China Affordability Challenge

ChinaEconomyBangkokChinaSeminarMay2013.pngBy John Richardson

THE “gold rush” is over in China”, Fran├žois-Henry Bennahmias, chief executive of Audemars Piguet, a Swiss watch company that is closing six of its 22 stores in China, told the New York Times.

Swiss watch exports to mainland China dropped 26% in the first quarter from a year earlier, said the same article.

“People simply went overboard about China, thinking that there could be no issue with suddenly opening 40 or 50 stores,” John Simonian, a watch distributor and owner of Westime, a watch retailer based in Los Angeles, told the newspaper.

“The stores in China are now full of inventories, with no guarantee that they can all get sold.”

There are two reasons why luxury goods sales growth in China in general has taken a hit.

They are:

*Increasingly affluent and travel-hungry Chinese are spending more of their money overseas. About half of Chinese spending on luxury goods occurs outside the mainland, according to a study released in December by McKinsey (is this also because increasing numbers of wealthy Chinese are leaving the country permanently because of anxiety over air pollution, food safety and economic and political security?)

*Beijing has launched a crackdown on corruption and the ostentatious displays of wealth by government officials in response to growing anger at inequality. As one Shanghai resident told the blog last month: “Even if you work very hard, and you take all the qualifications needed to get ahead, such as a good first degree and a good masters degree, if you are unlucky you still might not get ahead. It’s all about connections to the right type of people.” The “right type of people” are local and central government officials that have gained more than their fair share of the benefits from China’s economic boom.

What does this mean for the chemicals industry?

It means that:

*During the “China Supercycle” it was assumed that headline growth rates benefited everybody. But, as the luxury-goods sales example illustrates, it is now clear that the quality of growth was weak and so the boom was always unsustainable.  

*China’s success is far from guaranteed as it attempts a very difficult economic transformation – perhaps the most difficult in economic history. Any number of outcomes is possible.

*As the slide above illustrates from our e-book, Boom, Gloom & The New Normal, the bigger opportunity in China has always been, and will continue to be, providing goods for low-income workers. This will involve the ability to innovate downwards – for example, finding smart ways to manage supply chains, raw-material purchasing and product design that make it possible to manufacture a refrigerator that sells at $100, while still making acceptable profits for everybody involved in the process.

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