When the European middle class begins to "downgrade consumption", Chinese hardware companies find new opportunities | New Land

The global business is in a state of turmoil and upheaval, and going global has become an unavoidable proposition for many Chinese companies. The 6.5 billion people overseas are scattered in nearly 200 countries and regions with extremely unbalanced development. The difficulty of getting involved in this complex market may far exceed the entrepreneurs' predictions or imaginations.

Hardcore Keji has been paying close attention to and observing the overseas market and going-global enterprises. Based on this, Hardcore Keji launches a new column: "Going Global New Land". We will cover developed countries and regions such as Europe, the United States, Japan, and Australia, and also focus on emerging markets such as Southeast Asia, Latin America, the Middle East, and Africa.

The column will take companies and products as the core, analyze the practical operation process of successful going-global companies from a professional perspective, and examine the causes and consequences of popular products in a country or region. Our higher expectation is to gain insight into and convey the glimmer of new trends.

The following is the twelfth article of this column

Author｜Huang Nan

Editor｜Yuan Silai

The richest people in the world are also being cautious with their spending.

After conducting on-the-ground research in retail channel stores in several European countries such as Germany and Italy, Liao Junhao, an investor of Zhixing No.1 Fund, found that in the face of pressures such as economic downturn, in this land that pursues ultimate aesthetics and craftsmanship design, a gust of "consumer downgrading" has also blown. The extremely low-priced Temu has topped the list in many European countries, and the low-end version of Zara, whose quality is so poor that it can only be worn for one season, has become a new favorite of German users.

According to predictions by the European Central Bank and others, the nominal income of the public will increase in the next 12 months, but the increase rate is lower than the inflation rate. Consumers are becoming more pessimistic, thereby affecting their consumption willingness and purchasing power.

Surprisingly, smart hardware from China has shown a remarkable growth. The sales volume and sales amount of products such as sweeping robots and lawn mowers continue to increase. Other hardware categories, such as the smart electric grill brand ASMOKE, have raised more than 1 million US dollars through crowdfunding, and the smart ring brand RingConn has achieved a revenue of tens of millions of yuan through a single channel of its DTC brand independent website in 2023 and has just completed a crowdfunding of more than 5 million US dollars.

Data from Eurostat shows that in 2023, the total value of high-tech products that China exported to the European Union reached 155 billion euros, accounting for 32% of the total EU imports, with electronic and telecommunications equipment accounting for the largest proportion of 39%. It is estimated that by 2027, the European smart home product market size will reach 56.18 billion US dollars, with an average annual compound growth rate of 12.15%.

Currently, the trend of going global is getting hotter, and Europe, as a core market, is recognized as a fertile ground for brand building and growth.

For a long time, China's exported hard-tech products have been generally regarded as a synonym for high cost performance in the global market. Start-up companies have innovative ideas, can achieve a certain degree of product strength, and have a design sense in both appearance and packaging. Coupled with the cost and profit space brought by the advantages of the domestic supply chain, it coincides with the needs of European middle-class users who are in the midst of "consumer downgrading".

However, Europe is also the "graveyard" of countless start-up companies.

Domestic users joke that "yesterday it was JD.com and Tmall, today it's Pinduoduo", and they will accept the downgrade in quality and design. However, European middle-class users are somewhat picky. Although more than half of them will use more discounts and coupons, at the same time, their high demand for brands, design, and services has not decreased.

Faced with the huge market space, for Chinese hardware entrepreneurs, Europe is still a land of opportunities. However, they need to temporarily put aside the accustomed involution thinking and approach this vast and fragmented continent with awe.

Crossing the Billion-scale Threshold

Unfortunately, the "product strength" that Chinese hardware companies often talk about can only support some small businesses in the unfamiliar European market.

"If you don't have a brand overseas, even if the product strength is good enough, someone will buy it, and perhaps you can achieve an annual revenue of a few tens of millions. But to achieve the leap from tens of millions to several hundred million or several billion, brand influence is indispensable. The product is the foundation and starting point of everything, and the brand is the tool to amplify the enterprise." Wu Hao, the co-founder and CEO of RingConn, said.

