In many product categories China is the largest market in the world. In no other country are so many shoes, watches or household goods sold. And the growth potential of the Chinese market is by no means exhausted. It has, however, shifted towards “made in China for China”. China expert Professor Roberto Donà explains the rules German companies should observe if they wish to profit from this development.
Every day huge numbers of articles or public debates are dedicated to China. In some cases they are predicting a future of prosperity, while others are forecasting – or perhaps just hoping for – imminent bursting of bubbles, either in the financial or real estate markets.
We have a positive attitude about the future because we believe that the Golden Age isn’t over just yet. However, even if predicting the future is always a complex matter, and is not the purpose of this article, there are some facts about China that paint a clear picture of development that most people have not yet grasped.
In most product categories China is already the largest market in the world and, in those where it is not, it is certainly the second largest. The number of bicycles, shoes, watches, household appliances, mobile phones and other items sold in China every year exceed the numbers sold in any other country in the world.
The country’s massive population and its increasing purchasing power are facts which we have to use as a basis for any further analysis.
From a macro-economic perspective China is the second largest economy in the world, the world’s largest manufacturer and the world’s largest exporter. These incredible achievements are the results of a lifecycle in which we can identify three different distinctive stages.
In the first, the focus has been on exporting low-cost products; dissemination of cheap “made in China” products throughout the world. Unfortunately, for most of the Chinese companies, this policy was so successful that it is this poor quality which comes to mind for most Western people when they think of China, which is not necessarily always the case.
In the second stage, China started to attract FDIs to leverage its favourable conditions such as labour costs, accessibility to resources and fiscal advantages. In the third, the focus was, and still is, on creating an internal market.
When summarising these three stages the government focuses firstly on the trade balance, secondly on FDIs and thirdly on consumption. The internal consumption, when required, has been also supported with stimulus packages (for instance during the financial crisis) because this will remain the primary goal, for now and for the future.
The reason for this is because in order to build a more harmonious society, which is one of the Chinese leadership’s priorities, it is essential to break down inequalities in terms of wealth and living standards. One way to do this is to create the conditions that provide a larger number of people with access to products and services.
Indeed, if we look at the overall GDP we can see that China is the second largest economy in the world, but using the GDP per capita, China ranks only at around 90th.
This disparity holds the explanation to possible future trends.
As the second largest economy in the world, China is already developed – indeed it is quite strange to define it as emerging – but if we focus on its ranking as the 90th in terms of GDP per capita, there is still a huge potential for growth. And this growth will mainly be driven by internal consumption.
The internal demand will drive the future development of the country and will mostly be fulfilled by products that are made in China for China. Of course an interesting percentage of this demand, in value, is for imported products, which the large majority want. The richest market, the golden pot, will be for domestically produced products, and a lot of players are seeing this as a potential new gold rush. Is it possible for international companies to play a leading role in this race?
Since the winner of any marketing competition is determined by the market itself and not by the regulatory bodies, even if many protected economies would like it to be otherwise, the answer is yes. But this will only be possible if international competitors understand the five key success factors of competing in China.
Parity does matter. Too many international companies study the behaviour of Chinese consumers by focusing on the luxury goods market, but this could lead to possible misunderstandings. The Chinese consumer market has a very high price flexibility and the final price of each products is very important in the consumer decision. Therefore it is fundamental to have a very efficient cost structure in order to be competitive.
Minimise the time to market. Competition is based on two key elements: price and product availability. Therefore companies need to have a process of order fulfilment so they can quickly respond to the changing demand.
Be prepared to play with big numbers. Although a large part of the population still lives in rural areas, the size of the market for consumer goods is made up of several millions of people. With these numbers only sizable companies can succeed, i. e. gain a significant market share.
Be everywhere, but, most importantly, be online. The country has the size of a continent and it is the third largest in the world in terms of its territorial surface area. This size is then combined with the largest population base in the world. As a result, any Chinese province is a potential stand-alone market in which local players are creating dominant positions. But all of these local markets are within the same country and any of these local players can become a potential competitor in other provinces. For this reason, a company with ambitions to become a market leader needs to have a high coverage of the territory with a very high rollout in terms of the physical network. These conditions has resulted in the incredible development of the internet and in particular the e-commerce resulting in technologically-oriented consumer behaviour.
Don’t forget to go back to China’s roots. In the past few years we have been reporting a strong rediscovery of the Chinese culture and traditional Chinese heritage. This is a normal process in a country with Millenarian traditions that has simultaneously become an economic giant, whilst going through a process of Westernisation. When the Chinese government began economic reforms the first natural step was to open the market to foreign products and services. The Chinese market was flooded with international products and the Chinese consumers started adopting to them. With the increase in local awareness, a process of adaptation to the local taste and symbolic values started creating a strong demand for localised products: a mix of international quality with references to Chinese heritage.
The combination of these five key success factors gives a strong input to the strategic direction of companies aiming to succeed in China, a strategic direction that can be summarised in the following four guidelines:
First of all, the products and services offered have to combine Eastern and Western elements. The combination of Chinese tastes with Western reliability and consistency seems to be a winning formula in many industries and for many product categories.
Secondly, the distribution model has to be highly effective and efficient to quickly deliver a required capillarity that is totally different from the European or the American markets. The “click and mortar” model, i. e. the combination of a physical presence with strong online capabilities, is at present the only one able to assure a full coverage of the market.
Thirdly, the size of the business needs to be capable of reaching the optimum economies of scale and scope required to compete in this market.
And last but not least, it is important to have a cost structure aligned with that of local companies. This can be achieved only by localising a relevant part of the supply chain in the region.
In other words, we are strongly convinced that to succeed in China it is important to locally produce products designed for the local market and to always take local risks and opportunities into consideration. Hence the focus on made in China for China!