The China Shift: Economic Realities

“The country’s greatness is its capacity to attract and retain the attention of others.” —Jonathan Spence

China is not a new topic in the pages of GCI magazine, though the seemingly understood paradigms seem to have shifted. Research, questions and curious observations produce an abstract of a country that’s evolving faster than casual analysis can cope with, and grasping the scope of the role China plays and the impact it has as a manufacturing center, a supplier and a potential market, under current economic conditions, has taken a turn since 2007.

As an economy, China advances at the speed of a 35 mm film, while most of the world is currently geared to the slow turn of slides in a carousel. Just as we recognize the frame, it’s onto the next. We put the frames together to discern the details but not before a myriad of new frames go by. By some estimations, in a period of a decade, the country has developed at a pace roughly equivalent to the development of the U.S. over a 50-year period in the early mid-to-late 20th century. It’s grown at an average annual rate of nearly 10%, and an estimated 150 million people have left the rural areas to work in factory towns, according to a National Geographic special issue on China (May 2008). Consider, too, that China was still restoring national sovereignty in the early 20th century, and the Chinese government had just embarked on paths of reform and modernization in the 1920s. Even more striking—as it is not yet in the fog of most of our memories—The People’s Republic of China and the U.S. normalized diplomatic relations in 1979; Hong Kong was still a British possession in 1996; and China joined the World Trade Organization in 2001.

Coupled with the speed of these developments, the population numbers go from being simply mathematically interesting to economically staggering. National Geographic calls China the world’s largest consumer, with 100–150 million in the middle class (defined by an annual household income of $10,000) and, hand-in-hand with the exodus noted above, more than 100 cities in China now have a population of at least one million—twice the number recorded in 1980.

In his book, The Chan’s Great Continent: China in Western Minds, Jonathan Spence explores and examines a thesis that Western perception of China has been colored, in part, by economic agendas. What then happens when economic realities impose on agendas?

In its first exploration on this topic, GCI magazine posed questions to Peter Kelly, owner and managing director of Taxi Cosmetics London, and Liz Grubow, vice president, group creative director of the LPK Beauty Group.

GCI: It seems that China has become a manufacturing center for Western companies, almost by default and through economic realities. Are companies re-evaluating their approach to China as a business endeavor?

Peter Kelly: Certainly a number of brands I am working with are re-evaluating their Asian strategy. Five years ago, Chinese manufacturing was seen as the answer to boost profit. However, today, while Chinese-made products are cheaper than “Made in the West,” the saving is no longer attractive enough to lure all brands away from their existing sources—be they their own facility or contractors.

Liz Grubow: There will be increased emphasis on sustainability and the environmental issues. Partnering with companies that are doing damage will not be supported.

GCI: Have economic realities changed the approach? How?

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.

GCI: Can you predict what role China will play in the fortunes of personal care companies in the coming years? Will there be shifts in the current paradigms?

Peter Kelly: My prediction is that, soon, Chinese brands, until now unheard of, will start to establish themselves in [Western] markets. This will start with consumer brands we first notice at the Beijing Olympics. In five years’ time, I predict there will be “Westernized” versions of Chinese brands on the shelves of Boots, CVS and Target. There has been a Chinese influence in design and products growing for a number of years. Tea and herbal medicines are an example in our own industry, as these have been incorporated into formulations for skin care.

Established brands in that market will become more aggressive as the consumer has more choice and a growing disposable income. Chinese brands, though, will get more Westernized and will prove to be formidable competitors as they re-brand and learn from their new U.S. or European rivals.

Brands that are established in China now will consolidate their business, tweak their products to suit the growing affluence and discerning nature of the Chinese consumer. [Those] thinking of entering now would be wise to re-evaluate. [They may be too late.] Brands looking to shift to Asia for manufacturing should also reconsider logistics, exchange rates and domestic labor costs. I don’ think companies will withdraw, but expansion or potential new arrivals will look elsewhere—such as Eastern Europe perhaps, as Taxi London has successfully done. It’s two to three hours away. No visa restrictions and, in a growing number of cases, tender a common currency.

Liz Grubow: There will probably be a strong nationalistic movement. We are seeing that now with a pride in country and culture. There is a great desire among the “Rare Generation—the Millennials and Gen-Y of China” to cultivate their own style and brands. They are more competitive, ambitious and individualistic than any previous generation.

JEFF FALK is senior editor of GCI magazine. Your input about China as a manufacturing center, a supplier and a potential market is invited. E-mail Jeff at [email protected] with any comments or suggestions.

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