/First the trade war, then the pandemic. Now Chinese manufacturers are turning inward.

First the trade war, then the pandemic. Now Chinese manufacturers are turning inward.

But in 2018, things stopped being normal. Across his industry, the US-China trade war had begun to strain apparel makers, one of China’s manufacturing sectors with the largest reliance on export sales. Orders that had been placed and made in advance were being delayed up to three months for shipping, hitting Zhu’s profits and clogging up his storage space with unsaleable inventory.

Then, before his business had fully recovered, covid-19 ripped through the world. Exports tanked, saddling Zhu with a stream of order cancellations worth an estimated $4 to $5 million. Domestic sales also suffered as physical stores shuttered under pandemic control restrictions. “The impact could’ve been huge,” he says. “My factory is really big; I have so many workers to support.”

But Zhu fortunately had another sales channel. In 2018, Pinduoduo, an e-commerce giant targeted at consumers in China’s smaller cities, launched an initiative to connect manufacturers with the domestic market. Under a so-called “consumer-to-manufacturer,” or C2M, model, the platform began using its massive pools of data and AI algorithms to help Chinese manufacturers predict consumer preferences and develop brands specifically for a domestic audience.

Zhu Kaiyu's store on Pinduoduo
Zhu Kaiyu’s store on Pinduoduo.

Pinduoduo told manufacturers not only how to customize their products—down to the wash of a jean or the length of a sock. It also advised them on how to redesign their packaging, how to set their prices, and how to market their goods online. In this way, manufacturers could improve the efficiency of their production, which in turn made the products cheaper for consumers. And the platform could cash in through charging a credit card transaction fee. This helped both the platform and manufacturers alike tap into a rapidly growing middle-class consumer base. Whereas upper-class consumers care more about international brands, this newer wave of consumers care more about quality products at lower prices.

When the pandemic hit, Pinduoduo quickly expanded its initiative. It added new incentives for affected manufacturers to join its platform, welcoming them to adopt its live-streaming service  (link in Chinese) and holding promotional sales events. And so, Zhu joined in with his own brand—水中君 (shui zhong jun), King of the Water—to recover his lost international revenue. He followed C2M guidance and set up a live-streaming channel. As of May, he says, he can now sell up to 25,000 items of clothing via livestream within a few hours—up from an average of 1,000 items per day.

The C2M model originally began as part of a broader push by such giants to modernize the manufacturing industry and attract more consumers onto their platforms. But the trend has accelerated and taken on new meaning since the trade war and the prolonged pandemic. As China’s access to international markets has grown more unreliable—with a possible trade fight renewal looming on the horizon—the country has increasingly sought to ramp up domestic consumption in an effort to stave off a greater economic recession.

“The problem is China is losing [overseas] demand,” says Derek Scissors, a resident scholar at the American Enterprise Institute, where he researches trade policy and US-China relations. “You want to replace it with Chinese demand.”

A chart of China's exports from Jan 2019 to April 2020

As well as Pinduoduo, other Chinese e-commerce giants, including Alibaba-owned Taobao and JD, are now offering C2M services. Since the start of this year, all three have set new goals for expanding their C2M initiatives. Pinduoduo, which helped launch 106 manufacturer-owned brands in 2019, aims to establish 1,000 more. It also signed a strategic partnership in April with the government of Dongguan, where Zhu’s factory is based, one of China’s largest manufacturing hubs.

Taobao, likewise, has committed to bringing at least 100 million RMB ($14 million) to 1,000 manufacturers each, distributed across 10 factory clusters, within the next three years. In March, it launched a new app called Taobao Deals to showcase the lower-price products designed through its C2M partnerships. JD says it will recruit partners across more than 100 industrial belts. In April, it also launched a “Export to Domestic” initiative through its new app Jingxi to let manufacturers open new stores on its platform for free and tap into its marketing, logistics, and delivery services.

In 2018, the C2M model generated roughly 17.52 billion RMB ($2.5 billion) in total sales, according to market research firm iResearch. It’s estimated to grow to 42 billion RMB ($5.9 billion) by 2022.