On Aug 11, Li Wei, Professor of Economics at CKGSB, was interviewed by Fortune Korea for an in-depth coverage on “specialized wholesale markets” in Zhejiang, China. Li Wei explained the reasons for these markets’ success, strengths and the challenges they will be facing in the rapidly changing Chinese business environment.
Yiwu, once known only as a small city located in the Southern Hangzhou, Zhejiang Province, has now developed into one of the most successful ‘specialized wholesale markets’ in the world. Today B2R—the distribution system used in the Yiwu market—is set to bring about radical change and innovation in China. According to Li Wei, “it will bring a revolution in the Chinese distribution industry.”
Li Wei claims that the development of the light industry in Zhejiang is mainly due to historical factors, and it has been largely influenced by its territorial characteristics. Due to limited arable land, peasants became individual merchants and arbitraged price differences across China, later becoming wholesale marketers. This had positive effects on the local economy, encouraging the local government to offer support and institutional protection to the sector. Since then, positive relations between business and government have been maintained in several parts of Zhejiang. This is particularly the case in the Yiwu market, where the local government has invested heavily in upgrading the wholesale market and it has established government-owned firms for regulatory purposes.
Positive government-business relations have been key to the economic development of Zhejiang province. However, Li Wei suggests that the role of the government was nevertheless limited. The rise of competitive light indusries was largely lead by the market, and the state only served to facilitate the necessary services. He highlighted that institutional innovation played an important role in the development of Yiwu. The local government protected entrepreneurs, in a historical moment where it proved critical. This happened ahead of its time, and it helped avoid crackdowns from the central government, and set an example for other regions to develop such forms of market.
On whether the Chinese Communist Party may have a negative effect on the growth of SMEs (small-medium enterpreneurs), Li Wei suggests that most of producers in light industries are private and that the government only owns a few state-owned firms for regulatory purposes, which means that there is relatively little intervention. The favourable relationship between business and government has been the main strength of Yiwu’s market, as the government’s infrastructural provisons were the pillars for the initial development and success of the local distribution market.
Professor Li Wei foresees a high contribution to the overall distribution industry by this sector in China. Chinese traditional distribution markets are inneficient. That is mainly for two reasons: relatively higher consumer prices caused by price markups and low efficiency in information transmission. The Yiwu market is based on the B2R distribution system, which reduces the number of distributors between producers and consumers. In this respect, Yiwu has the potential to revolutionise the distribution industry in China.
However the Yiwu market still faces several challenges ahead. Chinese consumers are increasingly opting for higher quality and branded products, and are incrisingly becoming sophisticated in their consumer choices. A response to this could be focusing on export markets. However, with the slowdown of export demand, this approach can prove very problematic. Therefore, Professor Li suggests that the Yiwu market should pursue a strategic shift to help manufacturers capitalize on the growing Chinese market, especially by addressing the needs of the increasingly value-oriented and sophisticated Chinese consumers. Another challenge is represented by rising production costs and the appreciation of the Yuan. To leverage its sales network across 219 countries and regions, the Yiwu market should enhance the purchasing experience of its consumers through improved service, delivery and assistance. To overcome difficulties associated with this strategy, suppliers in this industrial network should be effectively incorporated and undergo objective monitoring on output and product quality. Also, an effective stock management and distribution channel can lead to lower costs, and enhance competitiveness.