More problems with Chinese partners

There's another depressing story in today's New York Times on a life-threatening quality problem with Chinese products. Now, it's a tire manufacturer who decided to forgo installing a gum strip inside the tire, an omission that makes the tire more likely to fail on the road, the tires' US distributor, Foreign Tire Sales, announced yesterday. The US National Highway Traffic Safety Administration is demanding a recall. Writes the Times:

...In September 2006, the Chinese manufacturer, Hangzhou Zhongce Rubber, a former state-owned company based in eastern China, acknowledged that a gum strip that prevents the tread from separating was left out of the manufacturing process.

It brings to my mind a question of alliances. If my business depended on an alliance with a Chinese manufacturer, I would be very nervous. Because there is growing anecdotal evidence that faraway partners are willing to cut corners without regard for the impact of those cuts on the end-user.

Which means those partners can't be trusted. While alliances are full of mistrust (am I getting paid what I'm owed? Is my partner selling my product as hard as he should? etc.) at their core is a profound trust--that the product works to its specifications and is of acceptable quality in the market in which it is to be sold.

Because when you sell someone else's product, you do so because you don't have (or don't choose to have) the capability, experience or resources to do it yourself.

(Think of what would happen if I sent this blog to be translated into the Czech language by a company in the Czech Republic. I don't know Czech, and would be reliant on them to do a proper translation.)

And without trust, these relationships are doomed. We can't inspect every tire, can we, to make sure the gum strip is installed? But if Hangzhou Zhongce Rubber, or the company that added an antifreeze ingredient to the toothpaste, or the companies that made the tainted pet-food ingredient, feel free to implement that little change that makes the product at least substandard, or even a danger to its users, you simply can't do business with them.

Foreign Tire Sales will likely go bankrupt as a result of the tire recall. Let's hope their replacement selects better partners.

manufacturing private label China New York Times alliances

Cheap, we're learning, also has a cost

A couple of years ago I met a guy who owned a manufacturing company. He told me he had two plants, in Indianapolis and China, that made his product. The price for making his doodads in Indianapolis? $4.50. The price in China? 40 cents.

This radical cost gap has caused the manufacture of many products to move from their home markets to China. The new book "Dragons At Your Door: How Chinese Cost Innovation Is Disrupting Global Competition" by Peter J. Williamson and Ming Zeng paints the picture clearly. Chinese manufacturers have a great cost advantage, and are applying it powerfully across industries.

And who could argue with my friend's logic? Would you pay $4.50 for something you could have for 40 cents?

Well, the downside is becoming clear. Along with the thousands of reputable firms in China that manufacture quality products, for their own sales or as private-label brands, there are many who are sloppy, shoddy or malignant--and their products are putting people at risk.

Exhibit A: animal food with a poisonous ingredient, traced back to a supplier in China.

Exhibit B: tainted drugs that killed people in Haiti and Panama, with Chinese suppliers on two different occasions using poisonous diethylene glycol--an antifreeze ingredient--instead of "its more expensive chemical cousin glycerin."

Exhibit C: the news, reported Friday, that certain Thomas the Tank Engine trains, made in a Chinese factory, were painted with lead-based paint.

"Don't ask, don't tell"ing on sourcing ingredients, shrugging at poor working conditions and tolerating disdain for intellectual property are all part of the same syndrome: cheaper is better. But when your standards fall, at some point there is a price to be paid.

The Government of China has the biggest responsibility to address this crisis. But so do the American and European companies who source products from China. It's time for them to get serious, demand high standards and concern for customers, uniformly, from all Chinese companies, even if it costs more. [And invest in quality control. Laissez-faire isn't getting it done.]

Otherwise maybe the future of that plant in Indianapolis isn't so dark.

manufacturing private label China New York Times

Why did Amp'd Mobile stumble?

It's another day of negative news for the US MVNO industry. One of the highest-profile operators, Amp'd Mobile, filed yesterday for Chapter 11 bankruptcy protection. According to theWall Street Journal (link - $$), they simply ran out of cash. How did they get to this position?

In the MVNO business (as well as the mobile operator business), customer signups are really expensive. It costs, depending on your distribution model, marketing model, etc., from $100 to $400 to sign up a customer. Meaning it will take perhaps eight to twenty-four months for a subscriber to pay off the initial investment in signing him up.

Established carriers have a large existing customer base to defray the cost of adding new customers. Startups don't. Therefore, they must have enough working capital to absorb these losses until they reach a critical mass of customers. Amp'd apparently didn't.

One other thing. I've heard from some Amp'd subscribers that their bills were late, that they didn't receive bills at all for some months, and in some cases they received bills with an outstanding balance of a penny.

