011 to 2014, the e-commerce-only model worked for Xiaomi. Each of Xiaomi’s products brought blockbuster attention, recruiting great numbers in internet traffic to their website and setting the stage neatly for their next release. Sales agencies were even willing to pay in advance to secure Xiaomi products due to demand. By 2014, however, Xiaomi’s online sales were no longer fast-growing due to several reasons. For one, the initial “scale dividend” gradually diminished. At the same time, the structures of the social networking platforms through which Xiaomi initially generated interest in their products were starting to transmute. One significant trend involved the spread of internet access to rural China, resulting in a change in the 25

http://www.ctiforum.com/news/guonei/536571.html.

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demographic makeup of online users from those in primarily metropolitan regions to residents of third, fourth, and even fifth-tier cities. The shopping preferences of these new internet users differed vastly from the preferences of the metropolitan residents. Having grown up in rural areas, they were less familiar with e-commerce and often did not trust their money for online purchases. By and large, they also preferred physically interacting with a product, testing out the products with their hands and seeing it with their own eyes, before buying. Competitors in Xiaomi’s market space, selling similar types of products, were quickly starting to set up agencies and offline channels for sales. Increasing online traffic coming from non-metropolitan areas meant an influx of customers unfamiliar with and unused to e-commerce, often not trusting the online purchase, and preferring physically interacting with a product in a brick-and-mortar shop. The “picture-based” model of e-commerce that Xiaomi had previously relied on earlier was obviously beyond the reach of these consumer groups, which, however, increasingly became the majority of the online consumer population. These new challenges signaled to Lei Jun that Xiaomi’s e-commerce model had reached its relative ceiling. To address these changes, Xiaomi created an omnichannel retail system beyond its e-commerce platform. Xiaomi operated differently from many of its competitors, who were starting to develop their own offline retail channels. In contrast to the traditional way of setting up the retail system, as Xiaomi’s competitors did, with layers of agencies between the manufacturer and retailers, Xiaomi set up its own retail stores, which, Lei Jun believed, represented “new retail” that had the capacity to operate with what he called “e-commerce efficiency.” Xiaomi Homes came back into play. Before they had served as rent-able spaces for birthday parties and doubled as free Wifi spots, Xiaomi Homes had originally been built in 2011 to provide offline post-sale services for customers who preferred not to mail in their Xiaomi products for repair and maintenance, for various reasons including lack of trust in the postal system. It was only later on that the Homes evolved to become the local community centers that they functioned as from 2011 to 2015, hosting fans and acting as a hypegenerating display space for current and upcoming Xiaomi products. It was only in 2015 that Xiaomi slowly started to transition Xiaomi Homes into shops. 2015 saw the opening of twenty-four Xiaomi Homes in Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, and Suzhou that were meant to serve as brickand-mortar shops. Initially, these new Xiaomi Homes were set to undertake 40% of all offline service orders, with the other 60% being taken on by approximately 200 distributing partners who had obtained Xiaomi’s Authorization to sell. Xiaomi gained important wisdom from the experience of selling its products through its own stores. At the beginning of 2015, when Xiaomi’s flagship product Xiaomi Note was launched, Xiaomi Homes were used as the location for the initial round of sales. Xiaomi fans rushed to the door of the designated Xiaomi Home and set up tents to wait on the eve of the launching day. Now, Xiaomi is determined to convert the functionality of these Xiaomi Homes to its offline retail stores. The Beijing Xiaomi Home was opened on the 6th floor of the Beijing Contemporary Mall in September 2015. They carefully designed a comprehensive plan to ensure

1.4 Offline Retail: Turning Xiaomi Home into Retail Stores

17

a maximized experience for customers. For example, they thoughtfully considered how to allow consumers to walk through the entire store from any entrance as conveniently and comfortably as possible, while they can see and experience Xiaomi’s various products as much as possible. Also, for the display of products, Xiaomi’s “classical” paper packaging for online sales which has been well received in the past seemed no longer proper for offline exhibition, so they changed it. Furthermore, they thought about how to attract consumers surrounding the mall and even online consumers to come to the mall and go up to the 6th floor by passing through a bunch of quilt and apparel counters to finally get into Xiaomi Home. They also redesigned the advertising presentation that was originally used for e-commerce. After three months of testing run, Xiaomi Home achieved sales of RMB 5 million to 6 million yuan per month, and 60% of the consumers on the entire 6th floor came to Xiaomi Home.26 Since then, Xiaomi gradually established its offline retail network of Xiaomi Home stores across the country. By 2016, Xiaomi already built its 40th Xiaomi Home store. Meanwhile, Xiaomi also started to establish its licensing system as well with its postsales service providers. Through years of exploration, Xiaomi Home now possesses three offline sales channels: direct sales stores, licensing stores, and agencies. Xiaomi also empowered its provincial-level branches, which were authorized to be in charge of all offline sales channels within their respective provinces. As of 2021, Xiaomi Home already covered all counties across the country, with more than 10,000 stores in mainland China (Fig. 1.2).27 The Xiaomi Home model worked largely because of simplification: Xiaomi simplified its business model, simplified its organization, and simplified its operations, which were fully digitized from start to finish. Xiaomi forewent a layer-bylayer distribution structure, which required profit sharing between each layer. Instead, they insisted on setting up its own “Xiaomi Brand Store”. At the same time, Xiaomi firmly entered the county-level market, with a closed-loop data system and a digital recording system that had no gaps. Even though Xiaomi sold its products through both its own brand stores and franchised stores as some other brands did, there is a difference between the Xiaomi Home model and other traditional offline sales models. The key was the channel structure and the role that the brand manufacturers played in the entire distribution chain. For earlier Chinese mobile phone brands, there had always been three layers in the distribution system between manufacturer and consumer: the provincial agencies, the regional agencies, and retailers. Often, there were more layers within each retailer. These “middlemen” are calculated to have added approximately 30% to the cost of the final price. If the factory price for a mobile phone was RMB 1,000 yuan, then the purchasing price for consumers would be RMB 1,300 yuan. It was taken out of the control of the manufacturers for the entirety of the retail chain, and the operation of distribution channels was managed by intermediate agents. As manufacturers were

26 27

Ibid 19. Ibid 19.

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Fig. 1.2 Xiaomi made its stores the home of its consumers. Source Yuming Ren/China Business Network Ltd., Shanghai

not ever able to access real operating data in an accurate or timely manner, massive and significant delays and distortions were unavoidable. Under the Xiaomi Home model, the distribution structure became extremely simplified. There was no national agent, provincial agent, or other layers between Xiaomi and its customer. The retailer was the only layer in the system, and the average intermediate expense through its retailers was only 10%. Xiaomi took on sole responsibility for both management and distribution operations, while retailers were limited to managing investment, co-construction, and joint sales operations. All business data was online, and all real-time data could be accessed instantly. When a transaction is completed, a data point is generated and displayed and is made immediately available for analysis and subsequent decision-making. Xiaomi also handled its products differently from traditional cellphone manufacturers. Under the traditional model, when a product left the factory, the ownership of the goods was effectively handed over from the manufacturers to the agents and channel vendors, and all distribution details were determined by the intermediaries. In contrast, under the Xiaomi Home model, the ownership of goods in any stores above the county and township levels belongs to Xiaomi, which allows Xiaomi to manage the entire retail system in real-time. Even though Xiaomi’s “gross margin per unit” is not high, its annual turnover and return on investment are very high, due to high operational efficiency. In 2021, the Xiaomi Home system in China achieved 17 times the annual turnover, and the return on investment reached 30%.28 28

Ibid 19.

1.5 Xiaomi’s Product Ecology

19

In Xiaomi’s view, the very nature of retail is to achieve the greatest consumer experience with the highest efficiency. As a result, the future development trend of retail can be summarized by two keywords. The first one is “efficiency”, achieved through all process digitization to integrate online and offline operations to allow the offline operations to achieve the same “e-commerce efficiency” as an online operation. The second one is “experience”, gained by the scenario design to truly enhance the consumers’ consumption experience. Xiaomi Home successfully digitalized its entire sales system, transformed its sales from a “low-frequency” activity to a “highfrequency” one, and expanded the scope of offering from a single product category of mobile phones to multiple categories, with a splendid product portfolio.

1.5 Xiaomi’s Product Ecology Xiaomi’s mobile phone was released for the first time in 2011, but, only two years later, Xiaomi started to explore different product types to grow its portfolio, creating an ecology of companies that mutually contributed to the others’ sales. The push towards new product lines outside mobile phones officially began in 2014. Xiaomi noticed sometime around 2013 that its digital e-commerce store, Xiaomi Mall, had impressive site retention. The overwhelming sales on its mobile phones had brought a not-inconsequential amount of traffic to the site, but analytics showed, even more promisingly, that even after customers had already completed their purchase or failed in their bid to buy a particular phone, they would remain on Xiaomi Mall to continue browsing. Xiaomi understood this to be the opportunity that it was. The online traffic brought in by hype over the Xiaomi mobile phones gave visibility to Xiaomi’s portfolio of other products. This included periphery products for its phone– such as accessories and power adapters, but the Xiaomi team suspected that it would work for other Xiaomi products as well. Eventually, online traffic from phone sales resulted in free advertising and promotion for Xiaomi’s smart bracelets, intelligent electric vehicles, air purifiers, and robot vacuums. Xiaomi’s push into the Internet of Things had begun. As the battery power for early mobile phones was mediocre, the demand for mobile phone power sources was strong. However, there were very few products in the market that could meet Xiaomi’s requirements, either the quality was low, the design was poor, or too expensive. As a result, a Xiaomi company called Zimi (i.e. Purple Millet in Chinese) Technology was born, specializing in mobile chargers, with the target of creating a “phenomenal” product. In the beginning, Zimi Technology planned to push out two product lines, one using high-standard imported batteries for RMB 99 yuan, and another using domestic batteries, priced at RMB 69 yuan. However, after the discussion, Xiaomi gave up its original plan, as it believed that it should not produce two products with both advantages and disadvantages. They preferred a product that, instead, they should focus on the best solution, if they target to be the best product in the mobile power supply category. As a result, Xiaomi determined to adopt the higher standard, but

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price it at RMB 69 yuan, which was about only one-third to one-half of the market prevailing price of the product with the same specification, low enough to make consumers scream. For achieving that goal, Zimi Technology adopted batteries of the best quality in the world. Each mobile power supply was designed with two-chip protection and software protection, which means three layers of insurance. The metal shell was selected, and the cylindrical Panasonic 18650 battery cell was used. The two sides of the mobile power were designed to have a natural curvature, and the runwaytype rebars were used to fix the battery. Such a design contains the optimal internal structure and uses the least materials with the lowest cost, which was the best solution that could be designed then. Because of the difficulty of processing such a design, Zhang Feng, Zimi’s founder, visited 30 cities to find a needed manufacturing factory, made nearly 200 sets of molds, and spent about 3 months, to eventually resolve the problem. After this preparation process, the cost of mobile power reached RMB 77 yuan. However, Xiaomi still priced its mobile power at RMB 69 yuan when its mobile power was released, with 10400 MA, a one-piece molded aluminum alloy shell, an anodic sandblasting process, and the simplest style of design for appearance. For the first month, Xiaomi sold 600,000 units through its online network; in the second month, 1.5 million; and in the third month reached 3 million. The total shipments for the first year exceeded 10 million units.29 As sales went up, the total costs were diluted, and profits were generated. There are numerous examples like mobile power. In 2015, for instance, Xiaomi released its first generation of the Xiaomi extension board, which quickly became a hotly pursued product in the market. Very soon, the appearance of the power extension board in entire China was “Milletized” or “Xiaominized”, and the design of the three jacks and three USB interfaces of Xiaomi’s extension board became the industry standard nationwide. Since 2014, Xiaomi has partnered with a large number of companies through its ecological chain and helped them to set up and develop their own brands in more than 100 industries, including mobile phone accessories, such as chargers and headphones, wearable devices, such as smart bracelets and watches, air purifiers, water purifiers, “white appliances”, and even travel bags, clothing backpacks, copper jewelry, latex mattresses, cotton towels, and many other products. Since 2014, when Xiaomi first set up its ecological chain, its revenue has almost doubled yearly. The chain has become an integral part of the total revenue of Xiaomi Group. Financial investment into the ecological chain companies has also brought valuable returns to Xiaomi. By the end of 2020, on the Xiaomi ecological chain, there are 2 companies with annual revenue of more than RMB 4 billion, 3 companies with revenue of more than RMB 2 billion, and 6 companies with revenue of more than RMB 1 billion. Several companies have been listed on stock exchanges, including Huami Technology, Yunmi Technology, Stone Technology, No. 9 Robot, and some others.30

29 30

Ibid 19. Ibid 19.

1.6 “The Internet Way of Thinking”

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1.6 “The Internet Way of Thinking” Lei Jun was a believer in a concept he called “The Internet Way of Thinking”. At the core of the concept is what he calls “the power of the Internet when it integrates with and empowers the manufacturing industry.”31 The Internet Way of Thinking comprises four main facets, which he summarizes roughly using four words/phrases: focus, be best, word of mouth, and speed. Focus The first tenet, focus: In Lei Jun’s view, many startups stand out at the beginning of their life cycle due to limited resources, mandating a narrow focus. The company then becomes known for this focused concept. Customers and investors alike latch onto this company’s concept and offer their support. However, many startups, he believed, once they develop to a certain size, are tempted by too many other business avenues. They lose their direction, become unfocused, and forget where it was they came from and where they had originally planned to go. Lei Jun had always been wary of companies who try to sell one product that solves a myriad of different issues. Lei Jun believed in high-quality products that focused only on a few dedicated issues. The company should channel all its resources into maximizing customer satisfaction within those few areas. A company’s resources, especially a start-up’s, will always be limited. Therefore, a company should never try to resolve too many issues with one single product, instead, should target to resolve one most critical issue each time. It would be a great success if a producer can resolve one urgent issue and maximize the satisfaction of consumers. The air purifier released by Xiaomi in 2014, the Zhimi (i.e. intelligent millet in Chinese) air purifier (not to be confused with the previously mentioned smart-tech arm of Xiaomi, Zimi) is an example of this concept in action in the Xiaomi portfolio. Zhimi focused solely on the air purification aspect of air purification machines. While this may sound and feel intuitive, the trendy products at the time of Zhimi’s release were multifunctional air purification units that featured everything from ion fragrances to electrostatic absorption to photocatalysis. Prior to early 2013, Beijing’s smog was so severe that a murky brownish sky was a more familiar sight to residents of Beijing than a clear day. While conditions, on and off, improved, air purifiers remained in demand, but at a high cost. As a consequence of all these fancy addons, domestic brands would have cost RMB 2,000–3,000 yuan, and imported brands were even pricier, selling at RMB 5,000 to nearly RMB 10,000. The filter inside the purifier alone would cost several thousand yuan. As more brands of purifiers hit the market, they became increasingly more complex. In addition to addressing what, in the industry, is considered “haze,” purifiers began adding a host of add-on, nonessential functions such as ion fragrance, electrostatic adsorption, and photocatalysis. Xiaomi, identifying the high demand for air purifiers, quickly incepted a new company on its ecological chain, Zhimi Technology, but its air purification machines chose to focus only on “reducing haze.” Zhimi had a three-layer filter and purified PM2.5 at a rate of more than 99%, but did not contain any add-ons or non-essential 31

Ibid 19.

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functions. As a result of their “focus,” Xiaomi was able to sell Zhimi units for only RMB 899. Predictably, they were a hot sale. At the peak of sales, 1.63 million orders were placed in a single week.32 Be Best While sharing a name with Melania Trump’s well-known Be Best campaign from her time as the US First Lady,33 Lei Jun’s second tenet of his internet way of life was not about bullying and well-being for youth but rather a philosophy of uncompromising zero tolerance when it came to designing the “perfect” product. An indicative example of this tenet is Xiaomi’s laptop chargers. Laptop chargers in the Chinese market at the time were designed with an unattractive external appearance and ponderous in size, and no one seemed to have much interest in improving them so that they would have the sleek, attractive look of an Apple charger, for example. They performed their function, and manufacturers overwhelmingly considered the design unimportant. Xiaomi saw these chargers and endeavored for a “more perfect” product. When Xiaomi decided to make a laptop charger, it gave its team a clear requirement: under the premise of performance, safety, and reliability, try to make the charger small and light with an attractive appearance. Thanks to the advances in materials science, Xiaomi’s R&D team, together with its upstream partners, finally made a quite elegant and beautiful-looking notebook charger after several years of experiment, that is, GaN (gallium nitride) charger. It’s even smaller than many phone chargers, but with up to 65W of charging power. Another example is the stainless-steel middle frame used in the mobile phones that Xiaomi first introduced in July 2014, the Mi Phone 4. In the past, the most used middle frame material in the industry was plastic, and high-end models would use aluminum alloy, but stainless steel was never used. However, no matter its structural strength, corrosion resistance, or texture, stainless steel always performs better. But the issue is that stainless steel is more expensive, and the degree of difficulty for processing is several times higher. A 309-g steel plate and a 19-g frame made of austenitic 304 stainless steel need to go through 40 steps, 193 processes, 8 times grinding using CNC digital control machine center after forging molding, and take up to 32 hours to process. Such a complicated process, nevertheless, was finally implemented by Xiaomi’s engineers, together with Foxconn, after tremendous joint research and development efforts. The processing cost of a steel plate reached RMB 400 per unit at Foxconn, while the processing cost of aluminum is only a few dozen of yuan per unit. However, the resulting toughness and texture of steel are unparalleled. Xiaomi’s calculator app installed on Xiaomi’s cell phone could be another interesting example. A calculator is a common function embedded in a cell phone, and regular consumers only use it for some simple calculations, such as addition, subtraction, multiplication, and division. However, Xiaomi’s design team didn’t view it as a simple calculation tool, instead, they considered it as an interface entrance with Internet service. As a result, the MIUI system’s calculator can continuously keep 32 33

Ibid 19. https://en.wikipedia.org/wiki/Be_Best.

1.6 “The Internet Way of Thinking”

23

track and display of every single step in the consecutive calculations, where any number can be copied or revised. This means that, when performing a series of complex calculations, the user can always review the input number at any step for possible error, and modify it immediately if needed. In addition, MIUI’s calculator can not only calculate various numerical numbers, such as exchange rates, weights and measures conversion, personal tax, and mortgage payments but also provide a function for “calculation of name of relatives” for the question such as “what is the name of Grandpa’s brother’s daughter?” After entering the question, there will be an answer “aunt” immediately shown on the display. This feature is especially useful when visiting relatives during the Chinese New Year and is widely considered the most amazing feature for a calculator, which clearly indicates that, even for a very minor function of a product, Xiaomi would try to excavate some new application scenarios and make it the best in its product category. Word of Mouth Another changing aspect of the internet landscape circa 2015, along with the influx of more users from the provinces, was the rise of Internet “influencers” and entertainment stars, from all regions, who also increasingly made up the online milieu. Along with other factors discussed later in this chapter, this rise caused word-of-mouth, as a marketing strategy, to peak. When Xiaomi launched MIUI back in August of 2010, Lei Jun challenged team leaders to recruit one million users without spending a cent on advertisement. It was a mission seemingly impossible. As a new company, Xiaomi had never released any software previous to MIUI and had no reputation in the market. But Lei Jun saw a truth of modern marketing: word of mouth, long known to be effective and potent, had peaked in the internet age. In fact, he earnestly believed that it could carry a company that had fewer than 100 users at its inception to one million users by the campaign’s end. Lei Jun’s word-of-mouth campaign was clever, but, more importantly, it was earnest. The employees and leads who were tasked with front-facing customer engagement participated assiduously in online forums, which came off to the users of the forums as the company’s sincere desire to listen and learn. For every engagement event such as Orange Friday, Xiaomi would select a group of users who engaged with Xiaomi’s products the most, and encourage them to interact with Xiaomi through comments, evaluations, suggestions, and other methods of communication. Then, Xiaomi would make these interactions a topic or a broadcastable event, and get the “word of mouth” about these events widely spread through various internet-based media, such as Blog and WeChat, so as to engage more people—thousands or millions of people, to participate. These continuous and massive engagements also enhanced the sense of achievement for these already engaged users and encourage them to do more. Xiaomi took two basic approaches in proliferating news of the brand through word of mouth. One was to embed a feedback-sharing mechanism in the open design of the cell phone. For example, in 2013, thousands of messages were shared by consumers via social media for the design of Xiaomi’s cell phone games “Crazy Pictures” and “Find Your Sister”. Another way is to find some specific issues through Xiaomi’s

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official interaction with users, and then, have a deep dive into the issues and spread the events out. Then there were the classic Xiaomi events held to promote customer engagement and post-event word-of-mouth promotion. Xiaomi’s flagship event, the weekly “Orange Friday,” engaged over one million users to participate through “Upgrade Sharing,” “Experience Report”, “Weekly Function Update Report”, and a mini-movie “100 Sponsors with Dreams” for the first 100 MIUI users, and allow these users to share their participation experience with the participating and non-participating viewers. Another weekly event “Red Tuesday” also engaged over one million users to share their order reservations and purchasing results. Xiaomi will waive their next order reservation request if they share their current reservations with other customers. The most explosive event came from Xiaomi’s online launching of its Red Millet (Hong Mi, or RedMi) cell phone, a lower-end mass-market version of its 2013 phone. Xiaomi designed an event called “Guess What Will Be Launched?” Anyone who forwarded this message would automatically make an order reservation. As a result, 7.5 million consumers made the order, and Xiaomi immediately made this “7.5 million orders” another event to broadcast. As the final result showed, over 10 million people participated in this activity through Tencent’s QQ space.34 Xiaomi didn’t invent word-of-mouth marketing, but it is one of the great word-ofmouth marketing successes. Marketing studies have long shown that the most trusted source of product information is family and friends, as customers are much more inclined to share their genuine likes, dislikes, and experiences with those they love. In the pre-internet age, however, there was a technical hurdle when it came to using word of mouth as a primary marketing tool. The speed at which “word” spread was simply not quick enough. Without internet-based communication tools, it often took months or years to get a brand off the ground through word-of-mouth alone, to spread the words (either good or bad words) to a potential consumer group with a decent size that is significant enough to form a market or a segment for producers. As a result, even though word of mouth from friends and family members is well recognized as the most trusted source, the role that word of mouth can play in marketing programs before the Internet age was only ever considered an amplifier, not an end-all in itself, that can help amplify a firm’s primary branding effort such as advertisement. Or in other words, word of mouth, in the traditional marketing menu, is only a “dessert”, but not a “main course”, if using the universal language of dining. In the internet age, however, the aspect of “anywhere” and “anytime” provided by mobile-internet-enabled tools and apps make the messages such as word of mouth can be viewed and heard by millions of recipients in a way as effective (or even more effective) as an advertisement placed in the prime time of the primary medias such as ABC or CNN, with almost no cost! Any potential consumer can receive “word of mouth” instantly from his/her friends and family members in one of his/her communication circles, and then, he/she can instantly forward this piece of “word of mouth” to other communication communities that he/she is in, regardless where he/ 34

Li, Wanqiang, The Sense of Engagement, China CITIC Press, 2014.

1.6 “The Internet Way of Thinking”

25

she is and where the other recipients are in this world. This “transmission chain” can be extended endlessly, and the number of recipients of word of mouth can be increased exponentially in a matter of minutes or even seconds. Therefore, in the internet age, with the most trusted information source, effective transmission channels, and almost no cost, word of mouth has become a “main course” in the marketing menu. Xiaomi provided a classical example of how to do it, and do it correctly and successfully. Speed The last piece of the “Internet way of thinking” is “speed”. “Focus”, “be best” and “word of mouth” deal with the process of product creation and marketing, but speed meant those targets were to be achieved quickly, gaining the company’s critical competitive advantage. In the field of the Internet, as most of the products are provided for free and the switching cost to consumers is typically low, manufacturers have to be quick in delivering and improving their products in order to retain existing customers while attracting new customers. Manufacturers have to consider in advance whether products can be produced in two or three months, or at most half a year, whether the needs and feedback of these testing users can be quickly collected, and whether the product can be changed or improved quickly after receiving the testing user’s feedback. In Lei Jun’s view, in the mobile Internet era, the customer’s deal-breaker is not an imperfect product. What breaks the trust and diverts the attention of the customer is a company that fails to provide an improvement on a product after receiving feedback detailing its flaws. This, to Lei Jun, was an opportunity to implement speed (efficiency) to gain a competitive advantage. Finding out how to quickly communicate with consumers, how to quickly collect their feedback, and how to quickly make corrections and improvements based on the feedback were the keys to success. It is a philosophy, if not derived from, at least in line with, a classic Chinese martial arts principle: Only speed can beat everything. Lei Jun once said something similar “Being able to be fast is an evolving and growing quality, which can be demonstrated through fast identification, fast response, fast decision-making, and fast improvement”.35 And all consumers will be more confident in a company, with higher efficiency and faster response, to continuously provide them higher values with better products/services. In 2011, when several Microsoft executives visited Xiaomi and talked with Lei Jun, they were bemused: “How can Xiaomi’s MIUI operating system achieve weekly updates?” they wondered. Microsoft’s own version update cycle is known to be long, and each new content update is notoriously large. It is difficult for Microsoft to bear the financial consequences of a failed update, and, as a result, the company is extremely careful with them. Even with the time between updates and the size of the update files, Microsoft executives often feel a level of anxiety about them. Lei Jun explained that Xiaomi divides its mobile phone system into two parts, each time essentially installing two sets of operating systems. If the update in one part were to fail, the system would automatically roll back to the previous version. It was the first time Microsoft executives had ever heard of such a solution.36 35 36

Ibid 19. Ibid 19.

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1 Xiaomi: An Internet-Driven Miracle

This “secret” solution, however, was easier said than done. Another one of Lei Jun’s sayings is: Speed doesn’t come from thin air, nor can it be manifested purely by the will to hurry something up. Insofar as software is concerned, it requires product line differentiation and an internal testing version, a development version, and a stable version. He also cited the importance of building a community of enthusiasts to provide real-time feedback on products through a supported system, such as fourblock feedback reports or user opinion polling. These users need to be deeply integrated into the design and development of a product. On the internal end, companies need an engineering team with full of passion, strong self-motivation, and excellent technical ability. To achieve “fast”, it is necessary to treat the set-up of a mechanism of achieving “fast” itself as an innovative product as well.37 In addition to fast decision-making for producing a product, Xiaomi also set up a series of rules for dealing with customer feedback. For example, they set up a “100 min response” principle, which means that, whenever a consumer posts his/ her feedback on social media like Weibo, within 100 minutes, the feedback should be entered into Xiaomi’s customer service system and answered by a Xiaomi’s rep accordingly. Another example could be the “1-h solution” mechanism for abnormal issues incurred for products and sales, and Xiaomi requires that the 1-hour response/ resolution rate for these cross-departmental issues need to be more than 80%. The more detailed metrics include the pickup rate for hotline calls or online inquiries, 24-h case closure rate, hotline satisfaction rate, online inquiry satisfaction rate, social media response time, 3-min processing rate, and many others. In addition to customer service for incoming messages, Xiaomi also reaches out to continuously improve and strengthen its user community through user feedback, online Q&A, and archive user feedback synchronously with the product development process, to accelerate the speed of answering users’ questions, improving the product based on user feedback, and forming more accurate and effective guidance for product research and development. Only with the support of these capabilities and indicator systems, “fast” can actually and effectively be realized over time.

1.7 Some Ending Remarks Xiaomi has managed one of the rare feats for a commercial brand: it is a brand that, in China, is beloved. It is also now a brand that is ubiquitous. You would be hard-pressed not to find a Chinese pedestrian walking the streets of Beijing or Suzhou or Shanghai whose entire house is outfitted from top to bottom with Xiaomi-branded products. This hypothetical Chinese passerby is more common than you might imagine. As a child, Lei Jun had wanted to build what he called a “great” company, which contributed to human society. In his view, in the pursuit of such a goal, there were two models that could be adopted: the premium model, in which producers charge a high premium for their products, and the utility/price ratio model, adopted by the 37

Ibid 19.

1.7 Some Ending Remarks

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companies such as Walmart, Costco, Uniqlo, and IKEA, in which companies try to continuously make good products cheaper and cheaper. Lei Jun prefers the latter and was an admirer of products like the Ford Model T. As a technology-intensive manufacturer, though, Xiaomi’s model is not as simple as a traditional utility/price ratio model. It can perhaps be better described as an enhanced utility/price ratio model, augmented by innovation and benefiting from efficiency. As Xiaomi does not pursue excessive profits and has less motivation to maintain the status quo to keep the excessive profit that the existing technology may bring to its inventor, Xiaomi’s model is more likely than the classic one to produce Schumpeter’s destructive innovation, which says that old technology is oftentimes destroyed in the process of innovation; at its most extreme application, it posits that true innovation is only possible through destruction.38 Xiaomi is a great disciple of the school of destructive innovation. Xiaomi’s story is a story about the power of the internet and the power of modern companies that have learned to wield it. Xiaomi is also one of the great success stories of the “internet age of marketing and communications.” This case identifies a new business model that can be developed using the Internet, and what changes need to be made for the marketing and branding strategy in the Internet age. Xiaomi’s C2B customer engagement strategy, word-of-mouth marketing approach, focus on postsale services, ecological system development, and its “Internet Way of Thinking”, together with its phenomenal sales records, have made Xiaomi a classical case in China’s cell phone and AI product industry, marketing and branding research, and business model development at internet age. Xiaomi has been one of the top sales leaders in China’s cell phone market with Apple and Samsung with a market valuation of over USD $35 billion and has entered into international markets such as Indonesia and India with global ambitions.39 Can Xiaomi be written into the annals of world business history like these companies Lei Jun admires? Possibly, but at least by now, Xiaomi’s journey has left some impressive imprints and is expected to get bigger and broader proof.

38

Joseph A. Schumpeter, “Capitalism, Socialism and Democracy”, Routledge, 1976. Xiaomi’s Financial Report 2022, https://baijiahao.baidu.com/s?id=1761421448821256257& wfr=spider&for=pc. 39

Chapter 2

Nongfu Spring: Down to the Soul of a Brand

In part due to technological innovation and the increased efficiency of mass production, the consumer market of the past several decades has settled into a buyer’s market. Companies, especially startups in saturated industries that provide basic goods, have increasingly had to adapt to an environment in which branding is critical to survival. Such companies operate in market spaces where room for creative and functional innovation is limited, and it is difficult to generate significant physical differences between themselves and competing products in the production stage. The question, “Why us?” or, “How can we get buyers to choose us?” has become more imperative than ever, leading to a rise in interest in corporate marketing and branding. As the masters of Positioning Theory Al Ries and Jack Trout once said, “It doesn’t matter who I am, what matters is who the consumer thinks I am.”1 An often-cited survey about geological structures once showed that most people know which mountain is the highest in the world, but significantly fewer know the second highest. Similarly, most people know Bible has the highest sales volume as the most widely printed book in the world, but what is the second book with the highest sales? Does anyone know?2 Often the competition for companies to stand out as memorable in the market is equally cutthroat. Only the most prominent of names are remembered. This chapter shares the remarkable story of the spring water company Nongfu Spring, a brand whose name means “farmer” in Chinese. Nongfu Spring–in essence, “Farmer’s Spring Water”—is a company founded by Shanshan Zhong in 1996, now a leading name in China’s packaged drinking water and beverages industry. They offer four major product lines: packaged drinking water, tea & related beverages, sports drinks, and fruit juice. In September 2020, Nongfu Spring was listed on the Hong Kong Stock Exchange (09633. HK). As of 2022, Nongfu Spring has sales of RMB 33.239 billion, an increase of 11.9% over the previous year, with a net profit of RMB 8.495 billion, an increase of 14.8% from the previous year. 1

Al Ries and Jack Trout, “Positioning: The Battle for Your Mind”, McGraw Hill Professional, 2001. 2 http://www.360doc.com/content/12/0224/13/2825520_189254047.shtml. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_2

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According to Nielsen’s statistics, the market share of the top three brands in the Chinese bottled water industry has reached 57.9%. Nongfu Spring, C’estbon (Yibao), Ganten (Baishuishan), MasterKong, Coca-Cola’s Binglu, and Wahaha are the six major brands that occupy 80% of the market share. Among them, Nongfu Spring holds a market share of 26.5%, ranking first in the industry, while C’estbon holds a market share of 21.3%, ranking second.3 Nongfu Spring is also a company that implemented the concept and strategy of “positioning” to an extreme in what had always been a conservative and relatively docile Chinese consumer market, and succeeded wildly–though, at times, controversially.

2.1 Dynamic Positioning to Make a Differentiable Brand The bottled water company Nongfu Spring had not been the original plan of its founder, Shanshan Zhong, who, at the time, was a reporter for Zhejiang Daily, the largest newspaper in Zhejiang Province, and a businessman involved in various ventures such as mushroom horticulture, the distribution of children’s nutritional products, and the acquisition of pharmaceutical companies. Before he founded Nongfu Spring, he had set up a few moderately successful companies in the food, health products, and cosmetics categories, but nothing at the scale of what would come next. One day in 1996, Zhong had been in Zhejiang Province for an onsite visit to a company that he had been targeting for an acquisition deal. The company produced what it marketed as “healthy wine,” but Zhong left the company largely unimpressed and not especially satisfied. He stopped at a nearby lake to consider the deal and his options, and it happened that the lake he came to rest by was Qiandao Lake, a body of water in Chunan County of Zhejiang Province, under the jurisdiction of the city of Hangzhou. Qiandao Lake, a misnomer, is actually a reservoir and was built in 1960. It has an average water depth of more than 30 meters and an area of 580 square kilometers under normal water conditions, but its most well-known feature is its very clear, very mellow water, which is said to be so clean that direct drinking from the source, without adverse health consequences, is possible. After observing the lake for a while, Zhong was said to have made an instantaneous decision. He would no longer pursue the acquisition of the wine company and instead found his own–making drinking water. Wine, however “healthy,” Zhong realized, was not a necessity. Consumers didn’t need to drink wine daily, nor did everyone even drink wine in the first place. Everybody, however, had to drink water. Zhong moved quickly after making the decision. Within the year, he had signed with the local government of Hangzhou the rights to the exclusive development of 3

Nielsen’s Research Report on Bottled Water in China: Future Development Opportunities in the Bottled Water Market, Industry Competitive Landscape and Investment Analysis; https://www. hc360.com/.

2.1 Dynamic Positioning to Make a Differentiable Brand

31

Qiandao Lake, and on September 26, 1996, Xinanjiang Yangshengtang Drinking Water Co., Ltd., the first iteration of Nongfu Spring Company, was established. In 1997, the first 4L bottle of Nongfu Spring, using clear Qiandao Lake water, was produced and sold in the market. Expectedly, Zhong encountered fierce competition in the drinking water market. As a mainstream necessity product with ease of mass production and a low entry barrier, bottled water was a competitive industry. In 1997, when Nongfu launched its first bottled water product, there were more than 3,000 brands of spring water available in the Chinese market. As a newcomer, it became imperative for Zhong to distinguish his brand among the crowd and keep his newfound company afloat. In large part, Zhong’s success can be attributed to his perceptive reading of the market early on, and his strong sense of the concept of branding. He understood that capturing a spot in this dense market was the key to the company’s survival and growth, and he knew that the answer lay in positioning and differentiation. When Zhong started his water business, Nongfu’s main product was categorized as “purified water,” the most mainstream and best-selling category of bottled water at the time in China’s drinking water market. The Chinese associated purified water with hygiene, cleanliness, and purity. The market leaders at the time who sold purified water were Lebashi (Rubust)—a company located in Guangdong Province that distinguished itself with its claim of a “27-layer purification process,” and Wahaha, a well-established, popular local beverage firm based in Hangzhou. Zhong quickly realized that it was not to his advantage to compete for the most rigorously purified water. He identified a different path. Qiandao Lake already had an established reputation and brand image among many Chinese, especially locals in the area, and Zhong recognized the lake as an asset he had that his competitors did not. To capitalize on Qiandao Lake’s existing reputation, Zhong incepted the idea of “natural water.” While now a popular concept all over the world–taken often even to extremes, such as with “raw water”—natural water was a decidedly novel concept in China in 1996. Zhong’s decision to market his product as natural water fundamentally changed Nongfu’s market position from a late-comer, in the purified water market, to an early adopter, and leader, in the natural water market. What came next was Zhong’s marketing push. Marketing campaigns are often started with a blitz of advertising, and Nongfu began to launch a series of slogans and ad campaigns around their new positioning. The success of these campaigns and the indelible nature of some of Nongfu’s slogans are still considered “classic” to this day, and many remain in the literature of successful Chinese brand advertising. Well-designed wording–a cleverly chosen word–can capture the key spirit of a brand and inspire instant memorability, giving customers a thin slice of what a brand is all about. Nongfu developed several slogans that are still considered “classic” by ad and media communications agencies in China today. The first one was “Nongfu Spring: A Little Bit Sweet,” which was used when Nongfu Spring was first trying to push the concept of “natural water. The slogan was pithy and didn’t overexplain natural water. Rather than going out of its way, this slogan didn’t directly highlight the natural and healthy nature of the water and only mentioned the “sweet” taste of water, which, however, left room for consumers to imagine or feel the sweet,

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2 Nongfu Spring: Down to the Soul of a Brand

natural, and freshwater flowing out of the mountain spring, and allow consumers to set up the linkage between the water and “emotional” factors, such as nature and health, by themselves. At that time, the advertisement of the market leaders of purified water, like Lebashi and Wahaha, prominently emphasized the multiple layers of purification of their waters, underscoring their waters’ technical features, and targeting the “rational” resonance in consumers’ minds, Nongfu Spring’ slogan highlighted its water’s natural or non-tap-water nature with simple, perceptually cognitional and easing-to-understand wording, targeting “emotional resonance” in consumers’ minds. As a result, this slogan created a unique position for Nongfu’s spring water in the drinking water market, which is different from all its competitors’ purified waters, and generated brand differentiation and recognition in consumers’ cognition (Fig. 2.1). Following the acquisition of Qiandao Lake, Nongfu acquired development rights for ten more spring water resources nationwide. Locales included Daxing’anling Mountain in Heilongjiang Province, which has a forest coverage of 92%, Changbai Mountain in Jilin Province, with an 88% forest coverage, Taibai Mountain in Shaanxi Province, with a forest coverage of 94.3%, Mount Emei in Sichuan Province, Wuling Mountain in Guizhou Province, a core area in China’s subtropical forest system and an important water conservation area in the Yangtze River Basin, Lingwu Mountain in Hebei Province, with forest coverage of 93% and an important water source in the Beijing-Tianjin area, Wuyi Mountain in Fujian Province, the largest, most typical, and most complete subtropical native forest system with the same latitude,

Fig. 2.1 Nongfu Spring’s “natural water” bottles are on the shelf of a supermarket. Source Yuming Ren/China Business Network Ltd., Shanghai

2.1 Dynamic Positioning to Make a Differentiable Brand

33

Manas in Xinjiang Province, deep groundwater taken from 170 meters down of the underground riverbed, which is snowmelt water from the North Tianshan Glacier, Danjiangkou deep reservoir water in Hubei Province, with water storage 29.05 billion cubic meters, and Wanlu Lake in Guangdong Province, the largest lake in South China with water storage 13.9 billion cubic meters of deep lake water. The nationwide layout of these natural water resources strongly supported Nongfu Spring’s positioning as a natural and healthy water brand with balanced minerals, and a series of advertisements using “Nongfu Spring, a little bit sweet” were commissioned on China’s CCTV (China Central TV). Catchy and memorable, the slogan is still used by the company today. The second well-known Nongfu Springs slogan was launched with a series of advertisements around 2000. Using proprietary photographs of its nationwide natural water sources as background, Nongfu Spring splashed its second major advertising slogan: “We are not water producers, rather movers of nature”, which traced back its drinking water to its original sources, and further explained why “Nongfu Spring, a little bit sweet”. No doubt, this slogan reinforced the image and reputation of Nongfu Spring water as a natural and healthy water in consumers’ cognition and enhanced the credibility of the slogan statement. With this advertising slogan, in the following year 2001, when Beijing bid to host the 2008 Summer Olympic Games, Nongfu Spring and the Beijing Olympic Committee jointly launched a Penny public charity event. With two Olympic champions Xuan Liu and Linghui Kong as spokespersons, Nongfu Spring announced that it would donate one penny for the Olympic bid for every bottle of Nongfu Spring sold, encouraging consumers to support Beijing’s Olympic bid by buying Nongfu Spring water, and promoting the concept of “a small contribution is also a support”, which greatly enhanced the popularity and reputation of Nongfu Spring. In 2018, Nongfu Spring launched a set of advertising commercials, many of which played like nature documentaries, and focused on the biomes around Nongfu Spring’s water sources. In one advert, in which the environment around Changbai Mountain was spotlighted, the filmmaker explored 2,800 species of plants and 1,500 species of animals that call the region their home. In the film, Nongfu included live, proprietary footage of rare Siberian tigers, Chinese mergansers, sables, and sika deer, many of which the ordinary urban Chinese had never seen before, and overlaid was a third slogan: “What kind of water gestates what kind of life?”. By depicting a harmonious coexistence between animals, the ecological environment, and Nongfu Spring’s water sources, Nongfu posited that its water was connected to the very fabric of life. The slogan and the corresponding nature films were viewed as a branding milestone for Nongfu. Widely praised by the public, the films were dubbed “some of the most beautiful advertisements in the company’s history” by commentators online.4 Around this theme, Nongfu Spring also launched a series of two to three-minute micro-films to convey the company’s spirit and present its value proposition to consumers. One of the films was titled “The Lifeline of Taibai Mountain” and 4

https://www.163.com/dy/article/ECFKI1660519FEEC.html.

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2 Nongfu Spring: Down to the Soul of a Brand

told the story of a water carrier, Wenlin Sun, who lived in the Taibai Mountains of Shaanxi Province. Each day he carried 165 kg of water from the mountain’s foot to its upper hills, a hike of 6 hours one way, scaling an altitude of 3700 meters each time, in order to deliver Nongfu Spring waters to a store on the top of the mountain for tourists visiting the mountain to drink.5 Another film, titled One Man’s Island, featured Zhongwen Xu, a water source inspector at Nongfu’s original water source at Qiandao Lake who lived on a small island less than 30 meters wide. Each day, he worked around the clock to ensure the normal supply of the factory’s water.6 Though the length of these ads was significantly longer than the typical 15, 30 spots, research surveys found that fewer than 30% of consumers choose to skip them when they came up on TV. Good advertising–compelling advertising–captures and holds the minds of consumers, and provides more creative value than just the product they’re trying to sell. Another important brand marketing activity that Nongfu Spring designed and implemented was consumer engagement. In addition to these microfilms and photo pictures, Nongfu allowed some targeted consumers to take an onsite visit to their water resources. They actively created topics and continuously organized many interactive events or activities to let consumers go to the fields to personally feel and experience the brand themes, such as “we are not water producers, just the movers of nature”. In addition, Nongfu also focused on bottle design. Their view was that packaging should not only carry the function of a good-looking appearance, it should also bring some added value to the brand as well. As a result, no matter it is the glass bottle design for its high-end water product, or its “music bottle” that was jointly designed with NetEase, one of the major internet gateways in China, to print some top-rated music review comments from the internet and some selected poems written by kids whose parents not at home working in other places, every single appearance of these Nongfu Spring’s packaging designs successfully attracted consumers’ attention, and generated the topics with widely participated discussion by existing and potential consumers. Over the years, Nongfu Spring has continued its effort on exploring the “soul” and “spirit” of the company, always seeking to create additional incremental value through its brand. Starting from focusing on satisfying the physiological needs of consumers to quench their thirst, to meeting consumers’ safety concerns for physical products, and then to the healthy considerations of consumers, and finally, Nongfu developed the natural waters with micro-minerals that are pursued by consumers. On this journey, every single step that Nongfu Spring took was to closely follow its brand concept, letting its brand’s creative advertising become the central topic of the marketing, and making the packaging of its products an advertising platform. All of these strategies effectively established direct access with its customers, and transformed its brand concepts into consumers’ minds to enable them to not only understand the physical features of its product but also its “soul” and “spirit”. 5

The New Year Short Film, released by Nongfu Spring on Video Media on New Year’s Day 2020. The Master of Thousand Islands episode of the 2016 Advertisement Film, released by Nongfu Spring.

6

2.2 Challenging Market Leader, A Strategy for Fast Approaching the Center

35

2.2 Challenging Market Leader, A Strategy for Fast Approaching the Center In view of positioning theory, marketing is, by its very nature, not a campaign about a product, but rather a competition for the cognition of the product in consumers’ minds. The job of marketing professionals remains to find ways in which to best capture the spirit and soul of a brand, and communicate that spirit to consumers. Nongfu Spring, from the very beginning, understood this, associating itself with the terms immediately with the phrases “natural water” and “a little bit sweet.” Therefore words that had never been used to describe water before in the Chinese market, thus highlighting the difference between Nongfu Springs and its domestic peers. But Zhong also understood that, as a newcomer to the market, a strong concept wasn’t enough. In particular, he believed that aggressive advertising and subversive campaigning were necessary to strengthen the company’s unique position. Along the way, he hoped to surpass all of the current market leaders, and, gradually, over time, even reshape the perception of drinking water that existing market leaders had instilled into customers’ minds, encouraging customers to challenge their own preconceived notions of what healthy water really means. Unlike many “typical” Chinese firms of that period, who often hesitated to “attack” competitors directly, Zhong was untimid in challenging existing market leaders aggressively. His controversial tactics were high risk, but ex-post data seems to indicate that Zhong’s tactic benefitted Nongfu Spring in the long run, if for no other reason than to have greatly strengthened the name recognition of the Nongfu brand in the minds of customers. In the history of Nongfu, there are two notable “water battles.” Both were instigated by Nongfu. The first “battle” started on April 24, 2000, on the day that Nongfu Spring inaugurated the largest water plant in Asia at Qiandao Lake. At the press conference held for the event, Zhong suddenly threw out a piece of news: in a series of laboratory research experiments that his company had conducted recently, he and his company found that purified water provided no discernible benefits to the drinker’s health. As a result, and because Nongfu Spring was a water producer concerned for their consumer’s health, Nongfu Spring would no longer produce purified water. Instead, from that day onwards, the only products they would sell would be “natural” water.7 Immediately following this press conference, Nongfu doubled down on these “lab experiment” results. Nongfu Spring took out a series of advertisements on CCTV, China’s premier broadcasting station, showing a teacher guiding students through the same experiment Nongfu Spring had claimed to have performed in their labs, which involved two daffodils and two different types of bottled water. Naturally, the advertisement revealed that, after 7 days, the roots of the flowers nourished with purified water only grew two centimeters, while the ones doused in natural water grew four. A subtitle placed at the end of the advertisement spelled out the company’s new 7

Yuanqi Capital, “The Dimension-Reduction-Competition of Nongfu Spring”, Jiemian News, July 8, 2020.

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direction, putting to print what Zhong had declared in his press conference a few weeks before Nongfu Spring would no longer produce purified water, and all waters produced and sold by the company from then on out would be natural water.8 Zhong then selected 2,700 primary schools in 21 cities across the country to participate in an event titled “Being a Little Scientist,” in which this daffodil experiment was repeated in each of the schools in real-time. Zhong’s aggressive tactics stunned other water manufacturers. Purified water was the mainstay of most of the largest brands in China’s drinking water market at the time. Furious that Zhong had pushed them into a corner, sixty-nine purified water producers, including Wahaha, Lebaishi, Yibao, and Jingtian gathered in Hangzhou on June 8, 2004, to collectively denounce the company Nongfu Spring. In an open letter, they accused Nongfu Spring of unfair competitive tactics to belittle purified water, all while using pseudo-scientific methods to prove their “natural water” claims. At the conference, the group insisted that the safety standards of drinking water had long been established by the State Bureau of Technical Supervision and the National Health Bureau and any purified water that made it to market met said standards, thereby clearing all bottled water currently on the market for health and safety. The group also criticized the daffodil experiment for being misleading.9 It seemed for some time immediately following this backlash that Nongfu Spring had overshot. Zhong had courted the enmity of approximately seventy competing companies, all of whom challenged his claims and the experiment the claims were based on. More damningly, the court arbitrating the issue eventually ended up ruling that, in fact, Nongfu Spring was involved in unfair competition, and guilty of making misleading statements, and Nongfu Spring was forced to pay a fine for the indictment.10 But, in reality, the incident significantly increased the name recognition of Nongfu Spring as news of this incident spread in the media. It also spread the term “natural water” to many who had never heard of it–or the company that came up with it– before. Courting the ire of much larger companies gave Nongfu Spring a platform, and reach, they had never had before. Customers who had previously only heard of household brands such as Wahaha or Yibao were now hearing the name Nongfu Spring as well. Just like with Pepsi and Coke in the iconic blind taste test years ago, Nongfu Spring’s head-on challenge of larger companies ended up increasing its own name recognition by association. It lost the lawsuit, but it won space in the minds of consumers. Its market shares started to rise.11 The second “water battle” instigated by Nongfu Spring involved Master Kong, China’s largest instant noodle manufacturer. In 2004, Master Kong also entered the bottled water market, producing, primarily, mineral water. Leveraging its reputation as China’s leading brand in instant noodles and tea beverages, Master Kong easily 8

Ibid 7. Ibid 7. 10 Ibid 7. 11 Ibid 7. 9

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37

gained access to well-established sales channels, thus allowing them competitive pricing, and, by 2008, Master Kong already obtained 25% of the market share in the drinking water market.12 This was largely ahead, at the time, of Nongfu Spring. Against this background, Nongfu Spring set off on its second “water battle,” targeting Master Kong. This time, Zhong targeted Master Kong by making water acidity and alkalinity a topic of public discourse as it pertained to bottled drinking water. In 2008, Nongfu started very publicly conducting a series of tests on the PH value of different bottled waters produced by various water makers. When reporters came to Nongfu’s facilities to report on the experiments, they were handed test reagents such that they could participate in the experiments themselves. The experiments were simple–grade school lab-level tests–and were easily understandable to the public masses. Various bottles of water with their brands clearly visible were placed on a table, and experimenters would observe the varying reactions of dissolving a piece of reagent paper in them. Nongfu Spring concluded from these experiments that Master Kong’s products were highly alkaline, and publicly accused Master Kong’s mineral water of being “pseudo-healthy.” According to China’s “Drinking Water Sanitation Standards,” the PH value of drinking water is required to be between 6.5–8.5, while Master Kong’s corporate standard was 5.8–6.2, which, Zhong pointed out, was lower than the national standard.13 In contrast, he claimed that Nongfu Spring waters never added artificial minerals or additives to the water, and never used what they called “urban tap water.” “What is suitable for the human body’s long-term health,” spokespeople for Nongfu added, “is a weakly alkaline drinking water, containing potassium, calcium, sodium, magnesium, metasilicic acid, and other natural mineral elements”;14 this line was subsequently printed on the packaging labels of all Nongfu Spring water bottles. Zhong’s claims triggered a period of national debate on the issue. Master Kong was forced to come out and defend its product. They pointed out that the scope of application for the Sanitary Standards for Drinking Water was limited to all drinking water that had a centralized water supply in urban and rural areas, while decentralized households’ water was taken directly from the water source without any facilities or only with simple facilities were subject to a different standard, a PH of 6.5–8.5, in the interest of protecting pipelines. If the acidity in the water were too high, critical pipelines would slowly erode. As the mineral water produced by Master Kong was packaged drinking water, not pipeline water, Master Kong insisted that the standard Zhong had cited was irrelevant to them. The quality of its finished product and production process fully complied with the relevant definition and requirement of

12

Jin Mei, “Kangshifu, Always Ahead of Uni-President for 3 Years, Needs to Learn to Slow Down”, Lishi Fast Consumption, a WeChat Official Account. 13 https://baijiahao.baidu.com/s?id=1696656616246844197&wfr=spider&for=pc. 14 https://zhuanlan.zhihu.com/p/37735764.

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“drinking mineral water,” Master Kong said, as specified in the “General Rules for Beverages” set up by the government.15 So, what was the final conclusion on the effect of water PH on human health? From a media standpoint, no definitive winner was declared. From a scientific and policy standpoint, no definitive verdict was delivered either. But Zhong likely understood perfectly well that the scientific and legal debate, even the media debate–and their ultimate conclusions–were beside the point. Master Kong’s reputation had already taken a hit, and its market share declined to 19.9% in 2008, down more than 5% points from its peak value before the debate and Nongfu Spring’s mineral water experiments.16 The concept of “weakly alkaline” water, which, much like natural water, many Chinese consumers had never thought about before, had also been instilled into their minds. Even today, tea houses all over China charge a higher price if the customer chooses to brew his/her tea with Nongfu Spring water. It was through the combination of these two campaigns that Nongfu Spring was able to impart concepts in the minds of consumers using scientific concepts and letting them flower. Even though the science around mineral water and the perfect level of alkalinity remains controversial, and the concept of natural versus purified water as well, Nongfu Spring successfully challenged an existing market standard that many consumers took for granted, and introduced what they posited was a new, superior standard for drinking water in its place. Nongfu emerged from these two “water battles” with the leading position in the Chinese bottled water drinking market.

2.3 Digging a Moat, Protecting Its Positioning: Nongfu’s Four Moats One of Zhong’s great recommendations as a business leader was his understanding of the dynamics of market positioning. Successfully differentiating a product is one thing; maintaining those created distinctions is another. Zhong understood that competitors could always copy or modify another company’s successful strategies, technologies, and business models to obtain late-comer advantages, and anticipating consumer brand jumping was critical to long-term success. Zhong was notably a CEO with a strong sense of anticipation; and also, of crisis. His view of the world had very few–if any–loyal customers. He had once cited the Apple-Nokia phenomenon as an example: when Steve Jobs released his new line of smartphones, nearly all of Nokia’s “loyal” brand followers switched to Apple almost overnight.17

15

Ou Zhikui, “Is Kangshifu Drinking Water Too Acidic to Drink?” Nanfang Daily, October 23, 2008; http://finance.sina.com.cn/consume/20081023/11545422159.shtml. 16 Jiang Yikun and Pan Qingshan, “Kangshifu versus Nongfu Spring: The Ten-Year Deep Grudge of the ‘Water Battle’”, Global Brand Network (www.qqpp.org.cn), January 11, 2010. 17 A conversation of Zhong Shanshan during an Interview with Chinese Media on November 26, 2017; https://finance.ifeng.com/a/20171206/15848001_0.shtml.

