When Plan to Help Others Sell in China Fails, a Start-Up Changes Tack
Originally posted on New York Times
In 2012, Frank Lavin, who had raised $5 million from family and friends, went live with an e-commerce platform, Export Now, that was conceived as an easy, low-cost way for American small businesses to sell their goods in China. The basic pitch: “Sell into China without leaving your desk.”
Two years later, the company, based in Akron, Ohio, has 10 employees in the United States and 22 in Shanghai, where it has a warehouse for storing and filling the e-commerce orders of its customer companies, which it shepherds onto Alibaba’s Tmall in China. But Mr. Lavin, 56, a former under secretary for international trade at the United States Commerce Department, concedes that Export Now’s sales have not met expectations.
In a recent conversation, which has been condensed and edited, he talked about why he started Export Now, what went wrong and what he is doing differently to attract clients like the National Football League.
Q. Had you ever started or run a business before?
Q. What prompted you to try?
A. It was around 2009 that I saw an opportunity, with China e-commerce growing in the high double digits — 50, 60, 80 percent annual growth.
Q. How was Export Now designed to work?
A. I’d worked in the U.S. Commerce Department, where we focused on hard barriers to trade — tariffs and trade promotion, encouraging companies to go overseas into new markets. After several years, I realized that unaddressed were the soft barriers that cumulatively make it very difficult to do business in China: How do I rent a warehouse in Shanghai? How do I hire somebody in Shanghai? How do I incorporate there? Those soft barriers are a challenge for small and midtier companies. My thought was that e-commerce, helped by Export Now, would allow a U.S. company to leapfrog those soft barriers.
Q. Who did you project as your clients?
A. A majority of Chinese e-commerce transactions take place on the Alibaba-operated platform Tmall, which is the largest e-commerce platform in the world. It’s larger than Amazon and eBay combined. We thought we’d set up a department store on Tmall, a platform on a platform, and allow foreign companies to sell their products in our department store. That original value proposition was oriented toward smaller companies, folks who otherwise might not find distribution. We thought, if we took the price down low enough, we could quickly sign up hundreds of U.S. companies. This was going to be volume-driven, with us making 20 percent on each sale.
Q. How low was the cost of entry for clients?
A. We had different pricing models, but typically $3,000 or $5,000 for a first shipment of a few pallets, enough to get going. For that, we’d take your product from Los Angeles into China and through customs clearance; handle warehouse operations, product-testing and approval; and put up your web advertisement in Chinese in the department store, handle all transactions and pay you in U.S. dollars.
Q. An inexpensive way to put your toes in the water?
A. For less than the price of a plane ticket to China, you can ship your goods to China and we’ll put them online for you in this massive market.
Q. How much business did you expect in your first year?
A. It was pretty conjectural. It was sort of saying, “We’ll build it and they will come.” We ended up at the end of 2012 with about 100 companies. That was the good news. The bad news was, the sales weren’t there, and the commitment wasn’t there.
A. The companies’ commitment to the China market. The majority of the companies we were supporting had no advertising strategy, no budget for advertising or promotion. I think the price was so low that we brought in companies that weren’t looking strategically at China.
Q. Was this humbling?
A. It was very humbling. We thought we had built a better mousetrap. In fact, Alibaba tells us we have the only company in the world that does this service. We’re making the largest e-commerce market in the world, the fastest growing consumer market on the planet, accessible to anybody in the world from their desk. But there was very little market take-up for it. I told our sales team, “It’s like we’ve got the best mechanism for kidney transplants, but nobody wants a kidney transplant.”
Q. Were you too early?
A. My guess is, if you’d asked three or four years ago, you’d have found under 1 percent of U.S. companies interested in selling in China. Since then, there have been lots of stories in the media about China business. Plus, Alibaba’s initial public offering has raised awareness of its size and the size of the Chinese e-commerce market.
Q. Did you lose a lot of money?
A. We kept our losses within budget. We have a somewhat complicated business model, and we knew the first year or two would be challenging.
Q. Did you change your approach?
A. On the marketing side, we’d clearly fallen short. We went through a furious series of experimentations.
Q. What did you learn?
A. There were two related flaws. We were attracting tire kickers, but the other flaw was that the department store model was noninviting or maybe even off-putting to the serious brands. If you are a serious brand committed to China, you want your own e-commerce flagship store. You don’t want to be on the shelf with other goods. So we changed the offer. We said, “We will do an e-commerce flagship store for you and help you build your brand.” Of course, that costs more money. We opened our first flagship store about a year ago for the N.F.L. And since then, we’ve started bringing on larger clients, those with revenues of $100 million to $1 billion. Today, we have more than a dozen larger clients that more than compensate for the departure of the very small clients.
Q. Are you helping them with advertising?
A. The first thing we say is, if you’re selling in the digital space, your advertising needs to also be in the digital space.
Q. How have you changed your own marketing?
A. One step we took about a year ago was going on Google Ad Words and buying “How do I sell on Alibaba?”; “How do I sell on Tmall?”; “How do I use e-commerce in China?” People searching on Google with those questions, now see our advertisements. We also realized that webinars make more sense than big city presentations.
Q. What kinds of adjustments do American companies have to make when they go into China?
A. I would tell every U.S. consumer product company: Your product will probably work in China, but not necessarily in the same way. You’ll need some diagnostics on your pricing and your selection and then probably need to do some engineering on how you merchandise your product. The N.F.L. has a very powerful brand, but it’s not powerful in China. The N.F.L. realizes it has to do a lot of outreach activity to explain the game, so the N.F.L. is heavily active in social media in China. One of our flagship stores is Totes, the umbrella and rainwear company. In the U.S., the brand is positioned as a very functional, utilitarian brand. In China, it’s much more of a premium brand, an umbrella you could easily give as a gift.