"RingConn" Smart Ring (Source: Enterprise)

However, a cruel consensus is that to build a brand in Europe, one must be mentally prepared to spend money without seeing immediate results.

Europe is a continental plate with numerous countries and languages. There are dozens of different languages in this vast region. The diverse cultures and complex economic systems radiate to the local people's living and consumption habits, bringing about differences in brand awareness among users in different countries and regions. For example, a certain brand's products may be a big hit in Germany, but may be ignored in English-speaking countries.

This means that marketing traffic and influencer resources cannot be reused. "Under the same investment, I would rather choose the United States, a unified market, where the ROI ratio of a single resource is higher. The languages, cultural systems, policies, etc. between states are basically the same, and the population is large enough." Liao Junhao analyzed to Hardcore Keji.

Also because the market is too fragmented, few activities that can attract people from different countries will lack the presence of Chinese companies spending money. For example, during the European Cup every year, large companies like Hisense will spend tens of millions of euros to win an advertising spot.

And for start-up companies with limited budgets, they must judge before entering the European market which country and region to prioritize to maximize the cost-effectiveness of the initial resource investment.

The experience of the smart electric grill brand ASMOKE is that the local market degree, user education degree, and business landing speed will directly affect the market and product rhythm. Take Germany as an example. The income level and education level of the German people are relatively high, the engineer culture is good, and many users have a relatively high acceptance and love for smart hardware products. Therefore, many manufacturers will choose Germany as the first choice when considering the European headquarters.

ASMOKE Smart Electric Grill (Source: Enterprise)

According to the Kickstarter overseas crowdfunding platform, since the launch of the ASMOKE smart outdoor grill, its sales in Germany, the Netherlands, the United Kingdom, and some Nordic countries have the highest proportion, providing a first-priority reference for its entry into the European market. And Wu Wenqi, the founder of ASMOKE, also found through on-the-ground research that the German and Dutch channel ends attach greater importance to the grill category, and the landing speed of priority investment in sales in these regions is faster.

However, even if the crowdfunding is booming, it is only the beginning of a difficult battle.

Generally speaking, after crossing the 1 billion revenue threshold, the growth flywheel will really start to rotate. In order to achieve this goal, companies doing the European market must establish a local team to deal with fragmented channels and cultures.

But the contradiction is that before most companies reach the 1 billion scale, it is difficult for them to have sufficient funds and talent density to support the construction of a local team. "At least one small CMO or regional head, or even the founder himself, needs to be able to go deep into the local market. Such people are not easy to recruit, especially for brand communication, it is best to be done by people who have an understanding of the local country's culture and living scenarios." Liao Junhao said.

It can be said that only companies that can afford to spend money in the early stage can survive in Europe. Looking back at the market side, for hard-tech enterprises that are still in the 0 to 1 development stage, from the perspective of difficulty and input-output ratio, Europe can be ranked fourth or fifth in the priority of its global market.

Before Entering the Market, Marketing Comes First

How long will it take for a European white-collar worker who often needs to travel on business to decide to buy a lightweight hair dryer?

First, they search on the Amazon platform and accidentally see an ultra-light high-speed hair dryer launched by a brand called Origin of Species. Then they see the relevant influencer review video on the streaming media platform. Then when they browse Facebook groups, x (Twitter), TikTok, etc., they often receive recommendations for related brand products.

When they finally walk into a local offline store and make a purchase after a trial, at least one month and at most three months have passed.

This complex decision-making process is called the "funnel model" in the marketing field. A large number of potential users go through multiple screenings, and only a very few will actually place an order.

In the European market with multiple countries and regions, the APP usage habits are different, and the preferences are greatly varied, making the product promotion and product recommendation and seeding communication methods more complex. At the same time, due to the low popularity of e-commerce and the low maturity of the online retail system in Europe, transactions occur offline, which will prolong the purchase cycle. It can be said that in the European user funnel, there are more filters and the bottom is narrower.

