Read The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World Online
Authors: Shaun Rein
Tags: #Business & Economics, #General
The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (16 page)
CASE STUDIES WHAT TO DO AND WHAT NOT TO DO IN CHINA
- A Good Location Is Hard to Get
Finding good locations for storefronts is difficult, as local governments redevelop entire sections of cities and push for massive building projects that end up being controlled by the larger real estate companies. Landlords often only sign deals with well-known brands, boxing out new brands or charging them astronomical rates. Other landlords are poor at mall management and offer unsuitable, disorganized retail spaces. Brands need to be patient and willing to grow slowly as they search for good locations at rents that allow them to generate a profit
.To combat the difficulty of finding these locations, some brands are becoming real estate developers themselves. Furniture retailer IKEA is building large mall complexes and has partnered with domestic electronics chain Suning and French supermarket retailer Auchan to be anchor tenants. This way, IKEA ensures good sites for its stores while it generates rental income
.
Key Action Item
Brands are finding it increasingly difficult to find affordable, good locations. Companies might have to become landlords or follow more conservative growth plans.
- Look Beyond Beijing and Shanghai
Many Western brands such as Ralph Lauren look at the high average incomes in Shanghai and Beijing and decide to focus sales efforts there. But high real estate, labor, and advertising costs make it difficult to profit in first-tier cities. Ralph Lauren has made little headway in China because it has concentrated most of its retail outlet growth in expensive cities, when it should have expanded in fast-growing, second- or third-tier cities like Changsha with less competition and rising incomes
.Luxury apparel firm Ports Design has opened hundreds of points of sale while maintaining a small presence in Shanghai and Beijing. Few sales are made at these outlets because consumers demand the bigger mass-luxury names like Louis Vuitton and Gucci. In many lower-tier cities, however, where these brands have not yet begun to sell, Ports dominates the market
.
Key Action Item
Companies should look beyond the well-worn path of Shanghai and Beijing to open shop where consumers have money and the demand for foreign products. There is less competition there, and consumers in those cities check to see if a brand has overseas outlets; they do not care about company presences in Shanghai and Beijing.
- Chinese Care About What Goes Inside Their Homes Now, Too
A decade ago, homes were so dirty and cramped that Chinese rarely brought guests home, because they were afraid of losing face. Most disposable income was spent on items people could see, such as cars, clothing, watches and jewelry, and mobile phones, to present an image of success to the outside world
.As Chinese got wealthier, they started to invite guests home but kept them in the living room. Wide-screen televisions became de rigueur, even in households of relatively modest wealth. The average wide-screen television sold in China is 42 inches, versus 37 inches in the United States
.Many analysts wrongly assume that Chinese simply do not care about making their homes nice. This is not true. Lack of spending is a function of poverty, rather than not wanting to spend money on home decoration
.As wealth in China increases, the trend is toward self-consumption and indulgence. One hot sector is bedding—products not shown to many outsiders. Surveys that my firm conducted in eight cities found expenditures on decorating bedrooms were rising faster than for any other room. Consumers buy wallpaper, furniture, small decorative items like vases, paintings, and bedding, which they use not to show status but to pamper themselves
.
Key Action Item
Chinese consumer tastes are evolving as incomes rise. They no longer buy items only to show status, although this still plays a critical role in purchases of autos, clothing, footwear, and consumer electronics. Hot categories (e.g., bedding) are emerging, for which the motivations for purchase are not about status as much as comfort and self-fulfillment.
- In-Store Education and Individualism
Consumers are often confused about how to use certain products. They worry about looking stupid and unsophisticated, so they often skip buying them. Companies can gain loyal customers by employing salespeople trained to educate consumers on how to use these products
.For consumers who have not arrived at a store with a clear idea of what they wanted to buy, or did not know what to expect there, in-store displays and sales-staff expertise can be major motivating factors to buy specific brands and products
.Wealthy people, peasants just a decade before, often go to luxury retailers like Zegna and order the entire set of clothes on a mannequin—shoes, socks, belt, pants, shirt, and cufflinks—because they are afraid of buying the wrong thing. They do not know how to mix and match clothing, and are very sensitive about being seen as lacking sophistication
.
Key Action Item
Brands need to create informative in-store displays to help educate consumers on how to mix and use products, and should train staff how to educate consumers.
