China’s YiWu: Business Models You’ve
Never Even Heard of
By Larry Romanoff, December 15, 2019
The YiWu Commodities Market
A brief bit of background for context. YiWu is the
world’s largest supermarket. YiWu is a small town (it’s actually a city with
more than one million people, but in China that’s a small town) in Zhejiang
Province, 45 minutes by high-speed rail from Shanghai. The surrounding area
contains countless thousands of smallish (and some largish) factories producing
vast amounts of small goods – hand and small electric tools, umbrellas, bags
and luggage, toys, giftware, small appliances, kitchenware, small electronic
items, adhesive tape. The products are mostly standard utilitarian items we
generally refer to as commodities.
With this intense concentration of manufacturing
clusters, YiWu has the largest commodity markets in the world. The
largest wholesale factory market in YiWu, the International Trade Center,
consists of eight 5-story buildings totaling about 5 million square meters and
containing about 80,000 shops, each shop owned by one of the small area
factories. It is so large that the aisles in each building have street names;
maps are normally required for navigation. To save you the arithmetic, if you
spend 8 hours per day, 5 days per week, with only 1 minute in each shop, you
would need more than 8 months to visit all of them. And that’s only one market
of about 20 in the city. Many markets specialise in a particular product:
umbrellas, artificial flowers, stationery, toys, candles cosmetics, fashion
jewellery, bags and leather products shoes, tissue, cloth, socks, lingerie . .
. Typical markets would have 2,000 shops selling only belts or 10,000 shops
selling small ceramic tea pots.
The YiWu Lighter Industry
One of the locally-produced items is cigarette lighters,
this industry around YiWu consisting of about 4,000 families who own and
operate about 1000 factories, all producing either components or entire
assembled products. These families might consist of only a husband and wife
with a few hired hands, or possibly a large extended family from the
grandparents, uncles and aunts, and offspring of university-graduated age. In
each case, a factory may hire as many or as few outside workers as necessary.
The Business Model
Several years ago, each of the factories produced
finished goods, often competing directly with each other, and lacking
standardisation or compatibility among them. Over time, various factories
proved better at producing some kinds of components than others, while some
excelled in assembling or packaging the finished goods. The factory owners met
repeatedly to discuss their overall situation and eventually agreed to
cooperate and specialise. Today, some factories produce all the various
components for a wide range of brands and styles while others focus on assembly
or packaging. Each factory in this existing network serves its part in the
system to produce sufficient volume to fill all existing orders. However, it is
also free to manufacture its own brands of lighters or to produce other
products in addition to lighters. So long as the basic cooperative requirements
are met, and since each factory is privately-owned, there are no restrictions
on activity.
This cooperative functions in a very real sense as a
huge, well-organised manufacturer and exporter with tens of thousands of
employees and 1000 manufacturing locations – but with no board of directors, no
executive-level or middle management, no policy manual, no fancy offices, no
bureaucracy and no corporate overhead. Due to the decentralised structure and
specialised, tight product focus, the group can move swiftly to meet any
challenges. Sometimes the development process from product conception to
produced sample can take less than 24 hours. The group can accept and fill
orders of any size, the production being done by whichever locations have
available capacity.
Financing is never an issue because the capital
investment load is distributed so widely, modernisation or the addition of
capacity being done in small increments according to the ability and ambition
of each manufacturing unit, and of course each person in the entire plan has a
vested personal interest in ensuring that costs are kept to a minimum. This
structure has an enormous hidden advantage in the existence of perhaps 10,000
marketers, all of whom fill every spare moment searching the internet for more
customers for this cooperative enterprise, each having much to gain from this
effort since all revenue goes directly into their own pockets.
This loosely-structured but tightly-knit cooperative
permitted the myriad small companies to function as a much larger and far more
powerful entity, with results that were stunning, YiWu increasing its share of
the worldwide lighter market from around 30% to over 70% in only a few years,
and the YiWu area generating a GDP of nearly US$ one trillion (one-third that
of California). It is worth noting that, aside from some newly-graduated children
joining the family business, there are no MBAs here. The entire business model
was invented by the older generation, many of whom hadn’t completed their high
school education.
It is unlikely that such an entity would long survive
in the West, because the Chinese concepts of family, cooperation, harmony,
either do not exist in the West at all, or not in the same way or to the same
extent. This is only one story of innovation in China. There are countless
thousands of others, in ways and places we might never imagine.
There is actually a bit more to this story. At the
business school at the university in YiWu, a prerequisite for graduation is
that all students must establish and successfully run their own business. These
may be only online shops selling any manner of products, but they are all
profitable. As well, local students are often sufficiently fluent in many
languages to act as agents for the millions of foreign buyers who come to the
city each year, helping them to navigate the system, act as translators, find
satisfactory products, negotiate prices and terms. Some of these kids earn as
much as US$100,000 in a year while still in school. We don’t see this at
Harvard or Western, nor do we see student parking lots jammed with BMWs and
Ferraris.
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Mr. Romanoff’s writing has been translated into 32 languages and his articles posted on more than 150 foreign-language news and politics websites in more than 30 countries, as well as more than 100 English language platforms. Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai’s Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He is one of the contributing authors to Cynthia McKinney’s new anthology ‘When China Sneezes’. (Chapt. 2 — Dealing with Demons).
His full archive can be seen at
https://www.moonofshanghai.com/
http://www.bluemoonofshanghai.com/
He
can be contacted at: 2186604556@qq.com
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Copyright © Larry Romanoff, Moon of Shanghai, Blue Moon of Shanghai, 2021
