China’s emerging new export markets
In the last decade China’s annual GDP growth fluctuated between 7.5 and 13 percent while OECD countries posted 3 to 4 percent. China’s year-on-year GDP growth for the first quarter of 2010 was 11.9 percent, second quarter 10.3 percent and annual growth is expected to be over 10 percent this year.
China’s labour cost is still competitive compared with most frequently talked about emerging economies, it recovered quickly from the global financial crisis and last year its exports outperformed global competitors.
However, China is also facing some challenges: an unbalanced and possibly unsustainable GDP contribution structure that relies heavily on government investment, construction and export; soaring labour costs; a rapidly growing gap between rich and poor; environmental issues and limited mining resources.
To tackle these China has started implementing strategies focusing on building a sustainable economy and stable society by increasing individual income, going green and directing both domestic and foreign investment into under-developed regions.
With this backdrop and ongoing changes, China presents multi-faceted opportunities for foreign businesses to export, import, outsource manufacturing or invest there.
The changing picture
As a result of policies aimed at increasing individual income levels and boosting domestic demand, consumer purchasing power has soared, and in spite of the GFC its retailing sector grew by over 15.4 percent in 2009 and is expected to maintain this annual rate over the next decade. As reported by the World Bank, China has replaced Japan as the world’s second-largest economy as measured by purchasing power.
In response to this huge and rapidly increasing market potential, overseas companies have been keenly pursuing opportunities in the consumer goods and service markets. Coca Cola, KFC, Louis Vuitton, Chanel and many other household names established a foothold in the first tier cities such as Beijing, Shanghai and Guangzhou over 15 years ago and then started exploring the second and third tier cities to further capitalise on increasing consumer demand and purchasing power.
While these well-known brands entered the second and third tier cities, overseas SMEs ignored them, thinking these markets did not have purchasing power to afford nor consumer awareness to appreciate quality goods and services. These businesses perceived first tier cities with high individual income to be more international, easier targets and hence guarantee better return.
However, thousands of such SMEs plus almost every big consumer goods and services player all competing in the first tier cities created a very crowded and competitive market. Some SMEs have found themselves lost in a huge, vibrant but tough market which their capacity can hardly cope with.
Where the affluent are
Today, with fast increasing income and consumer purchasing power, the second and third tier cities in China present unprecedented opportunities for small and medium sized foreign consumer goods and service providers.
In the list of the richest 20 cities in China in terms of GDP per capita, three out of four first tier cities are ranked as number one, eight and 13, while the other 17 are all second or third tier cities, mostly with over four million population each.
Compared with the first tier cities, affluent second and third cities provide:
* Big but still manageable market size
* Fast growing purchasing power
* Increasing demand for quality Western goods and personal services
* Less competition.
Australian exporters have not overlooked opportunities to capitalise on China’s fast growing purchasing power. In 2008 China overtook Japan as Australia’s biggest trading partner. Australia exported USD26.1 billion of goods and services to China in the first half of this year, a 54.3 percent increase from the same period last year, on top of GFC-affected 5.4 percent annual growth in 2009.
While the World Factory takes two thirds of Australia’s iron ore export by value, the affluent among China’s 1.3 billion population are consuming Australia’s quality lamb and shiraz. China is also the biggest buyer of Australian education and the fourth biggest overseas market for Australian tourism.
A favourable perception is one of critical factors facilitating Australian goods and services entering China. Australia and China are both in Asia-Oceania region, with similar time zones. There are neither historical issues nor major disputes and Chinese perceive Australia to be a green country with abundant natural resources and a relaxed lifestyle.
For these reasons Australia’s products, especially lifestyle products such as sportswear and equipment, health supplementary products, food and beverage and personal services, are perceived to be superior to those of most OECD countries. Lifestyle-related consumer goods and services Australian exporters could consider offering to China are:
Exotic café, salon, restaurants, entertainment centres, clubs
Fitness centres with advanced programs/concepts
Education for children
Vocational education and training
Food and beverage
Fashion, jewellery and accessories
Home decoration and renovation
Products for children
However, in a foreseeable future, Australian exporters can hardly compete with Chinese competitors in the price-sensitive mass market or competitive first tier cities. The market scale in cities such as Beijing, Shanghai and Guangzhou is beyond the capacity of most SMEs. But, by leveraging our positive image and reputation for premium quality, Australian exporters, especially SMEs, should consider targeting niche markets to service the emerging middle and upper middle class in the second and third tier cities.
Go inland to manufacture
With the average competitive labour cost at around CNY15,000 to CNY25,000 (equivalent to around AUD2500 to AUD4000) per head per year and the economy of scale accumulated over the 30 years since it opened its doors to Western countries, China is an attractive sourcing and outsourcing destination compared to developed economies and even some emerging third-world manufacturing countries.
However, labour cost in export manufacturing-oriented East and South China is rising quickly and squeezing manufacturers’ lean profit margin. Contributing over 84 percent of China’s national export revenue, East China and South China are also stretched in term of land supply and facilities.
To implement a strategy of sustainability and move up the value chain, on 6 April this year the China State Council issued the Guidance on Better Usage of Foreign Capital Investment, directing foreign investment in labour intensive products to under-developed regions in Central and West China.
This national strategy is intended to maintain China’s domination as a world factory while reducing environmental damage and depletion of resources and alleviating the labour shortage and soaring costs in export manufacturing oriented regions. In line with this policy, local governments in Central and West China provide incentives such as low interest loans and priority land supply for foreign investment, across a range of industry sectors.
One example of inland relocation is the labour intensive textile manufacturing sector. The growth rate of investment in this sector nationwide was 4.8 percent in 2009 but ranged between 15 percent to over 40 percent in various provinces in Central and West China, compared with minus 5 percent in the traditional manufacturing bases in East China.
By relocating to Central and West China, textile companies can reduce up to 40 percent total manufacturing cost, thanks to low labour cost, preferential policies in land leasing and tax in these regions. In the six provinces in East China such as the Jiangsu, Zhejiang and Shandong provinces, where the majority of revenue comes from export, the average profit margin of two thirds of textile enterprises is a mere 0.62 percent.
Forty percent cost savings can revitalise almost any business, including low profit margin industries such as textiles, toys and electronic goods. Relocating to low cost regions in Central and West China provides a compelling competitive edge to manufacturers based in China.
With all these trends and changes in China, Australian businesses should take a break and review their China strategy, look beyond the horizon and adopt a smarter strategy—consider going west and/or exploring second and third tier cities.
It is rarely a short or cheap journey to do business with China. Companies looking to capitalise on new opportunities need to carefully study Chinese regulations, understand Chinese consumer behaviour, develop a robust China strategy and even leverage Chinese expertise to do business there successfully. All the little things can add up to big difference or even a commercial miracle in China.
—Sara Cheng, Manager Greater China region, Australian Business International Trade Services, has assisted over 100 Australian companies to do business with China and co-authored Engage China—The Realities for Australian Businesses.