News

Of China's 1.3B population, who wields buying power?

GUANGZHOU, CHINA - May 12, 2008
Steve Toloken, Plastics News

While the debate about China often focuses on its economic impact on other countries - trade surpluses, product safety problems and lower inflation from low-cost goods - many foreign firms are quietly shifting their gaze to opportunities in China's domestic market.

The talk is not new. China has been viewed as a vast, yet often unreachable, market since 19th century English mill owners fantasized about riches that could result from convincing everyone in China to add just an inch of fabric to their clothes.

Some China observers caution that it's still too easy to overstate the potential of selling into the market, as more and more companies are turning their attentions to riding its rapid growth.

Ten years ago, Wilmington, Del.-based DuPont Co.'s engineering polymers business in China was driven 99 percent by companies that bought its plastics to manufacture goods for export.

But in today's China, with increasing consumer spending, rising costs, an d the country's currency growing in value against the U.S. dollar, roughly one-third of DuPont's business there is sold to the domestic market, according to Philippe Hanck, sales and marketing director for Greater China, India and ASEAN countries for DuPont engineering polymers.

"The domestic market, I think, is where we invest at this moment for the next 10 years," said Hanck, who is based in Hong Kong. "There is an incredible demand for engineering plastics and technology in China from the local market."

One U.S. business group in China said its members are progressively changing their focus from exports to selling in China.

In 2003, just 35 percent of the member companies in the American Chamber of Commerce in South China said their primary reason for being in the country was serving the Chinese market, with the rest seeing it mainly as an export platform. But in five years that trend has nearly reversed. Now, 57 percent of AmCham' s 1,200 member companies say selling into the Chinese market is their primary focus, according to Harley Seyedin, president of the Guangzhou-based group. AmCham included the data in its April 8 report on South China business conditions.

"When they started coming here 10-15 years ago, a market did not exist, except for certain segments," Seyedin said. "[Chinese consumers] over the last five years have begun to look at buying good things."

The change is driven by China's rising wealth, and rising costs - from currency to land, labor and the environment - that are hurting China's appeal as a low-cost hub, he said.

The switch may have been recent, but Seyedin said it reflects years of legwork and localizing operations. More than half of AmCham's companies have been in China for longer than 10 years, with companies such as Procter & Gamble Co. and Lexmark International Inc. finding success selling locally, according to Seyedin.

In fact , about 75 percent of the firms in the group's report said they are profitable in China.

"They've been here long enough to understand the market," he said. "They've been localized to the point that a majority of their employees are Chinese who've been well-trained to run branches of multinational companies profitably."

Some analysts caution, however, that all the talk about China's unlimited market potential and its 1.3 billion people is sometimes in need of a reality check.

Some investment banks have maintained that China's rising middle class is en route to becoming the world's biggest consumer market. Actually, however, the country offers a viable consumer market to Western firms of about 150 million people with a per-capita gross domestic product of US$5,000, clustered around Beijing, Shanghai and Guangzhou, according to a December 2006 report from Beijing-based consultancy Dragonomics Advisory Services Ltd. Compan ies can sell cost effectively into that market, with its sufficient disposable income, Dragonomics said.

Right now, the consuming power of those 150 million people is on a par with South Korea and its 49 million people, but is one-sixth that of Japan, and just a tiny fraction - one-twentieth - of the U.S. market, the report said.

Another factor that lowers Chinese consumer spending: Chinese generally save much more than most people in developed countries because China lacks a social safety net. In effect, people tax themselves voluntarily to be ready for future problems, the report said.

Of course China is growing rapidly, which is where arguments about its market potential tend to focus, but Dragonomics research contends that, even with currency appreciation of 4 percent a year and fairly optimistic GDP growth, China's consumer market in 2015 still will be only one-fifth the size of the U.S. market.

"In short, consuming China is an important story, but the Chinese consumer is a long way from taking over the world," the report said. Dragonomics said its conclusions remain valid today.

Nonetheless, some plastics companies report that China's demand for more sophisticated materials is increasing. DuPont's Hanck, for example, said Chinese automakers are asking for materials they never needed before, to meet new local consumer demand and mandates like the government's adoption of European vehicle emission standards.

He said DuPont has seen Western auto parts producers bring existing business models to China and require US$2 million to launch a major project. Working with DuPont, Chinese domestic auto parts makers can reduce those startup costs to US$500,000, according to Hanck.

"The speed at which those companies can come up and catch up is absolutely incredible," he said. Their demand for technology is "a big change really taking place at this moment," he said.

Consultant David Hemmings at Pacific Rim Alliance Ltd. LLC said he's seen a change in the thinking of Western clients during the past two years.

"Most of our clients these days are focused on the Chinese market as a market to sell to, rather than export and sell to the U.S.," said Hemmings, president of Ada, Mich.-based Pacific Rim, which offers consulting services for market entry and sourcing.

"The Chinese market has matured and has significantly more buying power than it had before. They are now generating enough of their own personal income [that] they can afford to buy things like high-end motorcars."

But, he added, "China is no longer the low-cost place to manufacture everything. The model has changed."

Now companies focused on the China market are forced to reduce costs, but the potential advantage is in applying the knowledge gained to their higher-cost home markets, Hemmings said.

One company pursuing that model is Traverse City, Mi ch.-based CPM Century Extrusion, which makes twin-screw extrusion equipment.

Century's parent, CPM Acquisition Corp. of Waterloo, Iowa, in October bought one of China's largest extrusion equipment manufacturers, Nanjing Ruiya Polymer Processing Equipment Co. Ltd. CPM has since worked on developing new equipment, combining China's cost advantages with Century's technology and marketing platform.

The firms' first jointly developed extruders were unveiled in Shanghai at Chinaplas, in April. The three levels of machines in the new Apex series focus on both China and export markets, including the United States and Europe. The higher-end models can be as much as 30 percent cheaper than comparable U.S.-made equipment, with similar performance, said Charles Spearing, Century's global sales and technology manager.

One big market, Spearing said, is multinational firms that require good equipment for their Chinese operations but want it cheaper, he sai d.

"We are providing what our market has been screaming for," Spearing said.

The Ruiya factory, in Nanjing, makes 400 machines a year, while Traverse City makes about 50. Company executives said that combination will allow them to keep growing their business globally.

Since the purchase, the Nanjing factory has recorded the best six months in its history, with its customers based mainly in the Chinese market, said Century President Bob Urtel.