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In Zhong’s worldview, a customer’s first motivation is to buy what benefits them more; there is no second motivation. As a result, Zhong made sure Nongfu Spring designed and dug in proverbial moats to protect its market positioning. Whether it was water sources, facilities, technologies, research and development, product portfolios, or sales channels, Zhong was assiduous in developing and defending these moats. Nongfu Spring’s first proverbial moat is its water source. Nongfu Spring started with Qiandao Lake, and Zhong knew its brand positioning remained closely tied to that source of “pure, natural water.” In the early 2000s, most domestic drinking water suppliers were still focused on purified water, and their facilities were typically built close to large cities due to logistical considerations around transportation. These companies were vastly uninterested in the acquisition of specific water sources. However, Zhong saw possessing high-quality natural water as a key differentiating factor that would ensure the uniqueness of Nongfu’s brand in the long run. With this forward-looking view, and to preempt future competitors out of the natural water space–or, at the very least, make entry more difficult—Zhong acquired the exclusive development rights to eleven more major water sources nationwide. He chose each of these with deliberation. These water sources all had features that made them special. Many of the water sources Zhong acquired were in well-known tourist places with established reputations, much like Hangzhou had been a popular tourist area, and Qiandao a reservoir with an existing reputation. Wuyi Mountain spring water, for example, was taken from the Wuyi Mountain Springs, long viewed as the ideal basis for rock tea, black tea, and a number of other famous Chinese teas. Nongfu, like last time, cheekily borrowed from the spring’s existing fame, integrating it into its own brand. He didn’t stop with acquisition. With the choice of reservoirs and lakes in his possession, he took several further actions. He built more than twenty highlymodernized production facilities near each of Nongfu’s water resources, each with environmentally-friendly engineering and design. Functionally, it allowed for better “harmony” between Nongfu Spring’s facilities with the surrounding environment, minimizing the impact of industrialization on the water source and protecting the water source’s longevity for future company sustainability. On the branding side, these actions had the additional benefit of allowing Nongfu to brand itself as an “environmentally-friendly” company. Zhong presented these facilities to consumers as evidence that Nongfu Spring was a company who protected nature and cherished its gifts rather than ignored them, who protected nature rather than contributed to its destruction. Or, as yet another slogan of Nongfu Spring stated: “In the forest, we are only humble bypassers.”18 To further strengthen the brand association of Nongfu Spring with the concept of “natural and healthy water”, Nongfu Spring organized what they called a “watersource journey” through each of these locales: a hiking expedition open both to regular customers and media representatives around the tourist regions associated 18

https://www.nongfuspring.com/aboutus/culture.html.

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with Nongfu Spring’s water production facilities. On these tours, Nongfu Spring representatives would take participants around production facilities to watch the production process and bear witness to how natural spring waters flow out of the mountains into the factory. Guests were welcomed to observe the ultra-hightemperature sterilization process of Nongfu’s spring water, as well as other packaging activities such as bottle blowing, filling, capping, labeling, coding, and stacking. The invitation of regular customers encouraged word-of-mouth marketing, while Nongfu’s choice of opening their facilities up to media representatives gave them brand visibility through TV and print pieces. Nongfu was also sure to maintain positive, collaborative relationships with the local governments of these areas. The inevitable contribution of Nongfu Spring’s facilities to the local economies in the towns in which their water sources were located gained them favor with local governments in these regions. Many of Nongfu Spring’s water resources were located in environmentally beautiful but economically underdeveloped areas. Zhong’s facilities contributed to growing what was oftentimes a flaccid local economy, gaining him favor with local governments, who often helped encourage Nongfu Spring’s growth in return. An example of this symbiotic relationship at work was in Changbai Mountain. Located in Jingyu County of Jilin Province, at the time Zhong built his first facility there, it had been a state-level “poverty” county. But the poverty county had 47 highquality mineral springs, five of which surged a daily amount of more than 10,000 cubic meters of high-quality, pollution-free water. In 2002, Nongfu Spring’s Jingyu water production facility, as its first production base out of Zhejiang Province, was completed, with a total investment of RMB 477 million. The facility was furnished with the world’s most advanced water-processing equipment at that time and was able to achieve a production capacity of 60,000 bottles an hour. In return, the local government adopted an initiative by Nongfu Spring and established a 10-square-kilometer water source protection area surrounding the Nongfu Spring’s Changbai Mountain water source area. It was the first water source protection area in China that was built in accordance with international protection standards. Jingyu County government further built a special railway that shipped Nongfu Spring bottled water to distribution centers and sales points, with its starting point at the Nongfu Mountain Spring Facility. It was the first railway in the history of Jingyu County.19 The second “moat” was diversification. Specifically, of product offerings. Over the years, Nongfu Spring developed a “dual-engine” business model: one engine drinking water, the other a miscellanea of other soft beverages. Among these were ready-to-drink (bottled) teas, sports drinks, juices, plant protein beverages, and coffees. The portfolio diversification helped increase Nongfu’s market competitiveness and buffered them from ups and downs in the drinking water market. Packaged drinking water served as Nongfu’s necessity product–meeting the drinking needs of

19

Live Coverage of Nongfu Spring’s Changbai Mountain Water Source by the program “Faraway Home” on China Central Television (CCTV) website in August 2022.

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all customers, while their second arm of beverage products served the more diversified and personalized drinking demands of customers. In 2003, Nongfu Spring launched “The Farmer’s Orchard”, the first fruit juice in the world that contained fruit grains, as well as the first mixed fruit & vegetable juice on the market at the time. In 2004, “Scream” was launched. It quickly gained recognition and acceptance from teenage customers when it launched with unique packaging and the slogan “Instead of beating your heart, scream.” In 2008, Nongfu Spring launched a water-soluble drink, C100. Using the slogan “VC’s 5.5 lemons meets all your daily needs”, the C100 series products were designed to provide customers with a convenient way of getting supplemental Vitamin C. In May 2011, a sugarfree tea “Oriental Leaf” was developed. In 2015, Nongfu Spring launched Nongfu Spring Natural Mineral Water–Glass Bottle, Nongfu Spring Natural Mineral Water– Sports, and Nongfu Spring Drinking Natural Water–For Infants and Children. The new products combined water from high-quality water sources, advanced processing techniques, well-designed packaging, and attractive development stories, and also marked the beginning of Nongfu Spring’s push towards more high-end product categories. In 2016, the Tea π came out: a tea with fruit notes. With its slogan “Tea π, its own style” and a series of operations targeting the younger generation, Tea π quickly achieved sales of 1 billion RMB in its first year on the market.20 In 2019, Nongfu Spring entered the coffee market and launched the “Charcoal” series. The first batch of products included three flavors of sugar-free black coffee, sucrose-free lattes, and low-sugar lattes. Nongfu’s third proverbial moat was technology. At the same time that Zhong was focused on acquiring and developing around water sources, he had also begun investigating processing technologies. Rather impressively, he opined that nature was not the only source of natural beauty: “Technology is also natural beauty.”21 One of the first “beautiful” technologies that Zhong implemented was aseptic production technology. Nongfu Spring came to possess fourteen beverage production lines that met the log6 sterility standard, the highest level of beverage processing in the world, which meant that not even one bottle was contaminated with microorganisms in every one million bottles of beverage processed. Through continuous technological improvements and upgrades, Nongfu Spring developed its own patents around sterilization. As of September 2021, Nongfu Spring and its affiliates had submitted a total of twenty-nine patent applications directly related to “aseptic technology” in 126 countries/regions around the world, of which invention patents accounted for 96.55%.22 Nongfu Spring also developed a high-precision, constant-temperature device that ensured uniform taste between different batches of product. In order to prevent the deterioration of a product’s flavor over time, Nongfu Spring applied special technology to the packaging material. The packaging insulated the drinks from oxygen and ultraviolet rays, the most corrosive forces when it came to beverage freshness, 20

The Chronicle of Nongfu Spring; https://www.nongfuspring.com/. Introduction of Nongfu Spring; https://www.nongfuspring.com/. 22 https://www.nongfuspring.com/. 21

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allowing for even pantry products to retain freshness through oftentimes extended shelf lives. Nongfu Spring eventually applied these technologies to the raw materials used to make juice and beverages for their non-drinking water lines. To make orange juice, Nongfu Spring grew its own orange orchards and built processing facilities in Xinfeng County of Jiangxi Province, producing 30,000 tonnes of fresh fruits a year. They called the brand 17.5°. As there was no standardized agricultural production system in many of China’s rural areas back then, Nongfu Spring established four major standards for its orange production operating systems, including field operation standards, fruit picking standards, factory sorting standards, and transportation standards. These standards were to ensure that every orange sold would have “smooth skin, uniform size, consistent taste, and good price.” These four standards included 34 operating procedures, 79 types of control, and 148 monitoring details.23 One such type of monitoring, for field operation, was the introduction of the GPS positioning technique into orchard management. Through this, Nongfu was able to obtain standardized statistics, traceability analysis, and feedback on the data from every single orchard. When fresh fruit became ripe, forty photos were taken of each orange that passed through the main optical sorting machine, allowing minuscule recordings of the surface defects from all directions without blind angles, and the fruit would be sorted according to the size of the defect area. In addition, near-infrared rays were used to detect the level of sugar and acidity in each orange, and at a carefully calibrated intensity such that they did not disintegrate or otherwise damage the skin of the fruit. Automatic weighing with intelligent grading instruments was used to sort and grade the fresh fruits. Nongfu Spring also introduced its aseptic technology into the production of NFC juices (Not from Concentrate) to resolve the issue of NFC room temperature storage. To ensure minimal waste of the fruit product, technology was developed to extract orange oil from the skins of oranges and natural pectin from the skin and residue. The fourth moat was sales channels, which Zhong made to ensure were welldeveloped and nationwide. The sales model that Nongfu Spring adopted was “dealership + direct sales”. In 2019, Nongfu Spring’s revenue from dealers and distributors accounted for more than 94% of its total revenue. Nongfu Spring came to cover more than 2.37 million retail outlets nationwide through 4,280 dealers, of which 78.9% of the retail outlets are located in third-tier cities or below. Nongfu Spring managed more than 10,000 front-line sales representatives nationwide through the mobile terminals of sales personnel, and dealers’ inventory through a big data analysis system to precisely control the aging of products at terminals, and improve operational efficiency.24 Through the information platform, Nongfu Spring not only obtained valuable market sales data but also changed the way its sales representatives conducted business. The platform can automatically assign the visit plan and the frequency of visits to all sales representatives, which is linked directly to the work performance of each 23 24

https://www.nongfuspring.com/media-detail.html?nid=79. Nongfu Spring IPO Prospectus, April 2020.

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salesperson, and would maximally motivate each sales channel. With the support of the platform, business representatives can also better and more quickly capture the dynamic changes in the market, and form their reaction strategies, which would help enhance the vitality and coherence of the channel. In addition, Nongfu Spring has placed 60,000 vending machines in about 300 cities across the country, which further expanded offline sales and provided better access to the end consumers.25 In order to maintain the efficiency of the supply chain, Nongfu Spring regularly optimized the logistics path and made necessary adjustments to capacity planning and warehousing planning every year, which changed the original static daily supply network management model to a dynamic one.

2.4 Some Ending Remarks When Nongfu Spring was founded in 1996, China’s GDP per capita was just in excess of USD $700. Twenty-five years later, China’s GDP per capita has reached USD $12,600 in 2021. On China’s journey to becoming a developed nation–or, even, by some measures, a high-income one–many multinational companies, such as Coca-Cola, Pepsi, and Starbucks, have gained tremendously and rapidly in China’s consumer product market. But, alongside them, many local, private Chinese firms also quietly rose. Nongfu Spring is one of the most notable examples. Having started as only a concept in the mind of a man who stood by a reservoir in 1996, it is now a leading brand in the mainstream consumer product market in China. In its prospectus released in August 2020, Nongfu Spring disclosed that it has become “one of the most profitable companies in China’s soft drink industry.”26 In 2017, 2018, and 2019, the net profit margin was 19.4%, 17.6%, and 20.6%, respectively, which was significantly higher than the average profitability of China’s soft drink industry in those same years (6.9%, 7.1% and 9.6%, respectively), as well as the average profitability level of 3.9%, 7.6% and 8.5% of the global soft drink industry during that time.27 Nongfu Spring can attribute its success to its focus on and clarity of its own brand identity, effective market tactics, and clever products which play to the needs of many different consumer groups. The combination has allowed the firm to target high-end consumers with a price premium. By dictum of brand equity theory, this price premium reflects the extra value the Nongfu name offers consumers. As now a leading player in the beverage market with a diversified development strategy, and one of the companies with the highest success rate in launching new products in the beverage industry in China, Nongfu Spring may step still into new categories in the future. Its ambitions are likely, not slaked. As Zhong himself observed, the average amount of drinking water that Chinese consumers consume is 25

Ibid 24. Ibid 24, https://www.doc88.com/p-90387051398548.html. 27 Frost and Sullivan Report, https://equalocean.com/analysis/2020100414906. 26

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not particularly high, and the space to further expand drinking water into Chinese households is wide. Therefore, there ought to still be great market potential for drinking water in China, and “Nongfu Spring will continue to strengthen its acquisition of high-quality water sources”.28 One particular direction might be catering. As a latecomer, Nongfu Spring has little to no active presence in the catering industry, which may represent a new direction for the company. Nongfu Spring’s case is instrumental in developing a better understanding of the nature of a brand, and why and how a brand brings extra value to customers and stakeholders. In the marketing iteration of Maslow’s hierarchy,29 there are two layers to a customer’s relationship with a product brand. One is the physical level, in which a brand’s products must satisfy the consumers’ physical needs. The second is the psychological level, in which the brand must somehow fulfill a customer’s emotional or spiritual needs, or tap into a customer’s base psyche, such as through the concepts of survival, safety, and health. It has become the responsibility of the brands to extract from the market both these levels of consumer need and highlight these values. The soul of the brand, in other words, should appeal—not just to the physical body–but also to the soul of the consumer. Regardless of where the company chooses to go next, the company has already succeeded wildly in this aspect. It is a brand that has impressed market analysts, financial investors, branding researchers, and industry experts. Nongfu has often been called “an advertising agency disguised as a company selling water” by marketing professionals,30 a testament if anything to Nongfu Spring’s branding savvy.

28

Nongfu Spring Financial Report 2022. https://en.wikipedia.org/wiki/Maslow%27s_hierarchy_of_needs. 30 https://new.qq.com/rain/a/20210226A0F4GR00. 29

Chapter 3

Haier: A Brand that Started with a Smashed Fridge

In the annals of Haier’s history, one month stands out among the others: June 1985. It is a month that is destined to be known as the start of the legendary journey Haier would embark on in the coming four decades to grow from a small, unknown, poorlymanaged fridge maker on the verge of bankruptcy with losses of RMB 1.47 million to a leading world brand in household appliances.1 As Ruimin Zhang, the then-newly appointed president of Qingdao Refrigerator Factory, which was Haier’s original company name, would recount, he received a letter from a consumer complaining about the quality of a refrigerator he had purchased from the brand in early June of 1985. Wanting to do right by this complaint, Zhang asked his staff to thoroughly check their entire manufacturing warehouse for refrigerator defects. The results came back: a total of 76, out of approximately 400 refrigerators, had deficiencies, 75 on top of the one mentioned in the complaint. The question, then, was how to proceed. Anyone who is familiar with the Chinese market for electronic appliances in the 1980s would inevitably remember the kinds of products that filled the shelves then. Everything “could” be sold, as long as it was at a low enough price. Low-quality products with all sorts of deficiencies were an industry norm. If Zhang had wanted to follow the industrial practice of the time, he would have simply left the warehouse, made the necessary downward adjustment to the pricing, and sold all of the refrigerators anyway. Most likely, in time, they would have sold well enough. However, he refused to, and instead, he made media headlines. It is chronicled that he declared to the workers of that warehouse, “This is a quality issue. As president, I take full responsibility, and it is my salary that will be deducted this month. However, all the fridges with deficiencies must be destroyed. If I allow you to sell these 76 fridges today, I will be allowing you to produce 760 similar fridges tomorrow.”2 And so, taking out a hammer, he—along with an entire warehouse of workers— hand-smashed each of the remaining 75 faulty refrigerators. 1 2

Haier Chronical 1984–2021, Haier Group. https://www.163.com/dy/article/GNSDE00Q0552N2VL.html.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_3

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3 Haier: A Brand that Started with a Smashed Fridge

In retrospect, these hammer-smashed fridges marked the birth of one of the world’s foremost brands, now known, among other things, specifically for their rigorous quality control. In the 38 years after the hammer incident, Haier has emerged as a world leader in multiple industry lines and has positioned itself as a leading global provider of better life solutions beyond just refrigerators. According to the yearly reports published by Euromonitor International, a highly respected market research firm that often acts as the barometer for the market performance of brands, Haier’s sales of refrigerators, washing machines, wine cabinets, and several other home products are the world’s number one most preferred product, and have been for more than 10 years.3 Since 2019, Haier has been listed on BrandZ’s Top 100 Most Valuable Global Brands for three years running, and it is the only global IOT Ecology Brand with a 41% increase in brand value during that time.4 Today, Haier boasts a comprehensive portfolio of brands, which include the in-house-developed “Haier,” for the mass market, “Casarte,” for the high-end segment, and “Leader,” which focuses on the younger generation, consumers born of the internet age. Their portfolio additionally comprises acquired international brands such as GE Appliance from the US, Fisher & Paykel from New Zealand, AQUA from Japan, and Candy from Italy.5 Another vector of Haier’s company growth is technology innovation, and it is through tech innovation that Haier is able to provide continued support for its sprawling brand portfolio. In China, Haier possesses about 68,000 patents, the greatest number of patents of any company in China’s electronic appliance industry. Outside of China, Haier is the owner of about 13,000 patents in 28 countries, similarly the top-ranked number of patents that any Chinese electronic appliance company holds overseas. In particular, Haier’s innovation patents in the Smart Family segment of the market were rated number one worldwide in an annual report released jointly by IPRdaily, a global authority media on intellectual properties, and incoPat, an innovation index research center, in 2021, totally 4535 patents.6 Haier is also a leader in setting global industrial standards. As of today, Haier has participated in the establishment of 82 international standards and 570 national industrial standards and is the only firm to be involved with all of the big five international standard-setting organizations.7 Most recently, Haier joined with Kantar, an authority on brand research and a subsidiary of the world’s largest media communication company WPP, and the Said School of Business at Oxford University to issue The White Paper of IOT Ecology Brands, which provides a standard of reference for the development of ecologically-friendly brands.8

3

http://www.caqi.org.cn/enterprise/2013-1/18/12930.html. https://baijiahao.baidu.com/s?id=1671248672791420001&wfr=spider&for=pc. 5 http://m.fangjiaapp.com/kb/288.html. 6 https://zhuanlan.zhihu.com/p/454309219?utm_id=0. 7 The big five international standard-setting organizations include ISO, IEC, OCF, IEEE, and Matter. https://baijiahao.baidu.com/s?id=1713677728570911979&wfr=spider&for=pc. 8 https://www.haier.com/global/press-events/news/20200921_148598.shtml. 4

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On the organizational management side, Haier has developed a model called the RDHY Management Model,9 which supports continued brand creation and development, through the integration and maximization of value on both the supply and demand side. As of today, over 320,000 companies in 74 countries have registered as members of the RDHY Alliance, testifying to the model’s universal applicability, easy duplicability, and usefulness across industry and cultural lines. On September 27, 2020, Haier’s founder Ruimin Zhang, the developer of this model, received a Special Contribution Award in Management Science, the highest honor in the management field in China.10 Therefore, what has Haier done in the past 38 years to get to where it is today? What are Haier’s key contributions to the consumer product market in China and the world? And what insights can we take from Haier’s case for what it actually means to be a brand, and what a brand can then offer to its consumers, suppliers, shareholders, and other stakeholders? We hope the following sections of this chapter can help shed some light on these issues.

3.1 Where Does Market Power Lie?—Identifying Customers’ Potential Needs and Improving Continuously Their Consumption Experiences As everyone would agree, providing products and services that satisfy a customer’s needs is the fundamental goal of all brands, regardless of whether its output is a product, service, or a fusion of both. Customer satisfaction is what ensures the survival and growth of brands in a competitive market. However, in order for a brand to achieve the status of the market leader, it isn’t enough to merely satisfy customers’ known, existing needs. Rather, they must have the ability to uncover tacit needs and anticipate imminent needs. We will categorize both these under the umbrella term “potential needs.” Potential needs are customer demands that have not been explicitly expressed through customer surveys, market surveys, or current customer interactions with existing products, but can be uncovered through observations, analyses, and deep dives into customers’ consumption behaviors and consumption experiences, and from developing a comprehensive understanding about how customers interact with various products or services related to the brand’s niche. Haier’s journey towards becoming a market leader in the electronic appliance industry was largely a result of their ability to identify such potential needs. The first example on this topic is the Little Prodigy brand, a product on Haier’s washing machines roster. Summer, in the washing machine market in China, is 9

RDHY is an abbreviation of the Chinese “RenDanHeYi,” which translates to “integration of employees (Ren) and user value (Dan)”, and will be discussed in more detail in the Sect. 3.5.1 of this chapter. 10 http://www.qdcaijing.com/p/165710.html.

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usually a low-tide season. Despite the sweat and grime of summer—which intuitively points to a greater need for the washing and changing of clothes—the Chinese often find it inconvenient to wash summer clothing using the bulky washing machines that were most common on the shelves of Chinese department stores at the time. These ponderous machines were water-consuming and electricity-consuming, and both water and electricity were precious resources through the months of summer heat. Haier first recognized this when other washing machine makers did not. By identifying the potential needs for smaller-sized washing machines by customers, Haier’s research and design team developed a smaller-sized washing machine brand, Little Prodigy, focusing on washing summer clothing. On top of a base design meant to help make laundry easier for Chinese customers through the summer months, Haier added additional features to the Little Prodigy to make it even more competitive in the market, such as bacterial killing, disinfecting, and no detergent. The Little Prodigy also pioneered the “separation” layout for washing machines in China, so adult clothing and children’s clothing, and undergarments and outerwear can be washed in separate spaces. Upon its launching, it was overwhelmingly welcomed by the market, and its popularity went as far as to change the seasonality of the market in the country. As of today, it is now pushing out its 18th generation of products and has seen many upgrades. The Little Prodigy is credited with revolutionizing clothing washing in China, codifying new trends in the marketplace, and pioneering the concept of separate and categorized washing in the country. Mini Fridge was another brand Haier created by identifying customers’ potential needs. Haier’s expansion overseas started with an aim toward the United States. The US, however, was not an easy market. As one of the most competitive markets for refrigerators, it already housed many well-known brands such as Maytag, Whirlpool, Bosch, LG, Samsung, and Kenmore, all of which have held leading positions in the market for many years. Seeing this, Haier took aim at a niche segment of consumers: college students. Through their research, Haier’s team found that students had a need for fridges that, first and most crucially, fit in their often-cramped college dormitories. They also found, as a corollary to this, that students often used the limited surfaces in their dorms for multiple purposes. In response to these specific needs, Haier developed a mini fridge, compact in size, with a working space at the top that functioned as a table. Perhaps unsurprisingly, this mini fridge ended up a huge hit with college students and was picked up to be sold by Walmart retail. Haier used further feedback to improve the fridge even more—by adding a computer table—and developed a mini dishwasher, made from plastics, to go alongside it. Both these products ended up selling through Sears appliance stores, which back then were still in their heyday, and were beloved by college students.11 Air conditioners, along with washing machines and refrigerators, are considered one of the “Big Three” of home electronic appliances. Haier also took the lead in this segment by identifying and anticipating the potential needs of consumers 11

https://www.shangxueba.com/ask/19414660.html.

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and addressing those needs through innovation. Traditionally, air conditioners were meant to provide “fresh” air—defined usually as new air introduced in a room—but there was no guarantee within those promises that the fresh air provided by an air conditioning unit would be “clean” or “healthy.” Air conditioners back in that time often did not consider the level of germs and bacteria that were often circulated back into rooms by their “fresh air” currents. Haier pioneered the concepts of “healthy air”, along with the “healthy air conditioner,” and developed the first air conditioning unit that contained a sterilizing cabin. Using 3D sterilizing technology, these cabins would perform a three-layered “water,” “fire,” and “electricity” sterilization process, capable of purifying the air sent out into the room by the unit. Through a Self-Cleaning Cold Expansion Sterilizer chamber (“water”), an air supply system with an evaporator and fan sterilization that operated at a high temperature of 56 °C for 30 minutes (“fire”), and an Air Sterilizer (“electricity”), Haier’s air conditioners were able to eliminate 99.9% of germs in the air of a room within one hour.12 Haier went on to develop another air conditioner with even more integrated functionality, fusing air conditioners, purifiers, humidifiers, fresh air machines, disinfecting agents, and dehumidifiers. Using technologies typically seen in aero engines, a process based on what is known as the Bernoulli Effect in physics, water within the machine would spin at high speeds to form a water curtain. When air passed through the water curtain, it would trigger, effectively, a “rain shower,” which washed out the air. These technologies were capable of removing 7 separate types of air pollutants—PM2.5, bacteria, formaldehyde, hair wool, dust mites, odors, and pollen, all of which were common in the indoor air of residential homes. In this way, Haier created a single product capable of satisfying all of a consumer’s needs when it came to fresh and healthy air. However, Haier’s insight into customers’ potential needs was not limited to just the design features of physical products, but extended, too, to customer service. Over the years, Haier has gained an overwhelmingly positive reputation for its five-star quality of service when it comes to air conditioner installations. In China, the installation of air conditioning comes as a packed deal with the sale, and it was common for the selling company to take on the responsibility of the installation as well. This was, and remains, not a rare practice in China. Haier, however, went the extra step, providing extra services based on their identification of their customers’ potential needs. For example, for a while, the paints on certain Chinese-manufactured furniture were discovered to have contained higher-than-standard chemical residuals which were harmful to humans, such as formaldehyde and benzene. Customers thus had a need to test the level of these residuals in their homes, but these kits were not easily accessible. Many residents were unable to do this on their own. When Haier realized this need, they added an “air testing service” to their air conditioning installation package. The service comprised a professional consultation for their customers’ purchasing of air purifiers based on the results of the air testing conducted in their homes. 12

https://baijiahao.baidu.com/s?id=1670185545983302506&wfr=spider&for=pc.

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Without question, this “additional mile” that Haier took solidified many of its customer relationships, and shaped the image and connotation of the Haier brand in the minds of its customers.

3.2 Aim High: Targeting High-End Sectors In a segmented market, different groups of consumers are served by different brands in a provider’s hierarchical portfolio. When it comes to quality and pricing, high-end brands represent a brand’s “ceiling.” They’re the best a company is able to provide to its customers in terms of quality, functionality, technology, experience, price, or all of the above. The highest level of product development in an industry is often measured by its high-end brands. As an ambitious entrepreneur, Zhang was inevitably an executive who aimed high. Developing a high-end brand became a natural extension of Haier’s branding strategy once Haier gained a leading position in the mass market. This decision started another legendary journey for Haier, this time with its high-end brand Casarte. Casarte is a word originating from Italian. It is a portmanteau fusing la casa, meaning “home,” and arte, meaning “art.” Taken together, Casarte means “the art of the home.” Haier hoped that naming a brand “the art of the home” would raise the expectations of consumers and establish a more upper-shelf image, and Casarte endeavored to appeal to high-end customers with the physical appearance of its products, the distinguished features on its machines, and upgraded functionalities. Beyond these external, tangible features, Zhaowei Song, the General Manager of Casarte, also considered the invisible “soul” that exists at the heart of all brands: the value proposition of a brand. Expressing his view regarding Casarte’s value proposition, he said: “The core value of Casarte is the art of the home, and to live for love; the goal of the brand is to allow consumers to lead a high-end lifestyle; the product needs to be original, technologically-advanced, and exquisite, and we should be making products the way an artist creates artworks; the brand image is quality, style, and taste; following high-end standard throughout the whole process; the user is the best designer, and a fan of the brand is its best promoter.”13 Towards that end, Haier carefully designed its products under the Casarte brand keeping the “new features and functionalities” and “technology innovation” goals in mind. For the Casarte refrigerator, Haier designed a fridge with oxygen-block, dryand-wet storage cabins, which kept products in differing levels of humidity as needed. The humidity of the moisturizing area is kept at 90%, while the humidity of the dry area is only 45%. The fridge is also equipped with infrared temperature control. Through infrared temperature sensors and temperature control, the fridge is able to rapidly trigger refrigeration within 0.1 seconds of the product being placed inside, providing immediate preservation. This technology is uniquely owned by Haier. In addition, the fridge utilized dual-sterilization technology, using a Fresh Turbo 13

https://baijiahao.baidu.com/s?id=1735140741110493457&wfr=spider&for=pc.

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vortex-dynamic-sterilization technique for the fridge compartment and an A.SPE herbal sterilization for the freezer; Haier was able to reach 99.9% sterilization in both compartments. For Casarte’s refrigerator’s structural design, Haier introduced French double doors and Italian-styled drawers. These features provided users with larger spaces for cold rooms and large drawer-type freezers, which quickly became the model followed by other high-end refrigerator brands in China and abroad. As of 2022, the Casarte brand refrigerator is in the top 3 best-selling fridges in China, and surpassed its sister Haier brand in Shanghai and Zhejiang Province, despite coming with a price several times higher than the Haier sister brand. Casarte’s washing machine products have the feature of preventing color mixes and fuses by design. Traditional washing machines typically can only handle clothes in similar colors at once—hence separate washes for colors and whites. To prevent such color mixing, brands in the past have tried gadgets such as color-absorbing paper or/and laundry bags, though the end result was usually the washing of light and dark clothes separately, underwear and regular clothes separately, and the clothes of children and adults separately. Casarte developed the world’s first dual-barrel-partition washing machine. In this way, laundry doers were able to wash different types and colors of garments in the same load, and the machine allows them both separation and efficiency at the same time. Casarte even further improved on this design in a subsequent release of this machine, putting out a washing machine that integrated the functionalities of wash, dry and garment care all in one. This enhanced dual-barrel design won all of the “World’s Big Three Design Awards” that year—Germany’s Red Spot Award, the IF Award, and the American IDEA Award. In addition, it obtained certification from the VDE (one of the most renowned certification institutions in Europe), TUV (a top German certification organization), and America’s SIEMIC. Casarte has many similar product designs. As a result, Casarte frequently received these three major design awards (Fig. 3.1).14 Casarte’s “high-end” standard is also reflected in Casarte’s sale and post-sale activities, closing the loop of “Casarte’s high-end process” concept. By the year 2015, Casarte had basically taken over all the primary and secondary markets in China, and as of year-end 2020, Casarte has 95% network coverage in all counties and above markets. It had over 8,000 brick-and-mortar stores, including unique experiences such as large-scale experience stores, creative life halls, and whole sets of brand halls. Despite their differing experiences, however, all Casarte stories are uniformly designed and decorated to be coherent with the Casarte brand. In addition to stores, Casarte also set up a platform called the Master of Living Arts (MLA), an art-of-living experience space for elite and high-end families meant to cultivate brand loyalty. Each year, the space hosts themed activities along with celebrities, inviting them to share their understanding of what constitutes an exquisite life. Past events have included the Casarte Family Marathon and the Business School Tennis Challenge, with each 14

https://baijiahao.baidu.com/s?id=1597624796789218872&wfr=spider&for=pc; https://casarte. co.chinachugui.com/news/itemid-490281.shtml.

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Fig. 3.1 Haier led the innovations in electronic appliances in China. Source Yuming Ren/China Business Network Ltd., Shanghai

event targeting a different demographic and user group. Casarte further extends this campaign for brand loyalty to their social media through content and creative projects. 2019 saw the advertising featured film “Casarte’s Life Story,” which used 6 groups of character stories such as “Costume” and “Half Bottle of Wine” to present six takes on the “one product + one family + one life” concept.15 Casarte remains one of the most successful and interesting stories in Haier’s bid for high-end market dominance. In 2021, Casarte took a firm number one place in the retail market share for high-end electronics appliances in China with their refrigerators and washing machines. Their onsite retail share for their washing machines and refrigerators reached 73.9% and 36.2%, respectively. The market share for Casarte’s air conditioner of over RMB 15,000 market reached 30.3%, while all average Casarte’s products’ prices are about two to three times higher than the industry average. From 2017 to 2021, Casarte’s annual sales revenue grew at 34% CAGR, reaching RMB 12.9 billion in 2021.16

15

http://www.iaiad.com/awards/uploads/2020/99027277c90fac2ab1f15d7bc44aa864/010615325 6855657.pdf; https://zhuanlan.zhihu.com/p/388854879. 16 https://baijiahao.baidu.com/s?id=1728787060453440986&wfr=spider&for=pc.

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3.3 The Age of Scenario Consumption: An Offering Portfolio Customized by Scenario High-end products represent the “ceiling” of a brand’s potential in both price point and quality. Within this sector, however, customers’ needs can be simultaneously varied in the category but specific in nature. Satisfying a high-end customer’s needs often requires more than one product; typically, it requires a whole line of products. These “comprehensive” consumption needs—such as, for example, the need for a whole kitchen of similar-quality products as opposed to only one refrigerator, or the need for a whole living room furnished with consistent quality furniture as opposed to merely one air conditioner—has come to be called “scenario consumption.” Scenario consumption was a term coined specifically to describe this type of consumer demand.

3.3.1 Triple-Wing Bird One of Haier’s most representative “scenario” brands is Triple-Wing Bird. TripleWing Bird belongs to Haier’s subsidiary Intelligent Home and was designed and developed with the “convenient one-stop shopping option” concept in mind. The brand wanted customers to consider this scenario: It’s been a long day of work, and you’ve come back exhausted to your home. You open the door, and the smart air conditioner has adjusted the room temperature to your preferred level. The TV starts playing the program you didn’t finish watching before you had to sleep the night before. Do you want a shower? The water heater in the bathroom estimates the time you take a bath every day and adjusts it to the 37 °C water temperature you like the most. Under the brand Triple-Wing Bird, Haier endeavored to bring this scenario to life. In the development of Triple-Wing, Haier gathered many partners in the areas of home products, home decorations, and home appliances, using these partnerships to provide better home solutions for customers. These included the designing and installation of smart kitchens, smart living rooms, smart bathrooms, smart bedrooms, smart balconies, smart home water supplies, smart home air, and whole home intelligence. In Triple-Wing Bird’s experience centers in Beijing and Shanghai, customers are able to purchase an entire “kitchen” or “living room” set. The living room sets encompassed wall decoration, ceiling decoration, and furniture and decorations for all services, obviating the need for customers to take care of all these aspects on their own. Triple-Wing Bird’s installations further obviated the need for customers to consider logistical issues such as wiring or lighting on their own, and they no longer needed to purchase home appliances such as cabinets, televisions, drawers, and air conditioners separately. Three-Wing Bird would design the entire living room from head to toe, complete with full installations. With kitchen sets, consumers would be able to experience one-stop shopping for all building materials, home improvement

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materials, kitchen furniture, and functional cooking appliances. These better homelife solutions covered all home-life scenarios from the living room and kitchen to the bathroom, the bedroom, and even balconies. Using digital technology, Triple-Wing Bird established a “1+N” service system that consisted of a project manager and a service housekeeper. The service housekeeper would coordinate separately with “N” resource partners. These partners consisted of anyone from home appliance service professionals to package service providers to wholesalers to home improvement companies, and, through this, the brand was able to provide a holistic solution for all of a customer’s home servicing needs with merely a single point of contact. Traditionally—for example—home renovation and decoration required customers to expend their own time and effort to design, schedule, and keep track. N+1 reduced the work for more hands-off home decorators to merely placing an order on the Triple-Wing Bird app. Through the app, all design, delivery, and installation would be handed off to the customer’s TripleWing Bird coordinator. The entire plan would then be laid out on the app for the customer to see, and, at every point in the process, remained transparent, viewable, and controllable. After the project was completed, all project-related documents would be retained and could be used for continued communications between the company and customers. So far, the Triple-Wing Bird platform has brought in more than 20,000 professional designers, more than 1,000 renovation companies, more than 1,000 home product brands, and more than 14,000 package service managers into their supplier alliance, and has provided users with more than 1,000 scenario plans, about 200 types of services, and more than 20,000 combinations kinds of products and selections. Per the Haier Intelligent Home 2021 Q3 Report released on October 29, 2021, more than 3,600 families have registered with Triple-Wing Bird’s services since it first went online in August, with a daily increasing rate of 300%.17 The model of portfolio offering by scenario significantly enhanced Haier’s financial performance. It not only increased the physical units of products sold but also allowed the brand to charge a premium since the portfolio service provided significant incremental value for customers. There was the case, for example, of a Haier customer known as “Mr. Wu.” Mr. Wu was a gentleman who lived in Caihuying Road South in the Fengtai District of Beijing, with a townhouse 320 square meters in size. He signed a “scenario contract” with Triple-Wing Brid’s at the Wangjing Triple-Wing Bird store to renovate his entire home for RMB 2.137 million. In this total contract price, only 8% came from the pricing on basic electronic products such as smart lighting, smart toilet, and other smart home products. The other 92% of the price came from “scenario” design and plans suggested by the 35 resource providers on Triple-Wing Bird’s platform. Without the scenario plan, taking only the base costs of furniture into account, Mr. Wu would have needed only one hot water shower for his bathroom, costing around RMB 16,000; with the scenario plan, Mr. Wu spent a total of RMB 102,505 on his bathroom, including tiling for RMB 23,694, cabinets

17

Ibid 16.

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for RMB 26,400, a smart toilet for RMB 42,712, and a water heater coming in at RMB 9,699.18 Since TWB’s app went online on August 8, 2021, Triple-Wing Bird’s average contract price has reached RMB 420,000. It even released an online promotional event, a streamed video broadcast hosted on the app that could be viewed at TripleWing Bird’s over 1,000 brick-and-mortar Experience Stores. TWB’s Experience Center in Beijing, from January to May 2022 alone, achieved a sales revenue of approximately RMB 70 million, with 50% coming from home alliance products and 50% from other products and services from the scenario plan.19

3.3.2 Food Net Haier’s Food Net is another interesting scenario brand to come out of Haier. This time, the scenario focuses on the Peking duck, the iconic classic of Chinese cuisine. As the signature food of Beijing, the Peking duck has increasingly made its way down from high-level gourmet to penetrate the mainstream, now widely accessible to the public through restaurants of varying price points. The process required to process and produce Peking duck, however, remains extremely complicated and with a high barrier of entry. It requires a great amount of labor and capacity. From the cultivation of the duck embryo to the finished dish on the table, authentic Peking duck requires 40 steps, with expediency and extremely sensitive temperature requirements being paramount, making it a prohibitively difficult task for a home kitchen; often outright impossible. Takeout was also unideal. If a Peking duck is packaged in a restaurant for takeout, it will lose its freshness and best taste due to the loss of heat by the time it reaches the customer’s home. Zhang Yu, a leader at Haier’s Food Net, recognized a market demand for home kitchens that have the capacity to handle Peking duck. Using kitchen appliances as the “touch point” for this new series of products, she formed a team with a national banquet chef named Zhang Weili and a duck farm owner to explore the ways in which a Peking duck could be “partially cooked” in the restaurant to be taken and finished off in a home kitchen. It was a process that had never been attempted before. Nor was it in the capacity of a single chef or a single duck farm. In fact, it turned out that to achieve a proper pre-cook, the process would require a full line of technologies from the handling of the ingredients to the processing of the duck to the distribution of the final product, requiring the implementation of numerous kitchen appliances. In 2020, due to the pandemic, Zhang and Zhang’s team were forced to explore the production standards of raw duck slabs at home. As there were no special tools in their home kitchens, the story has it that they were forced to blow duck skin, in preparation for the baking, using their mouths until their cheeks became inflamed. With no pre-established standard of operations, either, they were compelled to work 18 19

http://www.cheari.com/article.html?id=6913. https://baijiahao.baidu.com/s?id=1702159462133320030&wfr=spider&for=pc.

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with Haier’s kitchen appliance department to study and update the oven program by eliminating thaw time and baking the duck directly. After half a year of experiments over the course of thousands of attempts, Zhang Yu and Zhang Weili’s team obtained what they considered the “best-tasting Peking duck” data. Paring down to the basics of their discovery for simplicity’s sake, their “ideal” process consisted of distributing the duck in an environment of −18 °C before baking the duck in an oven with a temperature of 200 °C and 70% humidity for 90 minutes. The roasted Peking duck with restaurant dine-in taste and freshness could then be served right at home at the dining table. Following Haier’s online announcement of the Peking duck ovens, 10,000 Food Net Peking ducks were sold in the course of 2 days. As of August 2021, Haier’s Food Network has allowed more than 100,000 families across the country to make authentic Peking Ducks in the comfort of their own home kitchen.20 With the success of Peking Duck, Haier further expanded its scenario product line to other gourmet foods. On December 16, 2020, Haier’s Food Net held its Intelligent Gourmet Platform Developers Conference in Qingdao, China. At the conference, Haier invited the China Cuisine Association, the China Food Industry Association, Tracing China by Xinhua Net, and other ecological organizations to jointly establish the Haier Food Net Food Ecology Alliance. The Alliance went on to create a gourmet ecological model supported by chefs, ecology organizations around the country, and Chinese consumers, attracting 100 chefs from 23 provinces across the country to join the platform to help develop recipes.21 During the 2021 Chinese New Year celebrations, Haier Food Net launched the “Chinese New Year’s Eve Dinner” package, bringing 16 famous chefs’ dishes to families crossing the country, including the roasted suckling pigeon by famous chef Wang Yonggui of Lu (Shangdong) cuisine, the “Hand-held Crispy Chicken” by renowned classical royal cuisine chef Luo Yongcun, the “Laodizi sauce hemp duck”, a well-known southern style dish, and “steamed pork with preserved vegetables,” a famous Hakka dish. Following the launch of the New Year’s Eve recipes, Haier’s Food Net near-instantly sold 120,000 dishes to 15,000 families, which was equivalent to the annual sales volume of a five-star hotel restaurant, and managed to even give the pre-prepared vegetable production industry a 10% increase in profits for that time period.22 On June 5, 2021, Haier’s Food Net Smart Food Research Institute was inaugurated in Qingdao to conduct research on Chinese culinary arts, nutrition and health, intelligent recipe innovation, and smart kitchen appliances, and it jointly developed, along with the China Culinary Association and its celebrity chefs via Haier’s smart kitchen and food net ecological platform, a series of programs related to these segments. As 20

“Integrated Model Promotes High-Quality Development”, Outlook WeChat official account, September 27, 2021, https://mp.weixin.qq.com/s?__biz=MjM5NzUzNjE2MA==&mid=265221 2734&idx=3&sn=45ec6e10db66822426672c5ebf6ef2cc&chksm=bd39a5318a4e2c2722028d05 aa38667083cfa47850cabcb5da35000e21aeb5e988eac25e8c84&scene=27. 21 https://baijiahao.baidu.com/s?id=1686335550550331216&wfr=spider&for=pc. 22 Introduction of Haier Group, by Haier Group; https://www.yuncaijing.com/news/id_15011291. html.

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of today, Haier’s Food Net has connected nearly 1,000 “ecological resources” in 12 major industries, including health, food, fresh food, wine, culinary, home improvement, hardware, supermarket retail, maternal and infant products, and logistics. The Institute and its various partnerships have put out a one-stop shopping package with seamless quality-of-life assurances “from source to table.”23 Under their model, suppliers were able to empower one another through their collaboration and interaction via digital recipes, standardized high-quality ingredients, more efficient packaging, and cold chain deliveries. It greatly improved financial performance for all partners involved, and consumers were able to enjoy the full smart kitchen experience for all their needs in the kitchen, be it buying, washing, cooking, storing, or—the best of all—eating.

3.3.3 Mr. Laundry Another notable Haier scenario brand, created through the recognition of China’s high-end customers’ dry cleaning and maintenance needs, is Mr. Laundry. As the living standard improved over time in China, Chinese consumers were purchasing more and more high-end clothes, which then required care and maintenance. However, most high-end clothes, especially wool coats and silk garments, are notoriously difficult to wash, dry, and take care of. With the kinds of washing machines commonly available at the time, clothing of this sort was often damaged. In response, Haier Clothing Net set out, together with Qi Datong, an expert in laundry at the time in China, and Wang Xuefeng, a clothing treatment expert, to explore the solutions. The endpoint of these experimentations became the professional washing and care platform, Mr. Laundry. After a half year of lab and research, Mr. Laundry launched new washing machine technology that came with wet washing and air washing, which resolved the high-end laundry care issues that traditional dry cleaners at the time were unable to handle. “Wet washing technology” used alkaline-filtered soft water and professional, selfdegrading, and water-soluble detergent, left no damage and no residue of the clotting protein, and gave a deep clean to every fiber of the garment. It additionally guaranteed no shrinking, no deformation, and no fading. The “air washing technology” was able to achieve a complete sterilization and disinfection effect, as Haier had discovered that air at 56 °C, run for 30 minutes, effectively inactivated the majority of viruses. The air technology also used fiber steam drying and a soft, bread-shaped inner cylinder to more gently handle the washed clothes. With this, Mr. Laundry was able to find the perfect in-between for clothes that cannot be solely dry-cleaned or washed with simple water-based washing machines. Their wet and air technologies ended up providing an invaluable supplement to the existing facilities in traditional laundromats.24 23 24

https://baijiahao.baidu.com/s?id=1701896198677228746&wfr=spider&for=pc. https://baijiahao.baidu.com/s?id=1725973348338874214&wfr=spider&for=pc.

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Since its opening in December 2019, hundreds of expensive garments are handled through Mr. Laundry’s special machines each month. Mr. Laundry’s second business line was leather product care, specializing in luxury bags. As its high-end clothes washing service has been recognized by more and more consumers, customers began to express a demand for care of their bags as well. In response, Mr. Laundry jointly created a “luxury laboratory” with professional leather care experts and luxury-product treatment experts, including the Italian leather care firm UNITERS, a top luxury treatment brand from Italy that provides care services for first-line luxury international brands such as Hermes and Chanel. This “lab” serviced customers with a full range of solutions for luxury goods cleaning, from care to repair among other services. The lab was able to care for more than 99% of all luxury leather goods types. In addition, on top of their generalized services, the lab also developed a local leather care solution based specifically on the needs of Chinese consumers. This lab ended up filling a gap in consumer need for domestic luxury care in China and remains loved by many high-end consumers. Mr. Laundry’s third business line was home appliance cleaning services. When delivering home appliance and laundry service to customers, Mr. Laundry’s staff found that there was typically a lot of dust on the home appliances and devices in the customers’ homes. When it came to air conditioners, for example, after being deactivated and left unused for the entire winter, their filter tended to accumulate a large amount of dust, insect casings, mold, and other harmful things. The dirty air would then be circulated back into the entire room, causing respiratory illnesses and other bodily discomforts when used in a space with closed doors and windows. However, Mr. Laundry also understood that home appliance cleaning was a pain point for many consumers, with many neglecting even their hygiene to avoid the periodic and continual fuss of maintenance of their appliances, and in response, Mr. Laundry developed cleaning services with standardized service processes for the five major categories of home appliances: air conditioners, refrigerators, washing machines, water heaters, and range hoods. Certified cleaning professionals would come to configure special cleaning detergents after receiving orders, using a full set of cleaning equipment and tools to provide cleaning services at consumers’ homes. This process used high-temperature (140 °C) steam cleaning and a 10-step standardized procedure. At the initial launch of the home appliance cleaning service, Mr. Laundry used the Qingdao area as a pilot region; they received 3,000 cleaning orders from Qingdaoarea customers in a single month. These customers rated the service at 99.9% of satisfaction, and the number of cancellations due to service quality across that period of time was zero. Following that pilot, Mr. Laundry expanded its home appliance cleaning service model nationwide and extended the home service type from “1” to “N”, including things such as curtain cleaning and care. Their annual service order is expected to exceed 100,000, and customers can now order a full cleaning plan, covering all aspects of their home life, through the single click of a keyboard.25 25

Introduction of Haier Group, by Haier Group.

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Mr. Laundry also paid a lot of attention to customers’ onsite/in-store experience, as the trend towards interaction and real-scenario experience became more and more relevant in customers’ purchasing decisions. Mr. Laundry redesigned and upgraded its onsite physical stores on three fronts. First, they standardized store design and image; as more and more customers started to come from the higher-end segment of the market, the overall principle for their store design became “uniform,” “stylish,” “clean,” and “simple,” presenting the image that Mr. Laundry was professional, healthy and high-end in order to meet the tastes of the particular consumer group they were targeting. Second, Mr. Laundry improved and standardized what they called “sensory experience”. Tailoring their designs closely to what they learned from user feedback, Mr. Laundry built an immersive customer service experience that touched all of a customer’s five senses, from vision, touch, and hearing to smell and taste. Thirdly, they standardized the offering of three free services that would be offered at every brick-and-mortar Mr. Laundry store: glasses/watch/jewelry cleaning, shoe cleaning for the removal of odor and germs, and shirt ironing for men’s and women’s shirts. These free services gave a value-add for customers and an incentive to come on-site into a Mr. Laundry store and created a differentiated experience that separated them from other brands and improved the stickiness of their customers. On September 6, 2020, Haier’s Mr. Laundry, jointly with other resource suppliers in the clothing cleaning industry such as the China Laundry and Dyeing Association, formed a “Clothes Washing and Care” ecological alliance in Qingdao. Its members consisted of nearly 5,000 “ecological resources” across 15 major industries, including the washing and dyeing segment, the washing and care equipment segment, washing and care consumables, information systems, washing and care services, clothing and textiles, luxury goods, real estate properties, hotels, and medical care. The goal of the alliance was to empower the entire clothing washing industry, from upline to downstream, in order to create and share value with the whole biome of companies. The alliance connected all the related parties on the clothes-washing value chain and offered customers of all the brands involved a one-stop shopping solution through the entire process of “washing, caring, storing, collocating, and purchasing.” The ecology also offered digital washing and care service on its digital ecological platform, which comprised more than 1,000 onsite stores and more than 5,000 online stores.26 The portfolio offering of the clothing washing services by scenario generated tremendous incremental value for all parties on the ecological platform. For consumers, not only could high-end clothes and leather goods be taken care of, but home appliances, curtains, and other home cleaning needs were also provided. For employees of the providers, income increased significantly. A shopping assistant in Mr. Laundry’s franchised store, for example, was able to double his monthly income in the off-season through activities such as promoting the home appliance cleaning service that was in high demand with customers. When it came to the stores, the service they provided changed from the original, simple laundromat they had to a home service package with a much higher unit price and much stronger demand, increasing the average per customer unit price from RMB 26

Ibid 25.

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40 yuan to more than RMB 200 yuan. Through the support of Mr. Laundry’s store operation, technical training, and the support of the whole ecological supply chain, the traditional laundromat was transformed into an “ecological store,” one invulnerable to seasonality and possessing much greater incremental value. The opening of one Mr. Laundry’s store in Xi’an City’s High-Tech Park, for example, achieved sales revenue of more than RMB 59,000 in its first-month operation, and its quarterly revenue was approximately 199% higher than that of the traditional laundromats in the industry.27 For Mr. Laundry’s ecological resource partners, the financial benefit was also significant. Uniters, an Italian luxury care brand, had zero domestic shares before entering the Chinese market, and equally low brand awareness. After signing an exclusive cooperation contract with Mr. Laundry, it was able to set up more than 200 stores nationwide within 2 years, and co-created luxury care products and technologies with Mr. Laundry have been extremely successful. Since then, its total revenue in the Chinese market has doubled every year.28

3.3.4 Ririshun Supply Chain Ririshun Supply Chain, established in 2000, is another Haier scenario service brand that focused on supply chain management and scenario logistics. It was built on a leading IOT scenario-logistics ecological platform. In 2018, Ririshun Supply Chain launched its first “scenario logistics” model, through which the company was able to provide scenario solutions and value-add services for industries such as fitness, automobile, travel, home services, and cold chain services, in the process recruiting many well-known cross-industry and cross-field ecological resources such as IKEA, Lin’s Wood, Emma, and Yijian to the scenario service ecology. Since its inception, Ririshun Supply Chain has developed a full-capacity, endto-end (factory-to-end-user) supply chain management process, and multi-scenario services, which include program design, order management, transportation capacity, warehousing network layout, warehousing management services, and end-user distribution and installation in the areas of procurement, manufacturing, transportation, and user services. Through airway, waterway, railway, and multimodal transportation, Haier further extended its supply chain service coverage on an international scale. As of today, Haier’s network covers 336 cities in 2,840 counties and regions across China with over 6,000 service stores, more than 1000 sea routes, 70 railways, and 1,500 airlines, reaching over 580 overseas ports in 180 countries. Ririshun has evolved from a leading brand of purely home appliance logistics to a scenario logistics ecological brand powered by the Internet of Things and is the only IoT scenario

27 28

Ibid 25. https://weibo.com/6545667773/K6qaL23fF. Introduction of Haier Group, by Haier Group; https://www.sohu.com/a/403538129_120153992.

