Home Blogs Asian Chemical Connections China: Value For Money Replaces Luxury

China: Value For Money Replaces Luxury

China, Company Strategy, Economics
By John Richardson on 30-Jul-2014


By John Richardson

IF you answer a knock on the door and a travelling salesman is offering you a deal that seems as if it is good to be true  – e.g. a top-of-the-range flat screen TV for just $100 – what is your first reaction?

Your first reaction would, of course be: “This must be too good to be true. The TV is either stolen, in which case if I buy it I might well get a visit from the police and/or it doesn’t work.”

And yet, five years ago, when the view was put forward that the “rise in China’s middle classes” would save the global economy, legions of people answered the proverbial door and bought this exceptionally dodgy product.

It was obvious back in 2009 that the extraordinary increases in demand growth for luxury goods in China could not be maintained because they were the result of an unsustainable surge in credit that was adding to already severe economic and social imbalances.

But many people told the blog that it was wrong, particularly those people who travelled to China and saw shops heaving-full of super-rich Chinese snapping up luxury cars, expensive liquor and I-Phones etc.  People who actually live in China, however, kept telling us something different.

Today, of course, the high-end shops are no longer quite as busy because the government has been forced to tackle the economic and social imbalances head-on before they become even worse.

Conventional wisdom is now where it should have been five years ago. The majority now recognise that the high-end consumption party has led to a dreadful hangover.

So rapid was the rise in lending post-2009 that there was simply  no way, even in a financial system with proper due diligence (and China is a long way from developing such a system) that all that money would be productively allocated.

Surprise, surprise, therefore, and lots of the money flowed into questionable real estate projects that made a super-rich elite even richer as the majority of Chinese were priced out of owning a home in the big cities. This has also left a legacy of oversupply in condos and bad debts that has to be unwound with major implications for the global economy.

The lending bonanza also further fuelled already rampant corruption, as the extra credit found its way into the back pockets of the politicians and the politically well connected.

Things began to change in late 2012 when Xi Jinping and Li Keqiang launched their clampdown on corruption. “Business in top-end Beijing restaurants is down by 90%,” an executive with a global polyolefins producer told us in November of that year.

And now, as the crackdown on corruption intensifies:

  • Sales of luxury goods globally are expected to grow slowly on the back of weaker demand in China, which account for about one-third of global demand for luxury goods. Bain & Co predicts the local market will grow just 2-4% per year, down from 20% in 2012.
  • This has led to price declines in luxury goods. For instance, retail price of Maotai, the favourite liquor of Chinese officials, has dipped below RMB 1,000 from RMB 1,600 a year ago (see the above chart). The wholesale price of  expensive seafood like abalone, sea cucumber and farm-raised soft shell turtle have also tumbled.
  • Autos, one of the major end-use markets for chemicals and polymers, is also suffering from an anti-graft campaign that to date has led to the arrest 33 ministers and vice-ministers  on corruption charges. The rich will obviously want to keep their hands down by driving more modest vehicles. And the government is leading the way by halving the 300bn Yuan a year it spends on maintaining and buying government cars.

Back in 2009, it was clear that the real, sustainable opportunity in China was in the rise of its poor and middle-income people – and that the term “middle class” was unhelpful because it was heavily associated with what it meant to be middle class in the West.

The way forward for chemicals and other companies is to focus their product development and marketing strategies on meeting the needs of these poor and middle-income earners. Average per capita urban incomes were just RMB 29,547 ($4,769) in 2013, according to China’s government. In rural areas, the average was just $1,276.

The  label on the front of a product is now, as a result, of much less importance than its value for money. For example, many millions of Chinese will be happy to buy a local smartphone that retails for just $299 rather than a Samsung Galaxy S5 that costs $929.