To break through these layers of obstacles, the most efficient bullet is the hit product.

Lin Yuan, the founder of Origin of Species, summarizes the two paths to the birth of a hit product to Hardcore Keji: The first is crowdfunding. These products focus on technological innovation, such as 3D printers, lawn mowing robots, etc., with a unit price of more than 500 US dollars, mainly targeting European male user groups. Through crowdfunding, seed-round customer accumulation and the first batch of mass production delivery are completed.

Most founders of these enterprises have an Internet background and understand social media gameplay. After creating a hit product and becoming popular, they will quickly attract financing. With this money, they build an independent website and start investing in traffic, eventually forming a DTC brand.

"Origin of Species" High-Speed Hair Dryer (Source: Enterprise)

Enterprises taking the second path have certain factory attributes. They mostly started on e-commerce platforms such as Amazon. In the early stage of entrepreneurship, they developed one or two hit products based on patent layout. Because of their supply chain advantages, these companies can develop new products at low cost, form a product matrix, and continuously produce hit products.

Of course, no matter which way, the source of hit products is a rich SKU and sufficient product reserves. For example, in the courtyard scene, Nordic regions like simplicity and nature, Germany emphasizes practicality and functionality, and the Netherlands focuses on delicacy and diversity. This requires being able to recommend specific products for a particular region based on local user needs and channel structures, and design products of different price segments.

The logic of hit products is more common online, while in Europe, brands that take the long-termism route still need to focus on offline channels.

The Strong Voice of Distributors

It is undeniable that the differences in policies, economies, cultures, and logistics pressures in European countries give distributors an absolute voice in the offline channel end.

"The popularity of a single product at a certain time node is more achieved from the product selection logic. Data analysis can complete tasks such as clearing inventory, rapid iteration, and response in a short period, but it is difficult to really enter the channel." Wu Wenqi pointed out.

At present, the admission standards for European channels to screen brands mainly look at three dimensions. The first is the local influence of the brand or product, that is, whether the brand itself can bring sales to the channel. "Generally speaking, the channel will not consider products that have no brand awareness or reputation in the local area." Liao Junhao told Hardcore Keji.

Compared with investing in potential stocks, distributors in the European channels prefer brands that already have a marketing system and growth path. "Under the premise of having a certain brand influence, buyers will work with the enterprise to increase sales with this momentum. This is the most important point for the channel."

The second is whether the product is competitive. For start-up companies, this point is differentiated, but the gap will not be particularly large in the short term.

The third is the operating system, including whether the local after-sales service, logistics, and other supporting functions are perfect, and overall negotiation and business terms such as the profit margin for distributors, the payment collection cycle, promotion expenses, and other business considerations. However, this is a relatively high threshold for most current hard-tech start-up enterprises. The direct impact is that European local terminal stores have a low willingness to directly cooperate with start-up enterprises, and the participation of distributors is necessary.

"The concern of the stores is that many start-up enterprises do not have the resources to invest in building a local team, making it difficult to form a good coordination with the terminal. Choosing to cooperate with a familiar distributor, if there is a problem with the product, the terminal can directly find the distributor. The distributor can solve the problem if it can, and if it cannot, the distributor will find the enterprise. This way, the communication cost is the lowest." Liao Junhao said.

Take EMOJI as an example. EMOJI focuses on independently researching and developing motors and electronic controls in the individual household field, and cooperates with salons in several European countries and regions such as the United Kingdom and Italy, providing them with core components and the overall design and research and development of hair dryers in the OEM and ODM modes.

Due to the limited expandable space of the customer source, the number of salons covered by a single distributor in the region is relatively stable, and only regular maintenance needs to be completed. Bai Rui, the founder of EMOJI, told Hardcore Keji that they have now formed a complete delivery process of "the salon makes a demand to the distributor - the channel summarizes and feeds it back to the enterprise - the enterprise provides a customized hair dryer".

"EMOJI" Motor Product Picture (Source: Enterprise)