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logistics ecological brand that made the Hurun Global Unicorn List for the last two consecutive years.29 One segment that showcased some of the variables for success was Ririshun’s fitness scenario solution. As can be observed in the market for fitness products nowadays, customer demand has exceeded merely wanting “a treadmill,” but instead desiring a whole set of holistic programs including but not limited to nutrition, bodybuilding, and physical therapy, among others. As a result, by recognizing this aspect of consumer need, Ririshun designed a customized package for its customers that included, along with the fitness equipment, tips and products encouraging a healthy diet, healthy drinking water, body washing and care products, fitness coaching professionals, nutritionists, fitness beverage brands and other resource suppliers. In order to mitigate the issues involved in dealing with certain high-value-butfragile equipment like mirrors made for gyms and fitness centers, Ririshun focused on the vulnerable points in the process such as warehousing, shipping, and installation. For warehousing, Ririshun allocated designated space in warehouses for the storage of delicate items and created a “priority green path” for these products to enter and exit. For shipping, Ririshun took second-round packaging with specially designed corner protectors to prevent the goods from damage and conducted rigorous wholeprocess monitoring. For installation and other onsite services, Ririshun’s service professionals used red carpets and wore white gloves to prevent damage during the installation process, allowing customers to have a positive experience at home. In addition, whenever Ririshun identified new consumer needs, they quickly provided corresponding solutions. The delivery of home massage chairs, for example, came with value-add maintenance-and-repair services, an add-on birthed from Ririshun’s observation that massage chairs often needed maintenance and repair after a period of time, but maintenance-and-repair professionals in the market were incredibly difficult to find. Small touchpoints like this greatly enhanced their customers’ consumption experience and improved the quality of their lives. Another “consumption scenario” involving Ririshun that is worth mentioning was their improvements in the shipping and delivery of electric bicycles, which is typically a process that involves a multi-stage process from processing, packaging, shipping, and distribution, to post-sales service that deliver the products from factory to consumers’ hands. One challenge that the electric bicycle business faced was the separation of vehicles and electricity in transit for reasons of safety and the difficulties faced by consumers when picking up the bicycles at the store. Ririshun designed a “pre-installation intelligence center” that had processing functions, which were previously performed at factories’ assembly lines, to traditional warehouses. In other words, they “pre-placed” the processing functions into the warehouses that would store the bicycles. For example, Ririshun would “pre-place” the assembly process of the modules of the electric bicycles in the nearest warehouse from the end consumers, and assemble parts in a customized way based on the consumers’ specific demand for battery, tire, frame, handlebar, lamp, mirror, and other parts of 29

https://www.rrswl.com/; 0wj8a.

https://t.cj.sina.com.cn/articles/view/2780826007/a5c009970270

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the electric vehicle, which totally redefined the function of a warehouse from a pure storage facility to a customized mass production platform that connected bike makers and parts suppliers at one end and consumers at the other end, in order to satisfy their commute and travel needs. Relying on its capacity on leading an intelligent warehouse network, intelligent shipping and distribution network, full process digital supply chain management, and the terminal interfacing network, Ririshun has established an intelligent connection through the entire assembling, shipping, and distribution process to innovatively provide its customers with an integrated customized scenario solution for the delivery of the products.30

3.4 An Integrated AIOT Ecosystem Platform Since the start of its own brand journey in 1985, Haier never stopped expanding the definition of what it means to be a brand. After high-end branding and scenario branding, Haier next focused on the concept of the “industrial internet ecological branding”, a platform named COSMOPlat, which was based on the ideas of collaborative creation, sharing, and high-quality development and “customized mass production”, providing digital solutions by scenario for different companies of varying sizes in varying industries. These brands would service companies in the areas of intelligent manufacturing, customized design and production, network integration, extended services, platform R&D, and digital management, culminating in a whole industrial ecology in which larger companies could share the benefits of the ecosystem with smaller companies. The name COSMOPlat was taken from “Chaos,” the first primordial god that existed at the beginning of the universe as told by Greek mythology, and Haier chose this name for its first industrial internet ecological brand as it hoped to position it as a pioneer for the forthcoming age of an integrated, internet-based, AI-augmented ecological system of companies.

3.4.1 Tsingdao Beer Tsingtao Beer is a notable example of how Haier built an industrial ecology through a partnership with larger companies. Tsingtao Beer is a well-known brewery brand, perhaps one of the most recognizable bearing a Chinese name, though it was originally founded in 1903 by British and German businessmen.31 It has since then become an official sponsor for the 2008 Beijing Olympic Games, and currently ranks on the list of top 500 global brands. 30

Ibid 25. https://letschinese.com/tsingtao-beer/#:~:text=Tsingtao%20Beer%20is%20owned%20by% 20the%20Tsingtao%20Brewery,has%20a%20global%20presence%20in%20over%20100%20c ountries. 31

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However, the beer and beverage industry has been experiencing fierce competition in recent years. Tsingtao Beer’s traditional mass production assembly line has reached its ceiling when it comes to further increasing its production capacity by any significant margin, and the outbreak of the global pandemic has only added additional pressure on the company and the entire industry. On May 15, 2020, COSMOPlat and Tsingtao Beer Co., Ltd. reached a strategic collaboration agreement to jointly build an internet-based industrial platform for the beer and beverage industry to allow both parties to share in the resources of the industry ecosystem. This partnership is to help Tsingtao Beer create new products, develop new models, transform its traditional uniform mass production to “customized mass production”, and digitize the operations of all their upstream and downstream companies, such as those providing hops, those providing grains, those supplying oil, supermarkets, and catering service providers, all of which, Tsingtao hopes, will improve the operating efficiency of its supply chain from end to end. In addition, COSMOPlat provided Tsingtao Beer with diagnostic services in the field of intelligent manufacturing through analysis and evaluation of their base production capability, product line design, digital factory logistics, AI-augmented management, and other areas, all of which fall under Haier’s practice of building “Lighthouse Factories” and “National Intelligent Manufacturing Benchmarks.”32 The goals of these factories and benchmarks are customized mass production, AI augmentation, and digital transformation. As a result of improvements made through these diagnostics, Tsingtao Beer was able to shorten the delivery cycle time of customized product orders and new product development by 50%, increase market share in the customized beer segment to 33%, and increase overall revenue by 14%. In March 2021, Tsingtao Beer, with the help of the COSMOPlat, was successfully selected to the list of Haier’s “Lighthouse Factories,” becoming the first firm in the beer and beverage industry in the world to be listed as a “Lighthouse Factory”.33

3.4.2 Qingdao Zhenghe “Sharing the benefits of integration with smaller firms” was another major goal of the COSMOPlat. As a result, small companies in various industries became the beneficiaries of this integrated ecology platform. Qingdao Zhenghe Industry Co., Ltd. was one such successful example. Qingdao Zhenghe is a leading firm in the industry of chain transmission, which is one of the three major transmission systems that is widely used in motorcycles, automobiles, ships, agricultural machinery, engineering machinery, lifting and transportation machinery, logistics and warehousing, escalators, food and drug machinery, light industry machinery, and petrochemicals. However, the company encountered various technology-related bottleneck issues in its chain transformation system, and 32 33

https://baijiahao.baidu.com/s?id=1694448097624867626&wfr=spider&for=pc. Ibid 32.

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Qingdao Zhenghe lacked the technology and experience in digital transformation to handle these issues properly and was unable to create incremental value. In May 2020, COSMOPlat signed a strategic collaboration agreement with Qingdao Zhenghe, within which they were contracted to formulate a set of digital transformation programs for Qingdao Zhenghe. The plan, encompassing “diagnosis, consultation, and implementation” aimed to identify existing shortcomings, delineated a change in direction, upgraded to intelligent manufacturing, and covered all operating areas such as design, production, logistics, warehousing, sales, service, personnel, and resources. With the implementation of the proposed programs and the aid of the empowerment given by COSMOPlat, Zhenghe’s products’ off-line time was accelerated from 72 to 10 hours, the R&D cycle was shortened by 10%, the yield rate of its products was increased to 99.5%, the number for minimum product ordering was down to 10 units, and the labor cost was reduced by 10%.34 COSMPlat helped consolidate the intelligent manufacturing capacity of the company, which helped resolve the bottleneck issues in technology, and a newly established Qingdao Zhenghe factory, with the aid of COSMOPlat, broke the monopoly of foreign firms in the tooth-chain engine segment of the market. Today, Qingdao Zhenghe is among the first group of companies to have been certified as one of the National Corporate Technology Centers of its industry and has been selected as a national leading technological innovation model enterprise. In January 2021, Zhenghe was officially listed on the Small and Medium-sized Board of the Shenzhen Stock Exchange (SZ 003033) and was the first company in Qingdao to be listed on that exchange in 2021.35

3.4.3 Qingdao Ruihua The garment is another industry that COSMOPlat’s empowerment plan was involved in. Qingdao Ruihua Group Co., Ltd., a well-established garment company located in Qingdao’s Jimo Science and Technology Innovation Park, was a good example of how this integrated AIOT platform worked. Ruihua was primarily engaged in garment dyeing, clothes washing, environmental protection equipment, international trade service activities, and the production and sales of woven clothing, jeans, and knitted clothing, selling primarily to Europe, Japan, Southeast Asia, and the United States. The issue facing the firm was that its traditional methods of mass production had become harder and harder to sustain in the face of changes in the market and the continuous upgrading of dynamic consumer demands, and the company had insufficient flexibility and too low a level of digitalization to properly meet these challenges, resulting in increased operating costs, decreased production efficiency, and inventory backlog. 34 35

https://baijiahao.baidu.com/s?id=1724253305946858934&wfr=spider&for=pc. Ibid 25.

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COSMOPlat designed a full, tailored digital transformation plan for Ruihua with the integration of software and hardware. In terms of equipment, COSMOPlat introduced Ruihua to an intelligent cutting machine, an automatic formwork machine, an intelligent clothes-hanging machine, as well as other pieces of IoT production equipment into the Ruihua operations process. Haier introduced an advanced scheduling system, a manufacturing enterprise production system, an execution management system, and a warehouse management system, and was able to facilitate easy data access and management of data across the entire production process. After the digital transformation, Ruihua was able to improve production efficiency by 20%, daily production capacity reached 12,000 units, the production cycle time was reduced from the original 20 to 7 days, the equipment utilization rate increased by 20%, and the management efficiency increased by more than 30%.36 Ruihua’s AIaugmented assembly line was able to automatically assign production tasks, greatly improving production efficiency. During the production process, the use of RFID chips enabled the system to take corresponding actions by simple scanning of the chip. Taking package sorting as an example: using an RFID chip to scan the code on each piece of clothing, clothes of different colors and sizes were automatically classified, separated, and entered into their respective automatic assembly lines. In the past, all this work had been done manually; it was, without doubt, time-consuming and labor intensive, and, following Haier’s intervention with their digital transformation plan, Ruihua became a much more efficient and consistent brand.

3.4.4 Yingkang Life Within this category, a brand that appears to have a less direct association with home appliances but is worth special mentioning is Haier’s Yingkang Life, an ecological IoT platform brand that operates separately from COSMOPlat. Yingkang Life is dedicated to changing traditional methods of medical treatment through the Internet of Things (IoT), aiming to provide fairer access to medical resources for the general public.37 As a company that started with a focus on the production and service maintenance of home appliances, Haier’s venture into healthcare represented a notable expansion in its portfolio and a change in its brand identity from the company that merely provided its users with a “convenient life” to a company that further endeavored to provide users with a “healthy life.” Relying on IOT technology, smart medical care, big data, and Haier’s online and offline service capabilities, Yingkang aimed to address the health needs of consumers through the entirety of their life cycle, from pregnancy and childbirth to long-term care for senior citizens, through constant innovations in the three major fields of medical infrastructure, medical equipment, and medical services.

36 37

https://www.sohu.com/a/493889363_120004668. Ibid 25.

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Smart Blood Network was a successful scenario solution project. Blood transfusion remains a core process in emergency medical services and the healthcare industry overall, across all disciplines. However, due to the highly inconsistent management of blood banks and distribution in China then, there were often critical delays in the matching, collecting, distributing, and handling of blood supplies, which at times threatened patients’ lives even for regular, routine, or pre-scheduled surgical procedures. To address this issue, Haier set up a smart blood network. Using an interconnected ecology between people (doctors and patients), machines, and blood resources, Smart Blood Network was able to reduce the wait time for emergency blood use down to zero. The system operated with constant monitoring and tracing of the blood supplies during transit. Haier used an integrated IoT digital technology that consisted of smart chips, radio frequency, and cryogenic storage technology to provide every individual bag of blood with a unique label and identifying information such as blood type, temperature, and location. This information would then be entered into the “Smart Blood Network” through a scan of the code on the label. The result was the traceability and monitoring of the entire process, no matter where the blood was. Today, the blood network solution has been applied to cover the entire system of hospitals in Qingdao and more than 1,300 other hospitals in 32 provinces across China, including cities such as Beijing, Shanghai, Hangzhou, and Changsha. Tremendous value was created for all participants.38 For patients, the blood network not only guaranteed and secured a consistent supply of blood for surgeries, but it also reduced unnecessary blood usage during the surgeries, cutting down patients’ medical expenses and greatly lowering the risk of adverse reactions associated with blood transfusions; on average, on the financial aspect, each patient was able to save more than RMB 1,000. For hospitals, blood was more easily allocated and reallocated across the entire hospital, and the blood scrap rate—a measure of waste in blood-related resources—was reduced to nearly zero. In addition, through the electronic blood matching technology system, Haier was able to recommend to surgeons the proper types of blood needed, reducing clinical blood use time from originally around 20 minutes to less than 1 minute. This expedition proved especially valuable in emergencies. As the first city fully covered by the Smart Blood Network, Qingdao was home to a Central Blood Station that connected to 38 different hospitals within the city, included 147 cold chains, and was equipped with IoT equipment. According to statistics from two surgical areas of the Qingdao University Affiliated Hospital, a total of 15,000 ml of unused blood was returned every month, and the cumulative returned blood in half a year was more than 90,000 ml—equivalent to 10% of the blood volume used by the entire hospital. Assuming an approximate 400 ml of blood was used per patient for surgery on average, the saved blood was able to provide for another 450 additional patients. In addition, the Smart Blood Network also greatly improved transfusion safety. It brought transfusion success up to a clean 100% and

38

https://baijiahao.baidu.com/s?id=1679129882176077979&wfr=spider&for=pc.

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reduced adverse transfusion reactions down from 2.67 to 0.96%. Unnecessary blood use was reduced from 30% to zero.39 Since then, Yingkang Life, as incubated by COSMOPlat, has become a listed company on the Shenzhen Stock Exchange (SZ 300143). In August 2020, Yingkang Life and Hurun Report jointly released the “2020 Yingkang Life - Hurun Health White Paper.” In October 2020, Yingkang Life ranked in the top ten of the 2020 Healthcare Innovation TOP50 list for “Creating a New Model of Internet of Things”. Yinkang was the only Internet of Things ecological brand on the list. In June 2021, Yingkang was listed in the World Brand Lab’s 2021 China’s 500 Most Valuable Brands and was stated to have a brand value of RMB 22.356 billion. This time, it was the only medical and health ecological brand on that list. Meanwhile, COSMOPlat has also become the world’s leading industrial Internet ecological platform, empowering 15 industries including chemical, energy, mold, and clothing. In 2021, COSMOPlat was listed in the World Brand Lab’s China’s 500 Most Valuable Brands with a brand value of RMB 76.029 billion and was selected into the list of IDG’s global leading brands for two consecutive years, winning the “International Innovative Enterprise Brand Award” as the only ecological brand selected in the field of Industrial Internet.40

3.5 What’s Behind the Brand? Consumers typically perceive a product brand based on its observable, external, and physical appearance, including its features, functionalities, and packaging. They may also associate the brand with its reputation for quality, service, style, and emotional elements. However, beyond technical innovations and product quality, it is the management of the producing firm that brings a reputable product or brand to the market, even though consumers may not directly observe it. In this regard, Haier stands out for its innovative management model and strategies, which have played a crucial role in shaping its brand today.

3.5.1 RDHY, A Design for Double Optimization RDHY is short for RenDanHeYi, a term in Chinese that refers to the optimized combination (HeYi) of employee value (Ren, meaning people or employees) with customer value (Dan, referring to customer orders). During Haier’s Global Managers Annual Meeting in September 2005, Mr. Ruimin Zhang introduced the RDHY model and its ideas. Essentially, every employee should directly interact with customers to create value for them, and in doing so, generate their own value by sharing in 39 40

Ibid 38. https://www.cet.com.cn/xwsd/3213875.shtml.

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the customer value they created. As a result, every employee’s income is based on customer evaluation rather than their supervisor’s evaluation and is paid by customers rather than the company. This creates a customer-centric culture where employees are incentivized to create value for customers and are directly accountable to them. The RDHY model is based on the concepts of a platform-based company, entrepreneurial employees, and customized user orders. The platform-based company redesigns the organizational structure from a hierarchical system to a flat, self-managed platform. The entrepreneurial employee changes the role of employees from followers who passively follow orders from their superiors to decision-makers who actively pursue creating value for customers. Customized user orders transform consumers from passive purchasers to active participants in the design and production process of the products they will buy. Under the traditional operating model, customers listen to employees, and employees listen to their managers. Under the RDHY model, however, the information flow direction is reversed: company managers listen to employees, and employees listen to customers. The ultimate goal of the RDHY model is to make every employee an independent and their own CEO and create a self-organized, self-initiated, and self-evolving entity that interfaces directly with the market. As Zhang mentioned when he was interviewed by the media after Haier acquired GE Alliance for USD $5.4 billion in 2016, “Haier may be the only company in the world that transforms large enterprises into entrepreneurial platforms, and over 10,000 middle-level management positions were eliminated”,41 which truly transformed Haier into an entrepreneurial platform that motivates all employees to maximize their creativity and service quality. The RDHY model stands apart from both the general competitive organizational model and the traditional business model. It embodies the concepts of “Decentralization” and “Disintermediation” in the Internet era, and repositions enterprises, employees, and customers in organizational structures, operation processes, and resource allocations. This allows the company to adapt quickly and continuously to dynamic changes in the marketplace. Haier’s RDHY model has garnered recognition and study from various management research and education institutions worldwide, including Harvard Business School, INSEAD, HEC Paris, London Business School, and Stanford Business School, and its case study has been published by Harvard Business Review.42 In addition, many top experts and scholars were attracted by Haier’s RDHY model as well and considered it practical support for their own innovative theories. For example, global strategy guru Gary Hammer believed that Haier’s management practice has become part of the “moon landing plan” of global management.43 Dana Zohar, the creator of quantum management theory, stated that Haier’s RDHY model has achieved quantum transformation, which brings enlightenment of management transformation to Western enterprises that were deeply immersed in Newton’s 41

http://www.360doc.com/content/23/0320/12/79641151_1072798940.shtml. https://www.sohu.com/a/274439179_465192. 43 https://www.haier.com/press-events/news/20220928_201954.shtml. 42

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paradigm.44 Bill Fisher, a professor of innovation management at IMD Business School in Switzerland, commented that “Haier’s RDHY model is an ideal organization form for the future, and set up a benchmark for the leading enterprises, not only in China but even for the whole world.”45 Another expert opinion comes from Christopher Nurko, the Chief Innovation Officer of Interbrand, the world’s largest branding management consulting firm. He has stated that the RDHY model of Haier is the key to unlocking future value growth.46 Similarly, Charles Handy, the master of European management thought, Michael Porter, the father of strategic competition, Henry Mintzberg, the Canadian management master, John Cotter, the marketing master, David Urich, the father of modern human resources, all have communicated with Haier and highly praised its RDHY model.47

3.5.2 Open Technology Innovation Platform Leading brands are often the ones with the most advanced technologies, and Haier is no exception. As a prominent brand in home appliances and many other industries, Haier has received numerous technology innovation awards and technique patents. However, what sets Haier apart is the unique approach it takes to technology innovation, which may be of interest to many observers. An important feature of Haier’s technology innovation is its “10+N” Open Innovation Ecosystem Platform, or HOPE (Haier Open Partnership Ecosystem). The “10” represents Haier’s top 10 R&D centers worldwide, such as those in Qingdao, Shanghai, Kumagai/Kyoto in Japan, Brugirio in Italy, Seoul in Korea, Bangalore in India, Louisville and Evansville in the USA, Bretaro in Mexico, and Auckland/Dunedin in New Zealand. The “N” represents its many other innovation centers in Israel, Silicon Valley, Singapore, Shenzhen, Xi’an, Beijing, and some other cities, which are ad hoc centers established in response to consumers’ demands from time to time, as well as its unique innovation expert partner communities with more than 10,000 participants. While many companies’ R&D centers are closed-door, in-house facilities, Haier’s R&D center is an open system and platform that allows for wide participation of all related resources in the ecology, enabling Haier to address its customers’ needs via R&D “anytime, anywhere”. Haier’s global open innovation system is made up of partners from a diverse range of R&D resources, including research institutions, universities, Fortune 500 companies, technology incubators, venture capitals, and innovation platforms. The global layout of the platform allows Haier to conduct its R&D activities in a unique way. One of its distinctive features is uninterrupted innovation through global collaboration. With innovation centers located in different time zones across the world, 44

Ibid 43. Ibid 43. 46 Ibid 43. 47 Ibid 43. 45

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research projects that are jointly participated in by multiple centers in different time zones can be conducted seamlessly, accelerating the speed of research, technology innovation, and product development. For example, Haier’s design and development of the T-shaped refrigerator and French-style refrigerator, jointly undertaken by its Qingdao HQ and its New Zealand R&D Center, is an excellent illustration of this approach. In response to customers’ requests in the Chinese, Australian, and New Zealand markets, Haier formed a joint research team composed of resources from its Qingdao headquarters and the New Zealand R&D center. With the two centers in different time zones, the joint R&D team quickly established a new product development platform and completed product planning and production of T-type refrigerators and French-style refrigerators. By complementing each other’s capabilities, resources, and technologies in the fields of product design, quality control and testing, and market access standards, the completed products filled a gap for Haier’s Casarte brand and Fisher & Paykel brand in both the Chinese and Australian/New Zealand markets, resulting in 43 patent applications in the areas of modularization, ice making machines, slide rails, and freezing systems.48 Haier’s second approach to innovation is the engagement of external expert communities through an online platform. The company established an online community platform that consists of nearly 7,000 external experts covering 18 technical fields. This platform enables quick responses to customers’ requests and helps identify the solutions to problems. For example, when a concept of freshness preservation through oxygen control was proposed, it faced technical challenges of large equipment size and high noise volume. Haier posted this issue on the expert community online platform, which quickly attracted technical experts in fields like food engineering, medical oxygen inhalers, and materials science to participate in the discussion. Within two hours, the platform collected about ten proposals, and eventually, an oxygen-enriched membrane design suggested by some material experts was selected. After using this oxygen control preservation technique with Haier’s Casarte brand, the market share increased from 18.9 to 32.4%, which is a remarkable growth of 71%.49 The third one is cross-industry collaboration for joint innovation, which is a unique aspect of Haier’s technology innovation approach. Haier’s global open innovation system includes partnerships with a diverse range of technical fields, beyond the home appliance industry. This allows Haier to incorporate advanced technologies from industries such as automotive, chemical, and food into their home appliances. An example of this cross-industry collaboration is the CO-removing module on the NOCO gas water heater, which was transformed from the automobile exhaust catalyst. By eliminating the CO from the source, the safety index of the gas water heater exceeded the national safety standard by 20 times, better meeting the consumers’ safe bathing needs.50

48

Ibid 25. Ibid 25. 50 http://m.cheaa.com/n_detail/w_420338.html?ivk_sa=1024320u. 49

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Fourth, Haier’s global network allows for faster access to the newest ideas and insights on technology innovation. Haier has established innovation centers in several innovation hubs worldwide, including Silicon Valley in the USA, Israel, and Singapore. This network enables Haier to have timely access to the latest developments in global high-tech dynamics. In June 2021, for example, Haier’s Silicon Valley Center monitored the latest developments of a Boston startup team that was working on combining new moisture-controlling materials with freezing systems to achieve significant energy savings. After negotiation, Haier formed a Sino-American-Indian joint venture, combining the Boston team’s new material research, the Haier Qingdao air conditioning team’s freezing system design capabilities, and an Indian team’s engineering capabilities. In November, the joint venture’s design proposal participated in the Global Refrigeration Competition, standing out from 445 proposals and entering the final eight after two rounds of races.51 Lastly, Haier utilizes licensing of patented original technology and codevelopment of new products as another approach to technology innovation. While Haier possesses many core technologies, it does not directly manufacture all of the products that use these patented technologies. For instance, Haier has a patent on the core technology of linear compressors, but it does not produce compressors. Instead, Haier licensed its core technology to two large compressor manufacturers in China, who were responsible for technology transformation and the production of compressors with Haier’s patented linear compressor technology. While Haier handled the upgrading of the compressor technology, the compressor manufacturers were tasked with transforming the technology to produce the final products. As a result, it realized the first industrial application of Haier’s core compressor technology with a patent licensing fee of RMB 16 million. It is estimated that when mass production is achieved, Haier could charge licensing fees based on the output of the compressor, leading to a revenue of up to RMB 100 million.52 Another example of Haier’s patented original technology is the “Electric-Proof Wall.” Since 2001, Haier has authorized several companies to manufacture or sell water heaters with electric-proof wall technology, leading to the widespread use of leakage protection function of water heaters by many companies in the industry, including Haier, Midea, Harbaugh, Wanjiale, Vantage, Weibo, and others. This technology was written into the ICE international standard in 2004 and has strongly supported the development of safer water heaters in China. According to third-party research data, as of today, an electric-proof wall function has been built in 7 out of every 10 electric water heaters in China market.53

51

https://baijiahao.baidu.com/s?id=1650334933337644827&wfr=spider&for=pc. Ibid 25. 53 https://www.sohu.com/a/229416220_99907453. 52

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3.5.3 Localized Globalization As a global brand, Haier’s presence is worldwide covering all five continents. The popularity of its brands and its fast expansion globally can be attributed to many factors, as discussed above. However, there is one more element that is worth reviewing—its unique way of global expansion, which can be labeled as “localized globalization”. Through this way, Haier localizes R&D, manufacturing, and sales in hosting countries or regions to develop and produce “localized” products that satisfy the “local” consumer needs. Let’s take a look at Haier’s R&D efforts in India for refrigerators. In India, vegetarianism is popular for religious reasons and the tropical climate necessitates refrigeration for preserving food ingredients, of which more than 75% are vegetables. To cater to this unique market need, Haier’s R&D team in India designed a BM Refrigerator with large-volume storage space on the upper level of the refrigerator. This design allows consumers to store large quantities of food and ingredients in cold temperatures while reducing the need to bend down to retrieve food by at least 15 times a day. This reduction in body bending can reduce more than 90% of the pain caused by bending down frequently. This innovative design helped Haier win the “Product of the Year Award” in the Indian market.54 Another notable story is about Haier’s washing machine which encountered a water pressure issue when it entered the Indian market, as India’s household-used water supply was unstable. To address this issue, Haier’s R&D team in India designed a “zero water pressure” washing machine that did not require any water pressure but still washed clothing effectively. Additionally, Haier developed a 20 kg lightweight washing machine with large space, self-cleaning, and advanced washing technology that was popular among many Indian consumers and companies. A similar story occurred with the water heater, where Haier localized the production of water heaters with its patented electric-proof wall technology to provide a healthy and safe bathing experience to Indian families. In addition, Haier designed and sold water heaters with musical functions to cater to the Indian culture of loving song and dance.55 Haier’s localized globalization story also occurred in Japan, where they conducted a survey and found that 41.4% of consumers were dissatisfied with their current kitchen space, and having two or more people cooking together in the kitchen made the space very crowded. Additionally, due to Japanese women being generally petite, it was challenging for them to reach objects in the deeper parts of the refrigerator. To address these issues, Haier’s R&D team in Japan designed the 500L TZ51H ultra-thin refrigerator, which is only 63.5 cm in depth, approximately 8 cm less than similar products. As a result, it became the thinnest refrigerator with the same volume size. With six optimally designed storage boxes in the freezer, it not only improved the overall kitchen space but also allowed petite Japanese women to easily access items in the topmost and deepest parts of the refrigerator.56 54

http://world.people.com.cn/GB/n1/2017/1220/c1002-29717345.html. http://house.shm.com.cn/2017-12/13/content_4678864.html. 56 https://baijiahao.baidu.com/s?id=1586030767437993372&wfr=spider&for=pc. 55

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Haier’s survey also found that many consumers have developed a habit of hoarding food during special periods, such as the pandemic. Due to isolation at home, they are unable to go to restaurants to enjoy popular local foods like sashimi. However, existing coolers at home were inadequate for preserving raw fish. To address this issue, Haier’s R&D team in Japan designed a new 280L large vertical frozen cooler that can regulate the cooler’s multi-temperature zones to meet different storage needs, including sashimi, for different families. Haier’s Japan team also responded to customers’ needs by developing a new washing machine. Considering the petite size of the Japanese elderly and the inconvenience they face when using a washing machine while living alone, Haier designed a “Care Machine” with a height of 800 mm, the lowest in the industry. The Care Machine facilitates the elderly to easily bend down to put on and pick up clothes. It is also equipped with a simple operation panel and adjustable sound volume for voice instruction, which greatly meets the laundry needs of the elderly in Japan. In Europe, more than 70% of air conditioners are recommended and installed by installers who consider installation time when recommending and installing air conditioners for their clients. For them, the more convenient installation of the air conditioner is, the better. Haier’s team in Europe discovered this connection and developed an F-series intelligent air conditioner that emphasizes its “easy to install” function. It was introduced to the Italian market and could reduce the workload for two service professionals to only one person. For installers, this Haier air conditioner saves 30% of installation time and 60% of the total service time due to its “easy to install” feature.57 In Pakistan, Haier’s local team identified the need of Pakistani consumers to store a large amount of meat during important festivals such as Eid al-Adha. Haier’s R&D team then developed a 519-liter freezer that could contain 12 sheep at one time to meet this demand. To address the local consumers’ need for ice cubes during summer, Haier also developed a refrigerator that integrated electronic frequency conversion and fast-freezing technology, which reduced ice-making time from 6 hours to 1 hour. Haier’s R&D team also developed a washing machine that specialized in cleaning Pakistan’s traditional clothing “Bapao” based on research on the laundry needs of local consumers.58 Haier has also localized its manufacturing and sales activities to produce and sell products with the innovative technologies developed by its localized R&D centers. Currently, Haier has established 28 industrial parks and 122 manufacturing centers worldwide. For instance, Haier’s Russian Industrial Park in Cherny City, Tatarstan Republic of the Russian Federation, was Haier’s first manufacturing base in Russia. The plant area covers 24,000 square meters and primarily produces middle-to-high-end air-cooled BM refrigerators. Its sales area covers Russia and some Central Asia countries. In Pakistan, Haier’s Ruba Economic Zone was established in 2002, located in the Punjab province. In 2006, it was formally named the

57 58

Ibid 56. https://www.imsilkroad.com/news/p/393496.html.

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“Haier-Ruba Economic Zone” and focused on manufacturing refrigerators, air conditioners, washing machines, freezers, TVs, microwave ovens, and water dispensers. In 2020, Haier’s brand was ranked first in terms of market share and market reputation in Pakistan.59 Haier established two Industrial Parks in India: the Haier India Pune Industrial Park and the Haier North India Industrial Park. The Pune Industrial Park is located in Pune, Maharashtra, and covers 160,000 square meters of land, including a 23,800 square meter refrigerator plant and 98,000 square meters of facilities for manufacturing water heaters, washing machines, air conditioning units, and TVs. These products are sold to the central and southern regions of India, as well as the Middle East, Africa, and Southeast Asian markets. The Haier North India Industrial Park is located in the Greater Noida Area Industrial Park in Uttar Pradesh, about 70 kilometers from New Delhi, and on the other side of the Yamuna River. When completed, it will be one of the largest industrial parks in India for producing home appliances, covering a total area of 500,000 square meters with a construction area of 280,000 square meters and providing 4,000 jobs.60 Haier also established a refrigerator factory in Romania and planned to set up a dryer factory in Turkey. The Romanian refrigerator factory was built in Mania Prahova county, with a land area of about 10 hectares and a planting area of about 57,000 square meters. The factory primarily produces and sells refrigerators, freezers, dishwashers, and kitchen and bathroom equipment for large, mature European markets. The new plant focuses on the production of refrigerators for these markets, with Haier’s aiming to take a top three position in terms of market share in Europe, using three different brands: Haier, Hoover, and Candy. Haier plans to set up a new clothes dryer factory in the Eskisehir Industrial Zone in Turkey. The factory will have a land area of about 40,000 square meters and will mainly manufacture, sell, maintain, and import and export dryers and other household appliances, targeting European countries.61 In addition, Haier has also localized its marketing and sales activities by entering the mainstream sales channels of the host countries. In Europe, Haier products have been sold through conventional channels such as ECI in Spain, MEDIMAX in Germany, and four major sale systems such as Boulanger and Darty in France, as well as the three major channels in Poland. Haier’s channel coverage in Poland has already reached 81%. In the US, Haier has successfully entered the top ten mainstream sales channels, including Wal-Mart and Best Buy. In Japan, Haier products have entered all ten major appliance retail channels such as KS, and many regional retail channels throughout Japan.62 Over the years, Haier has established a 7 × 24 service system overseas, with 18 call centers and 23 sites covering more than 100 countries on six continents. The 59

http://it.shangdu.com/_it/2021/0824/082498705.html. http://world.people.com.cn/n1/2019/0330/c1002-31004078-2.html. 61 https://www.sohu.com/a/497102958_121124565. 62 https://www.haier.com/about-haier/global/?spm=net.home_pc.header_128848_20200630.6; https://baijiahao.baidu.com/s?id=1724729685649035064&wfr=spider&for=pc. 60

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company supports 33 languages and 37 product categories. Haier has also set up 7,200 service centers with more than 15,000 engineers overseas to provide consumers with 7 × 24 service, covering most regions and countries around the world.63

3.6 Some Ending Remarks The Haier case we discussed in this chapter highlights some of Haier’s most remarkable stories, which could be instrumental for many readers for their understanding of what a brand can do, and how to be successful in consumer markets in China and around the world. Starting with a hammer-smashed fridge in 1985, it has reached the “summit” of its industry by many of today’s important metrics. In many ways, Haier’s 39-year-long journey has been rather legendary—and surely is in China—and the cases and models that they developed since their inception can be inspiring references for other companies that aim to be a provider of the best consumer solutions in and outside the home appliance product industries. Haier has always been ahead of the game on its journey. From a single-product refrigerator to multiple product categories, from a mass market brand to multi-layered brands targeting different consumer segments, from a physical product brand to a scenario brand to an ecological brand, Haier always saw the next page of the book before other brands were even willing to flip the last. When its peers focused their attention on physical products, Haier was already focused on branding and the firm’s credibility; when its peers were looking only at sales, Haier understood that retaining lifetime users was critical to their long-term growth and sustainability; when others were focused only on selling single products, Haier created scenario packages and beginning-to-end experiences; when others relied on income from a single product line at a time, Haier was generating revenue through a cross-industry line ecology; and, while many of Haier’s peers were satisfied to merely be a “copycat” of proven, existing technologies, Haier always enjoyed, and even relished in innovation. Ruimin Zhang once said, “There are no successful enterprises, only enterprises of their time.”64 As Haier’s case shows, to be a success of one’s time, a company has to fulfill its duties on the fronts of technology, management, marketing, and other core fields, but it is leadership, vision, and ambition that separates the top crop of brands. These three factors have always been the power sources of Haier’s engine. As the founder and CEO of the firm, Zhang fully understood the industry on its demand and supply side. Within the former, he and his team were always been willing and able to go an additional mile to identify customers’ potential needs, in addition to their existing needs. For the latter, they were determined to possess the best technology and knowledge capital so that they could quickly develop the precise right products to satisfy the abovementioned identified needs. In all facets, Zhang aimed high and endeavored to the cause of providing customers with “better life solutions”. 63 64

Ibid 62. https://m.thepaper.cn/baijiahao_11964953.

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Life goes on, as the Haier logo is wont to remind us, but Haier remains a brand worth watching down the road.

Chapter 4

Anta Sports: Rising with the Recreation of Global Brands

As the world’s largest consumer market measured by Purchasing Power Parity (PPP),1 China has been a battleground for many global consumer product brands in the past few decades. When China first opened up to the outside world about 40 years ago, it was widely viewed as a remote, alternative, and insignificant overseas market for many global brands in the early 1980s. However, over the years, it has grown to become a primary market for sales and a hosting country for regional research and production centers for these global brands. In 1999, when the Global Fortune Forum was held in China for the first time, the stage featured the slogan “To dominate the world, conquer China first”.2 The global significance of the Chinese market in recent years was clearly reflected in various statistical data. For instance, in the automobile industry, Buick sold 1.06 million cars worldwide in 2021, out of which 825,000 were sold in China, accounting for about 78%. Cadillac’s total global sales for the same period were approximately 380,000 cars, with 230,000 sold in China, accounting for 61%. Similarly, Volkswagen sold 4.9 million cars worldwide in 2021, with 2.23 million sold in China, accounting for about 46%. Germany’s three luxury car brands, namely Audi, Mercedes-Benz, and BMW, also generated approximately 42%, 36%, and 38% of their global sales from China in 2021, respectively.3 It is important to note that, however, while global brands have competed fiercely and grown rapidly in China, some Chinese homegrown firms have also emerged as major competitors to these global brands in a relatively short period of time. An interesting topic that would be worth exploring is how these local brands established their market positions in competition with the global brands. As will be discovered in this chapter, many local brands have taken various paths to their success, but one approach that stands out is acquiring well-established global

1

https://en.wikipedia.org/wiki/List_of_largest_consumer_markets. www.mckinsey.com. https://news.sina.com.cn/china/1999-9-27/18112.html. 3 https://baijiahao.baidu.com/s?id=1721752210152778790&wfr=spider&for=pc. 2

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_4

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brands and localizing them in the Chinese market, which is often seen by these local companies as a “shortcut.” Why did Chinese local acquirers view the acquisition of global brands as a shortcut to market leadership? It was because they recognized the value of these brands that went beyond their well-designed products or services and established market positions. This value includes the reputation accumulated over the years and the culture and consumer perceptions embedded in these brands. Innovative functionalities and features of these branded products were often backed by unique and patented technologies that couldn’t be independently developed in the short term. As a result, acquiring well-established global brands became an appealing option for ambitious Chinese companies aiming to rapidly capture market share. Not everyone, however, achieved success by taking this “shortcut” in China. In the sports products industry, which is the focus of this chapter, the acquisition of the Italian brand Lotto by Li Ning Sports in 2008 serves as a classic example. Lotto, once a competitor of Nike and Adidas in soccer and tennis products, was acquired by Li Ning Sports in China for HK$10.65 billion in 2008.4 However, the deal did not live up to its initial promise, as Lotto gradually lost its position on the soccer field and faced significant financial losses. As a result, Li Ning Sports entered into a supplementary agreement with Lotto to reduce the contract ending time from 2028 to 2018. Furthermore, as of July 2021, Lotto Sporting Products Co., Ltd. had been delisted due to the company’s decision to dissolve it, marking the end of its over 20-year journey in China.5 In contrast, ANTA Sports Group, another homegrown brand, offers a successful example of achieving market leadership through global brand acquisitions. In 2009, ANTA acquired the operating rights of FILA in China for approximately HK$600 million. Ten years later, the revenue from ANTA’s FILA brand surpassed its main brand, ANTA, reaching RMB 21.8 billion in 2021. ANTA’s total revenue in 2021 reached RMB 49.33 billion, second only to Nike China. In the first half of 2022, ANTA Group’s total revenue exceeded that of Nike China, making it China’s largest provider of sporting products. ANTA currently owns over 11,700 stores nationwide, serving over 200 million consumers, and has filed for 2,600 patents. With 60,000 employees, including 8,000 overseas, ANTA Group has become the largest private textile and garment company in China with the highest number of overseas employees.6 The upcoming chapter will delve into ANTA’s case in detail, with a focus on how the company successfully localized the global brands it acquired and how these acquisitions played a crucial role in helping ANTA achieve its goal of becoming a market leader. 4

Announcement released by Li-Ning Company on July 31, 2008, https://www1.hkexnews.hk/listedco/listconews/sehk/2008/0731/ltn20080731460.pdf. 5 https://baijiahao.baidu.com/s?id=1708665093813997955&wfr=spider&for=pc. 6 Anta Group’s Financial Report for the third quarter of 2022. https://www.marketscreener.com/ quote/stock/ANTA-SPORTS-PRODUCTS-LIMI-6170948/news/ANTA-Sports-Products-Lim ited-Reports-Sales-Results-for-the-Third-Quarter-of-2022-42026266/.

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4.1 Retail Transformation Let’s begin with Shizhong Ding, the co-founder, and CEO of ANTA Sports Group,7 and how he laid the groundwork for the company’s rapid growth with the acquisition of global brands. Ding grew up in Chen Dai, a town in Jinjiang County of Fujian Province in southeast China, where there were over 1,500 shoemakers in the 1990s. In 1981, he joined his father and brother to start a shoe business partnership. In 1987, at the age of 17, he borrowed RMB 10,000 yuan and 600 pairs of tourist shoes made locally in Jinjiang from his father to test the market in Beijing. Four years later, he returned to his hometown with a newfound understanding of the importance of branding for long-term business success. He found that shoes with comparable quality were sold at least twice as expensive with a brand compared to those without. He realized that only by building a brand, opening specialty stores, and expanding distribution channels could a shoe business succeed in the long run. In 1994, after discussions with his father and brother, they decided to rename their company “ANTA,” which means “doing business with peace of mind and being a person with trustworthiness” in Chinese. Since then, Ding has taken over the responsibility for the company’s operation and served as the general manager. When ANTA first launched its brand, it took a different path from other shoemakers in Jinjiang, who were mostly OEM (original equipment manufacturer) companies. ANTA initially adopted a wholesale approach, which was common in the industry at the time. ANTA provided licenses to distributors to sell ANTAbranded products exclusively in designated areas and offered seasonal products to these distributors at trade fairs. This strategy helped ANTA weather the Asian financial crisis in 1997, during which many OEM shoemakers in the Jinjiang area went bankrupt. By contrast, ANTA survived with its own brand products and its wholesale network, which laid the foundation for its subsequent growth. In 1999, Ding recognized a “historic opportunity” to promote the ANTA brand during the upcoming 2000 Sydney Olympic Games. He made a bold decision to sign Kong Linghui, a popular table tennis player at the time, as the brand ambassador for RMB 800,000 and invested millions of yuan in advertising on the CCTV (China Central TV) sports channel. The total advertising expenses amounted to about 80% of ANTA’s profits at that time. When Kong Linghui won the Olympic championship the following year, ANTA immediately became a well-known sports shoe brand in China, thanks to its advertising slogan, “I choose, I like,” which was spoken by Kong.8 The advertising and marketing model created by Ding, featuring “Sports Star + CCTV,” quickly became popular among other shoemakers in Jinjiang, including Xtep, 361 Degrees, Jordan, Hongxing Erke, Peak, and others. A high number of shoemakers scrambled to put their advertisements on the network. As a result, the CCTV sports channel was even nicknamed the “Jinjiang Channel”. From the Sydney 7

Ding Shizhong is currently the Chairman of Anta Group’s Board of Directors. He previously also served as the CEO but stepped down from the CEO position in January 2023. 8 Chronicle of ANTA Group, https://www.anta.com/culture/history.

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Olympics in 2000 to the Beijing Olympics in 2008, the entire sporting goods industry in China, including both global and Chinese brands, experienced a golden age of growth. ANTA was one of the most prominent brands during this period and was even referred to as the “Engine of China’s Sports League” due to its sponsorship of numerous sports events and teams in China.9 In 2007, ANTA Sports went public with an IPO on the Hong Kong stock exchange (HK 02020).10 The sporting goods industry in China, however, was hit with oversupply and inventory backlog even before the games, presenting ANTA with a significant challenge in the aftermath of the Beijing Olympics. ANTA’s financial performance began to decline in 2011 and lasted for more than two years. Facing the change, rather than complaining about the situation, Ding reflected on the reasons behind the company’s downturn. He realized that ANTA’s wholesale business model had not changed for many years and the company was not adequately understanding its customers’ changing needs. To avoid future inventory backlogs, ANTA needed to transform its business model from a “brand wholesaler” to a “brand retailer” and genuinely understand its consumers and their needs over time. This reflection led to the concept of “Only One Party-B,” in which both the brand owner and distributors interface with the same ultimate party—the consumers. Under the brand wholesale model, ANTA’s job is considered complete when the goods are shipped out to distributors, but under the brand retail model, the job is done only when the goods reach the end consumers, if not considering post-sales services. As a result, ANTA took several actions to transform its business model and assist its retailers, who were previously managed by wholesalers, in completing the transition. ANTA helped set up operating standards, improved display spaces, and implemented “refined” retail practices to drive demand. ANTA established its own retail college to train employees at all levels of retail, from shopping guides to retail operation directors. It also provided support to retailers in setting up financial, operating, recruitment, and performance appraisal systems to improve efficiency (Fig. 4.1). In addition, ANTA developed a “calibration system” to evaluate the “health status” of its more than 30 distributors and the stores they managed. This system utilized 25 indicators in five categories, including operation, product, finance, channel, and human resources. An interesting criterion, called “Wall Efficiency,” was proposed by a salesperson. It calculates the value of the area of the four walls of the store and determines how products should be displayed on the wall with the highest value. It also helps to identify how the wall with the lowest efficiency can be improved.11 ANTA adopted this suggestion and achieved remarkable results. ANTA’s reform efforts extended to its sales system, where the company classified its over 8,000 retail stores into various categories such as shops, department stores, and outlets, each with different layers such as flagship and regular stores. ANTA also linked the responsibilities of its five functional departments—operation, product, 9

http://news.ppzw.com/Article_Print_46166.html. ANTA Sports went public with an IPO on the Hong Kong stock exchange (02022. HK) in 2007, https://ir.anta.com/sc/about.php. 11 http://finance.sina.com.cn/zl/2019-04-17/zl-ihvhiewr6519250.shtml. 10

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Fig. 4.1 An ANTA’s sportswear store in China. Source Yuming Ren/China Business Network Ltd., Shanghai

finance, channel, and HR—directly with the retail stores to ensure that retail standards were met. The company shifted its performance assessment focus from wholesale to retail indicators, and ANTA’s headquarters managers had come down to the front-line management of retail stores and trained sales personnel to help them achieve growth targets such as store growth rate, new product sell-out rate, and store efficiency. ANTA successfully completed its retail transformation in 2014 by reducing its headquarters management staff by nearly half and streamlining its distribution network from 8,075 stores in 2012 to 7,622 stores in 2014.12 ANTA shifted its focus from “quantity” to “quality,” and its sales revenue began to recover. The transformation also changed ANTA’s image in consumers’ minds to a “consumer-oriented” retail brand with a “customer-driven” consensus among all employees. ANTA’s retail system attracted younger generations with the emergence of many high-end stores with annual sales ranging from millions to tens of millions of RMB. This transformation laid a strong foundation for ANTA’s further development.

12

Ibid 12.

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4.2 The Integration of Global Brands with Domestic Positioning Over the years, ANTA had developed a strategic plan focusing on “single focus (sports products), multi-brands, and omni-channels,” with the vision of “bringing the transcendent sports spirit into everyone’s daily life”.13 To achieve this goal, ANTA planned to create a portfolio with different brands targeting various segments. However, as a single, locally grown, and mass-market brand, quickly developing multiple brands to fill the gap in higher-end segments posed a challenge. However, ANTA promptly found a solution, that is, acquiring some established global brands. As will be seen in the following pages, ANTA’s acquisition and localization of the renowned Italian brand FILA can be considered a classic case in the sports goods industry. As a global brand, FILA was founded in 1911 by two Italian brothers, Ettore and Giansevero Fila, in Biella, Italy. It was once ranked among the most well-known sports goods brands in the world.14 After ANTA acquired the operating rights of FILA’s trademark in China, the brand was integrated into ANTA’s product portfolio to serve its strategic development plan with three layers targeting different segments. The first layer was ANTA, positioned as “professional sports goods for the mass market,” primarily focusing on lower-end consumers, with very few individual categories stepping into higher-end segments. The second layer was FILA, designed to target fashion sports products with a layout in first to third-tier cities, and pricing in the medium to high-end range. The third layer consisted of other global brands acquired by ANTA, such as Descente, Kolon Sport, and Amer Sports, focusing on high-end outdoor sports products. The challenge, however, was to ensure the successful localization of the acquired global brand in the domestic market, as many similar acquisition deals in China had failed, including FILA itself before ANTA’s acquisition from the retailer Belle Group in 2009. Belle had purchased FILA’s assets in China just before the 2008 Beijing Olympics but failed to make the acquired brand profitable due to management issues. Consequently, Belle quickly sold FILA despite its reputation as a retail giant with robust retail capacity, holding the acquired brand for only about one year.15 The issue for ANTA, therefore, was how to revive the acquired brand in China’s sports goods market. ANTA took several actions after acquiring FILA from Belle. The first step it took was changing the sales model from wholesale to direct retail. ANTA’s management team believed that the original distribution system had too many layers, making it difficult to understand consumer preferences and demands timely and respond promptly. Additionally, the distribution of interests among stakeholders could cause supply chain interruptions and supply crises. As a result, ANTA took nearly three 13

https://www.anta.com/english/aboutanta. http://www.fila.cn/cms/history.html. 15 https://baijiahao.baidu.com/s?id=1631051943108881063&wfr=spider&for=pc. 14

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years to fully transition from wholesale to retail and became the only brand that could directly sell products through its own stores in China’s sports goods market. Secondly, expanding the coverage of its retail stores was necessary for ANTA to replace the wholesale model with direct retail without reducing sales. This expansion required significant investment in terms of both money and time. At the time, many industry experts believed that covering the entire Greater China region through direct retail terminals was not feasible for a brand. However, at a FILA strategy seminar in October 2012, Ding proposed an ambitious goal known as the “500 times 500” strategic goal. The aim was to open 500 retail stores within ten years, with each store achieving annual sales of RMB 5 million.16 This total sales figure of RMB 2.5 billion was considered impossible by many industry peers. Nevertheless, only six years later, FILA China’s sales had already exceeded RMB 10 billion in 2018,17 demonstrating ANTA’s success in expanding its coverage. The third action taken by ANTA was to develop a multi-brand strategy. FILA’s main brand was designed to focus on consumers aged 25–40 and positioned as a highend fashion sports brand in the Chinese market. ANTA carefully selected its brand spokesperson, designed the overall image of all stores, shopping bags, and shoe boxes, and created its unique brand slogan, “Live Your Elegance.” In addition to its primary brand, ANTA also launched FILA KIDS, a children’s clothing brand for consumers aged 3–15, in 2016, which became profitable in its first year of operation. By the end of 2017, FILA Fusion was introduced at Beijing’s Xidan Juntai Department Store, targeting consumers aged 16–24.18 Through this portfolio, FILA developed the capacity to cater to the needs of consumers of different age groups and provide high-end fashion sportswear for various life scenarios. The success of FILA’s acquisition and localization greatly strengthened ANTA’s confidence in implementing its multiple-brand strategy. ANTA continued to expand its brand portfolio by acquiring Sprandi of Poland at the end of 2015, signing a joint venture agreement with Japan’s DESCENTE in 2016, and acquiring KOLON SPORT of South Korea in 2017. With the completion of its brand portfolio build-up, ANTA has become a unique player in China’s apparel industry, covering multiple brands and omni-channels. This has allowed ANTA to expand its reach from high-end Shin Kong World to third-tier cities, showcasing its competitiveness in the market. Ding proudly stated that, “Anta not only aims to be the number one brand in China but also strives to become a global company”.19 FILA also implemented a “one-store-multi-brands” strategy by establishing flagship stores that allowed the company to sell all its sub-brands in each retail store or mall. This approach facilitated integrated growth for FILA. For example, on the 7th floor of Beijing Xidan Juntai Department Store, there are 15 sports brands, and among them, 4 are ANTA brands. These brands cater to the top professional segment of the mass market. For the pricing range, Descente, a high-end brand, offered men’s In Chinese, 5 million is expressed as 500 × 10,000. Ibid 12. 18 Ibid 12. 19 https://finance.sina.com.cn/meeting/2019-01-18/doc-ihqfskcn8365229.shtml. 16 17

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sports shorts priced between RMB 350 and 790, FILA offered them at RMB 350, while ANTA sold them for around RMB 100.20 ANTA’s reputation and brand portfolio were significantly enhanced through its active sponsorship of various sports events and the signing of renowned international sports superstars. In 2014, ANTA became the official partner of the NBA in the Chinese market and signed several NBA superstars, including Garnett, Thompson, Rondo, Parsons, and Scola, as brand ambassadors, which helped ANTA expand its brand presence in the international market. Additionally, in 2017, ANTA signed agreements with the Chinese Olympic Committee and the Beijing Winter Olympic Organizing Committee, becoming the official partner of the Beijing 2022 Winter Olympic Games. In October 2019, ANTA further solidified its position by signing an agreement with the International Olympic Committee (IOC) to become its official sportswear supplier. In July 2020, ANTA unveiled a franchised version of sportswear featuring national flags for the Beijing 2022 Winter Olympics. Moreover, approximately a month later, ANTA became a global strategic partner of the World Nature Foundation (WWF).21 In addition, ANTA acquired several global brands, including Kolon Sports and Little Funny Cow in 2017, and Amer Sports in 2019. On November 19, 2020, the stock price of Anta Sports (02020. HK) reached a high of HK$114 during intraday trading, and the company’s market value exceeded HK$300 billion,22 marking a significant milestone for the company as it celebrated its 30th anniversary in 2021. The success of ANTA in effectively integrating its acquired global brands highlights the importance of the acquirer’s “localization capacity”, a factor that had been previously overlooked in the acquisition deals involving global brands and local companies in China. While the focus had traditionally been on capital and cultural integration, ANTA’s case emphasizes the significance of the acquirer’s ability to “localize” the creativity of the acquired global brands. This localization process encompasses various aspects, such as brand management, retail management, sales channel management, supply chain and logistics management, consumer insights, and research and development. These capabilities serve to amplify the original value and impact of the acquired global brand within the local market. However, it should be noted that achieving success with acquired global brands in China is not guaranteed and necessitates re-creation and reprocessing by the local acquirers.

