Australia Should Prepare for Electric Shock Treatment

As a nation, it’s time to seize emerging opportunities. Or sleepwalk into oblivion.

To Australia’s north, 1.5 million new electric vehicles (NEV) have just rolled out of Chinese production. China makes more cars and more electric cars than any other country.

With a population of 1.4 billion people, China’s objective isn’t so much to let everyone have a car, but to enable everyone to have access to mobility when they need it. Strategically, this makes sense.

According to an April 4th article in The Economist, China is also the largest producer of batteries. Moreover, emissions rules in western Europe are tightening. Britain and France have said they see no role for cars powered only by internal combustion after 2040.

Shanghai The Bund. (Photo credit: Danielle Spinks)

In Shanghai, a city with a greater population than Australia (26 million), there are 6 million cars. To counter the traffic congestion, There are strict quotas on the number of license platesthat can be issued each year. It has a lottery-style system where a winner gets the chance to buy a plate. You have a 0.2% chance of winning.

To alleviate exhaust pollution, median strips planted with trees and flowering shrubs, each with distinctive white paint around the bottom to prevent from boring insects. In Beijing, to ease both congestion and pollution, there is road space rationing. According to the last digits of a license plate, a car owner needs to use public transport one day a week. With unparalleled levels of data and surveillance, owners who contravene the restriction are fined every three hours.

After having spent time in both Beijing and Shanghai recently, I have to say the traffic congestion was not as bad as Sydney.

Beijing congestion? (Photo credit: Danielle Spinks)

The goal is not car ownership, it’s access to mobility

In Australia, we have seen the uptake of new services like Car Next Door and GoGet. These ride-sharing services mean that car owners can make money from their vehicles when they are not in use. It also makes accessing a vehicle simpler and more affordable to the many inner-city residents who do not have access to parking spaces or may not want the cost of registration and insurance.

A much larger proportion of cars in China are used by more than one party, either as a taxi or as rise-sharing vehicles than they are in the West.

Didi Chuxing is the largest ride-sharing company in the world. It dwarfs the size of Uber, with over 550 million registered users. According to an April 4th article in the Economist, Alibaba and Tencent are both investors in Didi Chuxing, which has now spread into South-East Asia and will soon roll into India and Europe.

These technology juggernauts are also investing in cars. Plans are afoot for Didi Chuxing to build autonomous robotaxis. Autonomous taxis surely would rely on a strong Artificial Intelligence industry. Fortunately, along with green vehicles and electric cars, the AI industry is listed as one of the sectors for advancement in the Made in China 2025 Policy.

Chinese city, Hangzhou, at night (photo credit: Danielle Spinks)

Made In China 2025

The Policy is a ten-year blueprint for industrial development in China. Released in 2015, the aim is to move China up the value chain and thereby reduce wage inequality and aid development.

Guangdong is a case where this is already evident. Martin Jacques describes it is once the place that made “cheap, mass-produced goods for the world,” it is seeking to move up the value ladder and into the services economy.

“Shenzhen and Guangzhou, like many cities in Guangdong, now look well maintained and prosperous, a far cry from the former days when they resembled China’s wild west.”

Jacques attributes the turning point to May-June 2010 strikes that saw massive wage increases. The strikes affected factories including Honda and Foxconn, the electronics manufacturer which employed 270,000 people. He writes, “It can no longer sustain its competitive advantage. Labour has become too expensive, too demanding, the expectations of its people transformed.”

One US Think Tank called the Made in China 2025 policy as “an existential threat to US technological leadership.”

The ten sectors listed in the policy for advancement up the value ladder including artificial intelligence, rail, green vehicles.

“The combined challenge of electrification and autonomy is stretching Western incumbents enough that some, maybe many, will snap.”

Country Strategies

It is hard to see why there is resistance on Australia’s part when there is such clear environmental need, technological simplification, and global demand. One wonders whether it is a lack of strategic thinking or over-reliance on income from old money — fuel excise. As at October last year, this was 41 cents for every litre of unleaded petrol and diesel. In total, it generates $10 billion, or thereabouts, per year.

China is not the first country to have a national strategy which states a clear vision and the methods to achieve it. The Meiji Restoration saw Japan embark on a process of rapid modernisation after 1868.

Terrified of Western invasion, Japan systematically went about researching all the systems and processes used in industry around the world. It cherry-picked the systems and methods it thought were the best. The navy based on Britain’s. Germany for railways. France for education. It then emulated these systems but infused them with distinctly Japanese characteristics.

Japan went from being vulnerable and isolated to becoming the second largest economy in the world. It happened with a speed described by Martin Jacques as “a remarkable historical phenomenon.”

Why a country strategy matters

It’s easy to see how technology, artificial intelligence, and car manufacturing can have shared benefits and symbiosis. Cooperation will help each sector thrive, and create a new gamut of sub-sectors. China has shown leadership in this regard.

