Innovation pays dividends

Song Zhenghuan isn't just a serious collector.

While some people collect stamps, antiques or even dolls, he likes to buy baby strollers.

When he finds a baby stroller with a different or new design while on overseas trips, he buys it and takes it back to his research center in Kunshan, East China's Jiangsu Province. He has bought about 500 baby strollers to date.

In fact the habit of 14 years is not just a hobby for Song, but a great help to his own baby stroller business.

"The source of innovation is not in my mind or in my office. It is in the market," say Song, president of Goodbaby Group, China's largest baby stroller producer.

The 17-year-old company has controlled nearly 80 percent of China's baby carriage market for 10 years. A Fortune magazine article says that one out of every three strollers sold in the United States is a Goodbaby product.

Goodbaby earned 3 billion yuan in sales and 130 million yuan in profit last year, rising 20 percent and 30 percent respectively over the previous year. About 80 percent of its sales are in overseas markets, of which half come from the US.

"Goodbaby only manufactures products designed by ourselves. We do not engage in original equipment manufacturing (OEM) licensing," Song says.

An OEM's profit rate can, at most, reach 2 percent, Song says. But for Goodbaby's high-end products sold abroad, the profit margin can reach as high as 50 percent.

"That's because we always have something new," Song adds.

Goodbaby owns more than 2,300 patents in China and more than 40 abroad.

Song, 57, currently spends almost one-third of his time overseas. But visiting clients is not his primary purpose. He would rather drink coffee or have dinner with shop assistants who work at local supermarkets or department stores. They are Goodbaby's "antennae".

'Useful' communication

That is an information gathering system Goodbaby has established in major overseas markets. They don't need to tell Song "sensitive information" about his competitors, such as their sales volumes or their wholesale prices. They only need to say what they have heard or seen during their work, such as what kind of products consumers are not satisfied with and what complaints they have.

"That is very useful information and is the source of our innovation," Song says.

Goodbaby has developed many new products after such "useful" communication. One example is a baby stroller that a parent can fold using just one hand without bending down. The idea came from an anecdote a sales clerk told Song.

One day a young mother was preparing to get into her car after shopping at a supermarket in Chicago. She was alone in the parking lot at that moment with her baby in a stroller. She saw three burly men approaching. Scared of a possible robbery, she became frantic when trying to force her baby and stroller into the car. Her baby stroller had to be folded with two hands.

Fortunately nothing dangerous happened in the end. But a new baby stroller was born in Goodbaby's factory because of the story and it later became popular in the US.

R&D 'addiction'

Song was a mathematics teacher and deputy headmaster of a school in Kunshan, a city less than one hour's drive from Shanghai, 17 years ago when he was asked to manage a loss-making factory owned by the local education bureau. The factory was the predecessor of Goodbaby.

Born into a family involved with traditional Chinese medicine, he still has a scholarly look today and usually speaks quietly. But when it comes to Goodbaby's growth, he becomes far more animated.

He likes to tell a story about a flock of ducks quacking at the edge of a pond, yet none of them daring to dive in. But after the first duck jumps, the rest follow.

"I want to be that first duck," Song says. He saved the small school-run business from bankruptcy by first making strollers for a factory in Shanghai. But the limited orders could not make the factory profitable. He started to develop his own baby stroller in his spare time. He then designed a multifunctional stroller that could also be a cradle and a baby walker. That patent was sold for 40,000 yuan.

But when Song and his colleagues developed the second patent, for which some companies bid 140,000 yuan, Song decided not to sell any more patents. "At that time the only thing we had is our own intelligence. Research and development (R&D) innovation saved Goodbaby," Song recalls.

The company then became a domestic market leader in less than three years.

Today its R&D center, with about 180 designers and engineers, is still Song's favorite place to work.

"He is 'addicted' to the process of R&D, just like a smoker is addicted to cigarettes," says He Xinjun, Goodbaby's vice-president for R&D.

"People know that if they can't find Song in his office, he must be in the R&D center, chatting with designers about new ideas," He says.

Goodbaby currently invests 4 percent of its annual sales revenue in R&D. Song is now building a 20,000 square meter R&D center in Kunshan with an investment of 100 million yuan. The center, the largest of its kind in the industry, is expected to start operation next year and design products for babies under four, ranging from strollers to nursing products, from infant car seats to toys.

Co-branding

Song started to explore the US market in 1995, but lost $360,000 in his first attempt because of the wrong partner and the low-priced products he offered. That company, owned by a Chinese-American, was a small agent not specializing in the baby stroller business.

"That painful lesson taught me that we must find strong partners when exploring new markets," Song recalls.

He went to Cosco, a well-known US brand that had exited the baby stroller market, but had an extensive distribution network. The US company was immediately attracted by Song's new stroller with a cradle-style rocking function. A successful negotiator and collaborator, Song reached a deal to establish a co-brand name, Cosco Geoby, to enter the US market. Geoby is a name Goodbaby registered abroad

Song used similar co-branding strategies to enter the European market, such as Hauck By Geoby in Germany and Cosatto By Geoby in the United Kingdom.

Surprisingly, after 10 years in the US market, Song still does not want to give up the co-branding strategy to promote his own brand. He believes that companies, in the era of globalization, must be good at their core business and can entrust non-core businesses to others in the value chain.

(Shanghai Start 09/07/2007 page11)