20

Ibid 12. https://baijiahao.baidu.com/s?id=1675532302577987261&wfr=spider&for=pc. 22 https://xueqiu.com/S/02020/163675760. 21

4.3 From Offline to Online with E-Commerce and Digitalization

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4.3 From Offline to Online with E-Commerce and Digitalization Another significant milestone in ANTA’s business model transformation was its shift from offline to online, fully embracing e-commerce. In China, the renowned online sales event ‘Double 11’ (November 11) continuously achieved new historically high transaction volumes within a single day, amounting to hundreds of billions of yuan. However, in 2015, ANTA’s ‘Double 11’ sales only ranked eighth in the sports goods category,23 which came as a shock to ANTA’s management as it did not match their offline performance.24 This disappointing result prompted Ding and his leadership team to establish a five-year strategic plan for the company’s online business, aiming to align its online performance with its offline business. Consequently, ANTA took over the control of its online business operations and flagship stores, which were previously managed by a third party. ANTA then focused on developing its own online team and retail capabilities, establishing a big data analytics system to gain deeper insights into its consumers and enhance its ability to respond swiftly and efficiently to orders and payments. Their objective was to build a “fast, accurate, and flexible” supply chain. In the following years, ANTA’s commitment to digitalization and e-commerce led to the accumulation of over 250 million consumer data on its platform and a membership system that boasted nearly 70 million high-quality members by 2019.25 Prior to the ‘Double 11’ sales event in 2019, ANTA conducted over one hundred online live broadcasts, bringing the “warehouse to the doorstep of consumers” rather than just the physical stores. Additionally, ANTA collaborated with JD.com and SF Express to establish dozens of “cloud warehouses” nationwide to stock pre-sale goods. On the day of “Double 11”, ANTA successfully delivered over 7 million packages, with approximately 500,000 packages reaching customers when they woke up that morning. During that year’s “Double 11”, ANTA’s e-commerce unveiled around 100 cross-industry IP products, including the new NASA series, Coca-Cola co-branded shoes, Super Dragon Ball co-branded series, KT basketball series, Marvel series, Olympic model, Huang Jingyu FILA model, and Wu Yanzu DESCENTE model. These products showcased ANTA’s transformation into a new lifestyle and content company, with many of them featuring unique stories that appealed to consumers’ desires for fresh, cutting-edge, and trendy products. In 2019, ANTA’s e-commerce sales experienced a year-over-year increase of 40%.26 Ding, however, set his sights high. He informed his colleagues that Alibaba’s e-commerce platform had 780 million users, with 400 million of them being sports goods consumers, 40 million being yoga product consumers, and approximately 5 million being buyers of skiing goods. In addition to these sports-labeled consumers, 23

Ibid 12. Ibid 12. 25 https://baijiahao.baidu.com/s?id=1662025483344167663&wfr=spider&for=pc. 26 Ibid 26. 24

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there were 65 million young people residing in small towns, 65 million belonging to Generation Z, 50 million new white-collar workers, 38 million refined whitecollar workers, 46 million senior middle-class individuals, and 100 million bluecollar urban workers. Ding believed that these groups should be the company’s target and primary focus in the future, stating that “every brand has its own goals with expandable space”.27 The rapid development of mobile internet has accelerated ANTA’s transformation towards smart retail. In 2018, ANTA introduced “smart stores” equipped with various features, including cloud shelves, pressure interactive screens, ANTA mall, and shoe testing instruments, aiming to offer consumers a more accurate and convenient shopping experience. For instance, when a consumer picks up a pair of shoes from the shelf, relevant product information will be immediately displayed on the screen, enabling the consumer to have a clear understanding of the product’s functions. In the back office, ANTA can gather data on the “touching rate” of the shoes and compare it with actual sales data. If the “touching rate” is high, but the sales rate is below average, it could suggest that the shoe design is appealing, but the comfort level is unsatisfactory. In such cases, ANTA may need to make improvements to the shoe design. The outbreak of the Covid-19 pandemic expedited ANTA’s digitalization and ecommerce transformation. In early 2020, when the coronavirus pandemic emerged, over 80% of ANTA’s offline stores closed for approximately five weeks from the end of January to February. Additionally, a range of planned marketing activities for the Tokyo Olympics had to be postponed. Despite these challenges, ANTA responded quickly and robustly. On January 23, the day when the City of Wuhan announced the lockdown, ANTA established the “ANTA Pandemic Emergency Office” to coordinate the company’s efforts in pandemic protection and to drive online business by implementing a series of measures. The initial step ANTA took was to enhance online sales. ANTA implemented an “All in Retail” program, involving more than 60,000 employees, business partners, brand team members, and management team members. As part of this initiative, ANTA established “We-Stores” on the WeChat platform and created numerous short videos featuring brand spokespersons and contracted athletes, aiming to motivate consumers to stay active at home. Moreover, ANTA brands introduced a variety of new products through online marketing campaigns to reach out to consumers, while ensuring uninterrupted delivery services around the clock through the SF and China Post EMS distribution system. The second step involved transitioning to remote work. Since the onset of the pandemic, ANTA’s management team has been working remotely. Between February 3 and 11, they conducted more than 4,000 virtual video conferences with employees. Furthermore, ANTA’s Corporate University designated February as “Learning Enhancement Month”, encouraging all employees to complete over

27

https://new.qq.com/rain/a/20200326A0SPZ100.

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1,000 online courses. This resulted in an average learning time of 2.7 hours per employee.28 The third measure taken by ANTA involved adjusting its supply chain, particularly in production planning and order allocation between in-house production and outsourcing. The fourth action ANTA took was to make changes to its sales policy, including adjustments to return policies, in response to the evolving market conditions. Finally, ANTA implemented extreme cost control measures, including cutting various expenses and budgets and negotiating with major stores to reduce rents and operating costs. These actions allowed ANTA to effectively minimize the negative financial impact of the pandemic. Even with almost all stores closed in February, ANTA’s retail sales (excluding e-commerce) still generated over RMB 10 million in revenue daily. ANTA’s overall e-commerce business either met or exceeded its expected targets in January and February.29

4.4 The DTC Strategy ANTA’s shift towards retail and e-commerce that began in 2009 laid the groundwork for the implementation of its Direct-to-Customer (DTC) strategy in 2020. This strategy allows ANTA to better connect with its customers. DTC is a brand strategy that was originally developed in North America and involves independent brands selling their products directly to consumers, bypassing intermediaries such as distributors, agents, and retailers. In China, brands that adopt the DTC strategy typically take various approaches, such as opening physical stores, setting up online mini-programs, developing official online apps, selling products through their official website, or opening flagship stores on e-commerce platforms. ANTA’s DTC transformation aimed to increase the proportion of online sales channels and expand the number of its own offline retail stores. Through omnichannel marketing, ANTA was able to gain direct access to its end consumers, which allowed for quicker penetration into targeted consumer segments, product upgrades through trial and error, and continuous enhancement of customer consumption experiences and user participation, ultimately building a successful brand. For ANTA, the essence of DTC lies in establishing a direct connection with consumers, legally obtaining consumer data to gain insights into consumer behavior and generating interaction with consumers, and eventually creating a closed loop between data and business. ANTA has focused on three business channels at the front end: retail stores, ecommerce via third-party platforms, and e-commerce through its own private domain. To bolster its retail system, ANTA has acquired distributors, increased equity investment in retail stores, and expanded e-commerce sales by establishing its official 28 29

Ibid 28. Ibid 28.

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private domain. At the back end, ANTA has upgraded its logistics and supply chain systems with intelligent technologies such as AI and RFID.30 These advancements have enabled ANTA to achieve more accurate demand forecasting and faster inventory replenishment. Notably, the RFID project has significantly improved the efficiency of receiving and delivering goods, while the omnichannel project has accelerated the integration of online and offline sales. The efficiency of inventory counting in terminal stores has increased by approximately 80%.31 These digitalization efforts have resulted in remarkable financial performance for ANTA. In the first half of 2022, ANTA’s total revenue from direct-to-consumer (DTC) sales reached RMB 6.64 billion, marking a year-over-year increase of 79.3%. E-commerce revenue amounted to RMB 4.57 billion, reflecting a growth of 26.6%. Additionally, the total number of memberships increased by over 20%. ANTA’s revenue from online business as a percentage of its total sales revenue surged to 28.9%, representing an increase of more than 20%. Furthermore, the private domain turnover of its various brands doubled compared to the same period in the previous year.32

4.5 Some Ending Remarks ANTA’s journey has demonstrated how a Chinese local company in an emerging market can transform into a world-class brand. It has challenged the notion that the successful acquisition of global brands by local firms in China relies solely on China’s market, China’s capital, and global brands themselves. Instead, ANTA has shown that the key to success or failure in the merger and acquisition process lies in the acquirer’s ability to localize the global brand. This localization encompasses various factors, including the acquirer’s positioning of the acquired brand in the local market, its marketing and sales model, the reach of its retail system, the level of e-commerce and digitalization, its capacity to leverage big data for timely market responses, and its seamless execution with the belief that “I can do it”. By focusing on these factors, ANTA has firmly established itself as a leading brand in China and beyond. ANTA takes pride in its development strategies, which are based on the principles of “single focus, multi-brands, and omnichannel.” According to Ding, these strategies have never been adopted before in the sporting goods industry and can be regarded as the “ANTA Road.”33 The single-focus approach allows the company to concentrate on its core competency, which is sports products. The multi-brand strategy enables ANTA to meet the diverse needs of consumers in different market segments, thereby expanding its customer base and increasing its market share. Finally, the omnichannel

30

http://news.sohu.com/a/536033586_99976125. https://baijiahao.baidu.com/s?id=1741943763705101270&wfr=spider&for=pc. 32 https://baijiahao.baidu.com/s?id=1742218404232040957&wfr=spider&for=pc. 33 Ibid 12. 31

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retail approach enhances the consumer consumption experience by seamlessly integrating online and offline channels, which is increasingly important in the digital age. ANTA’s remarkable execution ability, coupled with its well-crafted strategies, distinguishes it from its competitors. Zheng Jie, ANTA Group’s executive director and president, emphasizes the crucial role of speed in ANTA’s success. Having previously served as Adidas Greater China’s vice president, Zheng observes that ANTA surpasses its peers in speed in almost every aspect, including decision-making, execution, adjustment, and transformation. In contrast, ANTA’s competitors often encounter obstacles when attempting to innovate and localize, due to navigating complex reporting and administrative systems that can delay the process by up to two years. Even if projects are eventually initiated, personnel and strategy changes may cause them to never be completed.34 This sluggishness has provided an opportunity for local companies in China, such as ANTA, to excel. ANTA’s digitalization and e-commerce have played a crucial role in the company’s transformation, particularly in relation to people, products, and venues. From the consumer’s perspective, the digitalized e-commerce platform has significantly improved ANTA’s operational accuracy and enhanced the overall consumer experience. By precisely identifying consumer needs and preferences, ANTA is able to provide customized products and services that cater to individual preferences. From a product perspective, digitalization has enhanced operational efficiency in terms of product planning, selection, and distribution. This has resulted in the progressive upgrading of ANTA’s complete product value chain, shifting from automation to intelligent augmentation, with the assistance of consumer big data. Regarding venue, ANTA has the capability to establish a centralized platform that encompasses its entire multi-brand company, the full value chain, online and offline operations, and international business lines. This allows the company to accurately define and design consumer consumption scenarios and content for its products or services, thereby enhancing its interaction with consumers across both online and offline channels. China has emerged as a highly dynamic and fiercely competitive market, where numerous global brands engage in intense competition. For a latecomer like ANTA, successfully acquiring and localizing well-established global brands can provide a strategic advantage, allowing them to quickly enter into the game and attract further collaborations with global brands. Ultimately, this paves the way for a local company to expand into the global market beyond China. On March 12, 2019, ANTA announced its acquisition of Amer Sports, the parent company of several globally recognized outdoor equipment and ball equipment brands, including Arc’teryx, Wilson, Atomic, and Salomon. Ding, ANTA’s Chairman, remarked that “the success of the tender offer allows us to work together to change the future of the global sporting goods industry.”35 These deals will undoubtedly help ANTA expand its presence to major markets worldwide, including Europe, 34 35

https://new.qq.com/rain/a/20200326A0SPZ100. https://baijiahao.baidu.com/s?id=1627799606898297240&wfr=spider&for=pc.

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the United States, and Asia–Pacific. ANTA’s ultimate goal is to become the world’s leading multi-brand sporting goods provider, and with these acquisitions, it seems to be getting closer to achieving that objective.

Chapter 5

BYD, A Disrupter of the Emerging Market

On September 27, 2008, Sino-American Energy Holdings Company, a subsidiary of Berkshire Hathaway overseen by Warren Buffett, announced its acquisition of 225 million shares of BYD, a Chinese new energy car maker, at a price of HK$8 per share, representing about 10% of the total outstanding shares of BYD after the offering.1 When the deal was finalized, Charlie Munger, Buffett’s business partner, commented BYD’s founder in an interview with Fortune magazine, stating “This man is a combination of Thomas Edison and Jack Welch. He is capable of solving technical problems like Edison and managerial issues like Welch. I have never seen anything like him.”2 The person Munger was referring to is Chuanfu Wang. Born in 1966, he founded BYD in Shenzhen in February 1995 and has since then been a driving force for technology innovation in many fields, including passenger cars, commercial vehicles, rail transit, batteries, and electronics, building up a comprehensive solution for zeroemission new energy from energy acquisition, storage to application. Just like Elon Musk, he has become a symbol of innovation in China. His ambition, however, is not only limited to the auto industry and not only in China, either, BYD’s many products today, such as new energy vehicles, batteries, and EMS (electronic manufacturing services), are all among the best ones in the world. As of 2021, BYD’s new energy vehicles have been operating in more than 400 cities in over 70 countries and regions on six continents, making it the first Chinese auto brand to enter developed markets, such as Europe, America, Japan, and South Korea.3 Wang is fondly referred to as the “BYD’s Chief Engineer” by his employees and considers himself an engineer first and an entrepreneur second. He spends a considerable amount of his work time, around 60–70%, on technology research and 1

https://fortune.com/2021/03/02/warren-buffett-investments-berkshire-hathaway-byd/. https://www.fool.com/investing/2021/03/26/looking-for-a-chinese-electric-vehicle-stock-just/#: ~:text=In%20a%202009%20interview%2C%20Munger%20told%20Fortune%20that,in%20gett ing%20done%20what%20he%20needs%20to%20do. 3 https://baijiahao.baidu.com/s?id=1744648832507629611&wfr=spider&for=pc. 2

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_5

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development. He likes to wear the same work clothes as ordinary engineers and enjoys discussing technical details with his engineers at workshops and laboratories. He has extensive knowledge of patented technologies and often surprises his hardware development engineers with his familiarity with the latest development, which his hardware development engineers even didn’t know. As an entrepreneur, he is keenly attuned to the market and closely monitors the trend of the auto industry toward electrification and intelligence. He frequently immerses himself in the marketplace to better understand consumers and gain insight into the competition. When traveling on business trips, he often visits nearby 4S stores to obtain firsthand knowledge of market competition at the sales terminals, helping him set up the right technology roadmap and make appropriate decisions. His hands-on approach to technology and entrepreneurialism makes him truly a “hybrid of Edison and Welch”. Wang is widely recognized as a “disrupter” in the emerging market. Under his leadership, BYD’s numerous innovations have completely transformed the battery, automobile, and new energy industries. To date, two out of every 10 mobile phones worldwide are equipped with BYD’s electronic technologies. In China, one out of every 5 new energy vehicles sold is a BYD car. On average, BYD applies for 11 patents and is granted 9 patents every working day.4 This chapter delves into the remarkable story of BYD’s journey and explores how BYD has established its dominant position in the marketplace through its continuous breakthroughs across various industries, which could be of great interest to many readers.

5.1 The First Disruption: Innovations in Process and Cost Wang, born in a rural family in Anhui Province, China, pursued a degree in metallurgical physical chemistry at Zhongnan Industrial University (now known as Central South University) in Changsha in the mid-1980s. During his graduate studies at the Beijing Nonferrous Metal Research Institute (BNMRI), he participated in a research project on a “Ni–Cd–Ni–MH secondary rechargeable battery” under the guidance of his advisor, Li Guoxun. In 1993, Wang was sent to Shenzhen by BNMRI to lead its newly established company, Bige Battery Co., Ltd. At the time, mobile phones were gaining popularity, but no company in China had the intellectual property rights to produce secondary batteries capable of cyclic charging. While many manufacturers were producing rechargeable batteries, they were only assembling purchased battery cells. Wang, however, wanted to conduct his own R&D. In 1994, he resigned and founded BYD the following year, aiming to manufacture secondary rechargeable batteries and targeting the battery cells, the core component with the highest technology content and profitability in the battery field. With a loan of RMB 2.5 million yuan from his cousin and 20 employees, Wang’s legendary journey with BYD began. In the 1990s, a Japanese company’s automatic production line for nickel–cadmium batteries would cost several tens of millions of yuan, far beyond BYD’s budget. However, facing financial constraints but considering the low labor cost in China, 4

https://baijiahao.baidu.com/s?id=1736383430883729121&wfr=spider&for=pc.

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Wang came up with a creative solution: breaking down the entire automated production line into many segments and only using automation control for some core segments, while letting workers manually complete other segments. In this way, BYD spent just over one million yuan, with forty to fifty workers, to build a production line capable of producing three to four thousand nickel–cadmium batteries per day, while the same automated production line in Japan only needed a few workers. To ensure the precision of manual operations, Wang designed many fixtures or jigs, which only cost a few yuan, to hold and support the workpiece during the manufacturing and assembly process. For example, he designed a hole in the screw placement, allowing workers to put the screw in the hole without getting it crooked. BYD’s innovative process is summarized by the formula “labor + fixture = robot,” which transformed Japan’s technology-intensive operation into a labor-intensive process, leveraging China’s lower labor costs and resulting in significantly lower total costs than its Japanese competitors. By using a semi-automated and semi-manual production line, BYD has managed to keep its annual depreciation costs at just 3–4% of its revenue, in contrast to fully automated production lines that can cost up to 30– 40% of revenue. This has allowed the company to offer lithium batteries at a much lower price of $1.3 compared to Sanyo’s $4.9.5 In addition, BYD’s unconventional production line is highly flexible and adaptable, enabling the company to produce new products easily and cost-effectively. Unlike fully automated production lines that are designed for only one single product, BYD’s production line can produce various products with minimal additional investment by making small adjustments to key segments and providing technical training for workers. Fast delivery is another advantage of BYD’s production line. The updating of mobile phone models requires different battery structures, but it would take Japanese companies several weeks to complete the process from the installation of automated equipment to debugging at that time. BYD’s “labor + fixture” semi-automatic procedure, however, only needed a few days to produce a new product by simply adjusting the number of laborers and adding one or two small processes.6 Wang’s mindset of finding ways to modify expensive equipment became a “habit” at BYD. For instance, Japanese battery products were manufactured in pure dry rooms, but BYD lacked sufficient funding to build such a room then. Therefore, they added a water-absorbing agent to the formula, which allowed the resulting product to absorb water directly, achieving the same result as a product produced in a pure dry room. Consequently, BYD’s investment in fixed assets was only 1/15–1/10 of similar Japanese enterprises, and their product prices can be 40% lower than their competitors.7 Therefore, the higher the demand for investment in equipment for a product, the more advantageous BYD’s approach becomes. BYD was also able to reduce costs through research and development (R&D), as illustrated by their work with nickel–cadmium batteries. This type of battery requires 5

Wu Xiaoyan, “BYD: China’s Low-Cost Innovation Model”, China Business Journal, November 21, 2009, http://auto.sina.com.cn/news/2009-11-21/0932541717.shtml. 6 Ibid 5. 7 Ibid 5.

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a large amount of corrosion-resistant nickel sheets, which were quite expensive at the time, with prices reaching as high as RMB 140,000 yuan per ton. BYD’s R&D center, however, found a way to use electroplated nickel sheets instead, which cost only RMB 10,000 yuan per ton, but with lower quality. To overcome this challenge, BYD’s R&D team modified the chemical composition of the battery solution to make electroplated nickel sheets less prone to corrosion. This single improvement resulted in a significant reduction in monthly nickel material costs, from five to six million yuan down to just tens of thousands of yuan. By adopting these disruptive tactics that were different from the industry’s traditional production methods, BYD was able to quickly capture the low-end market. In just three years, they had taken nearly 40% of the global nickel–cadmium battery market, by shifting from capital-intensive tactics to more labor-intensive ones.8 After the initial success of Nickel–cadmium batteries, Wang decided to enter the lithium-ion battery industry which was dominated by Japanese firms. These firms did not believe that Chinese companies then could produce Nickel–cadmium batteries, but Wang was undeterred and decided to take up the challenge. He invested funds to purchase equipment and recruit talent, and in 1996, BYD became the first Chinese company to produce lithium-ion batteries. By using unconventional tactics, BYD succeeded in becoming Motorola’s first lithium-ion battery supplier in China in September 2000, and Nokia’s first Chinese lithium-ion battery supplier in September 2002. During the selection process, Motorola and Nokia had doubts about BYD’s production process due to its many manual operations and the quality of its products. In December 2000, when Nokia inspectors visited BYD, they were surprised to see BYD using a spoon to scoop out the paste when adding material to the battery—a method they had never seen before. Despite their initial doubts, when Nokia brought a battery back to Finland for testing, they found that the battery performed very well. The actual test results proved the quality and reliability of BYD’s products. By 2002, BYD’s nickel–cadmium, nickel–hydrogen, and lithium-ion batteries ranked second, third, and fourth, respectively, in the global market.9 BYD’s unconventional production line provides an answer to the question raised by many foreign competitors on how some Chinese manufacturing firms could control their costs at seemingly “unreasonable” low levels. BYD’s case revealed that the “secret” to their success lay in the innovation of the production process given the financial constraints. This innovation in the production process helped Chinese firms achieve low costs, which has been termed “cost innovation” by some scholars in China.10 As BYD deepened its roots in the battery industry, it also expanded its electronic business to a wider range of areas. In 2002, BYD entered the electronic product

8

Ibid 5. Gu Qiani and Zhang Qiang, “Wang Chuanfu: Technological Ingenuity”, Enterprise Management Press, 2020. 10 Zeng Ming and Peter J. Williams (UK), “Walking Dragons”, Machinery Industry Press, December 2017. 9

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component manufacturing field, encompassing precision mold manufacturing, precision mechanical components, input modules, and other parts manufacturing fields. The company became a partner of Huawei, Samsung, Motorola, Nokia, and other leading manufacturers in 2003. In 2006, BYD entered the EMS (electronic manufacturing services) field, engaging in SMT production manufacturing, entire machine assembly and testing of electronic products, and the field of precision metal exterior parts production. BYD Electronics (00285. HK) focused on the mobile phone component business and went public on the Hong Kong Stock Exchange in 2007, expanding into the ODM (original design manufacturing) business line. BYD Electronics began to enter the intelligent product fields such as smart homes, game hardware, and drones in 2014, and in 2015 it entered the automotive business field and launched automotive intelligent cockpits and in-car communication products. BYD Electronics also expanded into the 3D glass field in 2017. As a result, BYD Electronics’ business now covers a wide spectrum of fields, including intelligent smartphones, computers, new intelligent products, automotive intelligent systems, and medical equipment and health, among others. BYD has become the only company in the world capable of providing a full range of structural components and whole machine design and manufacturing solutions for metals, glass, ceramics, plastics, sapphires, and other materials on a large scale.11

5.2 A Disruptive Car Maker: Vertical Integration In July 2002, BYD (01211. HK) went public on the Hong Kong Stock Exchange, raising USD $210 million.12 At the time, BYD’s core business was in batteries. However, the lucrative profits in the battery manufacturing industry attracted over 100 competitors, leading to intense competition and a 10% annual decline in rechargeable battery prices. Wang sensibly realized the changes in the marketplace and concluded that relying solely on battery manufacturing could be risky. He explained to his colleagues that “No enterprises, like living organisms, can afford the time interval between the decline of one business and the rise of another. They must create new business advantages before the core business declines.”13 As a result, Wang decided to expand BYD’s business beyond battery manufacturing, while still investing in R&D to maintain its leading position in the industry. He saw the growing trend of cars in China and made the strategic decision to enter the automotive manufacturing industry, which was a significant shift for the company. In January 2003, BYD acquired Xi’an QinChuan Automobile Co., Ltd. and rebranded it as BYD Automobile, marking the company’s official entry into the automotive industry. The announcement of this acquisition on January 23 came as 11

http://electronics.byd.com/elec/index.html. Public data released by BYD Investor Relations. 13 Qiu Xiaoli, “Wang Chuanfu, China’s Mainland New Richest Man: Inventor + Business Genius”, Youth Reference, October 13, 2009, https://finance.ifeng.com/a/20091013/1328321_0.shtml. 12

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a shock to the business community, including shareholders, fund managers, and the media. The idea of a battery manufacturer venturing into car production was considered way too surprising. Many fund managers advised Wang to abandon the acquisition plan, and some even threatened to “sell off BYD’s stocks until it dies” if Wang persisted with the acquisition.14 Despite facing opposition, Wang repeatedly explained his plans and even held a marathon telephone conference lasting an entire day without taking a break for meals, except for quickly eating a bowl of noodles sent by the hotel. On January 24th, the day after the acquisition was announced, BYD’s stock price plummeted from HKD $18 to HKD $14.45, and the company’s market value dropped by nearly HKD $2.7 billion within two days. The stock continued to decline over the following week, reaching the bottom of HKD $12.5.15 Under immense pressure, Wang persisted in communicating with institutional investors to explain the rationale behind his decision. Many investors were skeptical about BYD’s move from the battery industry to the automotive industry, considering it a reverse expansion from a low-threshold industry to a high-threshold one, with significant limitations and risks. However, Wang argued that both the car and mobile phone industries are assembly industries with high technical content, so both can be vertically integrated. He believed that BYD’s success in battery manufacturing could be transferred to the automotive industry, allowing the company to succeed. In his view, BYD had already become the second-largest player in the battery field globally, with little room for further growth, forcing the company to find a new industry to enter. The booming automobile industry in China, with high entry barriers, high technological content, fewer players, and low competition, made it an ideal target for BYD. He summarized his development strategy as the “kangaroo model”, which means integrating internal resources, like a mother kangaroo, when succeeding in one field, like breeding a new baby kangaroo, quickly shifting to another one, like breeding another baby kangaroo. He also believed that BYD’s advanced battery technology could be leveraged to develop electric cars, which were the primary direction for the entire auto industry. When BYD entered the automotive industry, it faced a different set of challenges that required a different skill set. Unlike the battery industry, which relied heavily on low-cost, skilled workers, the automotive industry required engineers, and college and graduate students with a background in science and technology. However, Wang saw an opportunity in the lower cost of Chinese R&D personnel compared to multinational corporations, and he adopted a “301 approach,” meaning that BYD would hire 300% more engineers than its foreign competitors, which would enable BYD to take a 1% lead, even though Wang believed they could achieve even more than that. He envisioned that BYD could bundle these elites together to compete with

14

Xia Kun, “Wang Chuanfu: I Want to Uphold Honor for Chinese!” WeChat Official Account “Zhenghe Island” (ID: zhenghedao), November 16, 2021. 15 “BYD Automobile’s 15th Anniversary | Things You Didn’t Know”, WeChat Official Account “BYD People”, January 19, 2018.

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their competitors with 300% more engineers, which would lead BYD to come out on top.16 BYD began its venture in the automotive industry with molds. Wang had visited a Japanese car mold factory before and witnessed a large number of Japanese workers lying face down on the ground, grinding molds. He quickly realized that 95% of the work required to make car molds needs to be done by labor. Since a car consists of tens of thousands of parts, all of which require many molds, Wang believed that using Chinese workers to make molds would provide a highly competitive advantage in cost. According to his calculations, a ton of molds costs RMB 80,000 yuan in Japan, but only RMB 20,000 yuan in China, representing a 400% cost advantage. In May 2003, BYD restructured the assets of Beijing Jichi Automobile Mold Co., Ltd. to establish Beijing BYD Automobile Mold Co., Ltd. With the F3 model as an example, the cost of making a car mold was only RMB 90 million yuan, compared to RMB 350 million yuan if purchased from vendors.17 BYD’s journey in the automotive industry was a bumpy ride, with numerous challenges in design, power, chassis, sales network, and service system, in addition to molds. Despite these obstacles, the company launched its first car in April 2004, which was met with ridicule from the hundreds of car dealers present at the event. The initial design of BYD’s first car was unsuccessful, leaving Wang feeling disappointed. But rather than blaming his engineers, he took a different approach. He purchased luxury cars from Shanghai Waigaoqiao Free Trade Zone for his engineers to disassemble and study. Many of the engineers were in their twenties and had never seen such high-end vehicles before, and felt hesitant to disassemble them. However, Wang encouraged them by taking a car key and scratching marks on the car door, then telling his engineers that they could do it now. In many state-owned car companies, college graduates may have to start by twisting screws and cleaning workshops before they can begin to learn about cars. And even in foreign car companies, they might begin their careers as testing drivers. However, at BYD, new college graduates were given the opportunity to participate in entire vehicle experiments in their first year. This approach allowed them to learn quickly through “learning by doing”. Wang emphasized the importance of providing innovation opportunities to R&D engineers and not expecting products to be perfect upon initial development. Instead of abandoning them if they were not yet perfect, the company allowed R&D staff to slowly improve upon their work. This approach helped BYD to become more tolerant of initial failures and ultimately led to the successful launch of the F3 in 2005.18 BYD applied its battery manufacturing strategies to the design and manufacturing of car-making equipment, producing most of the equipment in-house and purchasing 16

Wang Chuanfu’s statement at BYD’s 2009 Interim Performance Press Conference, Hong Kong, August 31, 2009, https://finance.sina.com.cn/jjxw/2023-05-12/doc-imytnpuf0402632.shtml. 17 https://auto.sina.com.cn/news/2006-05-13/0931185135.shtml. 18 https://en.wikipedia.org/wiki/BYD_F3#:~:text=%20%5Bcitation%20needed%5D%20Product ion%20of%20the%20first%20generation,as%20a%20more%20premium%20option%20called% 20the%20Surui.

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only a few specialized pieces externally. This approach allowed the company to reduce its manufacturing costs significantly. For instance, when Qin Chuan Automobile purchased equipment for its painting line from Germany’s Dürer company, it spent over RMB 100 million yuan. In contrast, BYD built its own painting line at a cost of only RMB 30–50 million yuan. Furthermore, BYD integrated the entire car manufacturing supply chain, breaking down each step in the process, such as engines, chassis, molds, vehicle electronics, interior furnishings, and even car paint, and incorporated it into its own manufacturing system. This approach allowed BYD to produce pretty much everything in its cars except for glass and tires, thereby achieving a high level of vertical integration. In contrast to traditional car manufacturers that rely heavily on the supply chain, BYD exercised complete control over almost every step of the process from design to assembly to component production. Wang believed that R&D and design are crucial as they determine 70% of a product’s quality. With tens of thousands of inhouse engineers, BYD was fully capable of designing a high-quality car at a low cost through vertical integration. The F3, BYD’s first car, was almost a replica of the Toyota Corolla but was priced at only half the cost of the Corolla. Toyota was reported to have bought an F3 and disassembled it to see how BYD could have achieved such low costs but ultimately found that Toyota’s suppliers were unable to provide such low-priced parts.19 Customers who compared proposals submitted by BYD and some EMS companies found that BYD’s costs were 15–20% lower, and the time required was one-third less.20 BYD’s car bumper, for example, is produced in-house and delivered directly to the assembly workshop while still hot, with no need for shipping from vendors, plus significant packaging and transportation costs. BYD’s parts department can meet production plans with just one day’s notice, while outsourced parts require a five-day inventory in the warehouse. If changes need to be made to parts or design, outsourcing requires continuous communication with vendors, which can be costly and time-consuming. In BYD, however, a single group meeting can resolve the issue. As a result, the cost of inventory and logistics can be significantly reduced. It is noteworthy observing that while the global automotive industry prioritizes specialization and relies heavily on a supply chain composed of smaller-scale parts providers, BYD chose to go against the grain and emphasized vertical integration with large-scale in-house production. However, BYD’s success indicates that this alternative path can also lead to efficiency and profitability, with budget constraints and a rich endowment of human resources at a low cost (Fig. 5.1). For product design, BYD initially adopted a strategy of imitating popular existing car models without violating intellectual property rights. For instance, BYD’s F3 imitated the Toyota Corolla, F3R imitated the Buick Excelle, F6 imitated the Toyota Camry, S8 imitated the Mercedes-Benz CLK, and M6 imitated the Toyota Previa. Wang viewed this strategy as “standing on the shoulders of giants”, by using nonpatented technology from popular brands, the design of their external appearance, 19 20

http://auto.sina.com.cn/news/2009-08-19/0958517474.shtml. http://finance.sina.com.cn/leadership/crz/20071204/00224245793.shtml.

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Fig. 5.1 BYD released its new model car at a press conference. Source Yuming Ren/China Business Network Ltd., Shanghai

and some popular elements, which allowed BYD to imitate without infringing others’ intellectual property rights. BYD fully utilized its expertise in “decomposition” to disassemble foreign brand cars to study their structures and analyze their components while avoiding using patented technologies. Wang once stated, “The car has been a traditional product for over 100 years. There are already no major existing patents. All the remaining patents are for appearance. BYD can change the design for the front and back of an existing car, for which no one has a patent, but BYD’s design needs to be good.”21 BYD has established a large intellectual property and legal department that studies how to break through existing patent barriers and advises BYD’s various business units on patented technologies to avoid in their product design. With this method, BYD has developed and applied for a significant number of patents in China. In 2008, BYD’s patent application already ranked fourth among all Chinese companies, with a total of 1,530 patent applications.22

21 22

http://finance.sina.com.cn/leadership/crz/20071204/00224245794.shtml. Ibid 5.

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5.3 The Third Revolution: All-In New Energy for Cars BYD’s success is not solely attributed to its ability to disassemble and imitate existing technologies for gasoline-powered cars. In Wang’s view, BYD is fundamentally a technology-based company with a focus on developing new energy vehicles and electric cars by combining its battery technology with automotive technology. Even before acquiring Qinchuan Automobile in 2003, BYD had already developed some technologies and gained experience in the electric vehicle field. In November 2002, BYD established an R&D team to start researching and developing lithium iron phosphate power batteries and formed the Department of Electric Vehicle Project in Shanghai. By 2003, BYD had completed research and trial production of battery pack modules for the Guangdong Electric Vehicle Project and began working on the research and production of battery boxes for HEV (hybrid electric vehicle) sedans and buses. In early 2003, BYD’s Department of Electric Vehicle Project initiated research and development on the Fuluier BEV pure electric vehicle, laying the foundation for an electric vehicle framework. In November, BYD successfully developed its first Fuluier pure electric vehicle equipped with an independently developed 20KW watercooled DC brushless motor and controller, which marked a significant milestone for BYD’s development of electric vehicles. In the following year, BYD bolstered its R&D team for electric vehicle development by recruiting a large number of fresh college graduates. However, due to the unprepared market conditions and technology at the time, BYD shifted its focus towards exploring the opportunity of DM (dual-mode) electric vehicles. The DM hybrid power system allows for both “EV (electric vehicle) or pure electric” and “HEV (hybrid electric vehicle) or hybrid power” modes. This hybrid power system can satisfy daily travel needs without exhaust emissions, as the engine doesn’t need to start under normal circumstances. In the early stages, BYD primarily focused on developing hybrid power dual-mode electric vehicles. As a new experiment without existing products as a reference, BYD explored various battery options, such as nickel–cadmium, nickel-hydrogen, lithium-cobalt, and lithium-manganese batteries. Finally, in 2004, BYD unveiled its first hybrid power electric vehicle, the ET concept electric vehicle, at the 2004 Beijing International Auto Show, which was built based on the Fuluier model. When BYD was developing its electric vehicle, the mainstream domestic automakers in China had yet to put electric vehicles on the agenda, and there was also a lack of professionals and parts suppliers in the electric vehicle industry. This left BYD facing significant challenges and required them to explore everything on their own, from electric vehicle control, motors, and batteries to production processes. Despite these obstacles, BYD persevered and continued to make progress. Finally, on October 1, 2004, BYD launched its Electric Concept Car ET II, through the improvement of the styling and drive system of the ET first-generation vehicle, which comprehensively optimized drive control, wire transmission, display scheme, lightweight design, and layout.

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The battery is the most essential and critical technology in electric vehicles, and BYD’s “iron battery” had numerous advantages over other batteries, such as a higher degree of safety, lower cost, longer cycle life, and eco-friendliness. In January 2006, BYD established a dedicated electric vehicle research institute, with a focus on refining control strategies, building program architecture, and clarifying the overall concept of product production, research, and experimentation. Wang personally led the electric vehicle project to accelerate the development of electric vehicles. On September 8, 2007, BYD achieved another significant milestone by officially naming its hybrid vehicle, which was built on the BHS3 powertrain, as the “DM” car. This made BYD the first car maker to achieve commercialization of electric vehicles, demonstrating their pioneering role in the industry. At the same time, BYD also began developing the F3DM electric vehicle alongside the development of the DM power system. The DM system is a dual-mode electric vehicle power drive system that uses the motor drive as the main power source and can be charged directly using a household 220v power supply. By the end of 2007, the F3DM prototype was essentially completed, and it received significant attention both domestically and internationally due to its improved performance. On October 9, 2008, the F3DM passed the national crash test, and two months later, BYD launched the world’s first new energy vehicle that does not rely on specialized charging stations, the BYD F3DM dual-mode electric vehicle. The F3DM was also the only new energy sedan included in the first batch of the “Recommended Vehicle Model Catalog of Demonstration and Promotion of Energy-Saving and New Energy Vehicles Project” in China.23 In the following years, a sequence of new model cars with new energy power had been developed by BYD. In 2008, Wang initiated the e6 pure electric vehicle project, which aimed to create a vehicle with 200 kilowatts of power, a 400-km driving range on a single charge, and 15 degrees of power consumption per hundred kilometers. In 2009, BYD officially entered the new energy passenger vehicle industry. In the following year, BYD launched its first batch of pure electric taxis, the BYD e6 taxis, which began operating on the streets. During the same year, BYD also successfully developed its first pure electric bus, the K9, which began commercial operation in Shenzhen in 2011 as part of the first batch of pure electric buses. BYD continued to innovate in the new energy vehicle market, launching its 3.5ton electric forklift in 2013 and the world’s first pure electric double-decker bus in London in 2015. In 2016, BYD officially entered the rail transit market and started the world’s first commercial operation of a cloud rail in Yinchuan, Ningxia, in 2017. In 2019, BYD established its global design center, and in 2020, it introduced its blade battery. Compared to traditional battery packs, the volumetric utilization rate of blade batteries has increased by over 50%. In 2021, BYD launched its DM-i super hybrid technology and models, which accelerate the revolution in fossil fuel vehicles. During the same year, BYD created 23

“Recommended Vehicle Models for Demonstration and Application of Energy-saving and New Energy Vehicles”, The Ministry of Industry and Information Technology of the People’s Republic of China, 2009.

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Fig. 5.2 BYD Destroyer 07, a dual-mode electric car. Source Yuming Ren/China Business Network Ltd., Shanghai

the YUNBA (which means Cloud Bus in Chinese), the world’s first low-capacity rail transit system for new energy and unmanned driving in Bishan, Chongqing, and launched its e-Platform 3.0, a special pure electric platform. From the launch of the world’s first plug-in hybrid electric vehicle with mass production in 2008 to its announcement in April 2022 that it would cease production of complete gasoline vehicles, BYD has established itself as one of the leaders in the new energy vehicle industry. Going forward, the company will continue to focus on pure electric and plug-in hybrid electric vehicles in the automotive industry (Fig. 5.2). In the global new energy vehicle market, BYD is the only leading brand known for its expertise in both electric and hybrid vehicles. In January 2023, the company launched a new high-end car brand called “Yang Wang” (which translates to “Look Up” in Chinese) with a starting price of RMB one million yuan. The brand features BYD’s core technology, “Easy Four Directions,” which is China’s first massproduced four-motor drive technology that enables precise control of the vehicle’s four-wheel dynamics through four-motor independent vector control. This electric power system incorporates stronger sensors to independently adjust the vehicle’s four-wheel dynamics in milliseconds, improving vehicle posture and creating a new automotive safety technology system. In fact, the prototype of the “Easy Four Directions” technology first appeared on the BYD ET concept car 20 years ago, inspired by the cheetah’s perfect control of posture at high speeds. By independently driving the four wheels with four motors, the car can move like a cheetah with four independent and powerful legs, which enhances

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both safety and performance. Over the past two decades, BYD has made significant progress in three critical technology fields: batteries, electric drives, and electric controls, leading to the development of the new high-end brand “Yang Wang.” With these achievements, BYD has established itself as a top-tier brand in the industry. In addition to providing ultimate safety, “Easy Four Directions” also delivers outstanding performance and driving experience, reaching a maximum speed of 20,500 rpm with over 1,100 horsepower. This technology can meet the performance requirements of various extreme scenarios, including on streets, off-road, and on tracks. The “Yang Wang” U8, the brand’s first mass-produced model, is a new energy hardcore off-road vehicle that uses this ultimate four-motor technology to tackle extreme outdoor and off-road scenarios. With a length of over 5 meters and a width of over 2 meters, the U8 also features an emergency flotation function, allowing all basic vehicle functions to operate normally in water and meet emergency rescue requirements. During BYD’s innovation and transformation process, Wang always kept a focus on the changing demands of the market and consumers and their implications for car makers. In his view, new energy vehicles should follow the path of coexistence of pure electric and plug-in hybrid, as energy density cannot be greatly increased no matter how much chemical batteries improve. He believes that plug-in hybrid vehicles have their own unique value and should not be viewed as a transition to pure electric vehicles. These vehicles can save lithium resources and are less restricted by charging stations with much cheaper prices than “burning fuel” by using electricity. An automotive industry critic, when discussing Chuanfu Wang’s ideology and determination, said, “When the external environment changes, one must make quick decisions, be willing to reject oneself, step out of their comfort zone, and try new things. When undergoing such strategic transformation, however, one must combine it with their core competencies,”24 which summarizes well what BYD has accomplished on its journey as of today.

5.4 Build a Brand Based on Innovative Technologies Starting from the emerging markets and the areas with relatively lower technical content, innovation has been a main theme throughout the entire BYD development process. During its early stage of battery and electronics manufacturing, it was mostly reflected in innovations in process reorganization, cost saving, molds, and materials. After entering into the automotive industry, its innovation was primarily demonstrated through its independent R&D and continuous development in key technologies. As a tech believer, Wang was confident that BYD could create its own proprietary and core technological capabilities in the field of new energy, based on

24

Yu Jianyue, “BYD’s Transformation: The Leopard Changes Its Spots”, WeChat Official Account “Jianyue Car Review”, April 26, 2018.

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its long-term accumulation of research and development by its talented technical employees. Therefore, BYD’s development philosophy centers around the idea that “technology is the king, and innovation is the core.” Wang places immense value on the company’s tens of thousands of technical R&D personnel, considering them to be BYD’s most valuable assets. According to Wang, BYD’s true value lies in its proprietary technologies and innovative business models developed by its over 40,000 engineers, with a particular emphasis on those related to new energy and environmental protection, which cannot be fully captured by financial statements alone. He believes that the growth of the company is driven by its people and technology, rather than merely financial metrics. Consequently, even during challenging times, BYD remains committed to its independent research and development efforts.25 Wang has developed a concept called the “fishpond theory” to describe BYD’s approach to technological innovation. According to this theory, BYD has created a technology fishpond where it raises many big fishes. Whenever there is market demand, the company can catch these big fish and put them into the market for industrialization and commercialization. This approach has enabled BYD to quickly respond to changing market demands. Following this approach, BYD has established 11 major research institutions covering a wide range of fields, including material science, electronics, batteries, automobiles, new energy, rail transportation, and semiconductors. These institutions include the Central Research Institute, the Institute of Electronics, the Fudi Battery Research Institute, the Institute of Electric Power, the Automotive Engineering Research Institute, the Product Planning and Automotive New Technology Research Institute, the Fudi Power Research Institute, the Fudi Technology Research Institute, the Commercial Vehicle Research Institute, the Light Rail Transit Research Institute, and the Semiconductor Research Institute. This network of research institutions enables BYD to collaborate across its various industries and develop new technologies. Globally, BYD applies for an average of 11 patents per working day and is authorized for 9 patents per day. This commitment to innovation has enabled BYD to continuously develop new products and technologies and stay at the forefront of the industry.26 The core technologies of BYD consist of a range of innovative systems and components that have been developed and refined through extensive research and development efforts. These include the ePlatform 3.0, an exclusive pure electric platform; the Blade Battery, which utilizes safer and more efficient battery chemistry; the DMi Super Hybrid Technology Platform, featuring ultra-low fuel consumption, electric hybrid systems, and electric-dominant hybrid technology with intelligent controls; the Dilink Intelligent Network System, providing advanced connectivity functions; the DiPilot Intelligent Driving Assistance System, which offers a suite of advanced driver assistance features; and key components such as IGBT (Insulated 25

Ibid 5. https://www.sohu.com/a/625092458_121257854; 335114. 26

https://www.sohu.com/a/609998269_121

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Gate Bipolar Transistor) and SiC (Silicon Carbide) MOSFET. These technologies are used across various industries within the company and represent significant advances in sustainable and intelligent transportation solutions. BYD believes that establishing a strong foundation with leading technologies is crucial for further advancing and expanding these technologies in various fields and applications. For instance, BYD’s highly successful Wangchao (which means Dynasty in Chinese) series and the Qin, Han, Tang, Song, and Yuan series of pure electric products were developed and incubated on the ePlatform 2.0, which served as a solid foundation. In September 2021, BYD upgraded the platform to ePlatform 3.0, which features software and hardware decoupling and vehicle domain control architecture, providing a solution for the next generation of intelligent electric vehicles. Models such as the Dolphin and Seal from the Ocean series, developed on the ePlatform 3.0, are forming a matrix with two major products from the Wangchao series in the new energy vehicle market, expanding the influence of BYD’s brand. With multiple popular models that have achieved significant sales in the past and new high-end products continually infusing vitality, BYD’s product matrix is likely to cover almost all new energy market segments in the future. BYD has leveraged the advantages of its products and technologies to expand into new markets and geographic areas. The company has not only focused on developing new batteries and cars but has also conducted research and development on energy storage technologies to enhance energy utilization efficiency. Additionally, BYD has ventured into the field of rail transportation with the launch of the “Cloud Rail” and “Cloud Shuttle,” which have fully self-owned intellectual property and provide solutions for urban traffic congestion. In April 2021, the company successfully operated the world’s first unmanned Cloud Shuttle demonstration line in Chongqing. BYD’s battery products entered the US market in 1999, and in 2011, the company established its North American headquarters office in Los Angeles. In 2013, BYD began constructing a pure electric bus factory in Lancaster, California, with a size of nearly 51,000 square meters, making it the first Chinese-owned bus factory in the US and the largest electric bus factory in North America. To date, the factory has delivered over 400 pure electric buses to 13 states on the east and west coasts of the United States, capturing a market share of over 40%. More than 50 public and private sector customers, including Los Angeles International Airport, Long Beach Transit Authority, Antelope Valley Transit Authority, and the University of California at Los Angeles, among others, have purchased from the factory, and it continues to receive more orders.27 BYD has also gained consumer acceptance in several other countries or regions, including Canada, Colombia, Chile, Brazil, Europe, and the Asia–Pacific region. As the first brand to have a complete product chain from batteries to whole vehicles, BYD is recognized as the most capable automaker in the battery field and the most capable battery maker in the automotive field. BYD is striving to become a worldclass new energy technology company, as it moves forward towards achieving its goal. 27

https://auto.gasgoo.com/a/70247581.html.

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5.5 Some Ending Remarks With its innovative products and technologies, BYD has left an indelible mark in various industries it engaged in, including batteries, automobiles, new energy, and rail transportation. As of today, BYD’s electronic technology is used in 2 out of every 10 smartphones globally, and 1 out of every 4 new energy vehicles sold in China is made by BYD.28 Throughout its over 20-year history, innovation has been a key theme in BYD’s different stages of development. In the beginning, BYD focused on process innovation, cost innovation, and inventions in molds and materials in the battery and electronic manufacturing fields. As BYD entered the automobile market, the company demonstrated its innovative ability through breakthroughs in some key technologies. According to Wang, “BYD has always aimed to prove that technology can change the world” since its inception.29 In 2021, BYD introduced a brand strategy of “two not just, and three confidences” to emphasize that its products are not just cars, and its market is not just limited to China; and BYD maintains confidence in technology, quality, and country. As of 2022, with several successful products on the market, BYD evolved its concept of “three confidences” to “four leadings,” emphasizing its position as a leader in technology, safety, quality, and the market.30 Moving forward, BYD aims to establish itself as a high-end brand with high value in its respective industries. About a decade ago, Wang stated that BYD had shifted its focus from solely accumulating wealth and expanding the business to finding ways to improve the living environment through new energy products and solutions. This mission aimed to meet everyone’s needs for transportation, physical products, and cultural development, as well as to improve the world’s ecological environment.31 As a company that has long pursued technological innovation to address social issues and enhance consumers’ quality of life, BYD’s efforts have been widely recognized by society, paving the way for its current success. Wang believes that the world’s current challenges, including the need for new energy, non-congested urban traffic, a stable climate, and a cleaner environment, require solutions. He is confident that BYD, with its cutting-edge technology and quality, can offer solutions comparable to those of foreign and joint venture brands, and will become a world-renowned brand in the near future.32

28

https://finance.sina.cn/2020-01-05/detail-iihnzahk2051046.d.html; https://baijiahao.baidu.com/s?id=1761778422448238376&wfr=spider&for=pc. 29 Ibid 7; https://m.thepaper.cn/baijiahao_21434114. 30 https://mall.bydauto.com.cn/pc/brandRelated?id=3. 31 https://baijiahao.baidu.com/s?id=1702097248416250640&wfr=spider&for=pc. 32 https://www.yicai.com/news/767495.html.

Chapter 6

WeChat: A Way of Life in the Information Age

In November 2010, Allen Zhang, the General Manager of Tencent’s Guangzhou R&D Center, came across a messaging app called Kik, which was developed by a Canadian company and had recently emerged in the market, rapidly gaining popularity. Within a mere 15 days, it attracted 1 million users.1 The key feature of Kik was its capability to establish direct connections and facilitate communication with contacts from a user’s phone address book, allowing for free messaging, caller stickers, personal status updates, and various other functions. Essentially, Kik resembled BlackBerry Messenger (BBM), BlackBerry’s most well-known instant messaging app, however, Kik had an advantage over BBM as it was cross-platform, enabling its usage on multiple devices such as iPhones and Android phones, and expanding Kik’s consumer base beyond just BlackBerry users. In simpler terms, Kik was a cross-platform application that allowed friends who had installed Kik on their phones to message each other for free. Zhang quickly recognized the significance of Kik in expanding users’ social networks as Kik requires phone numbers and email addresses for registration. Kik’s back-end system would then search the user’s address book for other Kik users, matching them and creating a social network closely linked to their real-life connections. Although other PC internet platforms, such as Facebook, Twitter, LinkedIn, and QQ, offered social network functions, they had not fully explored the social network potential of phone address books. Zhang emailed Pony Ma, CEO of Tencent, suggesting the development of a similar app to Kik, and Ma agreed. Ma believed that the mobile internet era was on the horizon, and Tencent needed to develop a communication and social app that was specifically tailored for smartphones rather than just creating a mobile version of QQ, which was Tencent’s PC-based communication app with the largest user base in China at that time. With Ma’s support, three Tencent R&D teams in Guangzhou, Shenzhen, and Chengdu were established to simultaneously develop the app, and Zhang’s team was the first to complete the task, winning this internal competition. 1

https://baijiahao.baidu.com/s?id=1692282976597601789&wfr=spider&for=pc.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_6

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On January 21, 2011, Tencent officially launched the first test version of its mobile app, WeChat, whose name used within China is Weixin, on the iPhone, marking the company’s entry into the mobile internet market. Since its launch, WeChat has evolved from its initial role as a social communication platform into a super app and an open ecosystem that connects “everything” in people’s real lives. Its slogan “WeChat is a way of life” has become a reality in China. While social communication remains an important function of WeChat today, it has developed many new features such as Moments, Official Accounts, Mini apps, WeChat Pay, transportation services, shopping and consumption, video accounts, and many others. As a super app, WeChat has significantly simplified people’s lives in various ways. Travel has become more convenient through WeChat’s advanced booking service for trains and airplanes, while car drivers can easily pay tolls on highways by scanning their license plate numbers. Making a doctor’s appointment is as simple as logging into an Official Account of the hospital where the doctor practices. Ordering food or making payments at stores has also become hassle-free, as consumers can simply scan the QR code. All these activities can be quickly completed using WeChat, and WeChat Pay, the platform’s online payment tool, is becoming increasingly popular and intelligent. A decade ago, people’s daily lives in China relied on SMS, newspapers, “red envelopes”, queuing, and window shopping, among other things. Today, the same lives can be lived through WeChat Moments, WeChat Pay, and various Mini apps. Doing business on WeChat has become a popular way for many small and mediumsized merchants and Internet celebrities to start and grow their businesses. Anyone can start forming a business team on WeChat, whether it’s a team of several hundred or just a few people. With just a computer, people can create content on Official Accounts and present it to the general public. With just a mobile phone and one person, people can start a small business through live streaming on WeChat. Even large corporations also use WeChat, such as Shanghai Disneyland, which live-streamed its ticket giveaways on WeChat Video Accounts. Sany Heavy Industry also developed its Sany SCRM system on WeChat, which directly connects dealers with end customers. Elon Musk once said, “If you live in China, basically, you’ve got everything you need if you’ve got WeChat. We will have tremendous success if we can recreate that on Twitter.”2 Some media in the United States even believe that “for social media platforms like Facebook, the best way to understand their future path is to learn from WeChat as an example.”3 As per official disclosures, WeChat’s user base has surpassed 100 million, 200 million, and 300 million in March 2012, July 2012, and January 2013, respectively. Its monthly active users reached 650 million, 989 million, 1.098 billion, 1.165 billion, 1.225 billion, and 1.309 billion in Q3 2015, Q4 2017, Q4 2018, Q4 2019, Q4 2020,

2

https://baijiahao.baidu.com/s?id=1735848282711717322&wfr=spider&for=pc. Ben Thompson, the founder of Stratechery, a technology research firm in the USA, http://world. chinadaily.com.cn/2016-08/03/content_26333440.htm. 3

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and Q4 of 2022, respectively,4 demonstrating its phenomenal growth and enormous user base. WeChat has become a remarkable story, fundamentally changing the way of life for its users and transforming the entire market. This chapter will delve into the journey of WeChat, its impact on consumers and the market, and how it accomplished what it achieved.

