Under New Management, E-Tailer DHgate Targeting Sales of Low-Cost Portables

Chinese e-commerce company DHgate is aggressively stepping up its efforts to boost consumer-direct and factory-to-dealer sales in the U.S., Chief Operating Officer Noah Herschman told Consumer Electronics Daily on a press tour through New York Wednesday. Herschman, whose resume includes stints at the former AV specialty retail chain Tweeter, as well as at Amazon, eBay and Groupon, is part of a new management team at DHgate that wants to bypass traditional distribution channels and connect Chinese factories that want a bigger share of the revenue stream to U.S consumers and retailers, Herschman said.

"Right now if you want to buy anything in the States or Europe or anywhere else, you go through a domestic supply channel” such as Best Buy or independent dealers, Herschman said. Some 80-85 percent of CE products sold in the U.S. are made in China, he said. The distribution chain starts at the factory in China, goes to an exporter or “freight-forwarder,” then to an importer, on to a distributor and then to the retailer, he said. “There are five levels of markup,” which can be as much as 100 percent of the retail price, Herschman said. “We get rid of those,” he said of DHgate, “and we allow for the first time -- either the consumer or the independent retailer -- to buy directly from the factory, bypassing all of these markups.”

DHgate brings “trust” and existing relationships to the model of having product sourced in China, Herschman said. Product sourcing involves finding a factory, developing an industrial design, building a prototype and production tool and laying out cash up front along with a letter of credit because factories don’t offer terms, he said. The factory designates a minimum quantity of product to do business, which can be 20,000-50,000 items, and then ships product to the U.S., a process that can take nine months or more, he said. It’s the model large retailers such as Best Buy and Walmart have adopted for certain lines, he said.

Now, the Chinese factories that have been producing goods for large, off-shore brands for 15-20 years have “started to feel a little neglected by the profit scheme,” Herschman said, adding that of a $600 iPhone, Apple makes $570 and contract manufacturer Foxconn makes $30. Factories that have been producing Louis Vuitton handbags for 10 years at $50 apiece, while Vuitton charges a customer $2,000, are going out on their own with their own brand -- “obviously not using the intellectual property of Louis Vuitton,” Herschman said, “but using the same kind of quality craftsmanship.”

Factories that have been producing CE products for years “know how to do this better than anybody in the world,” he said. “Why can’t they build with the same quality and craftsmanship but just develop their own brand?” he said. Asked about the IP used in CE software that runs the devices, Herschman said the manufacturers will use the Android operating system for smartphones and tablets and “build their own menus” that are “getting better and better -- but are not going to be an Apple menu.”

On how product selection is determined, Herschman said products carried through DHgate are made on “judgment calls” by category managers who are experts in their fields. A product must have a proven record of positive customer reviews in performance, listing quality, shipping and customer service, he said. DHgate buyers are looking for the “largest up and comers” in a given category, Herschman said.

On the timing of DHgate’s accelerated push into the U.S., Herschman said Chinese factory production has been dropping due to struggles in the world economy that began in 2008 and to rising labor costs in China that have led some companies to move manufacturing to countries including Vietnam, Cambodia and the Philippines.

As a result of the softening in factory output and worldwide growth in e-commerce, the Chinese government has mandated that by 2015, 10 percent of all exports have to be conducted through e-commerce, Herschman said. That has created competition among Chinese e-commerce companies. DHgate competitor Alibaba announced a year ago that it will offer subsidies to small and medium-sized exporters that complete transactions on its OneTouch platform, for instance.

Some Chinese factories have excess production and many are developing their own brands as a result, Herschman said. In addition to being motivated by new e-commerce mandates, changes in shipping costs are making it easier to do cross-border trade, he said. Herschman cited DHL’s efforts to “maximize air freight capacity” and “clear customs fast.” In some cases a DHL plane still in the air can clear customs before landing, he said. The U.S. Postal Service has also facilitated tracked shipping from China and Hong Kong, through shipper EMS, and DHgate claims an average shipping time to the U.S. for small ePacket parcels of seven to 12 days. A 2-kilogram package (about 4-1/2 pounds) ships for under $10, Herschman said.