- Differentiate Your Product Selection in Retail Outlets, Because Most Chinese Won’t Pay More for Service
Consumer electronics sales in China are soaring because Chinese want wide-screen televisions, air conditioners, and refrigerators. However, retailers like Best Buy have retreated from the market despite much fanfare about opening there. What went wrong for Best Buy?
Retailers like Best Buy cannot charge premiums for products when they sell the exact same items as local vendors. Chinese generally won’t pay for extra service or better ambiance at a retail store, when they can buy the same products online or in local markets for much less
.Unlike in America where economies of scale for big-box retailers mean lower prices, smaller shops in China undercut big box retailers because they do not adhere to global business standards and have cheaper employee costs. Shop owners often live in back of stores or save costs by not using air conditioning or having dim lighting
.The result is that consumers will window-shop at big-box retailers for product information, but will buy online or in local electronics markets. Many consumers told us they would go to Best Buy’s computer section to get objective, insightful advice from sales clerks who did not work on commission, but then go to smaller shops where they could buy the same computers for less and get pirated versions of software
.Home improvement chains Home Depot (from the United States) and La Maison (from France) made this mistake by selling the same items found in local decoration markets for higher rates, only to be seen as having high prices. They should have differentiated their product lines more. Both chains closed shop in China, and their British competitor, B&Q, is barely hanging on, having closed 50 percent of its stores
.
Key Action Item
Retailers must differentiate their product selection from local competition in order to charge premiums, and to avoid becoming a destination where consumers go for education but not to purchase. If retailers fail to do so and try to compete on service, they will suffer from the perception of being higher priced, even if it isn’t always true.
Chapter 8
CHINESE NEO-COLONIALISM IN AFRICA AND THE END OF AMERICAN HEGEMONY?
The first African I met in China was a Rwandan named Gahiji studying Mandarin at Nankai University. I was downing some beer in the hot Tianjin night air in 1998 at a joint called Alibaba’s, when I noticed a haunted-looking man hunched over at the table next to me. His appearance shocked me. He had purplish, craterlike scars all over his arms and legs. He wore a loose, mud-colored tank top, stained with sweat, over his chubby torso.
But it was his eyes that drew my attention to him—yellow, pit-like, almost lifeless. I watched him down 14 shots of vodka before he looked over at me and grunted for me to pull my stool over. When I came over, he started speaking to me in a drunken blend of Chinese, French, English, and what I later learned was Kinyarwanda. It was hard to understand what he was saying, but over the next few months I spent many nights drinking and talking with him, listening to his story and gradually piecing the fragments together.
Gahiji had ended up in China in the aftermath of the genocide in his home country four years earlier. One million Rwandans had been slaughtered in ethnic clashes in a six-week period, while the rest of the world did nothing. There was a deep pain in his voice (which I later noticed again during my talks with Lili Li), and during our discussions I thought to myself how lucky I was to have had a peaceful life growing up in America, and how chaotic some parts of the world can still be.
His story was tough to listen to. He told me how he saw his own son get hacked to death in front of him with a machete, pantomiming with his arm the thrust of a machete onto his son’s skull as he spoke. He kept motioning in a slicing movement while mumbling, “My wife . . . hacked to death . . . my parents . . . my whole family murdered by Hutus in front of my eyes. There was no reason I survived. I wish I had not.”
The pain and suffering Gahiji had dealt with just a few short years before shook me. When I hear relatives on my father’s side of the family who are Jewish talk about the suffering during the Holocaust under the Nazis, it is hard for me to imagine. I tend to compartmentalize those images as things that happened long ago and far away, picturing them as grainy black-and-white photographs. Even when I visited Auschwitz as a teenager, it was hard to picture the horror that had taken place there; it was a sunny day and the death camp looked so peaceful and still.
But Gahiji was a real, live person in full color, just a few years older than me, who had gone through hell and was trying to crawl out.
As I got to know Gahiji, I learned that many other Tutsis like him had come to China to study on full scholarships, as had students from several other African countries. In the years since then, every time I have visited a major Chinese university to give a speech or meet with university officials, I have seen African students walking and biking around campus.
China’s drive to attract African students was not driven by purely altruistic motivations. Even back in the 1990s, the Chinese government was making a push to build relationships with elite families all over Africa. Inviting well-connected Africans to study in China was part of an ongoing diplomatic battle with Taiwan. Both governments used loans, aid, and, likely, backroom business deals to secure official recognition as the true China. As a minor power back then, the People’s Republic sought close relationships with small, nonaligned countries as a counterweight to American hegemony.