6.1 From Zero to One: Before the Birth of WeChat The internet emerged in China during the mid-1990s, paving the way for the rise of brands such as Baidu, Taobao, and QQ, Tencent’s instant messaging platform. By 2010, these brands had become the dominant players in search, e-commerce, and social networking markets. However, the introduction of the iPhone in 2007 and the Android operating system in 2008 marked the beginning of the mobile internet era, with a particular focus on mobile-based communications via smartphones. This shift created uncertainty as to whether these PC-era brands could maintain their dominance in the rapidly evolving mobile internet market. Around 2010, Kik emerged as a new player in the messaging app market. In late December of that year, Lei Jun, the founder of Xiaomi Technology Company, developed the first Kik-like app in China called Mi Talk. The app was initially designed for the Android operating system and later developed for the iPhone. It took only one week for the Xiaomi team to create Mi Talk, which was marketed with the slogan: “Love free, love real-time, more convenient than SMS, and no worries about phone bills.”5 Despite the presence of QQ Mobile and Feixin, an IM software developed by China Mobile, in China’s market at the time of Mi Talk’s release, QQ Mobile was plagued by poor user experience, while Feixin lacked support for cross-platform operations with carriers. Mi Talk aimed to fill the gap in the market for IM apps based on WiFi. Xiaomi began internal testing at the end of 2010, and within six months of its launch, Mi Talk had registered 2 million users. By June 2011, Mi Talk had expanded to cover multiple platforms, including Android, iPhone, and Symbian.6 Xiaomi was not the only company to recognize the opportunity for instant messaging (IM) apps in China at that time. Other companies, such as Feixin, Kaixin, and Shanda, also began exploring Chinese versions of Kik. In particular, Tencent’s Guangzhou R&D center, led by Allen Zhang, was secretly developing its own app, “WeChat,” when Mi Talk was launched. Zhang, who had previously developed the popular Chinese email software Foxmail, which Tencent acquired in 2005, was responsible for email-related R&D and operations at Tencent. He spent over three years experimenting with his product, QQ Mail, which eventually became the most widely used email product in China. 4

From the official releases of the Annual Reports of WeChat and Tencent. From an official release by Xiaomi Corporation. 6 https://baijiahao.baidu.com/s?id=1707822310381993063&wfr=spider&for=pc. 5

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Through continuous interaction with email users, Zhang gained a deeper understanding of email products and their users and used the email platform as a testing ground for new concepts. He also developed several other products, such as Reading Space and QQ Drifting Bottle. While Reading Space represented an initial exploration of “user communities” and “social products,” offering simple interpersonal interaction, QQ Drifting Bottle provided users with a novel and interesting experience, creating a new channel for making friends with unknown people. These products greatly increased the activity and stickiness of email users and laid the foundation for WeChat’s success later on. Similar to Lei Jun, the emergence of Kik also caught Zhang’s attention, as mentioned earlier. It was viewed as a significant threat to Tencent’s mobile version of QQ Mail, known as “Handheld Mail,” because it represented a new instant messaging (IM) app that could be used on mobile internet. With the support of Tencent’s CEO Pony Ma, Zhang’s QQ Mail team quickly shifted their R&D focus from developing “Handheld Mail” to creating a Kik-like IM tool, which was named “WeChat,” meaning “miniature mail” in Chinese. Initially, WeChat was developed as a high-speed short mail, but it was so fast that users did not consider it to be just an email. Since it was developed by the email team, WeChat reused as much of QQ Mail’s backend protocol and framework as possible, enabling rapid implementation. The communication protocol also utilized email’s HTTP instead of the typical UDP used by instant messaging tools. Consequently, sending a WeChat message is similar to sending a miniature email through the WeChat backend. Back in 2010, Zhang expressed his desire for the iPhone 5 to not support phone functions. His intention was to avoid paying phone bills while still being able to receive messages on Kik, use Google Voice for talking, and engage in video chats through Facetime.7 WeChat fulfilled all of Zhang’s expectations by integrating the messaging function of Kik, the voice function of Google Voice, and the video function of Facetime into a single platform. This integration was particularly useful at the time when phone functions were rarely utilized. On January 21, 2011, WeChat launched its testing version 1.0 for iPhone users, which was similar to Kik. This version of 1.0 allowed users to import their existing contact information through their QQ number. The app provided basic functions such as instant messaging, photo sharing, and avatar changing. With the subsequent testing versions 1.1, 1.2, and 1.3, WeChat gradually added new features, including support for reading phone contacts, private messaging with Tencent Weibo, and multi-person chat. By the end of April 2011, WeChat had already accumulated four to five million registered users.8 On May 10, 2011, WeChat launched version 2.0, which introduced a voice messaging function similar to Talkbox.9 This new feature greatly expanded WeChat’s user base and attracted many individuals who preferred voice messaging over typing 7

Allen Zhang’s statement on Tencent Weibo at 23:58, November 19, 2010. https://www.jiemian.com/article/415255.html. 9 The Chronicle of Weixin, released by WeChat. 8

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Fig. 6.1 WeChat has become a lifestyle in China in the information age. Source Yuming Ren/China Business Network Ltd., Shanghai

on their phones. Subsequent releases, from versions 2.1 to 2.5, added support for video messaging and introduced the “Nearby People Search” feature, which further fueled rapid user growth. By this time, WeChat had already amassed 15 million users. By March 2012, WeChat’s user base had exceeded 100 million.10 On April 19, 2013, WeChat released version 4.0, which added an album function similar to Path and Instagram. This update allowed users to share albums within their friends’ circles. Shortly after, the release of WeChat Moments further enhanced user stickiness. By September 17, 2013, WeChat’s user base had exceeded 200 million, and less than four months later, on the late night of January 15, 2014, WeChat announced that its user base had surpassed 300 million (Fig. 6.1).11 The fast growth of WeChat can be attributed, in part, to the support of Pony Ma and Tencent headquarters, as they facilitated the migration of a large number of existing QQ users to WeChat, which created a significant social network effect. When QQ users noticed their friends on their QQ contact list using WeChat, many of them promptly installed the app as well. At that time, QQ and WeChat were fully interoperable, allowing QQ users to easily register for WeChat accounts with just one click. Furthermore, WeChat observed that the primary user group of QQ consisted mostly of the younger generation, with few middle-aged and senior citizens using it. To attract these age groups, WeChat specifically designed and developed various 10 11

Ibid 7. Compiled according to official releases by WeChat.

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features and functionalities, tailored to the needs of these users. For example, they abandoned the previous cumbersome method of registering for QQ via a website and, instead, introduced a way of one-click registration directly through a mobile phone number, simplifying the registration process for elderly users. They also adopted user-friendly and intuitive designs, ensuring that WeChat was easy for the elderly to understand and quickly learn how to use. As a result, a considerable number of middle-aged and elderly individuals were attracted to using WeChat. Additionally, many young people who had close relationships with them, such as children, juniors, and subordinates, also started using WeChat to facilitate communication with them. Over time, WeChat gradually extended its reach within people’s entire social circles and emerged as the dominant brand in the Internet communication market in China, surpassing Mi Talk.

6.2 WeChat’s Product Portfolio Over the years, WeChat has made significant progress in developing and introducing a wide range of new products and features, enhancing its innovative product portfolio and catering to various scenarios in users’ lives. This relentless commitment has played a pivotal role in WeChat’s sustained dominance in China’s internet communication market. In this section, we will delve into some of the most notable products in WeChat’s diverse offering portfolio.

6.2.1 Public Account: Empowering Even the Smallest Entities to Have Their Own Brand A WeChat public account is an online account operated on the WeChat platform that provides various forms of information, services, promotions, and other content to users. These accounts can be created by individuals, businesses, government agencies, and organizations, enabling them to promote and distribute their messages through the publication of text, images, voice, video, and other formats. Meanwhile, users can follow different public accounts to receive relevant information and services, as well as interact with the account owners. Today, public accounts have become an integral part of the WeChat ecosystem, serving as a crucial channel for individuals and businesses to promote their brands, engage in marketing and advertising activities, and provide services to their audience. There are two types of public accounts on WeChat: subscription accounts and service accounts. Subscription accounts primarily serve as a channel for media outlets and individuals to distribute information to their users through WeChat. Service accounts, on the other hand, provide businesses and organizations with more

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advanced features, allowing them to establish a public account service platform with a focus on service-oriented interactions and user management. As social platforms have become the primary channel for new media communication in China, public accounts have emerged as a cost-effective and efficient tool for self-media to provide information services. In recent years, with the rapid growth in the number of individual information service providers utilizing public accounts, many personalized self-media have transitioned into team-based and brand-based operations, resembling corporate entities and exploring diverse revenue generation methods. At the same time, WeChat has been continuously enhancing the capabilities of public accounts through collaborations with various partners, aiming to develop diverse application scenarios and provide users with intelligent solutions. For businesses, public accounts have become a vital tool for small and mediumsized enterprises to accelerate growth, boost revenue, and enhance efficiency. Many companies are now opening public accounts and investing in their development to leverage this tool for product sales, customer service, public engagement, and cost-saving operations. For individual users, public accounts offer an alternative way to access the information and services they need in real-time. Users can subscribe to different types of public accounts in various fields based on their personal preferences and needs. Additionally, they can also conveniently access online services such as discounts, food ordering, and shopping through merchants’ public accounts. WeChat public accounts have also been utilized by government agencies in China to efficiently disclose information, release news, and interact with citizens. In particular, public service-oriented accounts have been created for issues closely related to people’s daily lives, such as education, healthcare, elderly care, transportation, and social security. These accounts help address the challenge of “last mile connectivity” by making it more convenient for ordinary people to access services provided by government agencies in these areas. This allows advancements in internet technologies to truly benefit a wider range of people. Since its launch in July 2012, WeChat’s public account has become a mainstream way of communication for sharing original content, conducting business marketing, and releasing government information both online and offline. Currently, there are over 20 million public accounts established on the WeChat platform.12

6.2.2 WeChat Pay WeChat Pay is a third-party payment platform and an integral component of the WeChat product portfolio. It offers secure, convenient, and professional online payment services to individuals and businesses. With its unique concept of “WeChat 12

“The 2019–2020 WeChat National Employment Influence Report”, jointly released by WeChat and The China Academy of Information and Communication Technology, May 2020, http://www. caict.ac.cn/kxyj/qwfb/ztbg/202005/P020200514604388340272.pdf.

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Pay, not just payment,” the platform has created numerous service and application scenarios for users, including shopping, dining, travel, doctor visits, and utility bill payments. Moreover, it provides professional payment collection capabilities, operational functionalities, fund settlement solutions, and security guarantees for various types of businesses and small merchants. By connecting companies, products, stores, and consumers through WeChat, the platform brings smart living to reality. In October 2021, WeChat Pay launched its brand video account, providing several post-payment capabilities such as video redirection, live streaming reservation, brand red envelopes, redirection to video accounts after payment in mini-apps, and brand coupon distribution. Additionally, WeChat Pay Score was developed to measure the credibility of individuals and businesses, simplifying the process of “building trust.” As of January 2022, more than 50% of WeChat Pay users have activated WeChat Pay Score, which covers over 3,000 industries.13 This development has been beneficial for both individuals and businesses, as it allows users to assess the credibility of businesses and make informed decisions. In particular, “WeChat red envelopes” are a popular application of WeChat Pay that allows users to send and receive digital gifts with monetary value, serving as a prime example of WeChat Pay in action. It was launched by WeChat on January 27, 2014. With this feature, users can view transaction records and withdraw funds. WeChat users have the option to send two types of red envelopes to recipients. The first type is the “random amount red envelope,” where users set the total value amount and the total number of red envelopes, and the system generates different amounts for each individual red envelope randomly. The second one is normal red envelopes, where each envelope contains an equal amount. During the 2014 Spring Festival, WeChat red envelopes gained immense popularity, and sending and receiving them became a new trend for festival celebration activities, symbolizing good luck and blessings for the coming year. On the eve of the 2014 Chinese New Year, an astonishing 16 million WeChat red envelopes were sent and received. This number further increased to 1.01 billion on Chinese New Year’s Eve in 2015. During the Chinese New Year holiday period in 2019, a remarkable total of 823 million users sent and received WeChat red envelopes.14 It is interesting to note that the popularity of WeChat red envelopes not only represented the success of a social product but also triggered the explosive development of WeChat Pay. Many users linked their bank credit cards or debit cards to WeChat Pay in order to send and receive red envelopes. From the perspective of payment and collection methods, the logic behind WeChat red envelopes is similar to WeChat’s AA Collection,15 as both involve a “one-to-many” relationship. The difference lies in the “direction” of the transactions. In AA Collection, one person collects money from multiple others, whereas in WeChat red envelopes, multiple people receive

13

From data officially released by WeChat. Ibid 13. 15 Liang Chen, “How did WeChat Red Envelop (Hongbao) come into being and ignite a trend?” Tencent Technology, https://tech.qq.com/original/tmtdecode/t544.html. 14

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money from one person. The collection function of AA Collection actually laid the technical foundation for WeChat red envelopes. From a marketing perspective, the initial design of WeChat red envelopes was for one user to “ask” other users for red envelopes, resembling AA collections. However, this approach could make the person being asked to feel reluctant to participate. To make the experience more appealing and engaging, the design was altered to allow users to “snatch” red envelopes by quickly claiming them before others in the WeChat group. This modification in design was based on an understanding of human psychology and made the product more enjoyable and acceptable for all participants. The WeChat team also carefully designed the way of distributing the total money amount into each red envelope by the system. Initially, the idea was to select lucky numbers, particularly those ending in 8, which are considered auspicious in China. However, this approach could lead to some users receiving less favorable number combinations. To address this issue, a random number generation method was adopted to ensure fairness and equal chances for all recipients. Regarding user operation, the sender has the ability to choose the quantity and monetary value of the red envelopes, as well as add personalized blessings. These red envelopes can be sent to friends through the “New Year Red Envelope” public account, with payment made using WeChat Pay. Upon opening the red envelope, recipients can claim the monetary value they received, and link their savings card with WeChat to withdraw the cash, which becomes available one business day later. In fact, the “red envelope” concept was not only developed by WeChat, similar products were also launched by Alipay and Sina Weibo. However, WeChat had the advantage of a vast user network with established social relationships. Additionally, unlike Alipay, which first gained traction on the PC platform before transitioning to mobile, WeChat Pay was initially developed as a mobile product from the very beginning. By integrating payment functions and enabling the linkage of users’ bank cards, WeChat was able to provide the capability for cashing out directly from its platform. Initially, the first payment scenario where users typically used WeChat Pay was gaming. Users could enhance their gaming experience by purchasing in-game items. The interaction with WeChat friends and the leaderboard settings also indirectly incentivized some users to use WeChat’s payment function. At the same time, the sticker store was also launched, which included some stickers that required users to pay for them. Afterward, WeChat Pay launched channels for mobile top-ups, and payment for lottery tickets, movie tickets, and taxi bills, making the scenarios where users can use WeChat Pay much more diversified. The entire ecosystem of WeChat Pay is built in partnership with various service providers. Currently, over 23,000 service providers serve millions of merchants every month, and more than 1,800 banks and payment institutions promote mobile payments together. It is estimated that over 97% of offline transactions come from

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service providers. As of today, WeChat Pay has compliantly entered over 64 countries and regions worldwide and supports direct settlement in 24 currencies.16

6.2.3 Mini App A mini app is a type of application that can be used without downloading or installing it onto a device. It is easily accessible through WeChat by scanning a code or searching for it, without installing or uninstalling any applications. The mini-app represents WeChat’s vision for the future of application development, as it provides a better user experience than websites in the PC era and greater convenience than downloading apps in the mobile internet era. Zhang has emphasized that all mini-app applications should be easily accessible and have distinct features. As can be seen, one of its primary features is the elimination of the download process, enabling users to use them directly. The second feature is their reachability, making everything easily accessible. For example, if a user wants to control a nearby lamp, they can simply scan it with their smartphone, and the controlling application will immediately activate. In settings such as museums, users can scan a QR code in front of an exhibit to access additional information about it. The third feature is the “use and go” functionality, allowing users to scan a restaurant’s QR code to either join the queue or order food without the need to download the restaurant’s app. Finally, mini-apps do not require uninstallation after use, making them much more flexible compared to traditional apps.17 Mini apps represent a breakthrough in mobile internet technologies, bringing significant social benefits by greatly improving the efficiency of social connections through the internet and promoting smart solutions in various industries, including transportation, healthcare, education, public welfare, poverty alleviation, and more. The elimination of the need to download and install applications has significantly reduced the cost of accessing services for users while helping small and medium-sized enterprises reduce their development and operating expenses. In the catering industry, for instance, mini apps have been successfully utilized for QR code ordering, pre-ordering, and takeout services. In 2021, the average daily usage of mini-apps by catering merchants reached tens of millions of users, with a repurchase rate three times higher than the industry average. On a year-on-year basis, the transaction volume using mini-apps in the catering, retail, and tourism industries increased by over 100%, the number of mini-apps with transactions increased by 28%, and the average daily transaction users increased by 80%.18 16

Official announcement during the WeChat Open Class, January 6, 2022, https://baijiahao.baidu. com/s?id=1721191834686111243&wfr=spider&for=pc. 17 Allen Zhang’s speech at the Tencent University WeChat Open Class, Pro Edition, December 28, 2016, https://baijiahao.baidu.com/s?id=1554933816518015&wfr=spider&for=pc. 18 ALADING Research, “The 2021 Annual White Paper on Mini App Internet Development”, https://www.sohu.com/a/531447363_120189950.

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Mini apps have also been widely utilized for epidemic prevention and various government services. During the COVID-19 pandemic, mini-apps for nucleic acid testing and vaccine appointments have served a total of 700 million users, while documentation mini-apps have cumulatively served 750 million users. In times of crisis, such as the 2021 Zhengzhou flood disaster in Henan province, the Tencent Docs mini app was instrumental in facilitating the allocation of rescue resources for flood control. On average, over 100 million users access government services through mini apps every day.19 The Labor Research Institute released the “Digital Ecological Employment and Entrepreneurship Report” in August 2022, which revealed that there were more than 8.39 million employment opportunities related to the development, product, and operation of WeChat mini-apps in 2021. The number of mini-app developers has exceeded 3 million, and the monetization scale of online traffic has increased by more than 90%, with the improved advertising capabilities of mini-apps. In 2021, the daily active users of mini-apps surpassed 450 million, which grew to over 500 million in Q1 2022. On a year-on-year basis, the number of active mini-apps increased by 41%, while the daily usage frequency rose by 32%.20

6.2.4 WeCom, An Enterprise Version of WeChat WeCom is an enterprise office platform created by the WeChat team, which offers a communication experience similar to WeChat for individual users. As an internal and external information connector exclusive to businesses, WeCom serves as not only a communication tool but also a link connecting various business functions. It integrates the core business information of personnel, finance, materials, production, and sales into one platform for centralized management and comprehensive analysis, allowing managers to have an overview of the company’s operation and make necessary adjustments to its strategies in a timely manner. Since its launch, WeChat has operated as a real-name system, with individual users forming social networks with one another using their real identities. These identities create numerous connections, which present significant commercial opportunities. WeCom was developed to help companies take advantage of these “identities” for business purposes. The original form of WeCom was known as “Enterprise Accounts,” which operated within the WeChat app as a “public account.” Its primary advantage was the convenience of not requiring a separate app download, which made it popular among WeChat’s “C-end” (customer end) users. However, the WeCom team ultimately decided to create a standalone app to separate users’ work and personal identities. Within this app, companies can integrate their employees’ WeChat accounts with 19

Official announcement during the WeChat Open Class, January 6, 2022. The Chinese Academy of Labor and Social Security Sciences research team, “The Digital Ecological Employment and Entrepreneurship Report”, August 10, 2022.

20

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other information through an internal address book, streamlining HR management and providing employees with an externally-facing identity assigned by the company. Consequently, when conducting external business, employees are identified as “Allen Zhang from Company ABC’ rather than simply “Allen Zhang” on WeCom. WeCom version 1.0 was launched in April 2016, with the concept of “separation of work and life”. It introduced three primary features: integrating Tencent enterprise email with WeChat enterprise accounts to synchronize address books with one click on the mobile phone; integrating various communication tools, such as phone, email, and voice; and providing corporate daily management functions, such as receipts, reminders, favorites, mobile announcements, attendance, leave, and expense reimbursement. In June 2017, WeCom version 2.0 was launched as a platform to connect internal office systems within corporations. Considering the high-frequency communication requirements in daily office operations, WeCom integrated several office modules, such as CRM, with its instant messaging function, which greatly improved the overall work efficiency for enterprises. As a result, WeCom was well transformed into a comprehensive mobile office platform, providing a unified entrance to various daily office operation scenarios for companies. In March 2018, WeCom began beta testing its integration with WeChat messages, enabling enterprise employees to add customers’ personal WeChat accounts as “friends” and send one-to-one messages directly through WeCom. In May 2018, WeCom further expanded its connectivity by integrating with WeChat mini-app messages. This fully interconnected WeCom and WeChat ecosystem provided greater flexibility for enterprise employees to effectively communicate with customers and seamlessly conduct business operations. In December 2019, WeCom launched WeCom 3.0, which officially linked WeCom to WeChat, connecting online and offline customer contacts. WeCom 3.0 introduced a new “Efficiency Tools” suite, which integrates office tools such as meetings, WeDoc, and WeDrive. The concept of “people as a service (PaaS),” as proposed by Zhang, aimed to make every employee a window of the enterprise to provide external services. WeCom members were encouraged to use WeCom 3.0 to publish business content on their customers’ WeChat friends’ circles, introduce the latest product information in real-time, and interact closely with customers. This approach provided enterprises with more effective channels to reach customers. On January 11, 2022, WeCom released version 4.0, which further upgraded its interconnectivity with WeChat by fully integrating with Video Accounts. Additionally, it introduced service capabilities for WeChat customers to optimize their shopping experience and improve collaboration with various modules within the WeChat ecosystem. The new version enables collaboration between three major Tencent products, WeCom, Tencent Docs, and Tencent Meeting, to generate new levels of productivity. Guangdong Yihao Food Co., Ltd. (or “Yihao Food”) can serve as a good example of the capabilities of WeCom for enterprises. Established in 2004, Yihao Food is a large-scale food company involved in breeding product research and development, production, retail, and branding. Since 2007, Yihao Food has expanded its presence

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to over 30 cities in China, including Guangzhou, Shenzhen, Beijing, and Shanghai, and launched a fresh food chain store called “Meat Union” in 2019. As of 2020, Meat Union had opened over 500 offline stores.21 With the rapid expansion across all business lines, the challenge Yihao Food encountered was the low efficiency of its operating system, in particular, its internal communication system, which could not keep up with the company’s business development. For example, the company executives were not able to approve various requests from subordinators promptly every day, and couldn’t quickly locate the employees they need to reach, either. In 2016, Yihao Food decided to adopt WeCom for internal communication. By using WeCom, both the front-end marketing department and the upstream breeding units in the supply chain were reorganized through WeCom, resulting in significant improvements in vertical and horizontal communication efficiency. In addition, Yihao Food integrated WeCom with various internal systems, including the OA system, ERP system, and systems used by major distributors, which not only resolved the approval challenges but also brought unexpected management enhancements. For instance, when new employees join, they would be automatically added to the company’s address book through WeCom, thereby entering the company’s collaborative operating environment. Since 2019, WeCom has been connected with WeChat’s consumer-oriented platform. WeCom provides individuals with a B-side (business) identity, such as Yihao Food employees. When a C-side (consumer) customer visits a Meat Union store to purchase pork, the most convenient way to engage with them is by adding them as a friend through WeCom on the spot, establishing a direct one-on-one connection with their WeChat ID. This connection is different from WeChat’s previous enterprise accounts, where customers unilaterally followed the account. WeCom now enables a more stable and secure connection based on the established relationship between the customer and the enterprise. Through one-on-one chats, group chats on WeCom, or showcasing content on the enterprise WeChat Moments, Yihao Food can attract and nurture its own private domain traffic while providing enhanced service to customers. Taking the Meat Union as an example, before using WeCom, franchisees relied on creating WeChat groups to reach customers within a specific area. If a franchisee decided to leave, they would naturally take away the customer group with them, and the headquarters of Yihao Food had little control over it. WeCom, however, could directly address this issue through the operations set up in the backend. Furthermore, WeCom has provided valuable assistance to Yihao Food for digital marketing. For instance, in a WeChat group for a specific stall, customers often inquire about current discounts and new arrivals or complain about the freshness of the purchased meat. Previously, these inquiries required manual replies from the group owner. With WeCom, however, the stall can utilize the function of automatic replies. For example, when asked about discounts, the system can automatically display available coupons. When a customer files a complaint, the system can automatically provide a dedicated complaint link. Additionally, the system 21

https://baijiahao.baidu.com/s?id=1739131627881693103&wfr=spider&for=pc.

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can automatically provide real-time logistics updates if a customer requires home delivery. Not only that, but WeCom can do even more. In 2016, Yihao Food integrated WeCom with its ERP system, connecting weekly reports and data on breeding and birthing to WeCom, which allows frontline breeders and technicians to open WeCom and immediately see real-time information about the pigs. This provides the possibility for fine-tuned breeding on the supply side. As of 2021, Yihao Food has established individual records for each sow and inputs daily information into the system. Based on this data, the system can predict pregnancy dates, delivery dates, and other production-related information. Furthermore, the services provided by WeCom in the field of big data have played a positive role in detailed cost accounting for pork, procurement, and reserves of feed and medicines in pig farms, and even mitigating fluctuations in pork prices. Since its inception on April 18, 2016, WeCom has steadily improved its capabilities to link WeChat with businesses and adapted to various personalized business scenarios for enterprise users. As of January 2022, the number of enterprises and organizations using WeCom has surpassed 10 million, with over 180 million active users, and these active users are further connected with more than 500 million users on WeChat. As revealed by the WeCom team, 1.15 million corporate employees engage in approximately 140 million service interactions with users through WeCom.22

6.2.5 Video Account A video account is a platform where users can record and create content, providing a window to observe and understand the world. Since its internal testing in January 2020, WeChat’s video account has undergone several iterations, gradually expanding its capabilities to support long videos, dynamic music editing, live streaming, live commerce, quick sharing, setting as status, homepage product showcases, and other capabilities. Within WeChat’s product portfolio, the video account aims to become the most versatile content component, interacting with other components within WeChat and ultimately becoming the best platform for video and streaming media content. In December 2021, Westlife’s first global online live concert was broadcast on WeChat’s Video Account, attracting over 27 million viewers with a peak of 1.5 million concurrent viewers.23 If a concert at the Bird’s Nest, Beijing National Stadium, can accommodate 100,000 attendees, it would be equivalent to having 15 fully occupied stadiums simultaneously watching this concert on video account. On January 31, 2022, the CCTV Spring Festival Gala premiered “Vertical Live Streaming” on a video account. On Chinese New Year’s Eve, over 120 million viewers 22

The WeChat official announcement at the News Conference on Enterprise WeChat 2022 New Product Launching, January 11, 2022. 23 Official release by WeChat.

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watched the Spring Festival Gala on the video account with a vertical screen, sharing this cultural feast from a new perspective. The immersive viewing experience won high praise from viewers, and over 350 million likes, over 9.19 million comments, and over 5.51 million shares were received in the video account live room.24 Video accounts have created a new territory for brands to self-broadcast, which refers to the advertising content that is produced, published, and promoted by the brand itself with the aim of showcasing their products or services to potential customers, and increasing brand awareness and loyalty. The typical way for brands to self-broadcast is by using live-streaming e-commerce to sell products, as exemplified by GOELIA, a women’s fashion clothing brand with a 28-year history. In October 2020, WeChat’s video account officially launched its live streaming function, which GOELIA started to use. At that time, GOELIA viewed video account live streaming primarily as a function suitable for brand promotion and did not fully explore its potential for monetization. Consequently, GOELIA took a more laid-back approach to live streaming on video accounts, with broadcasts occurring only two or three times a week for 1–2 hours each time, and the content focused more on brand storytelling and virtual tours of new stores rather than aggressively pushing product sales. As a result, GOELIA’s sales performance on video account live streaming remained flat, resulting in a low return on investment. In September 2021, GOELIA received data from WeChat video account staff that showcased the success of an offline brand using live streaming. This brand achieved a daily Gross Merchandise Volume (GMV) of around RMB 200,000. It was evident that this brand had a much higher frequency of live broadcasts and stronger sales attributes compared to GOELIA. The video account staff emphasized that, in terms of brand promotion, live streaming is similar to opening an offline store, while not streaming is equivalent to keeping the store’s door closed. If customers have no way to enter, how can they shop? These words convinced GOELIA’s executives to reconsider their approach. As a result, GOELIA formed a dedicated live streaming and operations team and decided to increase the frequency of their video account live streams from 2– 3 times a week to 3 times a day, each lasting 4–6 hours. After just half a month, GOELIA observed significant results. Compared to half a month prior, their GMV on a single day of video account live streaming had increased multiple times, and even more unexpectedly, the number of viewers for a single live stream almost reached 300,000.25 In WeChat’s product portfolio, video accounts are seen as the most “atomized” content component. They are expected to work in synergy with other products within the WeChat ecosystem and become the best carrier form for video and streaming media content. This type of synergy within the WeChat ecosystem has 24

Official release by China Media Group of the Central Radio and Television Station, https://bai jiahao.baidu.com/s?id=1723523789541134359&wfr=spider&for=pc. 25 “Why is Video Account the New Battlefield for Brand Self-Broadcasting?” 21st Century Business Herald, January 7, 2022, https://baijiahao.baidu.com/s?id=1721540195041316521&wfr=spider& for=pc.

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already been demonstrated in cases such as GOELIA’s. By integrating video accounts with WeCom, fans of WeCom can book and watch GOELIA’s video account live streaming, and fans of video account live streaming can become members of WeChat communities. In its development process, WeChat has pursued a core concept of decentralization. Whether brands add friends, groups, or public account fans, they are all viewed as private domain assets of WeChat that can be smoothly connected and converted from each other. For example, in August 2021, Pop Mart had planned to hold an international trendy toy exhibition in Beijing, but the sudden outbreak of the epidemic forced the cancellation of the offline exhibition. At that time, Pop Mart chose to hold an online exhibition in the video live-streaming room. Ultimately, Pop Mart broadcasted continuously for three days during the exhibition, with a total audience of over one million and a cumulative transaction volume of over RMB 25 million.26 The rapid transition from offline to online did not reduce the enthusiasm of the audience, as the video live streaming reached the loyal fans that Pop Mart had accumulated in the WeChat ecosystem in the past. According to the “Digital Ecological Employment and Entrepreneurship Report” released by the Labor Science Institute in August 2022, video accounts created 13.41 million job opportunities in video shooting and live commerce in 2021.27 At the Third China Short Video Conference held on August 10, 2022, speakers from the media considered video accounts to have brought unique value to media integration and cross-screen ecology construction and opened up a new space for public opinions. Video account is expected to further focus on content that users like and find value in the areas of general knowledge, life, and information, and provide prioritized support to verified media and original content creators.

6.3 The Secret of WeChat’s Success The rapid rise of WeChat in China’s mobile internet market has been remarkable, triggering great interest and curiosity about the secret of its success. According to Allen Zhang, the philosophy embraced by his team has been the most crucial factor in WeChat’s success. In an internal open letter to the WeChat business group when it was established in May 2014, he summarized several attributes inherent in this philosophy. Firstly, it is important to focus on doing things that provide value to users. Many decisions require trade-offs, but user value should always be the top priority. Even if a strategy provides short-term benefits but goes against user value, it should be avoided. All members of the WeChat team should ensure that their efforts are visible to users, not just to their colleagues and supervisors. 26

Ibid 21. The Labor Science Institute, “Digital Ecological Employment and Entrepreneurship Report”, August 2022.

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Second, it is crucial to maintain WeChat’s value proposition as it is reflected in the products and services that WeChat offers. Values play an important role in making decisions and resolving disputes. For instance, if the team believes that users should not be harassed in any way, then WeChat will avoid designing any product or engaging in any behavior that may cause harassment to users. Without a consistent value proposition, WeChat’s products and services may become fragmented, catering to different interests, and giving an impression of a “two-faced person” with different personal values and product values. Third, WeChat believes in maintaining a small-sized team and staying agile, even after the business group has grown. It is important to avoid being bureaucratic and procedural. For instance, WeChat once banned the use of PowerPoint, believing it reflected formalism. Although this approach may seem arbitrary, the goal was to maximize efficiency. WeChat will continue to limit the number of people hired and only recruit the best people to join the team. For an excellent team, fewer people are better than more. Fourth, prioritizing learning and rapid upgrades over past experience is crucial. The mobile internet landscape is evolving rapidly, and WeChat’s products need to keep pace with new trends and environments. Fifth, a systematic way of thinking is critical. WeChat follows its vision of “connecting people, connecting businesses, and connecting things” by establishing an integrated and self-operating system instead of building fragmented local business models. WeChat concentrates on a platform based on connectivity that is open to third-party access and collaborates with third parties to co-build an ecosystem of users and services based on the WeChat platform. A systematic way of thinking also helps to maintain the system’s transparency and fairness, enabling it to operate under established rules without outside intervention. Sixth, the principle of “letting users bring in more users and word of mouth win more word of mouth” is vital. In the era of interconnection, the network effect of the Internet promotes products and services. If WeChat can get one user to recommend the brand, word of mouth will spread. Creativity is not just about grand plans, but also about the little things the company does every day. The creativity of WeChat needs to be reflected in every detail and perceived by users, which in turn will encourage them to share their positive experiences with others. Finally, creativity and innovation are just as important as execution. WeChat encourages debates and finding the right solutions through argumentation at work. The team should not sacrifice their speculative abilities for the sake of team interests or personal relationships. Progress comes from both execution and speculation.28

28

Allen Zhang summarized these seven principles in an email sent to all employees when he was appointed as the President of Weixin Group on May 6, 2014, https://www.163.com/tech/article/9RJ K47HR00094ODU.html.

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6.4 The Closing Remarks: Even Ordinary Individuals Can Make Their Voices Heard WeChat is perhaps the most popular software in China today, and since its inception, it has been pursuing only one thing—connecting people. WeChat believed that, through the connection it helps established, even the most ordinary individuals can make their voices heard and showcase their powers, and even the smallest scenes can also get the attention of society to be explored. Let’s end this chapter with a few more examples that reflect WeChat’s belief in the power of connection. In the city of Yibin, Sichuan Province, there is a small street called Linjia Lane, which is home to dozens of tailor shops. Many of these shops have been in business since the late 1970s and have become more prosperous over time. However, their business was limited to a small geographic area with a radius of about 500 meters. When these shops connected online through WeChat’s various products, they were able to immediately expand their reach to the entire city. As their reputation grew, they even attracted outside orders from all over the country through video channels, tourism, and logistics. Skilled tailors on the street received more orders than they could complete, even when working through the night. Nowadays, customers and tailors can directly communicate via WeChat to discuss design layouts, techniques, and patterns for customized services. The tailors’ sewing machines have also been upgraded from manual-operated to computerized ones.29 Linjia Lane’s case demonstrates how WeChat’s online products helped small businesses break through spatial and temporal limitations to fully realize their potential. “Sister Mushroom” is another example of the power of connection through WeChat. Wu Shengcui, a 54-year-old woman living in a rural area of Hubei Province, spends her days working in her vegetable garden, fish pond, and chicken coop, like millions of other rural women. However, WeChat changed her life in the evenings. At 8 pm every evening, Wu becomes “Sister Mushroom” on WeChat. She puts on a pink coat, carefully applies makeup, and chats with friends from all over the country through live streaming, which she learned from a class on live broadcasting sales organized by her village. Initially, she did not think she could make money from streaming because she felt it was harder than farming and did not earn as much money as selling vegetables. But things changed when a person with the ID “Allen Zhang” awarded her a cup of milk tea and someone ordered her farm products. Wu was very excited all night, even though she didn’t know at the time that this person was the founder of WeChat. Later on, when her farm products sold for over RMB 1,000 yuan, Wu bought a sound system and danced freely in her backyard. She felt that she had rediscovered her true self on WeChat’s video platform, and she could finally be seen by others beyond her village.30

29 30

https://weibo.com/ttarticle/p/show?id=2309404724552948383851. https://www.sohu.com/a/456576726_120948001.

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Zhang has stated that WeChat’s goal for video accounts is to enable everyone to express themselves, not just internet celebrities and big-name bloggers.31 To achieve this, WeChat has lowered the barrier to entry for using mini-apps, video accounts, and WeChat to the lowest possible level. This has allowed for many social experiments that were previously unimaginable to grow boldly in China, and many barriers and divides have been crossed. WeChat has the most extensive network of contacts, enabling even the smallest voices to be heard, and allowing everyone to have their own brand. This is no longer just about meeting the need to increase income, but rather helping individuals achieve self-realization. In this sense, WeChat is playing an immeasurable role in the full and free development of people and social progress in China.

31

Allen Zhang’s speech at the 2021 WeChat Open Class, January 19, 2021, https://baijiahao.baidu. com/s?id=1689368801483595224&wfr=spider&for=pc.

Chapter 7

DingTalk: The Digital Way of Working in China

As Tencent led the way in providing a social platform for individuals through WeChat during the mobile Internet era, Alibaba shifted its focus towards facilitating connections among individuals within enterprise organizations and connecting enterprises with their upstream and downstream partners. Their objective is to establish a digital standard for workplace practices, improving office efficiency and collaboration with other businesses by digitizing workflows and enabling companies to leverage cloud and mobile technologies in their daily operations. In comparison with the well-established enterprise software market in Europe and North America, which features prominent brands like Microsoft, SAP, Oracle, Salesforce, and Adobe, there is a notable gap in China’s enterprise-level software market. China is home to approximately 40–50 million enterprises, with the majority being small and medium-sized enterprises (SMEs) that require informatization and digitalization. However, unlike well-developed countries in Europe and America, China encounters challenges in establishing a robust foundation for enterprise informatization. Many companies in China lack software talent, and a significant number of small and medium-sized enterprises (SMEs) do not have dedicated IT departments. Additionally, insufficient funds to invest in digitalization and a low willingness to pay for such services from users pose additional hurdles in the Chinese market. Over the years, China has developed powerful internet platforms with solid capacities such as instant messaging, audio and video, and security. These platforms have the potential to help enterprises and organizations acquire digital capabilities quickly and cost-effectively. However, the use of a universal software solution presents a challenge due to significant differences among various enterprise users. Relying solely on platforms and software-as-a-service (SaaS) vendors to provide standardized solutions is not feasible. For example, attendance and scheduling records directly impact employee payroll, but scheduling rules vary significantly across industries and companies. In the property management industry, wages are calculated based on half-hourly intervals, which is entirely different from companies and industries that calculate wages monthly or bi-weekly. Therefore, it would be ideal if platforms

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_7

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could offer software with a basic framework while allowing different users to write their own low-level code to meet their specific needs. This chapter focuses on DingTalk, a platform developed by Alibaba that provides basic enterprise software with user-self-developed low-code features, providing SMEs with an inclusive way to transform their digitalization process.

7.1 How Was DingTalk Born? Alibaba, including its well-known subsidiary Alipay, is widely recognized as the largest e-commerce enterprise in China, with a remarkable track record of success in B2C (business-to-consumer) transactions. However, it is less well-known that Alibaba also has a strong foundation in B2B (business-to-business) operations. In fact, when the company was established by Jack Ma in 1999, its primary offering was web pages in English, which small and medium-sized export companies utilized to advertise their products in foreign markets. The initial product was called “China Supplier”, and Alibaba formed a dedicated sales team to promote it, later known as the “China Supplier Iron Army”.1 During the advent of mobile internet, Alibaba’s Taobao and Tmall smoothly transitioned from PC terminals to mobile devices, emerging as China’s largest online retail platforms. However, Alibaba was not satisfied with what it had achieved in the e-commerce market and aimed to compete with Tencent in the social media field. In 2013, Alibaba introduced a mobile social product called ‘Laiwang,’ but it did not gain significant traction as expected. In January 2015, the team responsible for Laiwang redirected their efforts towards B2B and launched a mobile office software named ‘DingTalk,’ which serves as the central focus of this chapter. As early as April 2014, following the unsuccessful attempt to challenge WeChat, the team behind Alibaba’s “Laiwang” project adopted a different strategy. They began engaging with enterprise customers to explore the concept of “enterprise social networking.” Initially, they believed their target audience would be companies with 200–300 employees. However, during their interactions with these companies, they discovered that there was no interest in the product. The companies did not perceive any significant issues that they believed social networking could effectively address. One afternoon, after an unsuccessful visit to a company, the team decided to take a break and enjoy some stinky tofu at a small shop on Huanggushan Road in Hangzhou. During their meal, one of the team members recalled that a former classmate had established a computer trading company in the area. Intrigued, they decided to pay an impromptu visit to the company called “Compass”, even though it was not originally

1

Founded in 2000, “China Supplier Iron Army” is a sales team that operates under Alibaba’s B2B company. Its primary objective is to promote the membership-based product called “China Supplier” to small and medium-sized enterprises. Recognized for its exceptional sales prowess, both within Alibaba and beyond, the team is commonly referred to as the “Iron Army.”.

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on their interview list. Upon arriving at Compass, they discovered that the company employed over 80 employees. During their conversation with the owner, Mr. Shi, the team was able to identify several key “pain points” faced by the company. According to Mr. Shi, the most challenging aspect of his daily operations was the disorganization of work information. His employees communicated with him using various software applications, such as QQ, text messages, WeChat, and email. As a result, work-related information was scattered across different platforms, often mixed with personal information, making it difficult to sort and prioritize. Mr. Shi expressed a strong desire to extract workrelated information from this chaotic mix and establish a clean and organized work environment. After identifying Compass’ needs, the “Laiwang” team made the strategic decision to focus on developing an enterprise social networking product to address their communication issues. The resulting product was named “DingTalk.” At that time, Compass was exploring options to purchase office software from the market, but the available options they were interested in had complicated interfaces that would require a month of training for employees. Mr. Shi was concerned about the potential loss of productivity during the training period. However, DingTalk offered him a solution by providing their office software for free. The two teams worked tirelessly for three months, and by September 2014, the first Android version of DingTalk was ready for internal testing at Compass. As anticipated, the initial version of DingTalk for internal testing at Compass was not user-friendly and encountered several issues, including bugs, message loss, and application crashes. However, the following day, when Mr. Shi woke up, he discovered that all the bugs had miraculously disappeared. It turned out that the previous night, DingTalk’s product manager had been tirelessly working in Compass’ meeting room, fixing all the issues to ensure smooth operations the next day. After the successful internal testing, DingTalk and Compass established a cowork group where Compass employees could submit bug reports at any time. On one occasion, Mr. Shi discovered a bug at 2 am and promptly submitted it to the workgroup. He did not expect an immediate response, but to his surprise, a DingTalk engineer promptly replied and resolved the issue by 7 am the following morning. During the collaboration between the two teams, Mr. Shi proposed the addition of a “message reach” function that would indicate whether the recipient had read a message. He believed that this feature would help prevent co-workers from ignoring important messages. In response to this request, DingTalk developed the “DING” feature, which allowed users to convert a message into a phone call and send a voice reminder if the recipient had not read the message for an extended period or in case of urgent events. This feature ensured that the recipient would receive an SMS and voice call for the DING message, even if the DingTalk app was not installed on their mobile phone or if mobile internet was not enabled. To better meet the needs of enterprise social networking, DingTalk implemented a registration system specifically for enterprise users right from the beginning. Certified enterprises were able to import their employee contact lists into DingTalk, enabling all employees to view each other’s contact information. Previously, HR departments

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had to manually update the contact list every time when a new employee was hired. With DingTalk, however, contact information is automatically updated in real time, eliminating the need for additional notifications. Mr. Shi believed that this co-creation process with DingTalk helped identify previously unnoticed problems, and he may have submitted the most “pain points” among all of DingTalk’s enterprise users. Attendance recording was another pain point that DingTalk tackled. In 2015, a DingTalk team member named Tian Peng spent two months at the Compass office, studying their attendance process and developing a smart attendance function for DingTalk. At that time, attendance at Compass was manually recorded, and generating attendance reports was a time-consuming task that could take skilled personnel specialists 3–5 days to complete for nearly a hundred employees. Tian Peng arrived at the company early every day to observe how employees clocked in, identifying problems and bugs and promptly resolving them. This iterative process continued for over a month until the smart attendance function became stable. With this feature, employees could easily clock in and out using their mobile phones, and attendance data were automatically generated and stored in the cloud, greatly improving the efficiency of the attendance process. The attendance recording process exemplifies the initial development approach of DingTalk. By digitizing the attendance recording process, valuable data, such as employee logs, chat frequency, and response speed, could be collected. For instance, if an employee consistently arrives late for work, DingTalk can alert the manager that the employee may require attention from the HR department. Similarly, if an engineer takes an extended period of time off from work, DingTalk may infer that the employee is preparing for a job change and attending interviews. The co-creation process with DingTalk played a pivotal role in the rapid growth of Compass. Within a relatively short period, Compass successfully incubated two additional companies—a financing leasing company and an enterprise service company— with a combined workforce of over 300 employees. The financing leasing company alone was valued at RMB 380 million yuan. Mr. Shi acknowledged that while it took him a decade to build a computer company with an annual sales revenue of only a few million yuan, he was able to establish a company worth RMB 380 million yuan in just over a year. He attributed a significant portion of this success to DingTalk. The platform helped enhance his management skills and improve his team’s work efficiency, ultimately leading to overall growth and success.2 When DingTalk was initially launched in January 2015, it served as an instant messaging (IM) software with a primary focus on the effective delivery of information through the “message reach” feature. However, within four months, it expanded its capabilities by integrating email, office automation (OA), and shared storage into the platform. Through collaborations with various enterprises, including Compass,

2

Lu Hualei, “The Secret to DingTalk’s Growth: ‘Co-creation’ DNA Creates a Unicorn in the Enterprise Market”, Economic Weekly, June 2017, https://boyamedia.com/category/detail/6078/.

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DingTalk continuously upgraded its software, ultimately transforming it into an intelligent mobile office platform that seamlessly integrated communication and collaboration features. On December 31, 2016, DingTalk officially announced that its business had reached 3 million companies,3 underscoring the platform’s rapid growth and widespread adoption. The co-creation process with its customers empowered DingTalk to leverage Alibaba’s expertise in digitalizing operational processes and develop highly applicable functions that could be extended to external customers. For instance, within Alibaba, the utilization of Bluetooth tags on every display screen enabled easy tracing of each machine’s location. This feature provided management with real-time information on the whereabouts of over 100,000 display screens every day, eliminating the need for inventory checks. Previously, asset inventory could take one to two months and required the use of scanning guns. Today, with everything, including physical items, human resources, and the operating system, connected through the mobile platform, DingTalk can readily apply this efficient system to benefit its customers. Many of DingTalk’s customers are manufacturing enterprises with production lines in multiple locations. To streamline equipment management across the company, DingTalk developed a platform that allows headquarters to integrate emergency alarms from each production line with DingTalk, ensuring real-time notifications to relevant personnel. This functionality was made possible through a similar system already in place at Alibaba, where all emergencies and responses are coordinated through DingTalk. In the event of system crashes, full databases, or other issues causing online systems to become unusable, DingTalk enables quick emergency responses and immediate notifications to the appropriate personnel. With DingTalk, it is clear who is taking charge and how quickly responses are being provided, typically taking just a few minutes or hours. Alibaba’s internal standard requires faults to be addressed within one minute, identified within five minutes, and resolved within ten minutes. Enterprises using DingTalk can synchronize their original systems through DingTalk’s interface with device sensors, allowing for the identification of anomalies that can be promptly shared as messages with the entire group, including headquarters, to inform relevant personnel. Through DingTalk’s connections, nearly 98–99% of an enterprise’s emergencies can be actively monitored, detected, identified, and resolved in real-time, forming a comprehensive closed-loop system.

7.2 DingTalk’s Journey Towards Digitalizing Enterprises in China The digitalization journey of DingTalk for enterprises in China has witnessed seven significant product upgrades, transforming it into a PaaS (Platform as a Service) mobile office platform. The initial version, 1.0 beta, was released on January 16, 2015, with a primary focus on enhancing internal communication within organizations. 3

The Chronicle of DingTalk, released officially by DingTalk.

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It introduced the “DING function” and aimed to minimize internal communication costs for enterprises. The key features of version 1.0 included an enterprise directory, DING notifications, and free calls. For example, the enterprise directory feature proved to be exceptionally valuable as it allowed for the inclusion of all employees within the organization into a cloud-based directory. This feature greatly facilitated the search for colleagues or departments, enabling direct communication and chat among employees by simply searching the directory. As a result, the efficiency of locating employees within the organization was significantly enhanced. Another example is the utilization of the DING function for notifications. Traditional phone notifications can be time-consuming, while notifications sent through QQ/WeChat groups can easily get lost among a barrage of other messages. Even some simple notifications like meeting reminders may not reach all participants until the last minute. However, by using the DING function to send notifications via SMS/phone calls, urgent reminders can be promptly dispatched, and recipients can acknowledge receipt with a “received” response. This approach significantly enhances the efficiency of work notifications. On May 26, 2015, DingTalk launched version 2.0, which placed a strong emphasis on Collaborative Office by integrating various features such as email, OA, and shared storage to create a comprehensive mobile collaborative platform. The primary objective of version 2.0 was to enhance the efficiency of office operations by introducing new functions such as mobile attendance, OA approval, daily log, and DingDrive. For example, many companies require employees to check in for attendance to ensure they are working at their designated workplace during working hours. However, traditional fingerprint attendance systems can only monitor employees at fixed office locations and not those on business trips or visiting clients. DingTalk’s mobile attendance check-in feature effectively resolved this issue at a lower cost, allowing enterprises to supervise their field employees by enabling them to check in remotely at various locations. On September 19, 2016, DingTalk introduced version 3.0, an enterprise platform that encompassed nine significant function updates focused on customer development, customer service, and customer retention. This update marked the establishment of a platform-based ecosystem tailored specifically for the enterprise-level market. The primary objective of version 3.0 was to provide industry-specific solutions for diverse sectors, incorporating essential features such as industry-specific customization, an open platform, and external contacts. Each industry possesses distinct focal points and workflows, resulting in substantial variations between them. DingTalk’s version 3.0 aimed to address these differences by delivering industryspecific solutions. Existing instant messaging and basic office functionalities proved inadequate for the diverse office scenarios encountered by different enterprises. For instance, the retail industry necessitates efficient goods inventory management, the real estate industry requires effective customer relationship maintenance, and the Internet industry grapples with a high volume of daily meetings. Given these substantial industry disparities, DingTalk’s resources alone were insufficient. Consequently, DingTalk established an open platform that facilitated industry application service

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providers to launch their services on the platform, thereby offering a broader range of choices for enterprise owners and meeting their personalized requirements. Application service providers were also eager to join the DingTalk platform to promote and sell their services. By December 31, 2016, DingTalk had been used by more than 3 million enterprises and organizations, becoming the top brand of enterprise social networking in China. In September 2017, the number of enterprises and organizations on DingTalk exceeded 5 million, making it one of the top enterprise service platforms in the world.4 DingTalk made a significant breakthrough on November 19, 2017, with the release of its version 4.0, ushering in the era of “software and hardware integration.” This new version provided enterprises with intelligent mobile office solutions that seamlessly combined software and hardware, with the goal to overcome online limitations by incorporating intelligent hardware and addressing issues that arise in offline scenarios. The main features included an intelligent front desk (M2), intelligent projection (FOCUS system), and intelligent cloud printing. The issue of employee attendance has always been a critical aspect of enterprise management. Traditional paper-based punching machines have proven susceptible to cheating by employees, while fingerprint recognition systems have a poor success rate, ultimately affecting the efficiency of the punching process. Queues forming during clock-in times are also a common occurrence with such systems. To address these issues, DingTalk has developed a facial recognition front desk that provides a secure and reliable “face-punching” solution. This innovative approach completely eliminates the possibility of employee cheating while achieving a high recognition rate. With this technology, employees can easily clock in and out by scanning their faces, making the process more efficient and convenient. In the following years, DingTalk introduced several new concepts to expand its services and customer base. On June 24, 2018, DingTalk proposed the “Five Online” theory, which included “Organization Online, Communication Online, Collaboration Online, Business Online, and Ecology Online” to broaden its service coverage. On December 9, 2018, DingTalk announced a full-chain digital solution to connect “personnel, finance, materials, and things” based on various office scenarios, which helped enterprises achieve digitalization of their operation management. On August 27, 2019, DingTalk further introduced the concept of “Intelligent Collaboration” for intelligent collaboration between people, between people and things, and between people and matters. This concept aims to create an innovative and efficient collaboration environment. Meanwhile, on January 9, 2018, DingTalk officially launched its internationalization strategy, initiating its efforts to develop overseas markets. As of June 2019, DingTalk’s user base exceeded 200 million, and over 10 million enterprises and organizations used DingTalk.5

4 5

Ibid 3. Ibid 3.