Branding is a challenge for DHgate, and Herschman conceded it’s going to take some time to build a customer base since U.S. consumers aren’t familiar with many Chinese brands, even Hisense or Haier. “There’s going to be a ways to go before we can get Chinese brands built,” he said, but in some categories brand is less important, including headphones and Bluetooth speakers. “If you want to buy a Samsung or Apple phone, you don’t shop at our site,” he said. “But if you want to buy a phone that’s made by the same factory that makes a Samsung phone and is super high-quality but it’s 25 percent of the Samsung price, then you'd buy something from us,” Herschman said. Consumers are savvy about the costs involved in manufacturing and cost benefits of store brands, he said. They also understand the advertising and marketing costs of building a brand. “Those dollars inflate the cost of the product,” he said.

The number one electronics category sold through DHgate is cellphones, Herschman said. An example we found Wednesday on the website was a 5.1-inch Android quad-core phone called the “S5 i9600 G900F MTK6582,” a 4GB smartphone with GPS and “air gesture” function, which had S5 in the product name (but not Samsung’s Galaxy name). The product image was the standard Samsung Galaxy screen image used for Samsung Galaxy smartphone listings at retail sites including Best Buy, Walmart and Newegg. The phone had a $107.61 unit price for purchases of one or two with free shipping to the U.S.

According to Herschman, DHgate doesn’t sell branded products. “We sell Chinese-branded products,” he said, saying “maybe it’s the Chinese brands’ time,” noting Japan manufacturers’ success in the ‘80s and ‘90s and Korean manufacturers’ current reign in CE. Based on the subsidized backing of the Chinese government and the evolving CE business, DHgate believes its suppliers can thrive on the world market.

Other electronics product categories on the DHgate docket are tablets, Bluetooth speakers, headphones and cameras -- small, relatively lightweight products that can ship for a reasonable cost, Herschman said. Shipments from China used to have to involve large quantities in order for manufacturers to be able to leverage shipping costs over a container of goods, but the USPS ePacket cost of $5 is affordable, he said. And if the average selling price of a smartphone or tablet, for instance, is high enough compared with shipping costs, DHgate will offer free shipping similar to the Amazon model, he said.

One of DHgate’s strategies is to “reignite the golden age of independent retail,” Herschman said. DHgate sees an opportunity for sales to mom-and-pop retail stores as well as third-party companies that sell through Amazon Marketplace and eBay. Independent retailers need to find a way to compete with Best Buy, h.h. gregg and Walmart “because those guys have massive buying power and can get unique selection and lower prices than the moms and pops,” he said. He added that it’s competition from the mass merchants that has put smaller stores out of business.

Under the DHgate model, retailers can choose from millions of product listings and choose a unique product that big box stores don’t carry, Herschman said. With the factory-direct model, they can compete on price, he said. “They can buy things at the same cost or even less” than superstores that are having products built for them, he said.

On the customer side, DHgate has its work cut out for it as comments about the company revealed via a Google search shows a high level of dissatisfaction with the company’s practices under previous management. Several comments from DHgate customers on a PayPal help forum referred to “fake iPhones,” “knock-off products” and to trouble with returning product.

For customer service, DHgate relies on live chat on the website, Herschman said. The return policy is “multi-tiered,” he said. “A lot of times people don’t want to return it but will negotiate for price,” he said. Products can be returned to China, he said, but the e-tailer is working on a deal with a U.S. liquidation company that would handle returns, he said.

Over the last several months, DHgate has hired “key e-commerce executives from the top competitive platforms” to develop its strategy, Herschman said. The executive team includes Jimmy Lau, vice president-international marketing, formerly with Alibaba and eBay Private Marketplace; Carolyn Scott, senior director-brand marketing, who had been with Texas Instruments and Starbucks; Tony Li, senior director-site marketing, formerly with Google, EA and YouTube; and Jenny Chen, head of search, formerly with CafePress, the company said.