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The China Shift: Economic Realities

By: Jeff Falk
Posted: August 5, 2008, from the August 2008 issue of GCI Magazine.

page 3 of 5

Peter Kelly: The boom in the Chinese economy (fueled by Western companies’ manufacturing) means a more affluent [Chinese] consumer and a domestic hike in inflation, meaning higher wages. This is passed on to customers in the form of higher factory gate prices. Coupled with extraordinary fuel increases, meaning shipping costs have risen, and you can see why Asia is no longer the solution to firms’ problems. Price isn’t the only major issue. Tragic natural disasters such as earthquakes and severe winters means the supply chain is put under increasing pressure.

Chinese manufacturers have also become more selective in who they deal with. At Taxi London, we have seen an increase in minimum order quantities—with a rise from 3,000 per SKU to 10,000 and higher, in some cases. We are having some product made in China right now, but 75% of our range is still made in the West—with Eastern European suppliers being strong sources, and the great exchange rate means U.S. suppliers are more attractive just now.

GCI: Has China as a consumer nation been undervalued, and have non-Chinese companies grasped how to compete for and serve Chinese consumers?

Peter Kelly: The domestic market has been undervalued. However, there are only a handful of brands that can invest the time (two years) and the fees to register product in the domestic market. Western businesses are getting better at serving the market, but all players who have been successful have done so only through setting up their own Chinese-staffed operation, so the culture gap is much smaller. Non-Chinese companies haven’t grasped the potential of the market either in size or formulation requirements, nor the logistical challenge of serving it. However, Western brands are more common for sure. Any major department store stocks counters familiar to Macy’s or Selfridges in the West.

Liz Grubow: It is my observation that, in the world of beauty, companies have made that connection with the consumer. Marketers have spent time and effort to understand the consumer: What is her regimen? Where does she shop, and how does she make her purchase decision? It is also very important to know what her dreams and aspirations are—not where she is now but where she wants to go. This insight is key, especially in such a quickly evolving and changing economy and culture.