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China A Nation Of Cheap Copycats? Nonsense

Business, China, Company Strategy, Innnovation, Technology, US
By John Richardson on 27-Oct-2014


By John Richardson

COMPLACENCY is the enemy of  good analysis and one particular piece of complacent, and quite frankly lazy, analysis is to dismiss China as being permanently stuck in the category of a” low value copycat nation”.

Beware the smartphones business. Anybody who was complacent enough to believe that the Chinese couldn’t make the leap beyond being a low value copycat nation in this particular sector has already been proved wrong.

“I’ve been using the One for the last couple of weeks, and I’ve found it to be one of the best smartphones I’ve ever used,” wrote  Farhad Manjoo, technology columnist for the New York Times in this article.

He was referring to a phone made by OnePlus, a smartphones start-up based in Shenzhen, China, which we have discussed before.

“The One has a beautifully spare design, it’s loaded with the latest tech specs, and it runs CyanogenMod, a version of Google’s Android operating system that is far more flexible and easier to use than the cumbersome flavours of Android now stuffed into rival phones,” added Manjoo.

And here’s the potential clincher: You pay just $299 for the One, compared with upwards of $650 for top-of-the-range Western or South Korean smartphones.

The word “potential” is important here because right now:

  • You take the risk that the company might not be around for that long, as even its CEO admits that “we’re not sure about our business model”. And so if the phone goes wrong in 12 months, you could be left with an impossible-to-replace dud.
  • You also have to pay the $299 up front, whereas the major telecoms companies offer installment plans, along with the backup customer service, that OnePlus at the moment lacks.

But  eventually, OnePlus, and/or other Chinese companies, may well overcome these barriers – perhaps with the help of a bit of government backing, in one form or another.

Here are some reasons why:

  • In July of this year, a record 7.36 million people graduated from China’s universities. This compares with 300,000 back in the 1980s. Some 2.3 million of these graduates could be out of work.
  • China simply has to rise to this demographic challenge for the sake of the social stability needed for continued economic prosperity. And so it cannot remain as just a low value copycat  nation, if it is going to create enough jobs for its graduates.
  • Making high value smartphones will also help China escape the “middle income trap”.

But you cannot have successful additions of new supply in any product without demand (obvious statement, I know, but  am not sure that every chemicals company always get this).

In the West,  because of the end of the Babyboomers demographic dividend, we know that:

  • Workers typically reach peak income levels around the age of 45 – 54.
  • Spending then declines when people join the New Old 55+ generation.
  • They already own most of what they need, whilst their incomes reduce quite sharply as they enter retirement.

And so it could  soon become an absolute “no brainer” to buy the $300 Chinese smartphone, rather than $650 plus Western alternative.

This will not only apply to older people. Because total demand is falling in the West, due to the retirement of the Babyboomers, younger people will see their income and  employment opportunities increasingly squeezed.

And so, other than small rich elite who will always be able to afford upwards of $650 without so much as a blink, the Chinese smartphone might end up being the default choice for everyone.

Local smartphones look likely to also increasingly dominate China’s domestic market (sounds obvious, but I am not entirely convinced that all chemicals companies understand this).

“Thanks to the frugal but feature-rich offerings from local firms, domestic sales have exploded. Over 100 million smartphones were sold in the second quarter [of 2014], accounting for over a third of global sales and making China the world’s largest market,” wrote The Economist, in this article.

“Strikingly, eight of the top ten vendors were local firms. Xiaomi, a start-up that only sells online, shot past Samsung to become the leading brand of smartphones in the country. After selling 15.4 million in the second quarter  the firm is on track to peddle 60 million  handsets this year, and wants to sell 100 million in 2015.

Why does “cheap and good” also increasingly matter in a developing economy such as China?

Because now that the artificial sugar high of the 2008-2013 is being permanently removed, we are left with the real facts on income levels, such as these from China’s National Bureau of Statistics:

  • In 2013, average per capita urban incomes were just Yuan 29547 ($4769).
  • Average per capita rural incomes were only $1276.

And, as already mentioned above, whilst blue collar labour markets are tight in China, the country’s graduates are struggling to find work. This means that they, too, will often not have the luxury of being able to afford an Apple or a Samsung smartphone.

What might this mean for Western smartphone manufacturers – and for Western manufacturers of other expensive branded goods?

It could mean that charts, such as the one at the top of this blog post, from the investment newsletter Barron’s, will become largely a thing of the past.

The chart shows how China’s mobile phone exports surged in September.

This was the result of the launch of the Apple iPhone 6, as some 200,000 workers employed by Taiwanese company Hon Hai Precision Industry were busy assembling the new phones at two factories in Zhengzhou, China.

Apple, obviously, owns the intellectual property and the branding behind the iPhone 6. In effect, therefore, these exports from China were really “re-exports”.

In future, though, economic value in the smartphones business might end up flowing only one way – just from China to the West.

How should Western consumer goods and chemicals companies respond to these challenges? This will be the subject of a later post.