🇨🇳 Look East, not West - The Rise of C2M in Ecommerce

Overlooked #76

Hi, it’s Alexandre from Eurazeo (ex. Idinvest). I’m investing in seed & series A consumer and consumer enablers startups all over Europe. Overlooked is a weekly newsletter about venture capital and underrated consumer trends. Today, I’m digging into the C2M (Consumer to Manufacturer) trend in China in my series exploring consumer innovations in Asia.

I have the feeling that Europe and the United States are lagging behind when it comes to consumer innovations compared to Asia. I’ve decided to dedicate a significant part of my summer to learn as much as I can on consumer tech giants in Asia to validate or refute my intuition. I’ll share my learnings with you along the way. I will dig into companies like Grab, Tencent, Pinduoduo or Meituan. I will also dig into trends like community group buying, consumer to manufacturer, super-apps, live-streaming, social commerce, etc.

I want to talk to anyone who has spent some time in the same rabbit hole. You can reach out at adewez@eurazeo.com.

I started a couple weeks ago with Pinduoduo’s new grocery model and the broader community group buying trend. Today, I’m digging into the Consumer to Manufacturer (C2M) trend in China. Chinese e-commerce giants such as Alibaba, JD and Pinduoduo have all launched C2M initiatives. It’s a model that disintermediates manufacturing by directly connecting factories and consumers. Factories launch their own brands which they directly sell through the e-commerce platforms. Consumers buy high quality goods at a relatively low price while manufacturers go upmarket by creating a brand and generating a higher profit per unit they manufacture.

In this article, I’ll cover the following topics:

  • Introducing C2M

  • C2M as the next logical development step for Chinese manufacturers

  • The 3 co-exisiting C2M models

  • The Pinduoduo’s example

  • C2M's enablers in China

What is C2M?

Initially, C2M was a way for new marketplaces to cut middlemen between factories and end users. Factories were only producing products under their own brands when they were ordered on marketplaces. C2M experienced a second iteration when social e-commerce players provided factories with a set of services (what to make, price point, how to package it, quantity to make, persona who will buy the product, funding through crowdfunding or pre-financing) to build their own brands. For instance, below is a graph and a quote from JD to explain the value it brings to manufacturers through its C2M model.

"First, JD produces a detailed report outlining demand for products leveraging JD’s extensive consumption data and industry insights. AI plays a critical role in this process to help analyze consumption trends, consumer decision trees, which show consumer motivations for purchasing decisions, and more. Second, JD works with partners to roll out simulations including creating mockup pages on the JD app and obtain customer feedback such as clicks, browsing duration and the rate at which products are added to the cart. Based on the first two steps, partners manufacture products that customers have illustrated will have high demand. JD also provides support for product launch and precision marketing, as part of the C2M process." JD

C2M is the next logical step for manufacturers. From OEMs to ODMs and now OBMs.

Manufacturers are building additional capabilities to capture a bigger pie of the value they generate when they manufacture a good. Upstream, manufacturers are now handling R&D and design. Downstream, some manufacturers are also trying to build their own brand.

  • OEM: Original Equipped Manufacturer. Manufacturers take and execute orders with detailed specifications from brands.

  • ODM: Original Design Manufacturer. Manufacturers design and make the products. Brands come to manufacturers without detailed specifications and just pick a design based on a pre-established book of available designs for a given product. It brings efficiency to the system because: (i) manufacturers design things for brands they know will be easy to manufacture, (ii) it shortens the production time as manufacturers already have the manufacturing infrastructure in place.

  • OBM: Original Brand Manufacturer. It seems to be the next logical step for manufacturers to create their own brand as they already do the design and the manufacturing. Before C2M, it was too difficult for manufacturers to build strong brands because the expertise between selling and producing is too different. Chinese social e-commerce platforms were the missing link to empower manufacturers to build their brands.

Three slightly different C2M models are co-existing.

iResearch distinguishes 3 different C2M models:

  • C2M e-commerce platform: it's the original model pioneered by Biyao in 2015. A marketplace connects factories to manufacturers. Factories are brand owners. There is no inventory risk because factories start manufacturing goods only after receiving the orders.