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On February 25, 2020, DingTalk unveiled version 5.0, which was hailed as its “largest version update to date.” This update introduced a range of new software and hardware products, including Exclusive DingTalk, Family-School Coeducation 2.0, Video Conference All-in-One F1, and DingTalk Live. These products enabled DingTalk to transition from offering universal products to personalized ones, providing customized solutions to assist enterprises and organizations in their daily management and operations. During the COVID-19 pandemic in 2020, DingTalk played a crucial role in facilitating remote work for tens of millions of companies and over 200 million individuals and supported 140,000 schools in over 30 provinces to conduct online classes for more than 130 million students.6 On January 14, 2021, DingTalk released its version 6.0, marking its evolution from a single collaborative office platform to a dual platform for both collaborative office and application development. This step allowed DingTalk to become a digital operating system that connects IT infrastructure and business applications. The new version introduced low-code development features, enabling non-technical business personnel to independently develop most business applications using the low-code templates and tools provided by DingTalk. This feature empowered enterprises to build customized solutions on top of DingTalk to meet their specific needs, making it a more versatile platform. In version 6.0, DingTalk introduced “Cool Apps,” a new type of scenario-based application that can be integrated into high-frequency office scenarios, including group chats. This integration makes previously less frequently used business applications more visible and easily accessible. With the added advantage of the lowcode platform, DingTalk has successfully transitioned from digitizing organizational management to digitizing business management. On the DingTalk platform, companies can now share a wide range of applications, including low-code applications, third-party SaaS applications, and self-built applications, directly within their work platform. Moreover, these applications can also be shared with external groups from upstream and downstream organizations in the enterprise chain, facilitating the crossorganizational utilization of these business applications. External companies even have the capability to initiate enterprise approvals and share them on the work platform or external groups of upstream and downstream organizations, which allows for streamlined approval processes within their respective companies. DingTalk has developed an external collaboration platform known as “Upstream and Downstream Organizations” to facilitate connectivity between enterprises. This platform offers a wide range of features designed to enhance collaboration, including upstream and downstream address books, external groups, cross-enterprise meetings, document knowledge bases, schedulers, and cloud drives. By utilizing this application, enterprises can invite their partners to join a unified address book, simplifying the process of finding and connecting with individuals across different organizations. The platform also allows for the categorization of partners based on their roles, such as suppliers or distributors, and provides the capability to export the organizational structure with just a single click. 6

Ibid 3.

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Members within the upstream and downstream groups can engage in anonymous chats, fostering open communication. However, if individuals leave their respective companies, they will be automatically removed from the platform to ensure data security. As of January 2021, DingTalk boasts an impressive user base of over 400 million, including more than 17 million organizations, such as enterprises and schools.7 The latest version of DingTalk, version 7.0, was released on December 28th, 2022, and has shifted its focus to collaborative efficiency across entire industrial chains. The new “Group 2.0” feature enables different enterprises and partners upstream and downstream to collaborate seamlessly like one company through group chats. This feature allows different companies to work together within a group on tasks such as editing cloud documents, publishing applications, processing workflows, and approving contracts. This enables different companies to share business applications and integrate data to guide their respective operations. All of DingTalk’s meeting, document, and project products fully support cross-organizational use. The original group chat function of DingTalk primarily focused on intra-enterprise communication, providing features such as Ding, read receipts, document collaboration, project management, scheduling, and to-do lists. With the introduction of Group 2.0, DingTalk has embedded more collaboration functions such as meetings, documents, and project management into group chats to facilitate cross-organizational use. For instance, participants from different organizations can join audio and video meetings within a group by using a meeting ID or link and clearly identify other attendees’ identities. Group chat members can share documents, knowledge bases, and other information with members from other organizations. Different members’ enterprise identities can be displayed when multiple people are editing. Teambition, DingTalk’s project management tool, also upgraded its cross-organizational capabilities to allow cross-organizational partners to enter project boards within group chats and track their cooperative projects’ progress. In version 7.0, DingTalk introduced a new function called “Ding Choice,” which offers over 1,500 types of on-demand SaaS applications, as well as integrated products such as smart travel, smart leasing, smart recruitment, smart contracts, and marketing services that were jointly developed with DingTalk’s partners, including Ali Travel, Ctrip Business Travel, Intelligent Recruiting, Liepin, Renrenzhu, Aizujie, eSign, Tanke CRM, and Funshare Sales. These applications and services provide a one-stop shopping experience for enterprise customers on the DingTalk platform, enabling them to easily connect with various external service providers. The introduction of “Group 2.0” and the “Ding Choice” platform are two key pillars that have enabled DingTalk to effectively address cross-organizational connections in both the basic and supportive activity areas of enterprise supply chains. This has resulted in the development of a strong foundation for DingTalk’s “interenterprise connectivity” in the field. The current number of low-code applications on DingTalk is 5 million, and it is expected to exceed 10 million in the next year.

7

Ibid 3.

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Fig. 7.1 DingTalk has assisted millions of SMEs in China with their digitalization. Source Yuming Ren/China Business Network Ltd., Shanghai

Additionally, DingTalk’s user base has surpassed 600 million for individual users and over 23 million for enterprise organizations (Fig. 7.1).8 In the eight years since its launch, DingTalk has undergone seven version upgrades, each with the aim of continuously lowering the threshold for enterprise digitization in China and serving every enterprise, organization, and individual with digital productivity tools. DingTalk CEO, Mr. Ye Jun, once summarized DingTalk’s evolution in three stages. The first one, addressed by versions 1.0–5.0, was focused on transforming organizations’ operations from traditional offline work to online organizations. This stage emphasized organizational online communication and collaboration, bringing in features such as group chats, document collaboration, project management, and scheduling tools. The second stage of DingTalk’s evolution is characterized by the digitalization of business activities, where low-code development software allows business personnel to become primary developers of applications, making it much easier to digitize daily work, which was addressed by version 6.0. In particular, version 6.0 introduced the “Cool Apps” function, which fully considered the fragmentation and high frequency of software delivery. This function allowed business partners in key high-frequency scenarios, such as deep collaboration in work groups, to directly access application components within DingTalk work groups, eliminating the need to download and install applications or switch to other interfaces. Furthermore, business applications within the DingTalk ecosystem can be introduced as cards in high-frequency 8

Ibid 3.

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domains such as group chats, one-on-one chats, calendars, and documents, making business processes run more smoothly by integrating organizational digitalization with business activity digitalization. The third stage is industrial interconnectivity, where digital collaboration occurs between enterprises, enabling the entire industry chain to work together. This is the issue that DingTalk version 7.0 aims to address. Ye Jun believes that online organization, business activity digitization, and industrial interconnectivity are interrelated but can also coexist simultaneously due to differences in the level of digital development across various regions and industries in China.9

7.3 A PaaS Provider Serving Digitalization of SMEs After seven major product iterations from version 1.0–7.0, DingTalk has gradually evolved into a PaaS (Platform as a Service) mobile office platform, while its partners are responsible for offering SaaS (Software as a Service). According to Ye, DingTalk can be seen as a basic operating system or a super app, with its “isolation” function being a primary feature. Users do not have to worry about the underlying system, whether it is iOS, Android, Mac, or Linux, because the super app will “isolate” all systems and adapt to them. DingTalk’s value lies in its ability to “isolate” various hardware and operating systems, making it similar to an operating system itself. As a result, many digital services in the industrial Internet can efficiently and conveniently reach the user interface through DingTalk, and adapt at low costs. In its early stages, DingTalk offered many SaaS services, such as standard clock-in and approval that all enterprises use. However, in the PaaS stage, DingTalk opened its platform to external partners, providing differentiated services to different customers, i.e., “PaaS+ ecological openness.” Despite China being known as the “workshop of the world,” many factories still rely on primitive communication tools, such as manual labor, paper forms, and Excel, to manage their operations. This has led to opaque production processes, difficulties in statistics of production volume and defect rates, complex timepiece salary calculations, and a lack of basic data collection and organization in outsourced factories. Recently, a group of SaaS service providers has emerged, offering digital factory-used mini-apps that can be operated on mobile phones and webpages to help companies resolve their various operational issues. These providers work closely with DingTalk, leveraging its platform advantages to reach customers quickly. When DingTalk transitioned to a PaaS provider, it made a deliberate decision to focus on its core capabilities and products, such as documents, audio and video, projects, and meetings, and opened them up to its entire ecosystem. As an industrial Internet connector, DingTalk left other industry applications, such as personnel, property management, supply, sales, and research, to SaaS companies. By doing

9

Ibid 3.

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so, DingTalk enables SaaS companies to connect with more customers through its platform. The growth of DingTalk’s user base has provided a boost for many SaaS startups, enabling them to launch and expand more rapidly. For example, in 2021, the low-code tool “JianDao Cloud” generated over RMB 100 million yuan in revenue, nearly half of which was attributed to the DingTalk platform. Likewise, “Chuanyun,” another low-code development tool, achieved RMB 20 million yuan in revenue during the month of Double Eleven in 2022, with an unprecedented growth rate.10 The current DingTalk ecosystem offers more than 1,500 SaaS applications that companies can purchase on demand through the “DingChoice” portal. For instance, the “Intelligent Travel” application is a comprehensive solution that connects multiple platforms like Ali Travel, Ctrip, Travel Manager, and Gaode Taxi. With this app, travelers can book hotels, flights, trains, and taxis directly within the travel group, while fellow travelers can copy the booking information with just one click. The application also integrates travel information and reimbursement processes, streamlining the otherwise cumbersome process of invoice and reimbursement for employees. Similarly, DingTalk offers intelligent leasing, a rental service for office equipment for small and medium-sized enterprises, in partnership with Alipay and thirdparty providers such as Renren Rent, Aizujie, Yidianyun, and Little Bear U Rent. This “leasing for buying” service covers office computers, printers, and conference screens, providing a solution to the high costs of enterprise office and IT equipment procurement. Through DingTalk, some other products that were originally targeted at consumers, such as Ctrip, have also discovered new scenarios for providing services to B2B enterprises, opening up new growth opportunities.

7.4 The Power of Low-Code Software The PaaS framework of DingTalk, with its low-code development capabilities, has been crucial in supporting the digitalization efforts of numerous companies, especially SMEs, over the years. The following examples showcase the significant impact it has generated. East Hope, a renowned enterprise group in China, aimed to transition into a fully functional mobile office in early 2015. At that time, the company had an OA system, but users had to use a computer to view the address book. To transition the PC-based OA system to mobile devices, technology service companies in the market usually charged approximately RMB 200 yuan per device, which would amount to an investment of four to five million yuan in total for all of East Hope’s terminals. However, DingTalk’s mobile application was available for free at the time and included address book functionality, meeting the basic needs of a mobile office without any additional cost. 10

A description by DingTalk CEO Ye Jun during an interview with S. Qin, one of the authors of this book.

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On April 16, 2015, East Hope’s Information Department began testing DingTalk with 10 employees to transform their PC-based OA system to a mobile end. They found the tool to be excellent and quickly promoted it throughout the headquarters. Within just eight days, by April 24, almost all of the headquarters’ employees (313 people) were using DingTalk. By April 28, the entire group had 10,843 people using DingTalk. However, they soon discovered issues with manual personnel information entry due to employee turnover. They contacted DingTalk and requested integration with their HR system. It took 15 days to resolve the issue, and by May 15, the group had 24,247 people using DingTalk. Today, all 30,000+ employees use DingTalk with an activation rate of 100% and a user login rate of 98%. On average, there are 101 audio and video conference calls and 9 live broadcasts per day.11 DingTalk offered East Hope a “Customized DingTalk” service, taking advantage of its low-code software development capabilities. East Hope’s customized app, named “Dongdong,” differs greatly from the original DingTalk in terms of color, functions, and applications. East Hope has developed 67 digital micro-applications using DingTalk as a foundation, with 90% of their business conducted online, connecting over 300 organizations, and reducing their organizational structure from seven levels to four.12 With the help of DingTalk, even frontline employees in production bases across the country can directly receive notifications from the company’s headquarters. Through employee-written daily logs, management can also understand how well the headquarters’ notices are being received. Previously, employees had to fill out various forms and certificates manually, but now they can apply through their mobile devices, and the certificates can be printed or downloaded through self-service, which has simplified the process from six levels to two. For example, income certification can now be generated with just one click thanks to the interconnected systems. In some cases, government agencies may still require physical seals, but after the company communicated, electronic seals can now be used with a generated code that can be verified for legitimacy on a public platform, which solved the difficulties of the seal issue. In addition, attendance, leave approval, training, performance management, and other areas have also been fully digitized and mobilized. The company’s equipment management used to rely on physical inspections by workers and data from the operation console to understand the factory’s operations. Each team, workshop, and department had staff responsible for statistics and analysis. With over a thousand teams within the group, each team would accumulate a thick stack of production reports annually. It was challenging to obtain real-time warnings and timely process abnormal situations on the production line, such as abnormal turbine speed or abnormal current voltage load in the power plant. With the help of the DingTalk platform, East Hope has implemented an equipment management system that has gradually integrated with the underlying systems of the production site, such as DCS and PLC. The system connects to real-time data 11

“Empowering More Regions with ‘DingTalk’”, Chin@ Moments, a Chinese financial self-media platform, May 17, 2021. 12 Ibid 11.

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points, automatically generates reports, synchronizes data, and processes images to the headquarters in real-time. Moreover, the algorithm models of the system analyze production conditions to assist decision-making. Through patrol inspections, electronic work orders, and production operation dashboards, high-risk operations can now be managed in real-time. The closed-loop management of abnormal indicators and task work orders form a better process for equipment management. This has significantly improved the efficiency and effectiveness of the equipment management process, enabling the company to identify and address potential issues more quickly and accurately. During the COVID-19 pandemic, many regions in China implemented strict epidemic prevention and control measures, resulting in traffic congestion and long wait times for truck drivers, such as in Xinjiang. To address this issue, East Hope developed a mini-app specifically designed for this scenario. The mini-app tracks and provides real-time updates on the driver’s status from entry to departure, allowing logistics companies to access the latest logistics information promptly. This miniapp also allows drivers to avoid interacting with on-site personnel or leaving their vehicles, reducing the risk of exposure to the virus. The vehicle can be automatically identified at the factory gate, and the driver can unload and leave without leaving the vehicle. Furthermore, traffic police can use the mini-app to check the invoice weight, reducing waiting times and overall traffic pressure for East Hope’s truck drivers. The East Hope group has developed an industrial internet platform for equipment using Alibaba Cloud and integrated various applications, such as production management, safety and environmental management, equipment management, and warning management into the platform, with DingTalk as the main display portal. Utilizing cloud infrastructure capabilities, DingTalk has become a super gateway for the group’s entire digitalization process, allowing all applications to be easily scaled up and replicated. Another example is Youlingyoushi (YLYS), a modern food company that specializes in freeze-dried food production, with an annual output value of over RMB 500 million. Despite not being a particularly large company, it has successfully utilized DingTalk’s connectivity features to connect with other enterprises. During the early stages of the company’s operations, its warehousing and logistics departments, branches, carriers, and customers were located in different places, making it difficult to coordinate the transportation of products. To communicate transportation orders, the company relied on phone calls, and subsequent transportation order information was manually entered into Excel spreadsheets. This approach resulted in the warehouse and logistics personnel being unable to track and record real-time updates on the status of the goods being transported, including whether they were being delivered to the customer in a timely manner or if there were any damages or losses during transportation. To obtain information, the staff had to wait passively for carriers to send screenshots of the customer’s signed receipts. This approach not only led to prolonged settlement cycles for transportation costs but also made it impossible to control the quality of carrier services. Additionally, it was challenging for the company to evaluate and assess the performance of carriers, given the lack of visibility into the transportation process.

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Using DingTalk’s low-code development capabilities, YLYS developed a “Service Provider Management System” based on Cool Applications in just two weeks. By utilizing DingTalk’s external group function for upstream and downstream organizations, YLYS was able to share real-time transportation information updates with its employees via the top card of the Cool Application within the group. Employees can easily access the backend by clicking on the card content to view the transportation status of the corresponding carrier. The system allows for online confirmation of the transportation fee for each shipment with a unified accounting method, reducing communication costs for all parties involved. YLYS has effectively addressed its previous logistical challenges, such as lost or mixed goods, lack of receipts for received goods, and difficulties in collecting payments, by leveraging the benefits of low-code development, cool applications, and DingTalk 2.0 group chat functions. With the help of these tools, YLYS can now manage carriers based on actual data, which allows the company to assess their service quality. Consequently, YLYS has reduced the number of logistics carriers from over 20 to 5, resulting in significant cost savings of millions of yuan in both system development and logistics.13 Guangzhou Ligong Industry, a precision manufacturing and robotics production company operating in the discrete manufacturing industry, is another example. The company encountered significant challenges in digitizing its operations due to the complexity of its business. Ligong’s operations involve diverse product forms, such as complete machines, parts, components, and over 30+ different production processes. With more than 20,000 SKUs across different categories, it is challenging to streamline the production process effectively. Moreover, Ligong has a diverse workforce with different educational backgrounds and job positions, ranging from high-tech positions performed by Ph.D. graduates to frontline operators without college degrees. As a manufacturing company with a history of 37 years, Ligong has accumulated a long-standing historical and old-fashioned imprint, which further complicated the digitalization process. Prior to implementing DingTalk, Ligong attempted to digitize its operations by searching for suitable methods, software, and hardware overseas. However, due to differences in industrial levels and ways of working across countries, these efforts did not yield desired results. Ligong’s CEO, Li Weichong, shared his experience of dealing with large ERP and MES system companies, where the charging model resembled a prepayment system. If the company didn’t pay in advance or paid less, they wouldn’t receive any services, even just via phone. Moreover, if on-site support was required, the costs were even higher. Even after investing one or two million yuan in software in the early stages, the company still had to pay around 100,000 yuan annually for daily services. In contrast, the cost of using DingTalk for Ligong is almost negligible today. With DingTalk, Ligong has been able to develop a customized smart manufacturing platform that integrates various functional modules, such as product lifecycle management, quality control, production scheduling, and 13

“Breaking the Barrier of Enterprise Connectivity: The Compound Effect of 8 Years of Continuous Evolution”, Pebble Business Review, a Chinese self-media platform, December 30, 2022.

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supply chain management. This has enabled Ligong to digitize its operations and significantly increase productivity while reducing costs. In 2021, Ligong began utilizing DingTalk’s low-code platform to develop a reusable MES system for its industrial chain, which integrated with its core operating system, resulting in the synchronization of production and operation data. With the new system in place, any machine malfunction can be reported with a single click, making it easier and more efficient to resolve issues quickly. Prior to the implementation of the system, production data was only refreshed 36 times every 8 hours. The new system, however, has increased efficiency by 228%, allowing production data to be updated over 200 times per day. Moreover, the new system allows every production process in Ligong’s factories to be accessed and monitored using a mobile phone, which has significantly enhanced the efficiency of their operations.14 In the past, Ligong’s employees had to manually load parts into production machines and tighten them, which was a tedious and dirty task. But with the implementation of intelligent robots and digital management, the production process has become much more streamlined and efficient. The robots now handle the majority of the work, freeing up employees to focus on more valuable tasks such as monitoring and optimizing production. The use of these robots and digital management has also had a significant impact on the company’s employee turnover rate, reducing it from 65% to just 5% at the frontline level. The employees now have more opportunities to learn new skills and take on higher-level responsibilities, making their work more engaging and rewarding.15 The adoption of low-code technology has revolutionized the manufacturing industry, and Ligong is a prime example of this. A significant number of Ligong’s employees who participated in the development of the MES system did not hold college degrees, yet they were able to leverage the low-code platform to build software with ease and at a low cost. This was an important factor for Ligong, as they recognized that software development should not be restricted to just graduate students or engineers proficient in complex coding languages. The adoption of low-code technology enabled Ligong to empower its employees to take ownership of the company’s digital transformation and contribute to software development, thereby enabling broader participation in the digitalization process. The DingTalk ecosystem has been instrumental in transforming Ligong’s business operations, providing access to a wide range of products and services. By leveraging third-party applications available on the DingTalk open platform, such as Sales Cloud CRM, Task Manager, and Ctrip Corporate Travel, Ligong has been able to streamline its workflow and improve efficiency across various departments. The use of Sales Cloud CRM on DingTalk has made the invoicing process seamless following a customer transaction, with staff members granted permission to complete the sales and finance process directly. Additionally, these data can be integrated with 14

“From Scaling Up to Deepening Value: A Thicker DingTalk”, JAZZYEAR, a Chinese technology self-media platform, March 22, 2022, https://baijiahao.baidu.com/s?id=1727979341966729064& wfr=spider&for=pc. 15 Ibid 11.

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ERP and inventory data through DingTalk, further improving data accuracy and reducing manual errors. Overall, the DingTalk ecosystem has enabled Ligong to access innovative solutions, improving its business operations significantly.

7.5 Some Ending Remarks Since the 1980s, the construction of infrastructure such as road networks, power grids, energy networks, and communication networks has laid the foundation for industrial growth in China, which has led to the establishment of millions of manufacturing factories. Today, a new wave of industrialization is taking place, which is built upon digital infrastructure and platforms. As Ye once commented, “The previous generation of ‘Made in China’ was characterized by manual labor, while the new generation is guided by digital technology, using digital tools to transform society.”16 This new era of industrialization is marked by the increased adoption of digital technologies such as automation, artificial intelligence, and the Internet of Things (IoT), which are revolutionizing the manufacturing industry. By leveraging these digital tools and platforms, companies like Ligong are able to increase efficiency, improve accuracy, and enhance productivity across their entire value chain. As of September 30, 2022, DingTalk has over 600 million users and more than 23 million enterprise organizations using the platform. Currently, there are 5 million low-code applications available on DingTalk, and it is projected that the number of digital applications developed on DingTalk, including both low-code and fullcode development, will surpass 10 million within a year.17 Since its launch 8 years ago, DingTalk has undergone 7 version updates, all with the aim of reducing the digitalization threshold for businesses in China and providing digital productivity tools to every individual, organization, and enterprise. The emergence of ChatGPT in the United States has greatly inspired Chinese internet companies. DingTalk, in its latest move, has integrated Alibaba’s large-scale model, marking a significant leap toward intelligence. By incorporating the largescale model, DingTalk now possesses AI capabilities that include generating poetry and novels, composing emails, creating marketing plans, generating meeting records, automatically summarizing meeting minutes, and generating to-do lists. For instance, when a user joins a new group chat, DingTalk can generate a chat summary based on previous conversations within the group, facilitating a quick understanding of the context for the user. The case of DingTalk highlights the significant impact that digital tools can have on transforming industries. The acceleration of industrial interconnectivity is a new trend in China’s digital economy, and DingTalk is a prime example of how digital transformation can reshape organizational management and business processes, creating 16

“China’s New Force on the Platform”, Chin@ Moments, a Chinese financial self-media platform, December 29, 2022. 17 Ibid 3.

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commercial value for its users. The possibilities for innovation and growth in these areas are vast, and the process of digital transformation is ongoing, with endless opportunities to reimagine and reshape business operations.

Chapter 8

The Ocean Engine: A Front Runner in Digital Marketing

Peter Drucker notably observed that “Because the purpose of business is to create a customer, the business enterprise has two-and only two-basic functions: marketing and innovation … All the rest are costs.”1 From a marketing technology perspective, modern marketing can be traced back to 1923 when Claude C. Hopkins published his groundbreaking “Scientific Advertising”.2 This book introduced the concept of using data and scientific methods to create and test advertising campaigns and symbolized the beginning of the era of data-driven and customer-centric marketing. The year 2023 marks its centennial anniversary when marketing has been shaped by ongoing technological advancements and the increasing emphasis on customer engagement and personalized marketing strategies. Founded in 1932, AC Nielsen is widely regarded as the first company to provide market research services.3 Nielsen revolutionized market research with its retail index, which tracked food and drug purchases and is considered the origin of the concept of market share. Nielsen also conducted the first radio and television ratings surveys, known as the Nielsen surveys, which provided critical insights into media consumption patterns and audience demographics. Also, in 1923, Procter & Gamble (P&G) made history to become the first company to use radio as an advertising medium, sponsoring cooking programs on radio stations. In the following year, 1924, P&G established a market research department, recognizing the importance of consumer insights in driving successful marketing campaigns. In 1933, P&G sponsored a comedy series on the radio, and inserted soap ads in between. This unique approach, which became known as the “soap opera,” proved to be highly effective in promoting P&G products. Loyal listeners of the program also became loyal users of P&G products, demonstrating the power of using storytelling and entertainment to drive brand loyalty.

1

Peter Drucker, “The Practice of Management”, Harper Collins, 2010 (First Edition: 1954). Claude C. Hopkins, “Scientific Advertising”, Snowball Publishing, 2010. 3 https://en.wikipedia.org/wiki/Nielsen_Holdings. 2

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_8

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Looking at the origins of modern marketing, it is evident that marketing involves studying the market and consumers in a measurable way and influencing consumers through media advertising to drive growth for products and services. Successful marketing strategies are based on a deep understanding of consumer behavior, market trends, and effective communication through advertising channels. During the first three-quarters of the past century, which was the era of traditional media, television reigned supreme as the most important advertising medium. However, in the last quarter of the century, the internet gradually emerged as the primary battleground for advertising and interaction with consumers. A major milestone in this transition occurred on October 23, 2000, when Google launched its AdWords program,4 which allowed advertisers to precisely match their information with users who were actively searching for relevant information, significantly increasing the effectiveness of online advertising. E-commerce advertising, which followed search advertising, essentially adopted the same idea of displaying product and brand information to potential customers, promoting conversions, and turning internet users into product consumers. Over the past decade, the rise of the mobile internet has transformed the media landscape, with the emergence of new forms of media that are characterized by mobility, socialization, and algorithmic content recommendations through massive user-generated social media platforms, short video platforms, and e-commerce platforms. These platforms leverage big data accumulation and algorithmic optimization to accurately depict user profiles. With an increase in traffic, users, and time, the recognition becomes more precise, enabling marketers to deliver highly targeted and personalized content to their audiences, and significantly enhancing the effectiveness of digital marketing campaigns. In this new era, anyone can participate in content creation, and the “content revolution” brought about by the rise of short videos and live streaming has become a dominant force in digital marketing. As the country with the most mobile internet users, China is likely to become the world’s largest internet-enabled market soon. According to the statistical report released by the China Internet Network Information Center (CNNIC) on August 31, 2022, as of June 2022, China’s internet users reached 1.051 billion, and the internet penetration rate reached 74.4%. Every administrative village in China has broadband, and the internet penetration rate in rural areas is close to 60%. The proportion of netizens using mobile phones to access the internet is 99.6%, while the proportions using desktop computers, laptops, televisions, and tablets to access the Internet are 33.3%, 32.6%, 26.7%, and 27.6%, respectively. As of June 2022, the user base of short videos in China has grown the most significantly, reaching 962 million; the instant messaging user base has reached 1.027 billion; the network news user base has reached 788 million, and the network live broadcast user base has reached 716 million.5 With the majority of Chinese consumers being on the internet, especially younger generations, brands have to use digital means to reach and engage with them. 4 5

https://en.wikipedia.org/wiki/Google_Ads. https://news.cgtn.com/news/2022-08-31.

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Identifying the most effective digital platforms and approaches for reaching these consumers is becoming a top priority for all enterprises in China, especially these 2C companies. Against this backdrop, the Ocean Engine is emerging as an essential service platform for engaging with consumers. The Ocean Engine is a comprehensive digital marketing service platform developed by ByteDance, which positions itself as a “mega-scale comprehensive digital system that connects users and brands.”6 Founded in 2012, ByteDance has more than 1.9 billion monthly active users (MAUs) across its entire product lines in China, with its most influential products, Today’s Headlines, a data mining-based recommendation engine product launched in 2012, and Douyin, a short video social platform launched in 2016.7 TikTok, which has become a popular social media platform worldwide, was initially launched as the international version of Douyin in May 2017. In November 2017, ByteDance acquired Musical.ly, a North American music short video social platform, and migrated all its users to TikTok in 2018.8 Currently, Douyin and TikTok operate independently of each other, as announced by ByteDance,9 and this chapter delves into Douyin’s emergence in China.

8.1 Why Was Douyin? The era of China’s digital marketing has witnessed the rise of remarkable internet products such as Taobao, Tmall, JD.com, Pinduoduo of e-commerce platforms, and social media giants like WeChat. Douyin, a short video platform, is the latest addition to this category. The feature of a short video refers to the creation and sharing of video content that is typically under one minute in length. Short videos have become increasingly popular on social media platforms such as Douyin, Instagram Reels, and Snapchat, as they allow users to quickly consume and engage with a large amount of content in a short amount of time. The short video content can be entertaining, informative, or both, and often includes music, special effects, and text overlays to enhance the viewer’s experience. In addition, short videos can be easily shared and reshared, making them a powerful tool for social media marketing and influencer campaigns. Compared to messaging apps with additional features, such as WeChat, short video platforms provide a unique and engaging user experience centered around short-form videos with algorithmic content discovery, which allows users to discover new and

6

https://www.fromgeek.com/vendor/311896.html. Official Announcement by ByteDance. 8 https://www.nytimes.com/2017/11/10/business/dealbook/musically-sold-app-video.html. 9 Roland Cloutier, the former Global Chief Security Officer of TikTok, in an interview with The Verge, October 15, 2020; https://cloud.tencent.com/developer/article/2252123; https://baijiahao.baidu.com/s?id=1680632895495391968&wfr=spider&for=pc. 7

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interesting content tailored to their interests, making it easier to find and connect with like-minded individuals. Douyin was launched in September 2016 with the slogan “Record Beautiful Life”, which allowed its users to create and share their own short videos, meet new friends, and discover various lifestyles and interesting things. As Zhang Nan, the CEO of Douyin Group, said, many people love the app because it is a product that elicits “wonderful feelings.”10 In its earlier stage of development, according to Zhang, Douyin installed over 100 short video products from around the world on phones and asked its entire team to experience and evaluate them every day. Despite each product having its own unique characteristics, the team found a common flaw in these products, that is, they were not “wonderful” enough. While short videos can convey a lot of information, previous mainstream short video products often had complex expressions. Zhang noted that users in China’s first- and second-tier cities usually have a broader perspective and higher standards for quality, so if Douyin could offer users the surprise and delight of “wonderful” short videos, it had a chance to succeed.11 As a result, the Douyin team downloaded and tested more than 100 short video apps, and identified four areas of user experience in which they could make breakthroughs. The first key area is an upgraded full-screen, high-definition experience. Although videos shot with smartphone cameras are already full-screen, viewing short videos on screens of different sizes can result in varying levels of visual impact and immersion. Therefore, investing in a high-definition delivery system like a Content Delivery Network (CDN) can be critical to providing users with a better experience. The second key area of user experience for Douyin is the use of music to create a “wonderful feeling.” Music is not just a differentiating factor, but an essential element that enhances the visual impact of short videos. When the right music is paired with appropriate visuals, it creates a natural and captivating atmosphere. As music is an integral part of many users’ daily lives, its compatibility with the theme of short videos is crucial to Douyin’s popularity. Additionally, good background music can inspire users and make their experience more enjoyable. The third key area for Douyin is the use of delicate special effects and filters. Chinese users, in particular, enjoy using special effects and filters to improve their appearance. In 2016, many Chinese camera filter apps ranked high on the App Store.12 The Douyin team invested heavily in optimizing the app’s beauty features and filters, which played a critical role in its popularity among users. These features allow users to enhance the visual quality of their videos, making them more appealing and attractive to viewers. Finally, Douyin’s other advancement is its improved shooting experience. Unlike previous short video apps, Douyin has made significant improvements in optimizing the filming process. It has introduced an airbag phone holder that can assist during 10

https://www.xinqtech.com/read/201803/1622804.html. https://baijiahao.baidu.com/s?id=1595114963259248413&wfr=spider&for=pc. 12 Zhang Nan, the CEO of Douyin Group, “Douyin: A Product Focusing on the Sense of Beauty”, a speech at Geek Park in 2018. 11

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filming and a “shoot on the go” button that follows the user’s hand movements, making filming smoother and reducing uneasiness for the user. All of these user experience breakthroughs have made Douyin stand out since its launch. But furthermore, ByteDance’s technology is also a significant factor in Douyin’s popularity among users. Firstly, on short video social sharing platforms, creators must consistently produce content, and consumers need to engage with the content for the “bilateral” model to be effective. ByteDance’s personalized recommendation technology can quickly assist users in finding content that they will enjoy. Secondly, AI technologies such as facial recognition, body recognition, and 3D rendering based on deep learning and image recognition have been incorporated into creative features such as panoramic stickers, AR stickers, 3D hair dyeing, and dance machines. While many of these features are not unique to Douyin, the existing techniques such as hair dyeing effects lack layers and depth and often have a flat appearance or only a single color without transitions. Douyin’s technology, however, can achieve 3D rendering, making the overall effect more realistic and surprising for users. In addition to its exceptional user experience and technology, Douyin has also implemented several innovative strategies in its operations. One example is the fun feature called “Challenge” in Douyin’s product design, which prompts users to participate by setting challenges. Users can also create their own challenges to express their understanding of beautiful content through creative content. Later on, topic challenges were introduced to further enhance user engagement. These challenges are based on specific topics or background music, encouraging users to create content according to certain rules, and promoting video publishing to further increase user engagement and stickiness. Douyin remains committed to direct communication with its users, holding weekly meetups in various cities across the country where Douyin’s product managers and operators engage with users. These interactions not only cover the technical details of the product but also place a significant emphasis on the user’s perception of the Douyin community. When it comes to content, entertainment featuring celebrities is a crucial category in the field of short videos. Douyin has invited celebrities to create online intellectual property (IP) and ignite the spread of content through a combination of “celebrities + influencers.” Douyin has also created exclusive pages and topics for celebrities and added features such as charts, red envelopes, and lucky draws to enhance interaction between celebrities and fans. The involvement of celebrities has triggered a celebrity effect that drives the entry of more fans. Douyin’s innovation in “creativity + technology + interaction” has transformed the platform from a simple form of entertainment to a social and lifestyle platform within just a few years. Initially, Douyin was considered just an entertainment platform where users could explore and discover novel things and people. As more users joined the platform, however, it became a social platform where users could interact with friends and family and see a bigger world. Later on, some users started selling their products on Douyin, which turned the platform into a marketplace. Restaurant owners, for example, also started promoting their restaurants on Douyin, which

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attracted customers to visit these places. As a result, Douyin has finally become a platform that connects users’ online and offline lives. While scrolling through Douyin, users may come across appealing content, such as food, that piques their interest and leads to a purchase. Douyin’s ability to seamlessly integrate online and offline activities has made it a part of many users’ daily lives. The impact of Douyin on people’s daily lives is evident in the “2022 Douyin Data Report” released by the platform,13 which reveals that Douyin has truly become an integral part of users’ lives. In 2022, during the COVID-19 pandemic, Douyin users used the platform to record and share their experiences, which include 45.59 million instances of staying at home, 18.42 million instances of quarantine, 12.89 million instances of testing positive for COVID-19, 3.25 million instances of participating in cloud fitness programs, 2.71 million instances of attending online classes, and 1.66 million instances of rehabilitation. These numbers illustrate how Douyin has evolved from a simple entertainment app to an essential tool that helps people cope with their daily lives, especially during challenging times. During the pandemic stay-at-home period, many people turned to Douyin to virtually visit scenic spots. The top ten most popular scenic spots in Douyin were West Lake, the Forbidden City, Tiananmen Square, Huangshan Mountain, Laojun Mountain, Mount Tai, Erhai Lake, the Guangzhou Tower, Gulangyu Island, and the Bund of Shanghai. Users could “travel” to these destinations without leaving their homes, providing a welcome distraction during a challenging time. In addition to scenic spots, visiting zoos on Douyin has also become a new trend. In 2022, there were 38,515 live broadcasts of zoos on Douyin, with a total viewing count of nearly 400 million. Shanghai Wildlife Park, Changsha ZOOLUNG Large Indoor Zoo, and Beijing Wildlife Park were the top three most popular zoos on Douyin. Through these live streams, users could get up close and personal with animals and learn more about them from zookeepers and experts, providing a unique and educational experience. Douyin has also provided a platform for county-level opera troupes to gain widespread exposure through online live broadcasts and received income through user rewards. In 2022, there were over 32 million live broadcasts of performing arts on Douyin, with an average audience of over 3,900 viewers per show. The top five types of performing arts live broadcasts with the fastest growth in popularity were musicals, Chinese dance, drama, comedy, and acrobatics. Through these live broadcasts, county-level opera troupes could showcase their talents to a broader audience, breaking down traditional geographic and cultural barriers. The ability to receive user rewards also provided a new and important source of income for these performers, helping to sustain and support their art form. Douyin live broadcasts have also helped to democratize access to knowledge beyond traditional books and classrooms. In 2022, there were 21,103 live broadcasts of universities on Douyin, with over 95 million viewers. Four Nobel laureates, 45 academicians, and nearly 400 professors shared their knowledge on the platform, promoting accessibility and inclusivity in education. 13

https://m.gmw.cn/baijia/2022-12/28/36263714.html.

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In addition, Douyin’s e-commerce sector continued to expand rapidly in 2022. Over the course of the year, the platform sold and delivered 2.83 billion orders of agricultural products to millions of households, providing a new and convenient way for consumers to access fresh produce. This growth in e-commerce has helped create new economic opportunities for businesses and individuals, while also providing users with a convenient and diverse shopping experience.

8.2 A Top Digital Marketing Platform in China Douyin’s immensely popular short video platform has facilitated the development of its digital marketing services for various brands, allowing Douyin to capitalize on the value generated by its short video programs. From 2013 to 2017, Douyin’s development of digital marketing services underwent its initial commercialization stage. During this period, Douyin established a commercialization team and introduced the CPM advertising model and information flow advertising in September 2014, initiating the “effect advertising” business. In January 2015, Douyin began collaborating with agents to explore localized advertising services and launched its CRM system, transitioning from manual to system settlement. It was in 2017 that Douyin’s short video platform fully embraced commercialization.14 The second stage of Douyin’s digital marketing services involved the establishment of a comprehensive product system from 2018 to 2020. During this period, Douyin released DOU+, a tool that has millions of enterprises and users utilizing it to expand online traffic. DOU+ allows users to promote their own videos or live streams for increased popularity (“self-advertising”), or other people’s videos or live streams (“proxy advertising”). Douyin also introduced its Enterprise Account, which serves as a one-stop operating platform for businesses to conduct business activities on Douyin. In addition, Douyin launched the influencer marketing platform “Ocean Xingtu” and the digital marketing decision-making platform “Ocean Yuntu,” along with the search advertising system for the Ocean Engine, as Douyin found that 57% of Douyin users browse before searching.15 According to data released by “Ocean Xingtu” in September 2022, Douyin has already attracted 2 million creators (or “influencers”) and 1.9 million enterprise customers capable of receiving orders. For brands looking to enter the Douyin marketing platform, cooperating with influencers who specialize in certain fields or have professional skills is often the first step. On a technical level, “Ocean Xingtu” has established over 300 tags to describe influencers, such as their expressiveness, services, and conversion capabilities. It can also accurately measure influencers’ historical commercial performance. Many brands invite influencers to crowdsource creative ideas and create maximum exposure on Douyin based on factors such as new product releases, promotional points, social holidays/festivals, and other factors. As 14 15

The Chronicle of The Ocean Engine, officially released by The Ocean Engine. Official Announcement by The Ocean Engine.

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influencer marketing becomes increasingly specialized, many automotive, 3C, and beauty influencers have developed a strong influence on their target audience through years of operations. The third stage of digital marketing involves the implementation of e-commerce advertising systems and unique digital marketing methodologies. Starting in 2020, Ocean Engine launched the e-commerce advertising platform “Ocean Qianchuan”, which offers integrated marketing solutions for Douyin e-commerce for both businesses and influencers. By integrating Douyin accounts, Douyin stores, Ocean Qianchuan accounts, qualifications, and funds, it provides one-click account opening and convenient management to achieve integrated marketing of “product management-traffic acquisition-transaction completion”, which reduces advertising and management costs while effectively improving e-commerce marketing efficiency. In addition, Ocean Engine introduced the O-5A brand asset marketing methodology, which creates a brand marketing system that consists of scientific measurement models, full content ecology, and flexible and user-friendly brand advertisements. Thanks to the continuous improvement of its content and product/service ecosystems, Douyin has formed a fast-growing flywheel cycle of users, content, and products/services, making it the preferred platform for new product launches and hit product creations that constantly meet the needs of consumers and brand owners through its four typical scenarios of “short videos, live streaming, shopping, and search”. According to the “2022 Douyin E-commerce Product Development Report,” Douyin has become the largest online business platform for 270 top brands on the entire network as of July 2022. From July 1, 2021, to June 30, 2022, there was a 161% increase in GMV (gross merchandise value) growth from Douyin’s short videos and a 124% increase in GMV growth from live streaming. Moreover, there were 1,351 merchants on Douyin with annual sales exceeding RMB 100 million yuan, 164 new emerging brands with annual sales exceeding 100 million yuan, and 175 products with annual sales exceeding 100 million yuan (Fig. 8.1).16 Compared to other digital marketing platforms in China, Douyin’s distinct feature lies in its future-oriented new generation digital marketing platform, which has a large number of young urban users. Its large-scale content format includes BGC (business self-generated content), IP, UGC (user-generated content), PGC (professionalgenerated content) production, and traditional media-produced content, making it ideal for “Grass Planting.”17 Douyin’s interest-based e-commerce platform transformed these “sitting merchants” that wait for consumers to search shelves into “walking merchants” that stimulate consumer interest to generate active purchases. In addition, Douyin demonstrated its ability to direct offline traffic through LBS (location-based services) and help local merchants find large-scale new customers.

16

https://min.news/en/tech/90807bbf6f8d80d8d633ede2cf40a57a.html. “Grass planting” refers to the process of carrying brand and product information on content and influencing consumers’ mental state.

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Fig. 8.1 Douyin has emerged as a front-runner in digital marketing in China. Source Yuming Ren/ China Business Network Ltd., Shanghai

With the rise of short videos and live streaming, content is playing an increasingly critical role in marketing, and “grass planting” has become a fundamental marketing skill. In a sense, all companies cannot expand without “grass planting” today. Douyin, with its robust content capabilities, is becoming the primary platform for brand grass planting, leading companies to shift from simply pursuing the effectiveness of bidding advertising to integrating grass planting-based content marketing and performance advertising.

8.3 O-5A Model, the Methodology of the Ocean Engine Philip Kotler once famously stated that the core of marketing is a company’s ability to create communication and deliver value while generating profits from its target market.18 Despite the ever-changing nature of communication methods, the essence of marketing remains unchanged. Kotler’s 5A relationship model outlines the five stages of a user’s relationship with a brand: Aware, Appeal, Ask, Act, and Advocate. Over the years, Ocean Engine has developed its own O-5A model by adding an Opportunity (O) to the mix, which represents the individuals who have the potential to become consumers but have not 18

Keven Keller, “Strategic Brand Management, Building, Measuring, and Managing Brand Equity”, Pearson, 2013.

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yet established a relationship with the brand. Following O, it is A1 to A5 groups, which are the five key nodes of the business chain from front to back: Aware (A1), Appeal (A2), Seed (A3), Purchase (A4), and Repurchase (A5).19 There has long been a debate on whether companies’ digital marketing investment should focus on building their brand or driving short-term GMV (Gross Merchandise Value) effects. The key issue is whether the brand should prioritize immediate returns or invest in building long-term brand influence. The O-5A methodology offers a solution to this dispute by proposing a “three-step” brand-building process. The initial step in the brand-building process is to renew awareness, which focuses on brand awareness to quickly establish or renew consumers’ awareness of the brand, by increasing the volume of brand exposure through various methods such as longterm exposure and endorsements from reputable sources. Through this approach, the size of the potential “water-storage” group (A1, A2) can be effectively expanded by creating accurate brand associations and building brand trust, which lays the foundation for the conversion of the A1 and A2 groups into A3 groups. The second step in the brand-building process is to build “water storage” for potential consumers. When the brand enters a high-growth cycle and needs to increase the user population, it is crucial to establish a closer relationship with consumers by focusing on building A3 groups. The Ocean Engine has found that A3 groups are more valuable in the O-5A population, and brands can leverage online traffic combinations and matrix content to gradually deepen the relationship between brands and consumers, ultimately leading to better conversion effects. The third and final step in the brand-building process is creating popular and attractive products, and brands can quickly establish brand awareness and stabilize their position in the market, enabling the traffic of these popular products to bring more value to the brand and facilitate scaled growth. The core logic of the O-5A methodology is consumer-oriented, with a focus on understanding and capturing the true characteristics of users throughout the entire chain. It emphasizes the importance of precise content marketing and tailored advertising that aligns with user behaviors. One notable example within the methodology is the A3 Seed group, which consists of users who actively search for brand information, read deeply for 10 to 20 minutes, watch content short videos, view influencer live broadcasts, add products to the shopping cart on Douyin e-commerce, but have not yet made a purchase. However, they already have a positive impression of the brand and a strong willingness to make a purchase. In addition to possible conversions on Douyin e-commerce, consumers from the A3 Seed group may also search, add to a cart, collect, and make purchases through the brand’s full-channel sales channels. For example, in Q1 2022, a hair care brand successfully utilized Ocean Engine’s data matching capabilities to analyze the volume data of the A3 Seed group in conjunction with the brand’s relevant search volume on an external e-commerce platform. The analysis revealed a consistent comovement pattern, indicating a correlation between the growth of the A3 group and the brand’s search volume on the e-commerce platform. 19

http://news.sohu.com/a/609314202_121280457.

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Ocean Xingtu has revealed multiple instances where the A3 audience within a specific industry exhibits significantly higher conversion rates compared to the A1, A2, and O audiences, with the potential for increases of over 20 times. Additionally, Ocean Engine’s research indicates that brands generally employ four primary methods of “grass planting,” which include brand content such as live streaming and short videos, celebrity content/advertising, interactive marketing involving watch-toearn20 and crowd-testing tasks,21 and brand advertising such as splash screens and grass planting passes. These methods are complemented by search linkage, which connects both on-site and off-site transaction domains. This combination of various methods results in what is commonly referred to as the “4 + 1 + 2” “grass planting” brand matrix. For brands that already have a good reputation among users and have created short video content that users love, they may attract a certain A3 audience without advertising on Douyin. However, new brands must combine content and advertising to gradually build their audience base. It is essential to note that audience assets are dynamic and can appreciate or depreciate over time. In the competitive world of brands, attention is always a valuable commodity. If a brand does not actively pursue it, someone else will, and the brand’s attention will decrease. By breaking down the O-5A model, brands can implement more effective and targeted audience operation strategies. Firstly, they can utilize the opportunity (O) audience to expand and create personalized consumer profiles, identify consumer interests, seize opportunities, and achieve efficient breakthroughs. Secondly, brands can improve operational efficiency through 5A layered management by calculating the number and structure of audience assets required to support growth targets, guiding brand audience asset management strategies, and promoting efficient audience flow. Finally, leveraging the A3 ‘grass-planting’ audience with higher interactive conversion rates can stimulate the growth of external e-commerce platforms’ GMV, and enhance the brand’s search volume and overall popularity. RIO Rivao, a cocktail brand, can serve as a good example of breaking through audience barriers.22 The brand had already achieved a high penetration rate among the “low-alcohol interest group” in the industry but sought new growth opportunities. They adopted a two-step strategy of “circling” and “sorting” to expand from a lowalcohol interest group of 60 million consumers to a liquor interest group with 140 million consumers, and then to a beverage interest group with 200 million consumers, attracting a wide range of new customers at each level. They targeted “elegant moms”, new generation white-collar workers, and Generation Z as their prioritized groups and delivered targeted content, such as “Summer Nights and Barbecue with 20

“Watch-to-earn tasks” usually refer to a marketing strategy on Internet platforms where brands publish video ads or articles and require users to watch and perform related interactive actions, such as liking, commenting and sharing, to increase brand awareness and influence. 21 “Crowd-testing tasks” usually refer to a way of testing and improving product or service quality by publishing testing tasks to the public and collecting user feedback. 22 Ocean Engine and Roland Berger, a consulting company, “The Crowd Asset Management Methodology of Ocean Engine O-5A”, 2022; https://baijiahao.baidu.com/s?id=174653745571042 5519&wfr=spider&for=pc.

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RIO Rivao” for Generation Z. During the 618 promotion (June 18th e-commerce promotion festival), RIO Rivao collaborated with 29 KOLs (Key Opinion Leaders) to broadcast to newly selected audiences, achieving over 130 million views and more than 3 million cumulative interactions. The playback completion rate exceeded the industry’s top 5 average,23 successfully breaking through audience barriers. Another example is the launch of a new product by Kraft Heinz. They introduced a salad dressing spray in China, emphasizing calorie control and no additives. Leveraging big data, they selected targeted audiences from the intersection of three audience groups: the interest group, industry group, and cross-category group, across O-5A categories. They targeted consumers interested in fitness, cooking, beauty and body care, and healthcare in the “interest group”; consumers interested in salad dressing products in the “industry group”; and consumers interested in low-calorie meal replacement products, enzyme products, sports equipment, and nutritional supplements in the “cross-category group”. After the product launch, Kraft Heinz utilized the real-time data analysis capability of big data to analyze the flow of new customers from A1/A2/A3/A4 audience groups and matched them with the best marketing media within the big data ecosystem through multiple touchpoints. As a result, the audience assets of O-5A brands increased by 137%, and the total number of transactions increased by 87% compared to the previous period.24 In the long-term operational scenario, the web version of the game product “Fantasy Westward Journey” developed by internet company NetEase is a classic boutique game aimed at promoting audience conversion and deepening relationships through long-term content management. NetEase discovered that KOL live broadcasts had high flow efficiency, and historical data analysis indicated that video promotion and information flow advertising had the largest audience reach. Therefore, NetEase formulated an overall traffic strategy centered around these three touchpoints. While acquiring new customers for the A2 audience group, NetEase also focused on strengthening the retention of existing customers in the A3/A4 audience groups. As a result, the overall A3 activation cost for the NetEase Fantasy Westward Journey web version decreased by 13%, the overall A4 payment cost decreased by 10%, and the conversion rate from A3 to A4 audience groups increased by 39%.25

8.4 The Power of Digital Marketing Douyin’s digital marketing platform and O-5A strategies have proven to be highly effective for brands seeking to foster potential consumers, expand their customer base, increase sales, and boost earnings. In the following parts of this section, we will showcase several representative brands to demonstrate the success that these brands have achieved with these methods. 23

Ibid 22. Ibid 22. 25 Ibid 22. 24

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8.4.1 You & Pure: How Does a White-Label Product Become a Brand? You & Pure is a skincare brand based in Dongguan, Guangdong that specializes in creating products for individuals with oily and acne-prone skin. The company was founded in 2011 and initially relied on private domain traffic channels, utilizing information flow advertising to attract customers and offer personalized skincare solutions for fans. In the second half of 2021, You & Pure expanded its marketing efforts by launching on Douyin and began exploring public domain channels as the company discovered that short video traffic depended heavily on the quality of content material, and opening live broadcasts gradually exposed a bottleneck in GMV (Gross Merchandise Value) growth. After conducting a comprehensive market analysis and evaluating their own operations, You & Pure identified a potential hindrance to their sales performance: a lack of brand recognition. To tackle this challenge, they made the strategic decision to utilize content marketing on Douyin, aiming to establish their brand, address perceived consumer concerns, and evolve from a mere product seller to a fully-fledged brand. Their focused strategy revolved rapidly establishing brand awareness and reputation by extensively promoting their flagship product, the You & Pure Sulfur Acne Essence Gel (also known as the You & Pure light bulb), through targeted advertising and marketing campaigns. Actually, when You & Pure joined Douyin, their initial approach was to promote their products through self-broadcasting. They shared information about the host’s skin type and the suitability of their products for acne-prone skin, aiming to attract users with similar needs. However, the outcomes did not meet their expectations, leading them to recognize that as a white-label product without an established brand, gaining users’ trust was a significant challenge. Through trial and error, You & Pure devised a strategy to establish itself as a trusted beauty expert by utilizing its own resources and cultivating a Key Opinion Consumer (KOC) image. They leveraged short videos to create engaging content, generating traffic and carefully analyzing data using the Ocean Xingtu platform to identify key selling points. However, they soon recognized the limitations of relying solely on KOCs and decided to explore collaborations with Key Opinion Leaders (KOLs) to extend their brand’s reach. Unfortunately, as a new brand with limited product awareness, they faced challenges in convincing KOLs to form partnerships with them. Despite the challenges it faced, You & Pure persevered and eventually secured its first collaboration with a Key Opinion Leader (KOL), which marked its entry into the KOL collaboration market and enabled them to expand its network of collaborators. In addition, You & Pure established the “You & Pure Skin Health Science Research Institute” in collaboration with the Gene National Engineering Research Center of Jinan University in Guangzhou. They also partnered with a cosmetics group

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in Guangzhou to establish the “You & Pure Skin Research Center.” These collaborations brought together a team of experts in biology, dermatology, and senior formula engineers from China, Japan, and South Korea, thereby strengthening the efficacy of their products. You & Pure utilized Douyin’s KOL “seeds planting” and content promotion strategies, coupled with audience segmentation, to identify and prioritize target audiences. The company extensively collaborates with small and potential KOLs, as well as beauty and makeup KOLs, for scaled seeding. For instance, You & Pure linked celebrity videos and KOL videos to integrate resources in live broadcasts to promote popular products. In April 2022, You & Pure partnered with Douyin KOL @Han Meijuan, who has over 10 million fans, to release a seed-planting video. During the 618 (June 18) and 818 (August 18) promotional days, the company worked with KOLs who have over five million fans to release seeding and sales videos to attract purchases. To further increase brand awareness, during the Double Eleven promotional period on October 26th, You & Pure collaborated with the celebrity Zhong Xintong to release a three-minute seeding video that garnered 25,000 likes.26 The company’s strategic use of celebrity endorsements effectively conveyed the brand’s strength to users. Since You & Pure began its seeding in April, the brand’s NPS industry ranking has surged by 204 places, reflecting a high level of customer satisfaction. Moreover, the Douyin topic play volume of You & Pure and its related products has exceeded 120 million, and You & Pure’s “Adolescent Acne Clearing Essence” has been ranked as one of the top three bestsellers in Douyin’s e-commerce category.27 These impressive figures demonstrate the brand’s popularity among consumers and underscore the effectiveness of You & Pure’s marketing strategies. For white-label manufacturers like You & Pure, Ocean Engine offers a clear and systematic methodology that includes the following steps: the first step is precise matching. Through the precise matching of short video materials and target audiences, You & Pure was able to quickly increase its sales volume. The second step is normalized live streaming. By utilizing normalized live streaming, Ocean Engine helped You & Pure improve conversion efficiency and expand its business scale. The third step is in-depth interaction. Cooperation with KOLs and in-depth interaction with consumers is essential for achieving circle-breaking and product seeding. The fourth step is content promotion. By combining KOL content and advertising, Ocean Engine enhanced the efficiency of “seeding” and increased the reach and impact of You & Pure’s promotional efforts. The fifth and final step in Ocean Engine’s methodology is to strengthen brand awareness. Ocean Engine supported You & Pure in consolidating user awareness

26

“The Logic of Brand Growth Has Changed,” a report published by Liurun, a Chinese business self-media, November 17, 2022. 27 Ibid 26.