Another reason why the Chinese government opened up to African students was that, even in the 1990s, Chinese leaders were already attempting to smooth the path toward securing rights to the continent’s abundant natural resources, especially oil and commodities like copper needed for construction, by cultivating relationships with leading African families. Countries that lack natural resources are subject to the whims of speculators, making them prone to inflation and derailing growth. History is rife with wars fought over resource access, and China does not want to get into a position where it feels caged in and has to use force to fight for oil or copper.
Today, China is garnering support not for international recognition of its statehood—it has already won that battle with Taiwan—but for the rights to Africa’s natural resources and to disrupt American power, perhaps even to replace American dominance with its own form of world order. It has made this push by cooperating with local African elites, giving their children scholarships like the ones the Tutsis I met in Tianjin had received. In some administrations, scholarships are awarded to the children of nearly the entire government hierarchy.
One part of the deal is that China transfers technological know-how and builds infrastructure projects like roads, highways, and bridges in African countries without the high-handedness of the colonial powers or America’s moral campaigns. Unlike European countries and America, Chinese investment usually does not come with any conditions on things like governance. African elites have welcomed Chinese investment and trade, which is growing swiftly—Chinese trade with African countries is growing over 20 percent a year, and reached over $110 billion in 2011. Nearly one million Chinese workers now live in Africa, part of a massive influx of Chinese money to the African countryside.
Big infrastructure projects are what helped jumpstart China’s own economic growth in the past few decades and cement its position as the dominant manufacturer, despite soaring labor costs. Many African countries have abundant natural resources, but sorely need infrastructure to enrich governments and spread the wealth to the general population. In a continent wracked by the lingering aftereffects of colonialism, despotic governments, disease, famine, and war, foreign investment is a far more useful tool for promoting real progress than foreign aid, and also far more sustainable. Charity does not pull countries and people out of poverty; improvement occurs when investment that creates jobs is made amid stable political climates.
In return, African governments give China’s giant, state-owned mining companies long-term, secure access to precious commodities like Zambia’s copper, Gabon’s iron ore, and Angola’s oil. China’s government realizes that one of the few things that could derail its growth is lack of access to these key commodities. For this reason, since the financial crisis it has used its massive $3 trillion in foreign reserves to shore up deals in Africa and around the world, from Australia and Canada to Iraq and even Afghanistan.
Plans to further broaden Chinese involvement in Africa are constantly being proposed. Top officials, led by Premier Wen Jiabao and Robert Zoellick, the president of the World Bank, are discussing relocating factories that produce lower-value goods from southern China to Africa. While this will increase pollution in Africa, and unload jobs no longer desired by Chinese onto Africans, its countries needs the jobs and the hard currency. Chinese factory owners want to maintain a cheap source of labor, but know that they will no longer find it at home as workers there demand higher wages.
Chinese investment is not always welcomed by everyday Africans, many of whom view China as the latest in a long line of foreign interlopers with designs on plundering the continent. Many feel that they are laboring in mines or on infrastructure projects for little personal benefit. This relationship ironically mirrors the mentality of Chinese sweatshop factory workers 20 years earlier, when they produced sneakers and T-shirts catering to the American consumer. Other moves, like an attempt by a Chinese firm to acquire more than a 20 percent stake in Kenya Airways, have drawn protest from opposition party leaders, because such deals are seen as enriching and propping up the regime in power.
China became the main point of contention in Zambia’s 2011 presidential election between the incumbent Rupiah Banda, who welcomes Chinese investment, and opposition leader Michael Sata, who ran on an anti-China platform. Sata won because he wants to take a tougher line against Chinese investment, even though trade between the two nations grew from $100 million in 2000 to $2.8 billion in 2010. He called Chinese investors “infesters” and wants to expel Chinese migrant workers.
In the run-up to the election, violent riots took place in Zambia and at several Chinese-owned companies in other African nations, expressing the fear that African leaders are selling the countries’ natural resources to China in a modern form of colonialism. In 2010, two Chinese coal mine executives in Zambia, while facing protests from local workers about pay and working conditions, fired shots into the crowd, wounding 11 people. The two managers were arrested and charged with attempted murder, but the charges were later dropped with no explanation from the Zambian government.