China’s mandate to sell 4.6 million new electric vehicles (NEV) has had a ripple effect around the world. It has banned the sale of internal-combustion engine cars after 2040. Already, General Motors (GM) plans to have 20 models of NEV by 2030. Ford also has initiatives underway to compete.

With clarity of direction, businesses must rise to the challenge to remain competitive. This is the nature of business. But countries need to do the same.

Surely there are intelligent ways Australia could create fruitful scenarios from the emerging macroeconomic picture. It could choose to adopt and modify other good systems from around the world. New Zealand could be modelled upon for its broadband, for example, or indigenous relations.

Adapting other systems saves us reinvention. However, we need not borrow from anyone else. Australia could clear the slate and start from scratch. Made In Australia 2025 Strategy.

What does a strategy do?

A strategy allows us to think about what we want in the future. What is the vision? What would Australia look like in 2030, ideally? We look within to see our strengths. We look outside to see opportunities and threats.

Good strategy uses Strengths to take advantage of Opportunities. Australia has abundant sunlight, a vast and mostly uninhabited interior, which could be used to harness solar energy. There are 25,760 metres of coastland. This could be used to generate wave energy.

Coal is near complete obsolescence. Most developed countries have signed agreements that coal will not be part of their energy mix in one to two decades.

Australia has a strategic choice: to see and seize the powerful opportunities around it. Or to preserve the status quo and keep doing what it’s doing — sleepwalking into oblivion.

Understanding the Rise of China

British Economist Martin Jacques has said that the “west is rapidly losing influence”  and that the world will be an increasingly unfamiliar place to those not conversant with the changes that are taking place.

Did you know that 90% of the world’s population live in developing countries?

That 70% of the world’s population is under the age of 25?

Continue reading

Starbucks Lessons from Australia

Starbucks opened its first store in Seattle in 1971. By 1992 it was publicly listed and had 140 stores and a growth rate of between 40 and 60% each year.

Starbucks currently has over 15,000 stores in 44 countries.

The Starbucks Concept

Right from day one, Starbucks did not see itself as a ‘coffee’ business, but a ‘service’ and experience business. Its model was built on the European coffee tradition, with which America was unfamiliar. Coffee in the States was generally a jar of percolated brew sitting on a hot plate.

The brand was built with a number of key attributes – the customer should be greeted within five seconds, there would be eye contact, their name would be remembered, and visiting the store was a place to relax, socialise, read, surf the internet and be seen.

Advertising and promotion were not to be the primary communication vehicles. Starbucks philosophy is based on the understanding that a positive emotional experience will generate word of mouth and lead to customer loyalty.

Starbucks in Asia

The first store to open outside of the USA was Tokyo in 1996. The company has been very successful in Japan and it continues to be a high performing market.

In China, its biggest growth market currently, the pastries and drinks are smaller to suit local tastes and a green tea frappuccino has been introduced. Similarly, the product items have been adjusted to cater to local tastes in Saudi Arabia and Japan.

There is growth in the large cities of Beijing, Shanghai and Guangzhou where middle-income professionals are burgeoning.

Starbucks in Australia

The coffee industry in Australia is worth $3 billion a year, with $1 billion of that consisting of takeaway cups. It was already mature when Starbucks opened its first store in Sydney in 2000. The retail market is tough with intense rivalry and returns of just 4% p.a. net profit.

Australia’s large migrant population, especially those from Greece and Italy, meant that the Australian market had adopted the routine of morning coffee many decades earlier. The European tradition was not new or novel. The local drinking palate was sophisticated, liking strength undisguised by syrups or excessive milk.

In 2008, Starbucks announced it was closing 61 out of its 87 Australian stores (73%) remaining with less than 2 per cent market share of the speciality coffee market – an unwinnable formula for an economy of scale and out of step with the ‘clustering’ saturation strategy used in the rest of the world. Starbucks announced the reason for the closures was consumers’ tightening of belts due to the global financial crisis and fears of recession.

In the Australian speciality coffee market today, Gloria Jeans dominates the high-end. As a franchise, its store owners know the local area, tastes, people and communities.

Second is McCafe (servicing the economy end), as well as Coffee Club, Wild Bean (an offshoot of BP at service stations) and Hudsons. Starbucks is in sixth place with less than 2 per cent share.

What went wrong?

Starbucks may have assumed that Australia had a very close ‘psychic distance’ from the USA and expected its stores to be met with the same enthusiasm as America. Its offering to Australians was the same as the US offerings.

Unlike McDonalds and Krispy Kreme, who both opened one or two stores in a slowly, slowly approach to stimulate demand and create a sense of scarcity, Starbucks saturated the Australian market with 87 stores and was soon perceived as a ‘mass brand’ not the exclusive brand position it was after.