You don't read much about billing in telecoms, as opposed to, say, marketing. But late bills, missing bills, etc., cause customers to withhold or delay payment. A carrier with these issues leaves money on the table--money that could help pay its bills while it waits for those new customers to turn positive. It's not clear how much this impacted Amp'd's situation, but it was a factor for sure.

Marketing is sexy, but collecting money from customers? That's priceless.

mobile MVNO marketing operations private label

Private-label cellular service arrives

Have you ever wanted your company's name on a cellphone service? For many clubs, charitable causes, etc., mobile service, used daily by nearly everyone, is a highly attractive product to offer to their members.

Today's Wall Street Journal discusses this market (free link), focusing on Sonopia, one of the companies providing a platform for clubs to resell mobile service.

The concept isn't brand new. Working Assets, a progressive political group, has been offering long distance service for nearly two decades and wireless since 2000. It recently announced that it is providing the platform for Planned Parenthood to offer its own branded mobile service. But Sonopia's recent launch has been the most visible to date.

The affinity group's value proposition to its members is as follows: cellphone service is a commodity, and if you have to buy a commodity somewhere, you might as well buy it from a group you care about (us), and channel some of the money (around 5%) our way.

More than this, though, the organizations feel they can deepen connections with their communities, both by having a logo on a product used daily and by having the ability to communicate with their constituents in a real-time, always-on manner.

But no one wants to do it at a loss, and even if cellphone service is a commodity, Verizon, Sonopia and the affinity group all want their piece of the pie. The question then is: will there be enough money to go around? And how many people will give up their Cingular family plan for a Yoga phone?

Time will tell whether private-label mobile phones are a long-term success, or merely a passing fad.

innovation, mobile, wireless, private label, mvno, Wall Street Journal

Everything you ever wanted to know about private labels: What I'm reading now #3

Unless you're a consumer-packaged-goods marketer or retailer, you probably have no idea how pervasive private labels have become in the stores you frequent. But the next time you go to the drugstore, see if you pick up a bottle of Aleve or the CVS naproxen sodium placed right next to it.

Professors Nirmalya Kumar of London Business School and Jan-Benedict Steenkamp of Duke University have satisfied the curiosity of everyone who ever wanted to know about private-label goods by writing Private Label Strategy: How to Meet the Store Brand Challenge.

According to the authors, the opportunities for private labels are vast, and the challenges to branded goods are daunting. Private label goods provide a point of differentiation for the retailer (such as Target or Tesco), and they create powerful leverage when negotiating terms with brand manufacturers.

Leading packaged-goods companies, like Procter and Gamble, Unilever and Nestle, are responding to the challenge. How? Four main ways:

1. partnering with retailers to produce exclusive specialty offerings
2. innovating like crazy to stay ahead of copycat private-label offerings
   
3. divesting laggard brands
   
4. increasing investment in advertising and marketing for the brands they retain
   

To point (4), the authors point out a most interesting development: as a result of the increasing size and scale of retailers, brand manufacturers' marketing dollars have been drawn away from advertising and other brand-building activities toward point-of-purchase and promotion investments. The latter help the retailer and sales (in the short term), but at the cost of the long-term value of the product--and as a side effect improving the prospects for private-label copycats.

The book is essential reading for any consumer-packaged goods companies or retailers, and for anyone else who wants to study up on a dimly-lit corner of the marketing world.

innovation, branding, marketing, retail, private label, reading list

US MVNOs - what viable concepts remain?

The US MVNO market has passed through infancy. Some MVNOs are entering adolescence (Virgin, Boost) while others are just starting to walk on their own (Helio, Amp'd, Disney). Discount prepaid operators are beginning to see a shakeout (see this news item). Which all begs the question: are there any new MVNO types that still have life? I think there are two:

1. The "store-brand" MVNO - if you are a large enough retailer, with a devoted clientele, and don't already stock other cellphones, a prepaid offering can be profitable. The prototype operator is Tesco Mobile in the UK.
   
   
2. The cult MVNO - how do you lure customers away from the large mobile operators? One way is to have a powerful, long-lasting bond with a segment of customers. And tell them: "Buy cellphone service from us. It may cost a little more, you may have to give up a little service, but it's worth it to support the community." One very recent example is the launch of the Planned Parenthood MVNO.

Store-brand MVNOs will be larger, but fewer in number, since a limited number of retail channels will fulfill the criteria to host a successful MVNO. Cult MVNOs, by contrast, will serve smaller subscriber bases, but could be much more numerous.

And, of course, one significant question remains: will the operators want to enable them?

(Photo: the LG225 phone offered by Planned Parenthood Wireless)

wireless, mobile, marketing, MVNO, retail, private label