PREVIEW OF FEB. 16 WEBINAR ON “THE END OF CHEAP CHINA”
Shaun Rein is the founder and managing director of the China Market Research Group headquartered in Shanghai, China, and a recognized thought leader on strategy consulting. He is the author of the new book “The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World.” Rein also is a columnist for Forbes and for Business Week’s Asia Insight section.
Packaging Strategies Editor Joseph Pryweller conducted a Q&A via email with Rein.
Q: We understand from your research that the Chinese market is changing dramatically as the country becomes more of a global manufacturing force. What are a few of the key drivers of this transformation and how dramatic is this change?
A: Over the past five years, China has been shifting away from being an export-oriented economy towards consumption. My firm estimates that exports account for 25% of the economy, down from 40% a decade ago. Manufacturing will remain strong in China, not because the nation manipulates its currency, the renminbi, as economists like Paul Krugman argue, but because of superior infrastructure and more efficient labor pools. (Editor’s Note: According to The Wall Street Journal, renminbi — abbreviated RMB — is the formal term most often used by Chinese officialdom to refer to the currency, whereas yuan is the actual unit of currency.)
However, the type of manufacturing is going to change — the country is moving up the value chain to counteract soaring labor and real estate costs. High costs are here to stay, as China faces the confluence of an aging population and more job opportunities, which makes it difficult to recruit and retain workers. Light industry is already relocating to markets like Indonesia while China is gaining on high-end manufacturing from Germany. Nike, for instance, produces more in Vietnam now than in China.
Q: How is the consumer market shifting, and how does this affect the production and selling of goods within China?
A: To offset weakness in America, many companies are retooling their production lines to sell into China, as the Chinese consumer will be one of the world’s great growth stories for the next decade. Retail sales have been growing 16-18% per year there for the last five years. I expect similar growth numbers in 2012 as consumer confidence remains high despite nagging inflation and a slowing global economy. Real profits are being made in China. That nation has become the second largest market in the world for Apple, which saw almost $13bn in sales there in 2011. Companies need to be prepared to sell into China now, not just produce in it.
The second chapter of my upcoming book actually tracks the story of a Midwest American furniture manufacturer that relocated manufacturing from China to Indonesia several years ago because wages were lower. However, the company ultimately found that Indonesia was not much cheaper overall because workers were not efficient, so they shifted higher-end production back to China while keeping the light production in Indonesia.
Q: In your book, you mention that there are some misperceptions about doing business in China. What are a few of the misunderstandings about China that could be limiting opportunities for Western companies to do business within the country?
A: One common misperception about business in China is that all Chinese consumers are price-sensitive and cheap. They are more value-driven. I like to compare consumption here to an hourglass – consumers are willing to spend a lot at the top of the hourglass if they see value, like a Louis Vuitton bag to show status and sophistication, or at the bottom, where they are price-sensitive about products like garbage bags. This is why you see 24-year-old secretaries who make $800 a month buy $1,000 Gucci bags but take a bus to work because they don’t want to pay for a taxi.
Brands that position themselves in the middle of that hourglass, like Marks & Spencer or Gap, just don’t do very well. Their products are too expensive to buy at a whim but not expensive enough for consumers to see value, whether it be prestige or comfort. It is critical that brands position properly for China specifically, whether it be with pricing or brand image, because transporting your image directly from America does not always work.
Q: What are a few of the ways that packaging and forest-product companies could improve their relationships within China and enhance the possibility of growth in that region?
A: There are huge opportunities for packaging and forest product companies in China. Our research suggests that the best way to trigger a sale is in that last 10 feet in a store – that is the moment of truth. One of the most critical aspects is the packaging – how the package looks, how it feels, and whether it can be reused by the consumer. Critically, many brands are making a mistake on packaging and trying to go as cheap as possible on it, wrongly thinking that Chinese consumers are price-sensitive.
For instance, we did a project for a laundry detergent company. Most detergent is sold in powder form here, in flimsy plastic bags because marketers think Chinese won’t spend money if the package is too expensive. We found the opposite was true for many consumers. They wanted packages that were reusable, like detergent sold in a plastic bucket, or with convenient caps for opening and closing the package and shapes that were easy to store.
The opportunities for packaging companies are huge here, but they need to do a better job of informing brand owners of consumer wants and of shaping the market towards premium. I find too many packaging companies are fairly passive in shaping the market. They do what the brand owners tell them, when I think they should be using data to convince brands to change their packaging.
Q: Can Western companies (especially those in packaging and forest products) continue to gain a foothold in the Chinese market, and how viable are joint ventures and partnerships with Chinese companies? In essence, do Chinese companies need Western influence as they grow, or are they becoming more independent and less likely to need outside resources?
A: In general, I recommend trying to invest in China directly without establishing a joint venture (JV), unless legal regulations force you to. I have seen far more JVs fail than succeed – parties might have different wants in the relationship and there are often culture clashes. I prefer American firms to set up directly in China alone and establish strong business partnerships with local companies. But I would be wary of being in a relationship that involves any intellectual property sharing, as your partner could end up being your competitor in just a few years. Outright theft remains a huge problem.
I also see serious competition emerging from domestic Chinese companies. They are aggressive, well-capitalized and quickly moving up the value stream, and competing on innovation rather than just price. It might make sense to acquire outright domestic firms if you want to offer the market different price points. It would be foolish to underestimate some of the domestic firms as they hold global ambitions.
Q: In general, what impact do you see more sophisticated Chinese consumers having on world markets in terms of retail products and the growth of manufacturing? Can you sum up some of the changes you expect in the near future?
A: As Chinese consumers get wealthier, their demand for air conditioners, cars, and more comfortable homes is going to strain global commodity markets and disrupt manufacturing status quos. Companies are going to have to stay ahead of the curve on what Chinese consumers want and adjust to the new realities, or else they will lose market share to domestic players and savvier foreign ones. China simply is not a cheap place to do business anymore, and Chinese consumers no longer are cheap.