The Starbucks team also failed to understand the psychological and socio-cultural aspects of the country it was entering.

Australia is not one homogenous market; it consists of over 235 different ethnicities and has a proud tradition of backing the underdog — in this instance, the small shop around the corner. Many consumers were found to actively dislike the ‘super-size’ high sugar/high-fat mentality of America which Starbucks was found to epitomise.

Even worse, Starbucks coffee was generally considered ‘watered down’ and inferior to what was already available at a much lower price. Ethically produced coffee and personal relationships were also important for the Australian market.

Confused Value Proposition

It may not have been these factors alone that were the undoing of Starbucks in Australia. The company was already contradicting its own value proposition when it introduced competing priorities in stores, such as the key performance target of servicing ‘x’ number of customers per hour.

With a value proposition built on friendliness and space away from work or home that can be used for relaxation and socialising, the pressure on staff to generate steady customer turnover meant that they were less able or inclined to engage in conversation or relationship-building with customers.

The use of vacuum-sealed coffee and automated machines to make coffee 40% faster, thereby reducing queue wait, also meant the augmented sensory benefits of watching the grinding and ritualistic preparations of the drink, as well as the hedonic aroma, were removed.

The in-store furnishings, magazines, music and wi-fi were imitable and being copied from stores all over the place, including Gloria Jeans, McCafe, Wild Bean and Coffee Club.

The Starbucks loyalty card was just like any other and posed no point of difference or customer motivation, who would just use the loyalty card of whichever company they happened to be using at the time.

In their favour, competing brands were also known for food. Although Starbucks does sell a range of pastries and sweet snack-foods, Starbucks owns coffee in the mind of the consumer and the brand is not perceived as a place you go to eat. McCafe (McDonald’s) means coffee and also food, as does Gloria Jeans (light food) and Coffee Club is where you can get a good coffee as well as a decent, not unhealthy lunch. With an average per visit spend of much less than its rivals, Starbucks found itself in tricky waters.

Finally, Starbucks strategy not to advertise or run promotions may have sounded good at first, but it probably needed to re-evaluate this at the earliest signs of competitive rivalry. Awareness was high, but such communications could and should have been used to convey the brand message or reason for being. The brand essence should have been reformulated for the Australian market and then communicated with clarity and simplicity as a reason to patronise its stores.

Instead, McDonald’s – well-known for its high ad spend – was able to curtail any growth of Starbucks by using subversive messages to undermine it, like this one.

Lessons from the Failure

Starbucks failure in Australia demonstrates why you need to understand your market before entering. What works in one place may not work elsewhere. While some overall methods or services will remain the same, a global strategy must always take a backseat to local needs and be adjusted accordingly.

Solid research, particularly, observational and ethnographic (such as that performed by IKEA and Tesco before they open stores in new foreign markets) is extremely important. A few months of studying and spending time with coffee-drinking Australians may have saved years and millions of dollars to Starbucks in the long-run.

Introducing the ‘Flat White’

7 Jan 2015 Update:

It seems like Starbucks has learnt a few things from the Australian experience. They have introduced the flat white, which is my favourite coffee, into American Starbucks outlets.

According to Wikipedia, the humble flat white was developed in Australia and New Zealand in the 1980s. It consists of a double shot espresso (ristretto) with microfoam of hot milk poured over the top. By microfoam, I mean milk that has been heated and jiggled to form small bubbles. Sorry, I’m not a barista.

A flat white tastes just like a coffee with milk, but far better. The consistency is velvety. It would have to be the most unpretentious and ubiquitous of coffees ordered today in Sydney.

Happy drinking!

Special thanks to the comprehensive review by Richard Fletcher and Heather Crawford upon which much of this article is based.

Richard Fletcher, Heather Crawford (2012), “International Marketing: An Asia-Pacific Perspective” 5th Edition, Pearson.

Cultural Differences & International Business

Australian businesses need to be mindful of more than the marketing mix overseas. Culture is either the great impediment or facilitator. Here are some very basic tips of how to begin considering the cultural aspect. Continue reading

IKEA – Strategy in a Nutshell

IKEA’s founder, Ingvar Kamprad, died in January 2018, aged 91. After starting from the humble Swedish beginnings, his entrepreneurial flare led to a multibillion-dollar global empire. Did you know the name Kamprad is a variant of Comrade? His passing marks a good time to review the strategy of IKEA. How radically it differed from other furniture businesses at the time of its conception makes for a good strategic case study.

Customer Profile

The customer profile is the global middle-class. They are interested in items such as bookcases, side tables, storage units. They are aspirational. They are delighted by the value but also the philosophy of style and good design and frugality. Spending amounts are very similar around the world. Continue reading