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through brand advertising, effectively facilitating the transition from white-label to branded products. By following Ocean Engine’s methodology, You & Pure has successfully expanded its customer base, improved its brand awareness, and ultimately transitioned from a white-label manufacturer to a branded product provider. The methodology’s focus on precise matching, normalized live streaming, in-depth interaction, content promotion, and consolidating brand awareness has helped You & Pure to achieve significant growth in the highly competitive beauty and skincare market in China. The timeline for You & Pure’s brand-building strategy encompasses three distinct phases. In the initial stage, the primary objective was to establish brand awareness through IP marketing, celebrity endorsements, brand advertising, and other “waterstorage” approaches aimed at capturing consumer attention. Transitioning to the middle phase, the focus shifted towards fostering an understanding and recognition of the product’s quality by employing seeding methods, such as KOL evaluations. Finally, in the later phase, the emphasis turned to utilize conversion tactics within ecommerce advertising to directly guide consumers towards making purchases during live broadcasts, often accompanied by attractive discounts. The overarching goal of this comprehensive strategy is to effectively build consumer awareness, strengthen the brand’s reputation, gain consumer trust, stimulate positive word-of-mouth, and propel long-term growth and development of the brand.

8.4.2 Bosideng’s Approach to Grassroots Marketing Bosideng is a top brand in the down jacket market in China. Founded by Gao Dekang in 1976 with just eight sewing machines, the company has come a long way since then. Despite his age, Gao’s thinking remains fashion-forward, youthful, and global, and Bosideng has achieved significant success in its digital transformation efforts. In October 2021, Bosideng collaborated with Burberry’s former design director to launch a new high-end windbreaker down jacket. The company aimed to use the Douyin platform for “grass planting” marketing to attract targeted high-end customers’ attention to the new product, and achieve desired sales and return on investment. Down jackets are standard products, and it’s not easy to differentiate. However, Bosideng adopted the following strategies to stand out in the market: First, Bosideng created a new trend category for winter down jackets, the “windbreaker down jacket”, to differentiate itself from other brands and make consumers associate this category with the Bosideng brand. Second, Bosideng implemented a targeted “grass planting” strategy as part of its marketing approach. Recognizing that the windbreaker down jacket represented a new product category, Bosideng aimed to generate demand among highly relevant audiences. To achieve this, Bosideng regularly showcased the high-conversion product in live streaming rooms, effectively attracting valuable viewers. The traffic in

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these live streaming rooms consisted of a balanced mix of natural traffic and traffic generated through customized advertising. The placement of advertisements was carefully determined based on research data, competitive insights, and comprehensive user data obtained from Douyin’s cloud maps platform. The strategy primarily focused on four core target groups: high-end, business, urban, and white-collar consumers. Special emphasis was placed on the A1–A3 groups, known for their high purchasing intent, high conversion rates, and preference for clothing products and collaborative celebrities. During the cold-start phase, Bosideng conducted thorough cross-testing of audience packages and materials, optimizing its advertising strategy and effectively reducing the cost associated with introducing the new product. Third, Bosideng carefully curated its main selling style based on the preferences of the targeted audience it had reached through its “grass-planting” efforts. They specifically chose the “bubble sleeve style windbreaker down jacket” as it perfectly aligned with the audience’s inclination toward fashionable and stylish clothing. Bosideng quickly optimized the script for the live broadcast of the main selling style, highlighting its standout features such as the “3D stereoscopic cutting, tailored for the Asian body shape.” The release of the “bubble sleeve style windbreaker down jacket” took place during a highly anticipated live-streaming event on October 27, 2021, and sales commenced immediately, capitalizing on the momentum generated by the engaging broadcast. Fourth, Bosideng took advantage of the influence of Key Opinion Leaders (KOLs) by inviting them to participate in live-streaming sales. The KOLs were then followed by the appearances of celebrities, such as Qi Wei, Wang Xiaoqian, and Yang Fafa, who opened up KOL sessions. Concurrently, Bosideng launched the “Customized Wind Feather Moment, Fun Sticker Challenge” activity, employing numerous KOL short videos to highlight the slimming characteristics of their windbreaker down jackets. They swiftly continued to engage the audience with topics like “What is Basic Respect for Temperature Drop” and “Creating a Halloween Atmosphere,” which successfully enticed a significant number of targeted viewers to join the live-streaming event. With a comprehensive set of “windbreaker and down jacket” seeding strategies, Bosideng accomplished an impressive feat of garnering 750 million online exposures within a span of 5 days, resulting in a total Gross Merchandise Value (GMV) of nearly 100 million yuan. In addition, the brand’s store attracted 178,000 new followers.28 A search for “windbreaker and down jacket” on Douyin yields a plethora of Bosideng brand videos, further solidifying the brand’s association with the product category and establishing a strong groundwork for future marketing endeavors. Bosideng’s success with Ocean Engine reminds people of the growth theory of David Aaker,29 the “father of modern brand marketing.” In his book “Brand Portfolio Strategy: Creating Relevance, Differentiation, Energy, Leverage, and Clarity,” Aaker stated that “the only path to growth is to create disruptive sub-categories while 28

“On Achieving Predictable Growth in Marketing in China: How to Do It?” a report published by Chin@ Moments, a Chinese financial self-media, February 22, 2023. 29 David A. Aaker, “Brand Relevance: Making Competitors Irrelevant”, Wiley, 2010; https://www. sohu.com/a/400851242_505841.

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significantly improving customer experience and brand relationships.”30 Bosideng’s innovative approach aligns with this theory, with the creation of a new sub-category serving as a “good seed” combined with effective content marketing targeted towards the O-5A audience, just like sowing, nurturing, and carefully cultivating for planting seeds in the farm. Through careful cultivation and innovative strategies, with good creativity, momentum, and fine cultivation, Bosideng achieved significant growth in both brand awareness and sales.

8.4.3 miHoYo: From Player Community to Mainstream miHoYo is a renowned game development and operating company based in Shanghai, known for its exceptional track record of creating high-quality games. Its flagship title, Genshin Impact, has garnered global recognition, particularly in the United States market.31 Unlike other companies that rely on bidding advertising for promotion, miHoYo focuses on personalized marketing strategies such as content marketing and cross-border marketing. Through leveraging the game’s exceptional content and the players’ derivative works, miHoYo continuously delivers the charm of the fantasy world to its users, creating a stronger sense of recognition and engagement. miHoYo’s marketing strategy is centered around producing high-quality content and building a strong brand in response to the decline in online traffic. Instead of relying on short-term games, their goal is to create long-term games that will continue to captivate players over time, through a combination of engaging content and a strong brand identity. When miHoYo launched Genshin Impact in September 2020, they opted for global distribution to attract a larger player base and establish a reputation for delivering high-quality games to the general public. To achieve this goal, miHoYo collaborated with various multi-terminal marketing projects on the Ocean Engine platform, such as Douyin, Today’s Headlines, and Watermelon Video. These partnerships helped the brand to achieve both “domination within the circle” and “explosion outside the circle” by reaching a broad range of potential players. Moreover, miHoYo continues to accumulate high-quality UGC content from Genshin Impact users, which in turn feeds back into the game itself, bringing forth excellent products that exceed user expectations. Genshin Impact also launched a game video collection contest through the Watermelon Video platform, inviting up-and-coming hosts and influencers to guide content creation, encouraging a large number of second-round players to download the game and create derivative works. This not only effectively sparked interest in the game but also led to the creation of a large amount of high-quality UGC content. Additionally, Genshin Impact launched a “national mission” on Douyin, using exclusive stickers 30

David Aaker, “Brand Portfolio Strategy: Creating Relevance, Differentiation, Energy, Leverage, and Clarity”, Simon and Schuster, 2020. 31 https://www.163.com/dy/article/HQEBD7IT05119BD6.html.

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and videos to encourage game downloads, and generated billions of exposures and numerous downloads. The specific communication strategy used by Genshin Impact involves synchronizing dual-line activities, from casual gaming to professional anchors, in order to unify topics and promote activities. Through Douyin’s advertising and other resources, users are encouraged to participate and create high-quality brand content. To this end, Genshin Impact launched the Douyin Challenge under the topic “Meeting in the Worldly Life,” using high-quality entrance flows to promote the Challenge and “National Mission” activities, and spreading exclusive stickers, which have accumulated more than 440 million video plays. In addition, Genshin Impact organized a video collection contest by gathering experts on the Watermelon Video platform to customize video programs, achieving a total exposure of over one billion across multiple platforms.32 Overall, the collaboration between Genshin Impact and Douyin resulted in over 600,000 pieces of UGC content, over 1.15 billion video views for the Challenge’s main topic, and a total exposure of 186 million times for the video collection contest.33

8.5 Innovation is Still on the Way: Some Ending Remarks Digital content marketing represents the latest stage of modern marketing and requires a combination of brand creativity, digital platforms, marketing technologies, and meticulous cultivation. Each of these elements is essential and none of them can be dispensed. The key to successful digital content marketing is to cultivate a large and highly engaged audience. The O-5A audience asset model, which involves the systematic construction of grassroots A3 audiences, represents a significant optimization and upgrade in marketing strategies. This shift moves away from short-term “harvesting” of audiences to a coordinated approach including both “planting and harvesting” to establish long-term relationships and shape consumer awareness earlier in the marketing process. To achieve this upgrade, brands need to make several needed changes. First, they need to shift from identifying single-point user “footprints” and scattered “grassplanting” to natural full-chain “footprint” identification and effective and collaborative “grass-planting”. Second, they need to move away from unrefined investments by simply buying audiences to meticulous cultivation of audience assets. Third, they need to make a change from extensive operations to refined operations, focusing on the most effective channels and strategies for engaging their audiences. Finally,

32

“The Digital Era of Brand Marketing,” a report jointly released by The Ocean Engine and Kantar, January 2023. 33 Ibid 32.

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they need to shift from fuzzy evaluation of delivery effectiveness to precise evaluation, using data and analytics to measure the impact of their content and refine their strategies. For reducing the uncertainty in growth, audience assets, content assets (from brand identity to content promotion), and product assets (such as functions and styles) are all essential. An excellent brand is a combination of multiple assets, and it is hard to be built up overnight. Fortunately, however, there are also several ways that brands can adopt to achieve it. First, brands can utilize opportunity audiences (O) to expand their reach and attract new customers, which involves identifying and targeting audiences that have a high potential to engage with their brand and creating content and experiences that resonate with them. Second, brands can improve operational efficiency through 5A layered management, which involves optimizing the five key areas of audience, asset, activation, association, and analysis to ensure that resources are being used effectively and efficiently. Finally, brands can leverage the higher interactive willingness of the A3 grassroots audience to achieve integrated growth of brand and operation efficiency. By implementing these strategies, companies can build a strong brand that resonates with their audience, drives financial performance, and ultimately achieves success in the competitive world of digital marketing. Digital platforms are becoming increasingly critical in today’s Chinese economy as they can leverage their technical expertise and vast amounts of data to offer scalable solutions that help brands enhance their marketing efficiency and financial performance. These solutions enable brands to showcase their content creation capabilities to larger audiences and amplify their impact through digital platforms. Douyin’s Ocean Engine is currently focused on pursuing new innovations. They have found that no matter how unique or novel an advertisement is, it becomes increasingly challenging to maintain consumer interest after the fifth exposure. This means that the effectiveness of advertising relies on constantly providing consumers with fresh stimuli, which is an unavoidable reality in the world of advertising. As the competition in the advertising industry intensifies and shifts towards the ability to create authentic and engaging experiences, the pace of innovation in advertising presentation resources is likely to accelerate significantly. For instance, when it comes to splash-screen ads, the focus has shifted toward style innovation. On Douyin, the current splash-screen ads incorporate advanced technologies such as naked-eye 3D, gravity sensing, and 360 panoramas, while also introducing new styles that pique consumers’ interest in deeper interactions. As a result, styles such as “shake the screen to open,” “semi-circular ripple + shake the screen to open,” and “swipe up to open” have witnessed an increase in click-through rates by over 200%, surpassing the overall market level.34 Along with stylistic innovation, advertisements that feature prominent intellectual properties (IPs) and focal points have been found to resonate more effectively with 34

Ibid 28.

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consumers. The 2022 Qatar World Cup, being a premier global sports event, has proven to be a valuable asset for advertisers looking to engage consumers through interactive advertising experiences. Consequently, it has resulted in widespread participation in advertising interactions and has garnered enthusiastic attention from consumers. In addition, in 2022, there has been a rapid development of new forms of advertising resources such as virtual spaces, virtual people, and the metaverse. These resources have shown great effectiveness in combating aesthetic fatigue and suppressing user ad avoidance, which has guided some consumers to engage in more deep interaction behaviors, ultimately leading to higher levels of engagement with the advertised products or services. In 2023, the Ocean Engine of Douyin is actively collaborating with brands to explore and utilize various innovative interactive advertising resources. Its aim is to better integrate the relationship among IP, promotional nodes, and advertising, and promote efficient communication at the right timing to achieve dual success in branding and performance. The digital marketing innovation of Douyin’s Ocean Engine is still on its way.

Chapter 9

A Lifestyle in the Third Place: Starbucks’ China Journey

On September 14, 2022, Starbucks unveiled its China Strategic Vision 2025 during a global investor conference. The Seattle-based coffee giant shared its plans to expand its coffee shops in China from 6,000 to 9,000, increase its employees, referred to as “partners”, from 60,000 to over 95,000, double its net income, and increase its operating profit by four times. What this translated is to open a new Starbucks store in China every nine hours on average over the next three years. Additionally, Starbucks plans to enter 550,000 supermarkets and convenience stores with its readyto-drink coffee, marking its most ambitious growth plan in a single regional market outside North America since its establishment in 1971.1 Despite challenges such as the COVID-19 pandemic, intensified competition from new coffee brands in China, and the increasing popularity of tea consumption among younger consumers, Starbucks’ plan reflects its confidence in the mainland China market and its future growth potential. Starbucks entered mainland China in 1999 with the opening of its first coffee shop in the China World Trade Center office building in Beijing. Over the years, China has become Starbucks’ fastest-growing overseas market, with the largest number of coffee shops outside the United States spread across more than 240 cities. The accomplishment of Starbucks in transforming itself from a latecomer foreign brand to a dominant player in China’s coffee market is a captivating subject, in particular, it would be intriguing to explore how the brand cultivated an emotional connection with its consumers through coffee and beyond. This chapter will delve into this remarkable story and uncover the secrets behind Starbucks’ success in China.

1

https://www.starbucks.com.cn/about/news/starbucks-strategic-vision/.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_9

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9.1 A New Dish on the Menu Prior to 1978 when China announced its new policy on economic reform and opening up to the outside world, the coffee market in China was virtually non-existent. The first foreign coffee brands to enter the Chinese market were Maxwell and Nestle in the 1980s, with their instant coffee products.2 Many aging consumers may still remember their advertisements from that time, in which these coffee makers attempted to educate Chinese consumers on how to brew coffee. Nestle’s slogan “Nestle, it tastes great” and Maxwell’s “Good to the last drop”3 were well-known among consumers, and their coffee products became popular gifts for families and friends. However, during that time, Chinese consumers were still not accustomed to drinking black coffee without milk and sugar, which was popular in Europe and the United States. To tackle this issue, Nestle introduced a 1 + 2 blended coffee that removed the bitterness and added creamer to create a sweeter taste. This innovative approach helped to popularize coffee among Chinese consumers, eventually making it a part of their daily diet. Coffee shops started to emerge in mainland China during the 1990s. In 1994, McDonald’s introduced “freshly brewed coffee” in its restaurant on Huaihai Road, Shanghai. The standard serving size was a large cup of coffee with two milk balls, but many consumers still found the taste too bitter and added five milk balls to reduce the bitterness.4 Nevertheless, Shanghai’s well-known preference and tolerance for novelty quickly made “freshly brewed coffee” popular in China’s largest city. During the mid-1990s, Taiwanese freshly ground cafes, including “Carving Time” and “Ueshima Coffee,” ventured into the mainland China coffee market. Zhuang Songlie, a college student from Taiwan who studied in Beijing, opened a café named “Carving Time” with his girlfriend near Peking University (PKU) and Tsinghua University in 1997, using money from his family. Initially, the café had only a few customers, so in order to attract students and faculties from PKU and Tsinghua University to the shop, they started screening movies to create a “literary atmosphere” in the coffee store. In the same year, Ueshima Cafe opened its first store in Hainan Province, followed by Manabe Coffee, which opened its shop in Huating Road, Shanghai in 1999. In 2001, Ueshima Cafe entered Shanghai and quickly gained popularity with its “coffee + Western food” menu. During the early days of coffee 2

Nestle opened its first sales office in Shanghai in 1908, but stopped its operation in mainland China for decades before China’s economic reform and reopening in 1980s. Maxwell entered to mainland China in 1984. https://www.nestle.com.cn/about_nestle/nestle_in_china; https://zhidao. baidu.com/question/2125615209378050187.html?fr=search&word=%C2%F3%CB%B9%CD% FE%B6%FB%BF%A7%B7%C8%BA%CE%CA%B1%BD%F8%C8%EB%D6%D0%B9%FA% 3F&ie=gbk. 3 https://tv.sohu.com/v/dXMvMzM4OTE2MjM4LzE4Njg5MjkwMi5zaHRtbA==.html; https://en.wikipedia.org/wiki/Maxwell_House#:~:text=In%201915%2C%20Cheek-Neal%20b egan%20using%20a%20%22Good%20to,Foods%20which%20took%20over%20the%20Maxw ell%20House%20brand. 4 https://www.shkp.org.cn/articles/2021/12/wx359951.html.

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shops in China, the customer base primarily comprised two categories: business professionals who came for business meetings and romantic college students.5 In the late 1990s, Starbucks made its entry into the mainland China market and introduced espresso, which significantly changed the taste preferences of Chinese consumers. David Sun, a Taiwanese man known as the “Father of McDonald’s” in Taiwan for introducing the fast-food chain there, was generally viewed as the person who brought Starbucks to mainland China. In 1998, when he visited Starbucks headquarters in Seattle, only two employees were working in its International Division, a general manager and a deputy general manager who were developing Starbucks’ global strategic plan. Sun suggested and convinced them to expand Starbucks into mainland China, and obtained the authorization to represent Starbucks in northern China.6 At the same time, the Unipresident Group in Taiwan and the Maxim Group in Hong Kong were also authorized to represent Starbucks in the Greater Shanghai Area and Southern China, respectively. In 1999, the first Starbucks store opened in the China World Trade Center, offering a cup of cappuccino for RMB 19 yuan, while the real estate price in Beijing at that time was only RMB 3,000 per square meter.7 To ensure authenticity, Starbucks initially imported all the items used to make coffee for its earliest stores, even though it later began sourcing consumables like cups from local suppliers in China. In these early stores, Starbucks utilized fully automated coffee machines from Italy that operated at high pressure and temperature, taking only 18–23 seconds to brew a cup of espresso and then deliver it to customers. In May 2000, Starbucks opened its first store in Shanghai, and CEO Howard Schultz attended the ribbon-cutting ceremony. Dressed in a black suit and standing alongside baristas in green aprons, he shared with Chinese consumers the story of Starbucks’ “Third Place,” where people are free, equal, and can truly relax and be themselves. At that time, the average monthly salary of Shanghai residents was RMB 1,842 yuan, and a cup of latte was sold for RMB 19 yuan.8 However, Shanghai consumers were far more receptive than expected, and many stores in Shanghai became profitable in just 21 months after opening, which was the first time in Starbucks’ global history. Compared to the many small cafes in the market at the time, Starbucks created a completely new “social space” and lifestyle with distinct “standard” elements, such as high income, elegant taste, and international fashion. As China’s economy grew and the white-collar class expanded, Starbucks’ coffee culture became increasingly popular. After 2005, Starbucks increased its investment in China and took back its licensed operations in the Chinese market to run it directly. In addition, the company accelerated the opening of new stores in wider geographic areas, including second and third-tier cities.

5

https://www.vzkoo.com/read/20220617c4be58964c416e1a1b06638d.html. http://www.360doc.com/content/14/0806/11/13141673_399792968.shtml. 7 https://www.163.com/dy/article/E4EANEKF05228OH7.html. 8 https://zhidao.baidu.com/question/499265089417776812.html. 6

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In 2011, Starbucks expanded its presence in China, reaching over 400 stores, which further grew to more than 4,000 by 2019. In April 2021, Starbucks opened its 5,000th store in mainland China, in Qingdao, known as China’s beer capital. On September 27, 2022, Starbucks celebrated the grand opening of its 1,000th store in Shanghai, marking a total of 6,000 stores in China, and Shanghai becomes the city with the most Starbucks locations worldwide.9

9.2 A Drive Fueled by Continuous Creativity Looking back at Starbucks’ journey in mainland China, it is evident that continuous creativity has been a driving force behind its rapid growth. This aligns well with Starbucks’ innovative tradition in the coffee industry, as exemplified by the introduction of the Americano and latte with added water and milk, as well as the launch of the classic “Frappuccino” in 1995. These Starbucks heritages have been well embraced in China and are widely recognized as key factors contributing to Starbucks’ remarkable success in the country, which is fully reflected in the various “firsts” that Starbucks has brought to its Chinese consumers. Let’s start with Starbucks Reserve, which was launched in China in 2014. Every year, Starbucks’ coffee buyers travel to coffee bean belts around the world in search of high-quality Arabica coffee beans. Only a small number of coffee beans possessing extraordinary quality, unique flavor, and a story behind them are selected for the Starbucks Reserve coffee. The selected beans are presented in a designated semi-open brewing bar in the store, where customers can interact with coffee masters, learn about the history and flavors of the selected coffees, and acquire knowledge about various brewing methods. Customers can also experience the “chemical reactions” between different brewing methods and different coffee beans, and distinguish different flavors such as “citrus, caramel, and herbal” as described on the coffee bean cards. This initiative has been well-received by customers, as it allows them to have a more immersive coffee experience and learn about the stories behind their cups of coffee. An example of Starbucks Reserve coffee in China is the use of yellow honey to process coffee beans by Starbucks in Yunnan Province in 2017. Traditionally, farmers in the region treated green coffee beans with water, but this time they took a different approach using yellow honey to process. This more complex treatment requires farmers to possess more processing knowledge and make additional efforts, such as accurately determining the proportion of removed pectin and striking a balance between drying and fermentation. Nonetheless, this unique approach distinguishes Starbucks from others. In 2015, Starbucks introduced a new coffee category in China called Flat White, which originated from the Australian-born espresso classic. Flat White differs from regular Latte coffee as it uses two Ristretto Shots, which are extracted using the same grinding and powdered coffee, but with less water, resulting in a more intense 9

https://stories.starbucks.com/press/2022/starbucks-opens-its-6000th-store-in-china/.

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flavor. Flat White also has a subtle sweetness, which balances the initial bitterness. Upon its launch, Flat White quickly gained popularity among Starbucks fans, who replaced their “Daily Latte” with “Daily Flat White”, making it a popular choice in cafes across the country. In the summer of 2016, Starbucks brought a new coffee experience to China with the launch of “Cold Brew Coffee,” which transformed the way coffee was brewed. Unlike the traditional method of using hot water, cold water is used to brew the coffee in this unique process. To make this coffee, Starbucks uses a specially blended cold-brew coffee bean that is ground and extracted with cold filtered water for over 10 hours. The slow extraction process reduces the coffee’s acidity and allows flavors to develop over time, resulting in a smooth and sweet-tasting cup of cold brew coffee. This innovative brewing method has since gained popularity worldwide and is now available in many coffee shops globally. In November 2016, Starbucks introduced a modified version of its cold brew coffee in China called Starbucks Nitro Cold Brew™ Coffee. This new coffee is made by injecting food-grade nitrogen into the low-temperature and slow-extracted cold-brew coffee. The result is a coffee with dense foam and a more natural and sweet taste. The nitrogen infusion gives the coffee a creamy texture and enhances the sweetness, making it a popular choice for coffee lovers. In August 2016, Starbucks launched its premium tea brand, Teavana, in China, offering two new Teavana Iced Shaken Teas specially developed for Chinese consumers: Iced Shaken Peach Green Tea or Oolong Tea, and Iced Shaken Pomelo Honey Black Tea. To develop these products, the Starbucks team of “Tea Doctors” carefully selected black tea, green tea, and oolong tea as the tea base, and added various fruits that are popular among Chinese consumers. Through countless taste tests and experiments, they successfully created teas that provided Chinese consumers with a unique and surprising experience, blending the bold flavors of tea and fruit in familiar and enjoyable ways. In 2017, Starbucks introduced Princi in China, a leading Italian artisanal bakery and gastronomic brand, to provide food for its new Reserve Roastery and Starbucks Reserve Bakery Café in Shanghai. This marked a significant change from the previous Starbucks model, which did not include in-store baking of food. With Princi’s expertise, Starbucks was able to offer its customers freshly baked Italian bread, pizzas, and other gourmet food items, further enhancing the overall coffee experience. In the same year, Starbucks Reserve Roastery Shanghai opened Bar Mixato, which was led by Timothee Becqueriaux, a cocktail master who had won the title of 2019 China regional champion in the Chivas Cocktail Competition, the world’s top cocktail competition. When the Bar Mixato launched, globally debuting unique cocktails using Reserve Coffee and Teavana as the base, Timothee and his team of over 20 bartenders with extensive knowledge of coffee, tea, and wine worked tirelessly to provide customers with a unique and delightful experience at Bar Mixato. Another “first” came in April 2020, when Starbucks announced the launch of the “Starbucks GOOD GOOD movement” in China, in partnership with global plantbased dietary advocates Beyond Meat and OATLY. This initiative aimed to provide

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Chinese consumers with new plant-based food and beverage options, including rolls with plant-based beef, as well as beverages made with plant-based oat milk. In April 2020, Starbucks Reserve Roastery Shanghai also introduced a new coffee platform called the “Starbucks Reserve Whisky Barrel-Aged Coffee” series, which combined the flavors of coffee and whisky. This unique Starbucks Reserve coffee uses Guatemalan coffee beans brewed in whiskey barrels, resulting in a balance of whiskey aroma and coffee flavor. The entire process—from barrel selection and coffee bean filling to barrel changing and roasting—was completed in Seattle. The resulting cold-brew coffee offered drinkers the rich aroma of alcohol without any actual alcohol content. In July 2020, Starbucks introduced the Tea Cloud Oolong series, which featured three unique tea drinks that broke traditional boundaries: dragon fruit guava tea cloud oolong, passion fruit peach tea cloud oolong, and rose grape tea cloud oolong. The Starbucks China team developed this series of tea drinks, which introduced an innovative way of tea-making in the industry. Fresh tea soup was used to make “cloud” tea, which was created by stirring the tea more than one thousand times to achieve a unique texture and flavor. In June 2022, Starbucks introduced a new iced coffee category called the “Iced Shaken Espresso” series, which showcased a new coffee blending technique called “Ice Shake.” The “Shake” method, commonly used in cocktail preparations, was applied to coffee preparation. Freshly brewed espresso typically has a strong flavor, but within a few seconds, the flavor and aroma could quickly dissipate. To prevent this, the ice shake technique takes advantage of the cold ice. The barista needs to pour the freshly extracted espresso directly onto the ice within 10 seconds, utilizing the low temperature of ice to lock in the fleeting rich aroma, then “shakes” to thoroughly mix the espresso, ice cubes, and flavored syrup. Over the years, Starbucks has constantly developed and produced new coffee categories and innovative products, solidifying its position as an indisputable leader in the coffee market in China since its entry in 1999. These supply-side-oriented innovations are the result of decades of knowledge and experience in coffee making, as well as a deep understanding of consumers’ beverage consumption needs, whether physical and explicitly expressed, or potential and emotional, which has provided Starbucks with limitless expansion opportunities and possibilities in the marketplace.

9.3 Starbucks’ “Third Place” Concept Let’s delve into Starbucks’ concept of the “Third Place” now. While coffee primarily serves as a functional beverage, the places where customers can consume it, such as coffee shops, offer potential for additional functions beyond its physical properties, such as socializing. Unlike noisy bars that may only attract a specific type of customer, coffee houses offer a quieter and more relaxing environment that is enjoyable for socializing over a cup of coffee.

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Fig. 9.1 Starbucks’ “Third Place” fosters a lifestyle for its consumers. Source Yuming Ren/China Business Network Ltd., Shanghai

Starbucks has effectively harnessed this potential by adopting the concept of the “Third Place,” a term coined by sociologist Ray Oldenburg in his book “The Great Good Place” in the late 1980s.10 This concept refers to a “Social Space” or “Offline Retail Space” that can provide customers with a relaxing, pleasant, and soothing environment within the setting of such a Starbucks store. The “Third Place” is an extension of the “First Place” which refers to the place where people live, and the “Second Place,” which is where people work or study. Over the years, Starbucks has continually infused new meanings and content into the concept of the “Third Place,” providing customers with new pleasures and enjoyments through continuous improvements in food safety, store format, and product innovation (Fig. 9.1). For its over 6,000 coffee shops in China, Starbucks has never replicated the same building model. Instead, the company consistently updates the design and layout of newly opened stores to ensure that its “Third Place” is always filled with charm for its customers. These Starbucks stores have now become landmarks in cities across China and are a parameter for China’s financial media when assessing a city’s

10

Ray Oldenburg, “The Great Good Place”, Paragon House, 1989.

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business environment.11 Since opening its first store in Beijing in 1999, Starbucks has designed and developed a rich variety of experiences in its stores in China. The first type of Starbucks store features a more professional and coffee culture atmosphere that brings consumers an extraordinary coffee experience, including Starbucks Reserve and Starbucks Roastery. In 2014, 15 years after Starbucks entered the Chinese market, coffee lovers in China became more adventurous with their taste buds and started exploring different coffee flavors from various regions as well as different brewing methods. To meet this demand, Starbucks introduced “Starbucks Reserve,” a brand developed in 2010, in China, and currently, there are over 600 Starbucks Reserve stores in the country.12 The appearance of Starbucks Reserve stores is mostly black and copper gold color schemes. They also offer more spacious seating arrangements and all baristas wear black aprons. Starbucks Reserve coffee is made from a carefully selected small lot of high-quality Arabica coffee beans, chosen by Starbucks coffee buyers from around the world’s coffee-growing regions. These beans are sent to one of the six Starbucks Reserve roasteries worldwide for roasting, resulting in the creation of what is known as “Starbucks Reserve Coffee”. In addition, Reserve stores are equipped with a wider range of brewing equipment compared to other stores. Starbucks Reserve Shanghai Roastery, which opened on December 6, 2017, is Starbucks’ first overseas roastery since its first one was unveiled in Seattle in 2014. The 2,700-square-meter store is the highest level of store in Starbucks China, which resembles a real coffee roasting factory. Upon entering the amphitheater-style building, customers are greeted by a giant two-story-high copper cusk decorated with over 1,000 traditional Chinese seals and carvings, hand-engraved with the story of Starbucks and coffee. The Roastery features hundreds of coffee masters who demonstrate each coffee flavor live for customers using 8 major brewing methods, including MODBAR® precision self-controlled brewing, Chemex French press, siphon, cold brew, the unique CLOVER® brewing, and Phantom.13 As customers move through the Shanghai Roastery, they can observe the carefully roasted green beans dropping into the storage jar on the bar via the “coffee symphony tube” hanging from the ceiling. These beans are then used to create cups of fragrant coffee using 8 major brewing methods, which are all demonstrated live by coffee masters. Instead of queuing at the counter, customers can place their orders using a handheld POS machine operated by mobile staff. Another experience is Bar Mixato. As the average customers visit Starbucks during the daytime, so what does the “Third Place” look like at night? When coffee and cocktails collide, what sparks? Starbucks Reserve’s “bar” brand, Bar Mixato, opened on the Bund in Shanghai in March 2019. Many people exclaimed “Starbucks has opened a bar!” when they heard the news. As of today, Starbucks has 20 Bar Mixatoes across the country, with Bar Mixato in Shanghai Roastery as its flagship. 11

http://m.haiwainet.cn/middle/3540916/2017/0624/content_30984615_1.html; com/7944046113/178116692. 12 The information is provided by Starbucks China Team. 13 Ibid 12.

https://xueqiu.

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Bar Mixato features cocktails using Starbucks Reserve coffee or Teavana as the base and also offers classic cocktails, aperitifs, wines, craft beers, and mocktails.14 The second type of Starbucks store features social value, including signing stores, green stores, and intangible cultural heritage stores. On May 19, 2019, Starbucks opened its first Signing Store in Guangzhou, which has since become a unique and innovative concept. The store employs deaf and hard-of-hearing baristas who, along with their colleagues, wear specially designed aprons embroidered with sign language gestures corresponding to the English letters of Starbucks. This innovative design allows customers to communicate their orders using sign language, creating an inclusive environment for deaf and hard-of-hearing consumers. Starbucks has long been committed to creating job opportunities for disabled people, and the Signing Store is a testament to that commitment. This type of Starbucks is often known as the “quietest coffee shop.” The design of the Signing Store reflects a fusion of coffee culture and sign language elements. The store logo incorporates corresponding sign language graphics under the regular name of “Starbucks.” To facilitate working for the deaf and hard-ofhearing baristas and ensure barrier-free communication with customers, the store has designed a new ordering system that includes a handwriting tablet for communication, a handheld menu board, and a double-sided display screen. All beverages and food products in the store are marked with special numbers to help baristas and customers easily communicate with each other and complete orders without speaking. The store also has a unique vibrating prompt, and the baristas use sign language to say “thank you” when handing out coffee, conveying the message that “although I can’t hear, I’m happy to share this cup of good coffee with you”. Overall, the Signing Store is an inclusive and innovative concept that promotes diversity and equal opportunities. So far, more than half of the signing stores worldwide are located in China, 12 in total.15 Another Starbucks store featuring social value is Green Store, which was jointly developed by Starbucks and authoritative organizations. The scope of assessment for being certified covers the entire lifecycle of the store. Every Starbucks Green Store must pass at least 8 standards of this certification system, which focuses on the areas such as energy conservation, water consumption management, and waste disposal. These standards include the use of high-efficiency, low-energy appliances, 100% use of mercury-free LED lighting, low-flow faucets, and adherence to garbage classification. In addition, Green Stores will also purchase green electricity through the national green certification platform, striving to use renewable energy to the maximum extent possible. Through this series of positive measures to improve store energy efficiency, each certified Green Store is expected to reduce 10.57 tons of carbon emissions and 301.7 tons of water consumption per year compared to an ordinary Starbucks store of

14 15

Ibid 12. Ibid 12.

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the same size in 2019. As of the end of March 2023, there are 110 Green Stores nationwide.16 The intangible cultural heritage stores represented another effort of Starbucks’ pursuit of social value. In 2020, Starbucks China opened its first Container Store, a highly innovative “Third Place” built with 6 containers, located in the Wisdom Bay Science and Technology Innovation Park in Baoshan District, Shanghai. On November 10, 2021, Starbucks China opened its first “Heritage Culture Gallery Store” in Beijing, partnering with a batik cooperative in Danzhai County of Guizhou Province to bring the art of Chinese batik to customers. This concept store is not only a new “Third Place” for coffee but also an exhibition place for intangible cultural heritage art. Starbucks designers and batik craft inheritors collaborated to create Starbucks’ first batik-themed coffee bar, showcasing a unique fusion of traditional Chinese art and modern coffee culture. This new concept store continues Starbucks’ commitment to providing customers with diverse and exciting experiences while also promoting and preserving Chinese culture. In September 2022, the second nationwide and first Shanghai intangible cultural heritage concept store opened in the Shenyu Li area of the Haipai Shikumen architectural complex. The blend of rich coffee aroma, Haipai culture, and intangible cultural heritage concepts creates a unique Third-Place experience. The third type of Starbucks store is the pet-friendly store. Since the opening of the first Starbucks pet-friendly store in Shenzhen in 2017, this concept has been expanded to nearly 230+ stores in Shanghai, Beijing, Chongqing, Hangzhou, and other cities as of March 2023. Many Starbucks fans are pet lovers, and pet-friendly stores provide an ideal option for them to enjoy coffee while spending time with their furry companions. These stores are typically designed with an outdoor area that serves as an exclusive playground for pets. Next to the seats in the outdoor area, specific leash hooks for pets are installed, allowing customers who walk their dogs alone to safely tie their pets while buying coffee inside the store. The pet-friendly stores also offer a special menu for pets, including the “Starbucks Pappuccino” made from freshly whipped cream, and for lactose-intolerant pets, the “Starbucks Zero-shot Americano” Purified Water is a refreshing drink. Through the mix of these different experiences of stores, Starbucks has expanded its innovative in-store setup and provided a complete, creative, and enjoyable “Third Place” experience for its customers, which has continued for years. In 2016, Starbucks opened its Disney Town Store, “Coffee Theater,” in Shanghai, which became Starbucks’ 11th store in Disney Resorts worldwide. In 2018, Starbucks China opened its first Coffee Origin Store in Pu’er, Yunnan, highlighting the unique coffee culture of the region. In 2019, Starbucks China opened its first Reserve Bakery Café at Grand Gateway Plaza 66 in Shanghai’s Xujiahui business district. Also, in 2019, the first Starbucks Reserve Bar Mixato opened on the Bund in Shanghai, as mentioned earlier, introducing a complete bar experience for the first time in China and opening a new model of integration between coffee and a bar. These new store concepts have

16

Ibid 12.

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allowed Starbucks to continue innovating and expanding its reach in the market while providing customers with diverse and exciting experiences. In Starbucks’ Third Place, Starbucks baristas, also known as “Starbucks Partners,” play a crucial role as they are the frontline workers that directly impact the quality of service and the overall consumption experience that customers receive. These partners receive extensive professional training on how to make a perfect cup of latte, brew coffee by hand, communicate effectively with customers, host coffee-tasting sessions, and even manage a store. At Starbucks, a new partner undergoes at least 30 days of rigorous training to become a fully independent barista and can then put on the “green apron” to serve customers at the counter. However, the learning never stops. Baristas continue to improve their knowledge and skills through various online training programs provided by “Starbucks Learning Center,” an inhouse online training platform that covers a wide range of topics, including “Retail,” “Leadership,” and “Coffee.”17 Simply putting on the black apron, however, is not the pinnacle of a Starbucks barista’s training journey. Starbucks also offers 7 different special training exams, including latte art and classic hand brewing, and only those who pass these exams can receive a corresponding badge. In addition, there is the annual “Starbucks China Barista Competition”, which started as a biennial event in 2009 but has been held annually since 2017. The competition includes four individual events, such as the “Coffee Ambassador Competition” and the “Latte Art Competition”. Only those who win the “National Coffee Ambassador Competition” can wear the “brown apron”, which symbolizes the title of Starbucks coffee ambassador. These national and regional coffee ambassadors serve as the “coffee leaders” of Starbucks, inspiring and leading their co-workers with passion and expertise in coffee.18 Starbucks also takes their partners to coffee bean origins during harvest season to allow them to experience the entire process of coffee production from picking to processing, with the opportunity to engage in in-depth communication with local coffee farmers to better understand the customs and culture of the coffee production areas. This initiative, known as the “Origin Trip,” has been conducted in various coffee origins such as Yunnan in China, Sumatra in Indonesia, Rwanda, and Costa Rica. Many Starbucks partners who have been on these trips have gone on to start their own businesses and open coffee shops, bringing the coffee culture they learned at Starbucks to a wider audience.19

17

Ibid 12. Ibid 12. 19 Ibid 12. 18

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9.4 Starbucks’ Expansion to the Digital Space In 2011, WeChat, one of the largest Internet platforms, was launched, marking the beginning of the massive development of mobile Internet in China. To keep up with this new trend, Starbucks began its digitalization process and started to expand beyond its physical coffee stores, and for achieving this goal, Starbucks entered into partnerships with some of China’s digital giants. On December 8, 2016, Starbucks announced a collaboration with Tencent to develop a digital gifting service on WeChat, which was launched in early 2017. Through this program, customers could access the “Starbucks” domain on WeChat by following the steps of “Me—Wallet—Third-Party Service” on the menu and easily purchase digital gift cards. In addition, WeChat users could visit the “Starbucks Social Gifting” section of Starbucks China’s official WeChat account at any time to choose from a variety of gift options for different recipients on various occasions. Customers could attach personalized wishes, photos, or special videos to make and deliver a customized “emotional gift”. These gifts could be stored in the recipients’ WeChat account and redeemed at any Starbucks store in mainland China at any time. In September 2017, Starbucks announced a partnership with Alibaba, another China’s internet giant, and its online payment arm, Ant Financial. The agreement included the use of Ant Financial’s Alipay as a payment method in all Starbucks stores in mainland China and the creation of a “Smart Store” in the Starbucks Reserve Shanghai Roastery, following the concept of “new retail”. Alibaba would also provide more personalized and customized products and experiences for Starbucks’ flagship stores on Tmall, Alibaba’s high-end e-commerce platform launched in 2015. Additionally, Starbucks’ social gift service “Starbucks Social Gifting” would be integrated with Alipay, allowing customers to send gift certificates and Starbucks gift cards to their friends and family members with customized greetings, which would be stored in the recipients’ Alipay accounts and redeemable at any Starbucks store at any time. In mid-September 2018, Starbucks launched its official online ordering service, Starbucks Delivers, using Alibaba’s well-developed Ele.me dispatch system. Customers can log on through either the Starbucks or Ele.me platforms based on their ordering habits and preferences. When an order is received, the store’s intelligent dispatch system analyzes the capacity of nearby stores and optimizes the delivery route for each order based on real-time data, ensuring that the ordered drinks are delivered to customers as quickly as possible. Starbucks Delivers was initially tested in 300 stores in Beijing and Shanghai, and now it is expanded to almost all mainland China markets. To meet Starbucks’ strict delivery requirements, Ele.me developed a well-designed delivery system, from specially designed delivery cup lids and sealed packaging to dedicated delivery teams and insulated delivery boxes. For example, the packaging engineers at Starbucks had to test more than 2,000 beverages and compare 5 designs before finalizing a hot beverage lid with double layers and a small round return box on the inner layer, which allowed steam to escape while preventing coffee from leaking during delivery.

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On May 21, 2019, Starbucks launched “Starbucks Now,” a mobile ordering service that allows customers to order online and pick up their orders in-store. Initially launched in Beijing and Shanghai, the service gradually expanded across the entire country. “Starbucks Now” was integrated with Starbucks Rewards, allowing members to accumulate stars and redeem them for coffee and other gifts. Members with a certain star level could earn 1 star for every RMB 40 yuan spent using Starbucks gift cards on the “Starbucks” APP, accelerating the rate of star accumulation by 25%. The order-picking process was a unique and creative part of the Starbucks Now experience. Rather than receiving a simple digital number like at many other coffee shops or restaurants, customers received an exclusive “secret code”, such as “Koi Today,” “Literary Youth,” or “All Good,” which were randomly generated but created an emotional connection between store partners and customers. Presenting the code to the Starbucks partners at the counter would result in the customer receiving their ordered cup of coffee. On July 21, 2020, Starbucks unveiled an enhanced version of its Starbucks Now Service, which was designed to provide customers with an even better experience in several ways. First, customers were no longer limited to using the Starbucks App for access, as they could now use any app of their choice, such as Alipay, Taobao, Koubei, or Amap, to enjoy convenient ordering and faster service while still earning membership points. Second, a reservation function was added to provide customers with the flexibility to select the pick-up time via the Starbucks App. Customers could now choose the nearest store to place an order in advance, save their customized selection and edit their shopping cart, and pick up their order directly at the pick-up desk when arriving at the store, thus reducing waiting time in line. On May 10, 2021, Starbucks launched an augmented function called “Star Tag” on its WeChat Mini Program and App, which allows customers to save their favorite drinks and customizations, such as adding more espresso shots or whipped cream, with just one click when placing their orders. Customers can also share their Star Tag with friends and family, strengthening their emotional connection. In addition, customers can explore the coffee preferences of registered stars and celebrities and easily order the same drink using Starbucks Now™. With Star Tag, customers can also express their personality and attitude through their views on coffee, generating posters with coffee views and favorite drink recipes to share on WeChat Moments. Starbucks has also introduced another innovative service called “Starbucks Status.” This new feature was jointly created by Starbucks and WeChat and officially launched on July 28, 2021. Previously, customers used to record their moments at Starbucks by writing heartfelt words and drawing interesting graffiti in the guestbook at the store, creating a humanistic atmosphere in the Third Place. With the launch of Starbucks Status, however, the guestbook has been upgraded and extended to the digital space. Customers can now scan the QR code on the guestbook and create their own “Starbucks Status” on WeChat, expressing their thoughts and feelings at the moment. Furthermore, customers can generate a “Starbucks Status” with just one click, which includes the Starbucks Now Password, coffee hashtag, and a customized background picture. This feature enables customers to quickly capture their mood,

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instantly upload pictures and a few words on WeChat, and share their Starbucks experience with their friends. Another noteworthy service area that Starbucks has explored is “scenario consumption” through the integration of online and offline experiences. On January 18, 2022, Starbucks announced a partnership with Meituan (3690. HK), a technologydriven retail giant in China, to unlock more potential of its Third Place in the digital world. As part of the agreement, Starbucks will establish an exclusive service domain on Meituan’s platform, called “1971 Salon,” where customers can access Starbucks Delivers service. In addition, Starbucks will use Meituan’s “Super Store” function to achieve seamless integration between online and offline activities. In the coming year, each Starbucks store on Meituan’s platform will have a multifunctional homepage that integrates functions such as consumption, booking, and display. Customers can fulfill all their requests, from online ordering for services like special Starbucks Delivers and coffee express to viewing the store’s event calendar, reserving space in the “1971 Salon,” and finding a star barista in the store, all in one place through Meituan’s “Super Stores” page. Each store’s online appearance will be unique, with different store labels, photos, and videos that best represent the store’s personality. There are several scenario services being developed by an exclusive space on “1971 Salon,” which aims to meet the unique space requirements of each customer for gathering, meeting, working, and studying. Through digital platforms such as Meituan, customers can find and book the “Third Place” that best satisfies their needs. One of the services offered is “Coffee Gathering.” This scenario features a casual gathering with a few friends that is guided by Starbucks’ coffee masters. Customers and their friends can discover the different flavors of the coffee world and try to make their own coffee together. Another service is “Salon Meeting,” which focuses on business meetings or community events. Customers can easily find a Starbucks store in Meituan that offers closed or semi-closed spaces that can be turned into comfortable “meeting rooms” with diversified catering services. As the number of covered stores expands, Starbucks is continuing to explore and unlock the full potential of the “1971 Salon” by introducing more coffee courses, club events, and other activities. It is expected that some of the existing activities, such as coffee classrooms, birthday parties, pet parties, and sign language classes that are currently offered in Starbucks stores, will also be organized and managed through the “1971 Salon” to better serve the communities where the stores are located. On March 21, 2023, Starbucks unveiled an innovative service that elevates the coffee experience in China to a whole new level of convenience. Partnering with Amap, a leading provider of digital map content, navigation, and location-based solutions in China, Starbucks Curbside provides driving customers with a hassle-free and time-saving way of enjoying their coffee routines. Driving customers can simply key in their destination on Amap and place their orders with Starbucks stores along the route before starting their journey. Amap’s ETA (estimated time of arrival) technology will guide the store on the right timing to prepare and deliver the order to a designated nearby pick-up point. All customers have to do upon arrival is to unwind their car window to pick up their orders from the

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waiting Starbucks partner. The service has been launched in 100 stores in Beijing, covering most of the city. It is also being trialed in 50 Shanghai stores, with plans to roll out to over 1,000 stores across China over the next year.20 By using coffee as the key element to connect with customers’ passion for the beverage, Starbucks has successfully created a unique coffee consumption experience in the Third Place, which is the core of its service, and further expanded this experience into the digital space to achieve integration and connection among various dimensions. Starbucks’ strategic cooperation with digital giants in China, such as WeChat, Alibaba, and Meituan, has accelerated its digital transformation, which will bring customers a new Starbucks experience that blends online and offline services, providing surprises and warmth with every cup of coffee delivered.

9.5 Some Ending Remarks Starbucks’ journey in China is truly remarkable and could be instrumental for many businesses interested in entering the Chinese market, which has hundreds of millions of consumers. As evident from the intriguing stories discussed above, Starbucks has brought not only just high-quality Arabica coffee beans purchased from the world’s best coffee-growing regions to China, but has also created an emotional connection between its baristas and customers by delivering every single cup of coffee with care, following its mission of “to inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.”21 Starbucks’ success in China is an exciting testament to the power of innovation. As mentioned earlier, many of Starbucks’ innovations, similar to Apple’s iPhone, are “supply-side-oriented,” based on the company’s knowledge and insight on both products and customers. Since its entry into the mainland China market, Starbucks has been at the forefront of innovation by constantly developing new and innovative coffee products and creative consumption scenarios that were unexpected by consumers before their launch but well-received when they arrived in the market. These “supply-side-driven” innovations have greatly enhanced Starbucks’ reputation as an inevitable leader in the Chinese coffee market, which, in turn, attracts more consumers to learn, experience, and enjoy the “lifestyle” designed and developed by Starbucks. This coffee giant predicts that by 2030, there will be 395 million middle-class households in China, and the “average number of cups of coffee consumed per year” by Chinese consumers will increase from 10 cups in 2019 to 14 cups in 2025. As the “coffee population” and “frequency of coffee consumption” continue to grow, digital orders are expected to surge. In particular, the coffee delivery of digital orders

20 21

Ibid 12. https://livingourvalues.starbucks.com/en-us/mission-values.

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is expected to increase by 200% by 2025 compared to its digital order sales in the fiscal year of 2022.22 Starbucks is taking steps towards sustainability by opening a Greener Lab Store, which began in September 2021 through initiatives such as the opening of one of the world’s most environmentally friendly Starbucks stores in Taikoo Li, Qiantan, Shanghai. The store offers a wide range of delicious GOOD GOOD food options with lower carbon emissions, and over 50% of its food and dairy beverages are made from plant-based ingredients. The store also offers reusable cups, which can be purchased for an additional RMB 15 yuan with any hand-crafted beverage. Customers who use these cups in other Starbucks stores can enjoy an RMB 4-yuan discount. Dine-in customers are also encouraged to use store mugs or bring their own cups to reduce the consumption of disposable cups. According to its China Strategic Vision 2025, Starbucks aims to operate 2,500 Greener Stores by 2025. In addition, Starbucks has introduced two plant-based dairy alternatives—oat milk (April 2020) and almond milk (April 2023)—at parity pricing across all stores, encouraging customers to adopt greener lifestyles. In March 2023, Starbucks announced plans to become the first coffee retailer in China to pilot a water replenishment project. In partnership with The Nature Conservancy (TNC), the Qiandao Lake Water Replenishment Project will improve water quality in the local ecosystem by focusing on sustainable agriculture and wetlands restoration, replenishing at least 1.5 million tons of water a year by 2030, equivalent to about 600 Olympic sized swimming pools, and enough to meet the annual water consumption needs of more than 23,000 people. Digitalization will be a key focus for Starbucks in the future. In its China Strategy Vision 2025, the company aims to accelerate the speed of its digitalization and technology-enabled store operations, with increased investment in the Internet of Things, machine learning, and algorithmic technologies. This includes the construction of Starbucks’ first dedicated digital technology innovation center in China, with an investment of approximately RMB1.46 billion (about USD $220 million), to develop its multi-channel business. The company plans to double its sales of coffee delivery business by 2025 and expand the coffee peripheral products and gifts business, with the help of digital technologies. Starbucks also intends to continue developing its Starbucks Rewards membership, offering more diversified, personalized, cross-channel, and digitalized interaction experiences through the continued upgrade and empowerment of its big data. The company aims to attract more than 170 million registered members and double the number of active members between fiscal year 2022 and 2025.23 Finally, let’s turn our attention to the supply chain, which is crucial for realizing and ensuring the quality of all of Starbucks’ ambitious plans. Starbucks is investing RMB 1.1 billion in the Starbucks Coffee Innovation Park (CIP), which is expected to begin operations in the summer of 2023. Located in Kunshan near Shanghai, it will feature Starbucks’ largest coffee roasting plant outside the US market. It will 22 23

https://www.starbucks.com.cn/about/news/starbucks-strategic-vision/. https://investor.starbucks.com/press-releases/financial-releases.

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process an average of 135 million pounds of beans shipped from global production regions each year and distribute them to all Starbucks stores across the country. The Integrated Distribution Center, which spans approximately 33,000 square meters of land, will meet a significant portion of Starbucks’ coffee bean needs in China. By shifting Starbucks’ baking and logistics systems from a decentralized setup to a more centralized one, the center will reduce logistics and labor costs, while improving the company’s traceability for food safety through upgraded digital systems. The CIP will feature sustainable roasting technology that reduces carbon emissions by over 30%. Up to 30% of energy consumption will be generated through renewable sources.24 From products to services, from dine-in to take-out, from physical stores to digital channels, from coffee consumption to emotional connections, and from satisfying customers’ biological beverage needs to creating a relaxing, pleasant, and elegant lifestyle for consumers, Starbucks’ venture in China well exemplifies the concept of the Third Place and has marvelously documented its expansion from one to the other. With its Vision 2025, Starbucks is expected to continue its journey of evolution and further enrich its various spaces for consumers in China down the road.

24

Ibid 12.

