Chinese consumers favour overseas brands in many sectors, eroding Beijing’s attempts to boost domestic profits

October 22, 2013 8:41 pm

China: Foreign values

By Paul J Davies

Consumers favour overseas brands in many sectors, eroding Beijing’s attempts to boost domestic profits

The menswear floor of the New World Department Store in central Chengdu, a city of 14m in western China, offers the kind of fast fashion you might expect to see in any second-tier city in the US or Europe. The signage on the concessions is in English but it displays unfamiliar brand names. “I’m David” sells urban casual wear, “Scofield” is meant to have a British feel, while “Mind Bridge” and “Gather Jewels” are both preppy Ivy League style. They may look the part, but these clothes struggle to compete with Uniqlo, Zara and H&M, all of which have their own stores nearby. Brands such as these illustrate the problems and opportunities facing China as it attempts to jump-start the consumer spending that will rebalance its economy away from heavy investment in factories and property.Chinese consumers want foreign goods. Whether sports shoes or cars, televisions or mobile phones, cosmetics or nappies, surveys show that foreign brands predominate.

Shaun Rein of China Market Research Group says people trust foreign brands not to cut corners and associate them with more of an established heritage than their domestic labels.

This spells trouble for China as its people become more middle-class and spend more on non-essential items. The more that they buy foreign goods, the more that the proceeds of China’s progress will accumulate to shareholders elsewhere. It will also mean fewer profits for Chinese companies to reinvest in innovation and expertise at home in electronics, for example.

When the US consumer boom began after the second world war, the world was much less globalised – most of the money that Americans spent went to companies that Americans owned. Unless China’s path changes, the draining of wealth to foreign companies will affect the country’s ability to get richer in a sustainable and more equitable way.

Its lack of popular brands is already visible to some degree in its trade balances with other countries. China may run a large nominal surplus but when economists adjust those numbers for the value that it adds or gives away in making goods that are consumed at home or abroad, the numbers tell a very different story.

For example, its total trade surplus with the US drops from $189bn to $127bn on a value-added basis, according to calculations by economists at BBVA, the Spanish bank. Most of this reduction is due to value given away in electrical and optical equipment, textiles and clothing.

Consumer brands are by no means everything to the future of China. It is beginning to export real expertise that should bring profits in areas such as infrastructure. This was underlined last week when China General Nuclear Power Corporation struck a deal to build a large nuclear energy plant in western England.

Chinese companies are also making strides in other less visible areas. The telecommunications equipment maker Huawei may not sell much to consumers, but elsewhere in the developed world and emerging economies it is becoming a real force.

However, branding in consumption is hugely important – it carries intellectual property and goodwill that confer higher margins and higher profits.

Chinese brands are beginning to make headway in some areas – particularly in fast-moving consumer goods. Jia Duo Bao, a kind of cold herbal tea in a red can, outsells Coca-Cola many times over in China even though it is twice the price, says Mr Rein.

Kiki Fan of market research company Neilsen says brands like this are no longer trying to fight multinationals head on, but are appealing to traditional beliefs about health and the properties of certain herbs or ingredients. “Some local brands better understand how to appeal to traditional ideas and use natural products to leverage off those local beliefs,” she says.

Arnaud Debane of Superbrands China says that local brands are even beginning to make headway in the more commoditised end of sophisticated products such as lower-cost smartphones, or television sets.

Even where foreign brands dominate preferences, such as cars, China can retain more wealth. This is partly through local brands such as Great Wall selling more cars than show up in preference surveys, but also through retaining more of the process of making and delivering the goods in the country, according to Alicia Garcia-Herrero, chief emerging markets economist at BBVA.

“Logistics costs can be very large, so the more of the supply chain you control, the more value you can hold,” she says.

If China can follow its neighbours and develop its own powerful brands like Samsung of South Korea, or Toyota of Japan, it can sell not only to its own 1.35bn people but to billions of others all over the world.

If it does not build or buy such brands there is a risk that its consistent trade surpluses will become deficits in the decades ahead. That is not what the push to rebalance China’s economy towards consumerism is supposed to do.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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