Dealing with the increasing mistrust of China’s intentions on the part of average Africans is a problem Chinese enterprises and government will increasingly face in the future. China’s companies and foreign-policy establishment will need to develop longer-term strategic thinking on how to deal with African nations. Too much of China’s current foreign policy is predicated on the philosophy of “Don’t interfere in our internal policy making and affairs, and we won’t interfere in yours.” As a core tenet of diplomacy, this might work for a minor power that wants to be friends with governments that don’t want undue foreign influence, but not for an economic superpower with deepening interests in countries around the world.
For instance, because of its noninterference policy, China only recognized the Libyan National Transitional Council long after Western powers and even Russia acknowledged Gadhafi’s overthrow. This has generated anger toward China among the new leadership in Tripoli.
AUSTRALIA
Chinese expansion is not just causing concern among politicians and local populations in Africa. China’s grab for commodities has been particularly felt in Canada and Australia, whose deep reserves of iron ore and other resources are highly sought after by China.
I met Miranda and Abby, two law school students from Perth, Australia, who were taking advantage of a strong Aussie dollar to vacation in Thailand. Perth is one of the cities affected most by China’s demand for iron ore because of the huge reserves in Western Australia and the Australian dollar has appreciated because of the demand.
Tanned with flowing blonde hair and a friendly smile, Miranda told me Chinese investment was driving prices in Perth through the roof. “It’s now over seven Aussie dollars for a cup of coffee,” she said—just over seven U.S. dollars. “Housing prices are going up and up—they’re getting too high for most regular Australians.” Abby, a brunette with athletic figure, told me a decent house now sells for 700,000 U.S. dollars, which is more than most people can afford, and that rising prices were making life difficult for too many people.
The Economist Intelligence Unit
reported in 2011 that Perth has become the 13th most expensive city in the world to live in. Five of the world’s 25 most expensive cities are in Australia due to Chinese demand for its natural resources.
Miranda told me her family had benefitted from China’s seemingly insatiable demand for iron ore. She welcomed the investment because the demand created high-paying jobs. Her father was an executive in the mining industry, and her dream job after graduation was to work at a white-shoe law firm for a few years before eventually shifting to an in-house legal position at a mining firm like Rio Tinto. The mining companies are where the money is, she said, and jobs there are more stable.
While Miranda and her family were benefiting from the mining boom, Abby was quick to point out the negative effects it was having on many of their fellow Australians. The mining wealth was not trickling down to the rest of the community, she said; the money brought in was concentrated among those in mining, while everyone else was being left behind.
Miranda agreed, saying local retailers were getting hit especially hard because the soaring Australian dollar was pushing consumers to shop online. Her friends were now taking advantage of a weak U.S. dollar to buy clothes from America. Even with shipping and handling, it was cheaper to go that route than to buy at a brick-and-mortar shop in Perth.
China’s investments are creating friction between the haves and have-nots in Perth and in similar regions around the world, and are leading the government and its citizens to wonder whether Chinese money is a blessing or a curse.
This story is not unique to Australia. In 2010 I was eating lunch with one of Canada’s most powerful members of Parliament. He turned to me and asked point-blank, “Should Canada welcome Chinese money? Is it a threat or an opportunity?”
He said that while he personally welcomed Chinese money to help create jobs, many of his constituents and the members of his party were worried about the security risks posed by Chinese firms’ control of too many of Canada’s natural resources. I heard this common theme from many leading Canadian politicians of different parties whenever I met them.
As China has outcompeted the West over the past few years, and doled out billions to buy up sovereign bonds in countries like Greece and Spain, countries around the world are beginning to wonder whether to put up barriers against Chinese money or to welcome it. By preventing too much Chinese investment, they hope to avoid security risks and the internal tensions created between those who benefit from Chinese money and those who do not. But they also worry about losing out on China’s money and newfound power. The world’s stock markets in the waning days of summer 2011 seemed to hinge on whether or not China would bail out Italy by buying its bonds, yet during the week when fears of an Italian collapse were highest, Italy was also trying to erect barriers to imports of Chinese ceramic tiles, which are cheaper and often of better quality than Italian ones.
“Canada is in a good position,” the politician told me. “We can continue to explore more business opportunities with China, but our proximity to America lets us remain close. Other countries that aren’t as close to America have harder decisions because they can’t play that relationship off against China.”