  • F2C (Factory to Consumer) e-commerce with self operated brand: an e-commerce platform starts its private label brand and partners with factories to manage manufacturing. In this model, there is an inventory risk because your produce before selling.

  • F2C e-commerce platform: a marketplace is connecting factories to manufacturers. Factories are brand owners but there is an inventory risk because they produce before selling.

C2M brings benefits to all the stakeholders: e-commerce platforms, consumers & manufacturers.

  • As C2M cuts intermediaries between manufactures and consumers, you have a better economic equation for both parties. Consumers are able to buy high-quality products at lower prices than the usually branded products and manufacturers are able to increase their profit margin per product sold.

  • Manufacturers have lower inventory risks than usual brands with the C2M model. With a C2M ecommerce platform, they have no inventory risk as they only produce once orders are made. With the other two models, inventory risks is reduced because demand is driving the supply. Manufacturers create products based on consumer insights and initial tests done on e-commerce platforms.

  • Manufacturers have a better working capital equitation. They used to be paid after 60-180 days and are now paid in less than 30 days by platforms, the same as other brands.

  • Manufacturers are up-skilling their factories. As a brand, they capture a higher stake in the value they create through manufacturers.

  • Consumers can have products that are more suited to their needs. C2M is an excellent way to bridge potential demand gaps in the market because manufacturers are constantly fed with customers insights from e-commerce platform. Moreover, in the C2M e-commerce platform products can be customized.

  • Several e-commerce platforms such as Pinduoduo, Alibaba and JD started their own C2M platform. For them, C2M is a new market segment that they can leverage to increase their GMV and tap into new customer personas.

The Pinduoduo Example

Pinduoduo C2M's efforts are gathered under the "New Brand Initiative" launched in December 2018 that aims to support 1k factories and manufacturers to develop their own brand.

Pinduoduo offers manufacturers the following services: big data on consumer tests, help on R&D planning, bringing trafic once products are released, marketing channels to sell their products with livestreaming and group-buying.

For instance, in 2018, Jiaweishi which is a manufacturer for well-known consumer good brands like Philips and Whirlpool partnered with Pinduoduo to launch its own brand of robot vacuum cleaners. Jiaweishi has the capacity to sell 1.5m robot vacuums per year. It was already using excess capacity to sell robots in the domestic market under its own brand but had limited experience in building a brand and distributing its product directly to consumers. Pinduoduo brought the Jiaweishi's brand to the next level. It increased its domestic sales to RMB30m ($4.6m), built brand awareness on Pinduoduo and developed new robots based on the consumer insights gathered by Pinduoduo.

"The old robot vacuum priced at RMB 279 was an online hit. Transparent manufacture through live-streaming video erases quality concerns with regards to an unknown brand while Pinduoduo’s group purchase pattern helps us spread our name quickly," said Jiaweishi. "We are now developing new robot vacuums based on the data collected from the platform. Pinduoduo’s R&D planning has influenced us to change the robot vacuum’s randomized cleaning route to a more orderly one and we have redesigned the vacuum’s appearance to make it more appealing to consumers." - Pinduoduo

Enablers in China

C2M is taking off in China for the following reasons:

  • The rise of the middle-class in China which has aspirations that fit perfectly with C2M: a good price-to-quality ratio, domestic brands, personalized products etc.

  • The growing tension on the Chinese manufacturing tissue. The trade war between China and the US as well as the Covid pandemic have pushed Chinese manufacturers and brands to compensate the decrease of foreign exports by serving more than ever the Chinese domestic market.

  • A willingness from factories to go upmarket. China has built the largest manufacturing tissue in the world which has now also become the most advanced manufacturing ecosystem. Factories want to capture a higher stake of the manufacturing value chain and they don't hesitate to manufacture more complex goods and to get their hands dirty with R&D, design and branding.

  • A geographical proximity between C2M production and consumption.

  • Platforms mixing social and ecommerce like Pinduoduo or Taobao which are the perfect set-up to aggregate a consumer demand that has a high willingness to make purchases.

  • Chinese manufacturers are sufficiently digitized to support inter-operability between social ecommerce platforms and factories ERPs.

Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