Chapter 10

Creating the Beauty that Moves the World: L’Oréal in China

The year 2022 marked the 25th anniversary of L’Oréal’s entry into mainland China. To celebrate, a magnificent event with the theme “Beauty Moves” was held at the Shanghai Exhibition Center at the end of the year, which included artworks from well-known artists in China and overseas such as Xu Bing, Angelica Dass, Zheng Bo, WEB3 Technology Art Creation Team Black Void, and Liu Jiayu. In addition, a documentary film entitled “Seize the Beauty” was produced by CMG (China Media Group) Shanghai with the participation of Winter Olympics Champion Su Yiming, the original creative team of the dance poetry drama “Green,” and others. Finally, L’Oréal and its subsidiary brands launched a charity project for women’s empowerment called L’Oréal for Women. The project plans to donate at least RMB 50 million to the China Women’s Development Foundation from 2023 to 2027 to provide diverse areas of support for women in China.1 Twenty-five years ago, when L’Oréal entered the mainland China market, the beauty industry was still in its early stages of development, with the emergence of few beauty brands. Notable ones included Maybelline, which inspired tens of thousands of Chinese young women in terms of fashion and personality by bringing its iconic products such as mascara to the market, as well as Florida Water, whose mosquito repellent still dominates the market today. Other popular brands at the time, such as Yue Sai, which was later acquired by L’Oréal, Ding Jiayi, a skincare brand, Dabao, Herborist, and Guangzhou Guerlain, were also present in the market. Overall, the size of the market was still small due to the low-income per capita level of consumers in China during the 1990s. The types of products offered in the market were limited, and consumer awareness of beauty products beyond basic skincare and cosmetics was virtually non-existent. However, L’Oréal’s entry into the market significantly changed the landscape of the beauty industry in China. As a new entrant, L’Oréal established its headquarters in Shanghai, branch offices in Beijing and Guangzhou, and production factories in Suzhou, a city near Shanghai, to begin its journey in China. L’Oréal’s arrival greatly awakened the aspirations 1

https://baijiahao.baidu.com/s?id=1752647254741604833&wfr=spider&for=pc.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_10

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for beauty of millions of Chinese consumers by bringing many of its well-known products and brands, such as L’Oreal Paris, Maybelline New York, Lancôme, L’Oréal PRO, and Kérastase, Vichy, and La Roche-Posay from Paris to China. In 2016, almost 20 years after entering the Chinese market, L’Oréal became the leading beauty company in China in terms of sales revenue, and its brands have gained the highest reputation among Chinese consumers. As of 2022, the L’Oréal Group employed around 87,400 people worldwide, with over 14,000 of them located in China. The group currently owns 36 international brands, 31 of which operate in China, divided into four major divisions: LUXE, Consumer Products, Dermatological Beauty, and Professional Products. These brands cover all consumer market segments through a well-developed distribution network, including e-commerce, mass market, department stores, pharmacies, hair salons, and branded and travel retail. Today, China is L’Oréal’s second-largest market globally and is projected to become its largest one in the coming years. In the rest of this chapter, we will delve into the remarkable journey of L’Oréal over a quarter-century, from its humble beginnings to its domination of the entire Chinese beauty market with billions of consumers today. Its journey could be of interest to many readers, in particular, those who operate consumer product brands and target global markets, as it provides valuable insights into how L’Oréal achieved its success in China.

10.1 “Glocalization”: Putting Lipstick in the Hands of Every Chinese Woman In late 1996, Paolo Gasparrini, a 46-year-old Italian, arrived in Hong Kong, starting to prepare for L’Oréal’s proposed entry into mainland China. At that time, L’Oréal only had a subsidiary in Hong Kong and a small Lancôme counter in Beijing managed by distributors overseen by the Hong Kong subsidiary. Meanwhile, some of L’Oréal’s major foreign competitors had already established footholds in China. Procter & Gamble’s brand Olay entered China in 1989, and Estée Lauder launched its first sales counter in Shanghai in 1993.2 When Paolo Gasparrini took his first trip to Guangzhou in 1996 to prepare for L’Oréal’s entry into mainland China, he and his team, with the guidance of OwenJones, the group’s formal global CEO, brainstormed at the White Swan Hotel to decide on the Chinese name for the brand. Eventually, they settled on “欧莱雅” (pronounced as Oulaiya), which translates to “elegance from Europe” in English. L’Oréal set its sights on making its products accessible to every Chinese woman and had a vision of China becoming its largest market in the future, as believed by Jean-Paul Agon, formal L’Oréal Asia Zone president. Gasparrini identified three key factors for success in developing the China market. First, given China’s vast and diverse market, L’Oréal needed to listen carefully to 2

https://m.yicai.com/news/2639661.html.

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local consumers and truly understand and respect their culture, needs, and choices. Second, the company needed to be adaptable and willing to change its existing products. Finally, it was crucial to provide consumers with high-quality products and first-class service at all times. Under Gasparrini’s leadership, the L’Oréal China team worked diligently to gain a deeper understanding of the new market by conducting market intelligence and research, building up the supply chain, and establishing communication with the local government. L’Oréal, as a global company with brands primarily built up through global acquisitions, has proven to be adept at transplanting a brand from one place to another or expanding it globally. Its $758 million acquisition of Maybelline in 1996 is still viewed as a classic example.3 Maybelline, a US cosmetics company founded in 1915, produced the world’s first mascara, but only 7% of its $350 million annual sales came from markets outside the United States at the time of the acquisition. However, after the merger, L’Oréal relocated Maybelline’s headquarters from Tennessee to New York and added the words “New York” to its trademark, which immediately gave the brand an international metropolis feels. Within just a few years, Maybelline New York’s sales revenue surpassed $1 billion, with most of it coming from over 90 countries outside the United States. L’Oréal effectively utilized its “transplanting techniques” in mainland China by successfully introducing its established brands into local markets, including L’Oréal Paris, Maybelline New York, Lancôme, L’Oréal PRO, Vichy, Kiehl’s, and Helena Rubinstein. At first, L’Oréal set up “beauty counters” in major cities such as Beijing, Shanghai, and Guangzhou, using these cities as hubs to extend its influence to surrounding areas. By 2000, the company had expanded into more than 50 large and medium-sized cities, with over 800 stores and over 2,000 professional beauty advisors selling its products. In 2004, L’Oréal made some strategic acquisitions in China, acquiring Yue Sai, a high-end skincare brand with strong brand awareness and a loyal customer base, and procuring 800 counters in 250 cities across the country. These acquisitions helped L’Oréal expand its sales channels and market share in China and increased its brand awareness and influence among consumers. The company’s brand portfolio and product lines in China were also significantly expanded, enabling it to better cater to the diverse needs of Chinese consumers. L’Oréal took a proactive approach to developing new products which catered to the needs of Chinese consumers. As early as the 1980s, L’Oréal established a research team at their Paris headquarters to analyze local culture, skin colors, and other factors that could affect product development. In 1993, L’Oréal formed a team in Hong Kong specifically to target the mainland China market trial and conducted careful research on consumer behaviors in different regions of China. Entering the new millennium, L’Oréal founded its China Research & Innovation Center in Shanghai in 2005, which

3

https://www.nytimes.com/1996/02/09/business/justice-department-approves-l-oreal-bid-for-may belline.html.

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later became one of the six global Research & Innovation Hubs of the Group, with the mission of inspiring the world with China innovation. L’Oréal PRO MAJIFASHION hair dye cream is a great example of a product that was developed specifically to meet the needs of Chinese consumers. The cream was created through collaboration between L’Oréal’s headquarters in Paris, its China Research and Innovation Center, and top Chinese hairstylists, based on extensive research on the hair quality and dyeing habits of Chinese consumers. The cream features a well-balanced proportion of basic colors and cool tones, resulting in a clearer and mistier coloring effect that quickly gained popularity across China and the entire Asia–Pacific region. Another series of products, Kérastase Genesis, was also launched to address the hair loss concerns of many Chinese consumers, with a formula that combined L’Oréal’s French lab’s anti-hair loss patent “Aminexil Factor” with Chinese ginger extract known for its anti-hair loss properties. The product’s scent, texture, and other features were all designed to cater to the preferences and needs of Chinese consumers. L’Oréal also prioritized educating Chinese consumers about its coloring products. Initially, Chinese consumers had a general resistance to the concept of hair coloring, as they believed it could make a person look “unprofessional.” However, L’Oréal’s decision to sign the renowned Chinese actress Gong Li as a brand ambassador for L’Oréal Paris, the biggest brand of the group that has carried the L’Oréal name since the establishment of its subsidiary in China, played a crucial role in reshaping beauty perceptions in both Western and Chinese contexts. Gong Li, with her elegant and stunning oriental temperament and standard East Asian hair and beauty look, starred in a video advertisement titled “Hair coloring makes you more beautiful,” which helped shift the perception of Chinese consumers towards hair coloring. Through this advertisement, Chinese consumers began to realize that hair coloring is a natural thing to do and not something to be avoided. In addition, L’Oréal utilized various marketing strategies in China. For instance, L’Oréal PRO, one of the first brands to enter mainland China in 1997, established the first professional hairdressing academy in China in 1999. The academy has trained over 50,000 hairstylists each year across the country, leading to a more significant market presence for the brand through the salons and hairstylists. Additionally, L’Oréal PRO collaborated with hairstylists to create new hairdressing trends, further enhancing the brand’s reputation and appeal to consumers. In the past two years, L’Oréal PRO has partnered with hair salons in Beijing, Shanghai, and Guangzhou, including Godhands, MQ, and Kraemer Paris, to open global flagship salons, which is a historic move for L’Oréal, as opening its own salons has never existed in the past 100 years. The brand aims to use these flagship salons as a laboratory and incubator for developing and testing new product services and digitalized projects, which can be shared with the entire industry. The salon experience also helps consumers better understand the value of professional hairdressing services and enjoy a more satisfying consumption experience. This pioneering business model originated in China now but could have a significant impact on the global

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hairdressing industry, aligning with L’Oréal’s philosophy of “In China, for China”, and “L’Oréal, for tomorrow.”4 L’Oréal’s approach to diverse sales channels allows its various brands to choose the most suitable option based on the characteristics of the product. Professional hair products were primarily sold to professional hair stylists or directly to consumers through hair salons, while mass-market consumer products were primarily distributed through media advertising and distributors. Luxe cosmetics, such as perfumes and other luxury beauty products, were sold through department stores, perfume stores, and duty-free shops. Dermatological beauty products, such as skin care products, were sold through specialized dermatological channels. To better meet the needs of the local market, L’Oréal’s product packaging, labeling, and pricing in China were all handled by local teams with respect to the firm’s global strategy. L’Oréal adopted an aggressive approach to building up its sales channels. For instance, in 2011, its luxury beauty brand Lancôme opened stores in several second and thirdtier cities, such as Zhenjiang, Yixing, Maanshan, and Baoji, which was considered a bold and innovative move for a luxury brand in comparison with other multinational companies. Since then, wherever Lancôme has opened a counter, competitors have followed suit, particularly in the high-end skincare market.5 In fact, the secret behind L’Oréal’s success lies not only in embracing various sales channels but also in building up the most diverse and desirable brand portfolio. Take L’Oréal LUXE Division as an example, the division has taken a rather forwardlooking view of the Chinese luxury beauty market since the very beginning. It has now developed 14 brands in China, each with its own unique positioning and targeted consumer segments, spanning from essential skincare to booming make-up to rapidly growing fragrance. As a result, L’Oréal LUXE has now surpassed 31% of the market share in mainland China today.6 L’Oréal is also a pioneer in riding on the wave of local ecosystem trends and an expert knowing how to shift its focus to cater to local needs. For instance, in April 2023, L’Oréal Dermatological Beauty Division launched 5 new strategic cooperation initiatives with partners from the health industry, including the Chinese Nongovernment Medical Institutions Association and healthcare companies Novartis China and Ping’an Health, to address the issue of the growing convergence of beauty and health ecosystems, and promote the “Beauty for Health” project in China. The Division has also established a diverse and balanced brand portfolio based on skincare research. Over the years, L’Oréal China has grown to become the brand’s second-largest market globally. In 2011, its annual sales exceeded RMB 10 billion, and by 2012, it became the top provider in six markets in China, including women’s skincare, makeup, men’s skincare, high-end cosmetics, dermatological beauty, and professional haircare products. L’Oréal Yichang Beauty Factory, the brand’s largest makeup

4

Press Release, by L’Oréal China; http://news.sohu.com/a/582861742_118677. https://www.jiemian.com/article/376002.html. 6 https://zhuanlan.zhihu.com/p/625452454. 5

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Fig. 10.1 L’Oréal has brought touching beauty to China. Source Yuming Ren/China Business Network Ltd., Shanghai

production site in the Asia–Pacific region, was completed and put into operation in 2013 (Fig. 10.1). Moreover, L’Oréal has always maintained sound relationships with the Chinese government and business partners over the years to seize emerging opportunities and achieved remarkable milestones in both Shanghai and entire China. For instance, L’Oréal was the only French enterprise sponsor of the 2010 Shanghai Expo for both the Chinese organizer and the French Pavilion. The company also sponsored some notable events, such as Shanghai West-Bond x Pompidou Art Center, and the “NotreDame de Paris, the Augmented Exhibition” in Shanghai in 2022, as the exclusive sponsor, to celebrate Sino-French exchange. L’Oréal is also a member of IBLAC and has held the position of Chairman of the CIIE (China International Import Expo) Enterprise Alliance for 5 consecutive years from 2019 to 2023. The company has also taken an active part in Shanghai 55 Shopping Festival for 4 consecutive years, infusing continuous momentum into the development of Shanghai as an international consumption hub. If we were to summarize L’Oréal’s extraordinary accomplishments in China over the past 25 years with just one word, it would undoubtedly be “HUGE.” L’Oréal fearlessly constructed a beauty empire in China, starting from scratch and progressing to a significant scale, ultimately transforming into the largest beauty group in the country today. “HUGE” was also the name of the strategy proposed by L’Oréal China in 2020. At that time, when the COVID-19 pandemic spread in China and worldwide, Fabrice

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Megarbane, President and CEO of L’Oréal China then, held an annual result press conference and unveiled the “HUGE” strategy together with L’Oréal’s China Executive Committee members, via a first-ever special green screen recording video. Throughout the entire 3-year pandemic duration, Fabrice and his team have remained steadfast in China, surmounting challenges, and consistently fulfilling the beauty aspirations of Chinese consumers by bringing high-quality beauty offerings to the country. To L’Oréal, “HUGE” is an even bigger ecosystem, encompassing various fields, such as digitalization, beauty tech, open innovation, sustainability, and more, which are all tailored to the Chinese market. L’Oréal’s experience in China has demonstrated that its localization journey, achieved through continuous experimentation and development over many years, has evolved into a leading business model that can be expanded globally. This journey has shown that true localization is not just about adapting global brands to local markets but unleashing the creativity of both global and local teams in the process. This approach is called “Glocalization” at L’Oréal and has helped it achieve higher quality growth and develop new products that create beauty for consumers beyond local markets, aligning with its new sense of purpose of “Creating the beauty that moves the world”, which is launched by the group’s new global CEO Nicolas Hierominius.7

10.2 Empowering Beauty Through Digitalization In around 2010, L’Oréal became concerned about the rise of e-commerce in China, as it observed slow growth in sales through traditional offline retail channels like department stores and numerous distributors, and fast growth of e-commerce penetration rates, particularly among younger consumers. This signaled that L’Oréal’s on-site growth model was no longer able to capture the transition of young consumers’ attention from offline to online. Consequently, L’Oréal began to explore the digitalization of its entire operations in China, marking the start of its digital transformation in 2010. In that year, L’Oréal established its online store on Alibaba’s e-commerce platform T-mall and its own app to create new digital connections with consumers. By 2016, L’Oréal had established a dedicated e-commerce department and conducted large-scale online marketing campaigns for 24 of its brands, such as YSL Beauty and Armani Beauty, with successful sales on T-mall. L’Oréal appointed its first Chief Digital Officer in 2014, and launched the strategy of “becoming the leader in “digital beauty.” The company aimed to expand its sales channels through e-commerce, penetrate emerging markets and target younger consumers, use data technology to better understand consumer behavior, optimize digital advertising and ROI measurement, and establish more personalized connections with consumers through enhanced emotional interactions. As a result, L’Oréal fully transformed its operations into a digitalized process, covering areas such as 7

https://innovation.ifeng.com/c/85Go7WejeNJ.

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consumer insights, product R&I, supply chain, consumer communication, targeted marketing, consumption experience, and e-commerce retail, which enabled L’Oréal to design products and services that meet customers’ needs more closely and deliver more personalized consumption experiences for consumers. L’Oréal’s digital transformation journey began with marketing, and it collaborated with China’s search engine Baidu to achieve more effective and targeted advertising for its brands. Since many consumers had been searching for “hyaluronic acid” on a daily basis, L’Oréal launched a marketing campaign with Baidu in response. During the campaign period, whenever consumers searched for L’Oréal brand’s celebrity spokesperson or “hyaluronic acid” on their mobile phones, they would be presented with cool animation screens showcasing L’Oréal’s products containing hyaluronic acid. This advertisement strategy effectively increased the advertising impact of celebrity spokespeople and addressed the common concerns associated with hyaluronic acids, such as its high cost, potential side effects, and discomfort, which ultimately facilitated the promotion of L’Oréal’s products. As of November 2015, the Baidu index indicated a significant 95% increase in the annual search rate for “hyaluronic acid” compared to the same period the previous year. In 2015, L’Oréal implemented a social media marketing campaign in China, utilizing “grass-planting” and live streaming. “Grass-planting” is a Chinese term for grassroots marketing, where sellers promote products or services through social media platforms by sharing content, reviews, and recommendations with their followers. L’Oréal collaborated with MCN agencies and Taobao to launch its inaugural “Beauty Advisors Celebrification” program, training people to sell products through online live streaming. In October 2016, L’Oréal started training its own counter beauty advisors to become internet influencers and sell products via live streaming. In 2017, L’Oréal partnered with Taobao, Alibaba’s retail platform, to select its first group of L’Oréal beauty advisors nationwide, including Li Jiaqi, a former counter beauty advisor in Nanchang who later became the “Livesteam King” in China. Since launching its Digital Beauty strategy in 2014, L’Oréal steadily increased its investment in digital media, particularly in China. As L’Oréal continued to digitize its operations, it gained a deeper understanding of e-commerce. In 2018, L’Oréal proposed a comprehensive strategy that integrated both online and offline channels, encompassing supermarkets, department stores, chain stores, e-commerce, social media, and entertainment. The company recognized that consumers, who constantly carry their mobile phones, regularly move between the physical and digital worlds, and dubbed them “phygital” or 2.5-dimensional consumers. L’Oréal acknowledged that digital transformation is not limited to selling products online when engaging with “phygital” consumers. Instead, the company adopted the global concept of “more than e-commerce” and focused on “social commerce.” This approach leverages the power of social media to increase brand exposure and conversions across the entire ecosystem, forming stronger connections with consumers. By establishing a brand presence across both online and offline platforms, L’Oréal aims

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to ensure that consumers choose their products regardless of whether they shop online or in-store. For effectively communicating and marketing to its consumers, L’Oréal forged deep partnerships with popular e-commerce and social media platforms in China, including Taobao, T-mall, JD, WeChat, Weibo, Douyin, RED, and Kuaishou. Through these collaborations, L’Oréal capitalized on the influence of these internet giants to promote its brand. For engaging younger consumers, L’Oréal often planned “retailtainment” campaigns, incorporating its products into games, variety shows, and other forms of entertainment that were popular among this demographic. These events were frequently broadcast through live streaming. The company also sponsored a range of online variety shows and e-sports gaming competitions, attracting a large number of younger consumers. In 2020, L’Oréal China launched its virtual idols “Mr. Ou” and “Ms. Lai” to establish a more trendy, technological, and futuristic brand image, generating discussions and interest among young consumers. In addition, the virtual model “Ou Xiaomi” made its debut in China, delivering a series of exciting live broadcasts for L’Oréal Paris. By leveraging these innovative approaches, L’Oréal aimed to stay ahead of its competitors and appeal to the preferences and interests of Chinese consumers. As consumers spent increasingly more time online since 2010, L’Oréal began building its digital assets, including its own brand websites, mobile websites, and online content, in collaboration with internet platforms. The company also collected a large amount of user data from their collaboration with e-commerce platforms and through POS systems, which were integrated into their comprehensive customer data platform (CDP). L’Oréal also manually recorded customer attributes with their authorization, such as age, skin type, and preferences through their sales personnel, which were then combined with online membership information and uploaded into the data platform. Each consumer was assigned a unique ID in the CDP, and all sales data were matched with users’ profiles. With this information, L’Oréal gained more accurate insights into each consumer’s behavior, allowing them to better personalize their sales activities. Let’s take a look at an example from a few years ago, where Maybelline New York’s intelligent vending machine was directly connected with T-mall. The Maybelline smart vending machine was installed in Cainiao mail stations on university campuses in China to collect data from college students through trial samples. When students approached the machine, they could use an AR tool to try on Maybelline lipsticks and see how they looked on their lips. If they were satisfied, they could receive a sample by scanning a QR code from the “T-mall Maybelline brand page”. If the student was already a user of Taobao or T-mall, they could receive the sample directly; if not, they would be prompted to join the membership, and T-mall would notify the vending machine to dispense the sample. In addition to the sample, there were also 10 relatively inexpensive products available for purchase from the machine, such as nail polish. This digital new retail experiment made L’Oréal look more like a technology company that was collecting and processing beauty data.

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In order to accumulate user data more efficiently, L’Oreal utilized widely available platforms such as T-mall, WeChat, and Douyin to advertise and attract consumers to collect samples offline. After receiving user authorization, their information was recorded through an offline service process and uploaded into the data platform. These user data were then applied to different stages of the marketing chain, such as user insights, strategy execution, and performance evaluation. With a complete user profile built, precise targeting could be achieved on different platforms, creating a personalized experience for each user. In September 2019, L’Oréal Paris launched a new facial cream nicknamed “Midnight Cream,” which broke T-mall’s single-day sales record for facial cream with over 100,000 sales on the first day of its release. The unique aspect of this product was that consumers were involved in every step of the product development process. L’Oréal Paris recruited over 1,000 consumers through the T-mall platform to gather their feedback on facial cream as well as their skincare needs and pain points. After identifying that a significant number of consumers who stay up late were looking for a lightweight and anti-aging cream, L’Oréal Paris proposed several product concepts in online Co-creation Communities to discuss with consumers about pricing and ways of purchasing to test their interest and willingness to buy. This fully engaged process resulted in the co-creation of the concept and product of “Midnight Cream” by L’Oréal Paris, T-mall, and consumers together, which set an excellent example of C2B (consumer to business) reverse product innovation. L’Oréal has been innovative in utilizing big data and algorithms to understand the latest trends and consumer feedback on various beauty products. Rather than relying on traditional methods like consumer home visits, surveys, and focus group discussions, the company collects data from product reviews, tweets, and other social media platforms. To better understand consumer sentiment, L’Oréal has established a Chinese Social Media Listening Center, which allows all employees to access realtime insights into what consumers are commenting on social media. This approach has enabled the company to develop and launch new products quickly, as seen with the popular “Midnight Cream,” which was co-developed by L’Oréal and T-mall and launched in just 59 days.8 To be more precise, Kérastase’s Genesis series was another successful example of L’Oréal’s C2B practice. In the development process of this product, L’Oréal first invited a team from its headquarters in Paris to China to conduct research and communicate with Chinese college students about their concerns regarding hair loss. Based on the insights gained from these conversations, L’Oréal collaborated with Chinese consumers on every aspect of the product’s development, including R&I, packaging design, fragrance options, color tones, and the selection of “Chinese anti-hair loss” ingredient, “Ginger”. This results in a whole series of products specifically designed for young Chinese consumers to combat hair loss. In addition to creating personalized consumer experiences and precise targeting, L’Oréal has also invested in artificial intelligence (AI) technology to enhance its digital capabilities. In 2020, L’Oréal started research on AI engine and in 2021, 8

https://baijiahao.baidu.com/s?id=1645656002204964548&wfr=spider&for=pc.

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introduced the concept of “Digital Intelligence Power”, which allows L’Oréal to fully leverage big data from logistics, orders, promotions, memberships, and other sources, and machine learning algorithms to predict product sales. During a major promotional campaign in 2021, L’Oréal’s AI engine accurately predicted a 20% higher sales volume for Lancôme TONIQUE CONFORT than traditional manual methods, and the final sales matched the predictions made by the AI model.9 In early 2020, L’Oréal and T-mall collaborated to build a color database for identifying the most suitable lipstick shade for Chinese consumers. L’Oréal shared all its lipstick shades from across its brands with T-mall, and by leveraging visual recognition technologies, T-mall expanded its color database to more than 2,000 shades. T-mall then provided L’Oréal with a guide to the current year’s trending colors based on the consumer intelligence generated. In February 2021, the first lipstick based on the color knowledge database was launched, and the database is expected to be used for L’Oréal’s other luxury makeup lines such as YSL Beauty and Armani Beauty.10 In 2020, digitization played a significant role in L’Oréal China’s remarkable yearover-year growth of 27.0%. According to CEO Fabrice Megarban, L’Oréal China had over 6,000 dedicated online beauty advisors by the end of 2020, who interacted with consumers through various online channels, such as group chat, live streaming, and logistics. In addition, there were over 100 full-time live streamers who promoted and broadcasted the brand online every day, and 19 WeMall online stores were launched, doubling their transaction volumes compared to 2019.11 L’Oréal Paris upgraded its private domain in 2021 with advanced user data segmentation by channels and personal attributes. The brand offers personalized content, such as skincare strategies, interactive rewards, new products, holiday greetings, and event information, based on user characteristics through channels such as “video channels,” “official accounts,” and mini-programs. Flexible offers ranging from RMB 9.9 yuan to 145 yuan are provided to users on its private domain. These refined activities have continuously improved user repurchase and conversion rates and increased the value of L’Oréal Paris’s consumers.12

10.3 Beauty Technology: Moving Beyond Digitalization L’Oréal’s successful digital transformation greatly improved its customer experience across all channels. However, digitalization alone cannot set up an effective barrier against competition if competitors adopt the same strategies. To stay ahead, L’Oréal 9

“Digital Intelligence Accelerates the Transformation of Beauty Technology”, WeChat official account, L’Oréal China Information Center, April 1, 2021. 10 “From 87 to over 2000 Color Innovations: What Does L’Oréal’s ‘Chinese-style Innovation’ Tell Us?” Jiemian (a Chinese financial and economic media), May 7, 2021, https://baijiahao.baidu.com/ s?id=1699070384832051016&wfr=spider&for=pc. 11 Ibid 6. 12 Ibid 6.

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launched its “Beauty Tech” vision in 2018, with the goal of creating the world’s first “beauty technology company.” In fact, as early as 2016, L’Oréal launched a tech-savvy product called La RochePosay My UV Patch, which was the first wearable device in the beauty industry utilizing the “Paper Network” technology. This ultra-thin lightweight skin patch test paper can change color under ultraviolet light. It can detect ultraviolet light when attached to the skin. When wearing the device, users can first download a mobile app and input personal data, including skin color, skin texture, and light reaction type. The software then generates a time reminder for self-monitoring based on this data input. After receiving the reminder, the user can scan the sensing patch, and the app will display the sunlight exposure risks and recommend sunscreen solutions by integrating the initial personal data with the real-time monitored UV irradiation dose.13 The second-generation product of the My UV Patch was named UV Sense, which can be charged automatically without the need for a battery and attached to nails or other body parts. Once connected, the sensor uses NFC (near-field communication) to transmit information about the wearer’s UV exposure to the app. The app then provides the user with recommendations for sunscreen information and warns them when they need to seek shade. In addition to monitoring UV light, UV Sense can also detect sources of air pollution, including PM2.5, PM10, and pollen. In March 2018, L’Oréal made its first significant move into the beauty tech industry by acquiring Canadian digitalization beauty company ModiFace. ModiFace developed the Magic Mirror, an augmented reality product that allows users to add cosmetic effects to selfies of their faces and hair. The technology also helps users virtually try on makeup and find the best look to match their outfits. With the Magic Mirror, users can see what their hair would look like in different colors and make purchases online with just one click. L’Oréal has applied this technology on social media and retail platforms, such as Facebook, YouTube, Amazon, and Watsons. More than 20 AI technologies derived from ModiFace have also been integrated into L’Oréal’s major brands. In 2019, L’Oréal introduced ModiFace technology to China. Through a partnership with Tencent, L’Oréal launched an AR dynamic makeup try-on function on the “Armani Beauty Boutique” mini-program, which boosted online sales of Armani Beauty by 38%.14 L’Oréal’s La Roche-Posay brand also introduced Effaclar Spotscan, the first mobile AI detection application for acne, in 2019. Users can take three selfies as instructed, and then upload them to the La Roche-Posay mini-program to obtain a personalized detection report. The mini-program provides skincare recommendations based on the identified skin issues and supports online ordering. If more serious issues are detected, Effaclar can help consumers book a one-on-one online consultation with a dermatologist. This technology led to a 40% increase in new

13 14

http://lady.people.com.cn/n1/2016/0527/c1014-28384327.html. Ibid 6.

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customers in a single month and an average 15% per-customer transaction increase for La Roche-Posay.15 Since 2018, the China International Import Expo (CIIE) has become one of L’Oréal’s main platforms to introduce its personalized beauty tech products across various categories. These products include Lancôme’s Absolue Dual LED Youth Treatment, YSL Rouge Sur Mesure, Kinectimals Custom D.O.S.E, home-use hair coloring device Colorsonic, as well as YSL Scent-Sation, creating personalized fragrance experience. The display of these new products at the Expo significantly aroused the interest of Chinese consumers in personalized high-tech products. At the second CIIE held in 2019, SkinCeuticals Custom D.O.S.E made its first debut in mainland China and soon became one of the most popular exhibits in the Consumer Goods exhibition area. As its name suggests, it is a system engineered to scan and evaluate consumers’ unique skin needs and combine active ingredients into a personalized corrective serum. Later on, thanks to the great spill-over effects of CIIE and the policy breakthrough of “Several Provisions on Innovative Development of Cosmetics Industry in Shanghai Pudong New Area”, D.O.S.E got successfully launched in Shanghai in May 2023, which marked the beginning of on-site personalized cosmetics services in mainland China. Now, it only takes 10 minutes for consumers to obtain personalized SkinCeuticals serum according to their own skin condition. YSL Rouge Sur Mesure, nicknamed “lipstick printer,” made its Asian debut at the fourth CIIE in 2021 and became an instant hit, selling out in no time. It was L’Oréal’s first personalized home-use beauty device to be launched in mainland China. L’Oréal also partnered with Swiss eco-startup Gjosa to introduce the L’Oréal Water Saver at CIIE, its first water-saving haircare device. It can reduce water consumption by up to 65% in salons and support up to three different wash and care products that can be injected into the water based on user requests, eliminating the need for frequent washing and rinsing. During the fifth CIIE in 2022, L’Oréal unveiled its latest innovation, Lancôme Absolue Dual LED Youth Treatment, which uses gentle amber and infrared dual LED waves and Lancôme Absolue Serum to significantly reduce facial wrinkles and improve skin texture. The device has already proved popular with Chinese consumers, who are increasingly looking for innovative and high-tech products. In the summer of 2022, L’Oréal showcased its innovative products and beauty tech innovations alongside tech giants such as Google, Alibaba, and Microsoft at the 2022 Viva Tech Summit held in Paris. This event highlighted L’Oréal’s commitment to delivering personalized, inclusive, and sustainable consumer experiences and presented its new vision of the “emerging beauty metaverse” for the future of the Web 3.0 world. L’Oréal’s new technologies and products proposed a future beauty experience that encompasses multiple dimensions, including physical, digital (beauty technology, retail), and virtual (Web 3.0), and introduced the concept of “perfect pixels” for beauty. The company believes that “on-chain beauty” will be the next frontier, providing consumers with a deeper sense of participation and freshness, 15

https://www.jiemian.com/article/7353277.html.

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and has been dedicated to creating the future of beauty and becoming the company of the future.16 To adapt to the new changes, L’Oréal has upgraded its digital marketing strategy to the “O+O+O (online + offline + on-chain) model”, taking the lead in the beauty experience, and allowing consumers to experience the integrated beauty technology and products of “online, offline, and on-chain”. So, what is L’Oréal’s “On-chain Beauty”? L’Oréal’s “On-chain Beauty” refers to the integration of blockchain technology into the beauty industry. It involves using blockchain to enhance transparency, security, and traceability in the supply chain, and to provide consumers with a more personalized and engaging experience. This technology can be used to authenticate products, track ingredients and their origins, and provide consumers with information about the production process, all of which can help to build trust with customers. In addition, on-chain beauty can also provide consumers with a more immersive and interactive experience by allowing them to participate in the creation and customization of beauty products. If Web 1.0 was primarily focused on text and images, and Web 2.0 expanded to include video, live streaming, image recognition, cloud computing, and SaaS solutions, L’Oréal has already been at the forefront of fields such as skin detection, remote consultation, and virtual try-on during the Web 2.0 era. As L’Oréal explores the integration of Web 3.0 with beauty for its multiple brands, it aims to implement the latest technologies such as blockchain, cryptocurrency, and NFTs in the beauty industry. Blockchain is the underlying infrastructure of Web 3.0, and L’Oréal is exploring the potential of blockchain technology to create a gathering place for beauty enthusiasts by issuing NFTs, connecting with local artists, and establishing new communication channels for community building. By leveraging blockchain’s decentralized and transparent nature, L’Oréal aims to inspire its users and reach the next generation of consumers in a more engaging and innovative way. On the path of beauty tech innovation, L’Oréal China has always been pioneering at the forefront. In 2020, under the leadership of CEO Fabrice Megarbane, a special cross-function task-force team was formed within L’Oréal China, and the “BIG BANG Beauty Tech & Innovation Challenge” was initiated, with a focus on enhancing phygital consumer experience, improving supply chain operation, and exploring future products with novel forms, functions, and experiences. This was viewed as a significant action to fulfill the “Ecosystem (E)” under the “HUGE” strategy and was kicked off just 3 months right after the strategy was announced. It is also worth mentioning that BIG BANG was announced through the second special green screen recording news conference of that year. BIG BANG has long fostered the incubation of forward-thinking innovations by start-ups and supported their commercialization. Over the last three years, BIG BANG has successfully

16

https://baijiahao.baidu.com/s?id=1737826948894758358&wfr=spider&for=pc.

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attracted over 1,500 domestic and more than 50 French start-ups, and deep collaboration with mentors from over 50 companies has led to the launch of more than 50 projects.17 In 2021, L’Oréal Paris collaborated with five female artists to create a digital NFT collectible lipstick art piece called “Reds of Worth”. The limited-edition lipstick was auctioned on OpenSea with a starting price of USD $1,500, and a portion of the sales was donated to charity. Similarly, YSL Beauty also launched its own NFT collection, featuring 10,000 golden cubes that can be obtained through the brand’s e-wallet. These NFTs unlocked new experiences and applications, such as the social token issued for DJ artists on the P00Ls platform. In addition, high-end luxury perfume brand Mugler marked the anniversary of its iconic “Angel” perfume by also releasing its first NFT, which showcased a beautiful 3D angel encrypted art collection designed by a digital artist. In early 2022, L’Oréal Group submitted 17 trademark applications related to the Metaverse and NFT categories, involving many of its brands, including Kiehl’s, Maybelline New York, Pureology, Urban Decay, Redken, and Matrix. Maybelline New York also created a virtual space called “LOFT,” where consumers can enjoy an immersive experience of a range of beauty products and services. Once again, L’Oréal stands at the forefront of exploring the Metaverse. In 2022, L’Oréal China collaborated with its BIG BANG strategic partner Oriental Beauty Valley to launch the “BIG BANG EXPO@METAVERSE”, the first beauty tech metaverse roadshow in China. This marks another important milestone for L’Oréal in the metaverse field. Additionally, Neal Digital, which won the Phygital Consumer track at previous BIG BANG, partnered with Urban Decay, L’Oréal’s makeup brand, to launch the UD PUB Web3 community program. This program allows community members to enjoy exclusive benefits and the latest experiences of Web 3.0 through a series of digital assets, which were created through the combination of the UD T-mall membership system and interactive digital assets. Upon the launch of the community, UD also released the “Galaxy Passport,” its first interactive digital asset, which was showcased at L’Oréal China’s 25th-anniversary immersive exhibition and interacted with the public. L’Oréal has been committed to its digital transformation journey since 2010 and set its strategic goal of becoming the world’s first “beauty tech company” in 2018. L’Oréal believes that beauty is created from the fusion of science and technology and that the power of digitalization and technological innovation will shape the future of the beauty industry. The company is dedicated to providing consumers with better beauty experiences through cutting-edge scientific research and the application of new technologies.

17

https://baijiahao.baidu.com/s?id=1768858165005371815&wfr=spider&for=pc.

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10.4 Some Ending Remarks: Building a Global Metropolis of Beauty L’Oréal’s journey in China is a great example of how a foreign company has evolved from a newcomer to a leading firm in this fast-growing market, and its brands are viewed as beauty icons in China and around the world. Since entering mainland China in 1997, L’Oréal has become the most influential beauty brand in the minds of Chinese consumers, and since 2016, its sales revenue has consistently ranked first in the China market. In China, L’Oréal has earned a reputation as a responsible and respected corporate citizen through its long-term commitment to corporate social responsibility and charitable activities in various fields, including art, science, education, and sustainability. In 2019, L’Oréal China became the first market to achieve carbon neutrality for its operating sites among all L’Oréal markets worldwide. Moreover, in 2022, L’Oréal North Asia Zone Supplier Day was held, where nearly a hundred L’Oréal’s suppliers collaborated under the theme of “L’Oréal for the Future, Low Carbon but not Low-key.” AP Label, a L’Oréal supplier, also announced that its factory in Suzhou had achieved carbon neutrality, becoming the first successful pilot of supplier collaboration to reduce carbon in the L’Oréal North Asia Zone. Furthermore, in July 2022, L’Oréal China donated funds to establish the “L’Oréal Responsible Consumption Fund” in collaboration with the Shanghai Consumer Foundation. The objective of the fund is to co-build a more open, transparent, responsible, and sustainable Chinese consumer ecosystem, and to help the green transformation of economic and social development in China.18 L’Oréal’s charitable initiatives in China have been thriving, with the “Beauty for a Better Life” public welfare training project and the “For Women in Science” program being well-established for many years. These programs have provided a path for public welfare activities that are well-suited to China. In addition, the “Youth Fun” campus public welfare project has created a unique way to fulfill the brand’s commitment to “L’Oréal for youth” by creating a 20-year two-way journey for youth and public welfare in China. This project has been successful in creating the “youngest” approach to public welfare, engaging young people in charitable activities, and instilling a sense of social responsibility in them. In 2021, L’Oréal Group implemented a global re-organization of its regional structure and established the North Asia Zone with China as its headquarters. The main goal of this strategy was to leverage the “Beauty Triangle,” which includes Japan, South Korea, and the Greater China area composed of Mainland China, Hong Kong, and Taiwan. This region is one of the most dynamic cosmetics markets globally, accounting for approximately 30% of global beauty sales.19 The North Asia Zone was established based on L’Oréal’s perception of five strategic opportunities in the region, which include Generation Z, Chinese beauty, 18 19

https://baijiahao.baidu.com/s?id=1738835151957633996&wfr=spider&for=pc. https://baijiahao.baidu.com/s?id=1695668736864149635&wfr=spider&for=pc.

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Korean beauty, Japanese beauty, and Western beauty. These opportunities are crucial to L’Oréal’s long-term growth and success in this region.20 Among the five strategic opportunities perceived by L’Oréal in the North Asia Zone, Generation Z represents a new generation of young beauty consumers born in the age of digitization, intergenerational changes, and the rise of “she power” that emphasizes female empowerment. The concept of “Chinese Beauty” is a rapidly rising wave driven by economic growth, increased confidence, and growing international influence in China. The “Korean Beauty” industry is known for its welldeveloped industrial ecosystem, easy market access, rapid response to changes, and leading beauty trends. The “Japanese Beauty” industry is characterized by craftsmanship, scientific research, well-developed regulatory frameworks, and continuous improvement of its professional services. Lastly, “Western beauty” strongly resonates with young people in Asia due to its disruptive innovation and unlimited personal expression, making it an attractive option for those seeking unique and personalized beauty solutions. According to L’Oréal, the China market will play a pivotal role in the “Beauty Triangle” as the headquarters of the North Asia Zone and, especially, create innovation synergies in the Zone. For example, Lancôme Absolue Essence Cream-InFoundation has achieved great success. It is a product inspired by Japan, co-developed with South Korea, and launched first in China. In particular, L’Oréal has been dedicated to promoting open innovation in China with its ecosystem partners. China has developed an advanced digital and technological ecosystem, making it an ideal ground for open innovation for L’Oréal. In May 2022, L’Oréal established its inaugural investment company in China, named “Shanghai Meicifang Investment Co., Ltd”, which made its first investment in DOCUMENTS, a high-end fragrance brand based in China, just a couple of months after its inception. Another notable example of L’Oréal China’s commitment to open innovation is the YOUTH BANG program, which empowers youth through cocreating the future with the young entrepreneurs’ ecosystem in China and, together, bringing more new inspiration and innovations to the industry. In addition, in June 2023, L’Oréal Group announced the launch of the “BIG BANG Beauty Tech & Innovation Challenge” in North Asia, at Europe’s largest startup and tech event, “Viva Technology.” It was the first regional open innovation initiative focused on cocreating and co-developing innovative beauty products and experiences with startups across China, Korea, and Japan. Furthermore, L’Oréal believes that China’s Generation Z consumers will drive innovation and growth in the region, and the integration of technology, consumption scenarios, and capital will create a multi-ring linkage in China’s beauty innovation ecosystem. Fabrice Megarbane, President of L’Oréal North Asia Zone and CEO of L’Oréal China, has noted that as L’Oréal China enters its next 25 years, L’Oréal will always stand at today while looking into the future, and believes that every challenge presents an opportunity. When the going gets tough, L’Oréal gets going. L’Oréal is confident 20

https://www.163.com/dy/article/GKJ5OAB20530UH99.html.

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and full of courage to go further and truly believes that beauty will go beyond at the dawn of a new era. The story of L’Oréal in China may end here, but its beauty legend in China is far from over. Since its entry in 1997, L’Oréal has captured every historical opportunity in China, especially for the emergence of new consumer groups and the rise of upgrading consumptions, China’s accession to the WTO, and the advent of the mobile internet era. Its successful implementation of strategies on localization, digitization, and technology innovation in beauty and skincare, combined with its consistent enterprising spirit and image building as a socially responsible brand, has brought L’Oréal from a dream of “putting lipstick in the hands of every Chinese woman” to its undisputable leading position in China’s beauty market today. As L’Oréal continues to innovate and adapt to the ever-changing market, it aims to make China a global “metropolis of beauty.” It will be exciting to see how it will continue to inspire and empower women to feel confident and beautiful in their own skin, and how L’Oréal continues to shape the beauty industry in China and beyond.

Chapter 11

Closing Observations

The analysis of these ten representative brand cases in China, the world’s largest consumer market, concludes here. However, what we have gleaned from these cases may be worth contemplating even past the end of this text. Many questions regarding China’s economic growth and the Chinese market may have been long-lingering in the minds of academics and corporate participants alike, and it is unlikely that a consensus will ever be reached as to the whys and hows of that growth, or the exact recipe for success in China market. However, what we know for sure is that branding is an integral part of the formula. Questions, such as how a start-up, niche player, or previously unbranded manufacturer can grow from zero to one, then from 1 to N, then become a leading brand in their respective market, what are the previously untaken expansion paths that end up becoming “Victory Boulevards”, what recipes help companies succeed in this enormous market, all invariably lead to branding in the end. The ten cases presented in this book cover a diverse range of industries in China from mobile tech to spring water, electronic appliances to sports products, and new energy to social media. It also covers, too, more traditional consumer products such as coffee/beverages and cosmetics. These industries represent the most dynamic, fastestgrowing segments of China’s economy, can serve as a sampler through which we can sense China’s market activity as a whole, and give context to China’s macroeconomic indicators, such as GDP, and patterns of growth over the past four decades. Each company has a unique narrative, but commonalities between their success exist. Some most notable ones can be summarized as follows: The first feature shared by these selected brands is that the companies share an understanding of the fundamentals of branding as an exercise. As often noted throughout the case studies, successful branding evokes an emotional response in consumers. While this book does not seek to comment on the moral implication of corporations using emotion to sell products, the pathos approach is at the heart of what makes some brands more inherently meaningful to customers than others; more tempting, more compelling, and more deserving of customer patronage and loyalty. It seems to us that emotional connections to brands exist organically and © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0_11

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intrinsically, and are not entirely manufactured by advertising and corporate strategy. The satisfaction a consumer derives from a product or service through its various functions or features is, by its very nature, a psychological or emotional phenomenon. Therefore, the psychological effect a brand can generate is, indeed, an objective fact, not artificially invented by marketers, even if this effect could be amplified and molded by advertising and related activities. Savvy companies understand that there is a value that lies beyond the physical performance of products and the rote functionality of services. The challenge for the company then is to identify these emotional values and convey them to customers in a proper and creative way. Effective companies even further nurture and cultivate the natural emotional link that consumers develop when engaging with their services and products. Whether it’s Nongfu Spring’s “movers of nature,” Haier’s “solutions for a better life,” ANTA’s “leading an elegant lifestyle through sports,” or L’Oréal’s “creating the beauty that moves the world,” the companies in this book have endeavored to carve out a niche for themselves in the market through branding. They were able to do so through specificity, developing a unique brand identity and personality, as well as clearly defining what their brand is meant to stand for, and consistency in pursuing that brand message. The second feature is effective digitalization and the early adoption of internetrelated technologies. It is a given now that computers are more effective than humans in transmitting information, but the scale to which this was possible was not always apparent, and many companies did not jump on trends early enough. All of the companies in this book, however, seized the opportunity of digitization and entered the datadriven economy in its incipient stages. As a result, they were able to capitalize on the computer’s exponentially augmented processing speed, consistent performance, accurate memory, multitasking ability, and automation capabilities, as well as making use of the internet’s efficiency and wide scope reach. In order to make use of the internet’s capabilities, inputs must be in digital form. Consequently, digitalization became a requirement for utilizing modern technologies in business operations, as digitization transforms analog and physical information into a format that can be processed, stored, and transmitted using technologies such as computers. Digitalization allowed companies to generate vast amounts of data that can be analyzed to gain insights into customer behavior, market trends, and other essential business metrics, enabling companies to make better business decisions. Early adopters of digitalization gained a competitive advantage over their peers, as they could operate more efficiently and provide more customized products and services. All the brands discussed in this book have implemented digitalization during their development process, serving as a testament to the advantages of digitalization. Xiaomi, in particular, leveraged the power of the Internet to an impressive extent by introducing the concept of “the Internet way of thinking”. The third feature shared by these successful brands is “Mobile-ization”. Similar to computers and the internet, companies that have grown and grown big in the past two decades have done so symbiotically with the rise of the smartphone and mobile apps. Shifting digital information access from personal computers to mobile phones

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was crucial to many of these companies’ success. With the explosion of smartphone use in China in particular taking place around 2014, the successful brands of the 2010s share the feature of having capitalized on mobile tech. The shift from PC to mobile devices enabled users to access digital information anywhere and at any time, providing unprecedented convenience in staying connected with friends, family, and colleagues, accessing information and entertainment, and—perhaps most importantly—making purchases, from business perspective. Mobile devices have also allowed for increased productivity, enabling people to work remotely, reducing the need for physical office space, creating a flexible work environment, and facilitating access to information without the usual geographic restrictions. For companies with workers and offices in underdeveloped areas with limited internet infrastructure, of which there were many in China in the 2000s and even into the 2010s, mobile phones became an especially crucial asset. The cases discussed in this book, such as Xiaomi, WeChat, DingTalk, and Douyin, showcase the value of “mobile-izing”, and the rapidness with which companies that go mobile can grow with few resources and limited initial investment. The fourth feature is the introduction and implementation of scenario consumption in the shift towards scenario consumption portfolios. As discussed in the book, scenario consumption refers to a portfolio that includes a packaged “bundle” of services and products that satisfies all of the consumer’s needs within a certain occasion or “scenario.” These can be one-time scenarios, like weddings and other major events, or more proverbial scenarios, such as outfitting a house from top to bottom, installing a kitchen, planning a travel outing, and so on. Usually, these portfolios include both services and products, as well as coordination and middle manning. Scenario-based portfolios target consumers seeking an experience that requires more than one product or service, absolving them of the need to take care of the details. Scenario consumption naturally brings benefits to both consumers and companies. For consumers, their needs in a certain scenario, such as planning a wedding or fixing a kitchen, would exist regardless of whether companies selling refrigerators provided stoves, ovens, or installations also. Without portfolio offers from suppliers, consumers would have to work out all the details themselves, including planning, designing, selecting, purchasing, shipping, and installation. Scenario portfolios offer customers one-stop-shopping that saves them time, money, and effort. For companies, scenario consumption expands sales potential and increases profitability, such that a premium can be charged for the incremental value-added services provided. In the bigger picture, and relevant to the contents of this book, offering scenario-based options allows a company to more deeply integrate their brand into consumers’ lives, serves to further expand their brand’s reach, and often increases consumer brand loyalty. In the age of the internet, business boundaries will be redefined by consumers’ consumption scenarios, instead of the traditional industry limits. Similarly, the content and purpose of the formation of a product or service portfolio have been changed with the internet. The original purpose of forming a portfolio was intended to mitigate the risk through diversification, and now it targets satisfying the consumers’ consumption needs on specific occasions with one-stop-shopping. The focus is no

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longer the statistical “correlation” between the dynamic movement of the products in a portfolio with business cycles, rather it now concentrates on the physical utility connections among the products in a portfolio to satisfy consumers’ scenario consumption needs. The fifth feature is the coordination of the supply chain and product ecology. With the globalization of businesses and the disaggregation of the production process, market competition has evolved from company versus company to supply chain versus supply chain. The internet and digital processing have made collaboration among companies along a supply chain much easier, though, at the same time, it has made marketplaces more competitive. Ecology collaboration further expanded the cooperation between the company and supply chain from a linear value chain within an industry to a cross-industry network/ecosystem, such as Haier’s integrated AIOT ecosystem platform. As a platform set up by an electronic appliance manufacturer, it provided collaborative functions for the companies in the industries of beverage, garment, auto parts, and healthcare, among others. The Internet laid down the technical foundations for the supply chain and product ecology collaboration, which allows digital penetration from the marketing end to the production end. For a supply chain, different tasks in different stages of the production process, such as R&D, design, procurement, production, and marketing, could be decomposed and outsourced to different parties that can best undertake these tasks, and, as a result, the products with the best features and qualities can be produced in this collaborate way via an internet-enabled network. The platform-based ecology collaboration had important implications. It served, among other things, to expand corporate boundaries beyond their traditional demarcations, as internet-enabled platforms allowed companies to collaborate with partners in industries they ordinarily would not interact with. We have seen a shift, as mentioned earlier: businesses used to delimit their scopes based on industry, and now, they are increasingly defined by customers’ scenario consumption needs. The sixth feature is a flattened business model, including a specific version of this model coined DEDA: “digitally-enhanced directed autonomy”. Several of the companies in this book, such as Haier through its RDHY model and Xiaomi, employ a business model in which every employee (or nearly) interacts directly with customers, personally creating value for them, and whose performance and pay are at least partially tied to customer satisfaction. This model reflects the new concept of “platform-based” companies, which redesign the organizational structure from a hierarchical system to a flat, self-management-based system, changing the role of employees from workmen whose primary obligations are to their upper managers to essentially entrepreneurs who are tasked with creating value for customers directly and on their own. The model also has the benefit of allowing customers to participate more actively in the design and production of the products and services that they will eventually purchase. A flattened self-managed digital platform empowers front-end employees who interface with customers, giving them greater autonomy and removing several layers of middle management. This model allows companies to operate in a much more efficient manner with more motivated employees who, at every level, have a better

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understanding and insight into the needs of the customers the company serves, when before these insights were trickled down from upper management. This type of model has been viewed as evidence of “version 3.0 of entrepreneurial spirit” in China,1 and obtained attention from Western scholars and researchers, from whom the term DEDA derives.2 Without a doubt, these shared common features of the brands collected in this book will help deepen the understanding of how brands, either local or foreign, are established and grow in a fiercely competitive market. As the largest consumer market in the world and an integral part of the global marketplace, the China market not only serves as a battleground for many international brands but also provides an opportunity for domestic brands to learn from their global counterparts and set up their own brands targeting Chinese and global consumers, leveraging a wellestablished supply chain and digitalization in China. As a result, understanding the ways in which brands are shaped and compete in the China market could be of noteworthy reference value for brands and companies aspiring to gain a foothold in the global market, and for readers interested in this topic. Over the past four decades, China market has seen the emergence of countless brands and products. For as many of the brands that thrived, many disappeared or failed early on. The recognizable brands of today are the ones that won the competition over the past four decades. In this book, our aim was to document a captivating episode of history from a unique perspective of branding and tell a few of those stories.

1

Qin Shuo, “The Evolutionary Logic of Chinese Enterprises in 45 Years of Reform and Opening Up”, International Business Network, Listening to the News, 04-17 22:08; in which, version 1.0 is referred to as the “duplicate stage” of the growth of Chinese enterprises, characterized by the adoption of foreign products, technology, and management experiences. Version 2.0 is roughly described as the stage of “Me too Me better,” where companies strive to be cheaper, faster, or better than their counterparts. Version 3.0 is defined as enterprises pursuing technological and managerial innovations, cultural significance, and global citizenship. https://m.yicai.com/news/101733300.html. 2 Mark J. Greeven, Katherine Xin, and George S. Yip, “How Chinese Companies Are Reinventing Management”, Harvard Business Review, March–April 2023.

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© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 J. G. Wang et al., Yes Logo, https://doi.org/10.1007/978-981-99-6608-0

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