Change in the key word to understand China, tells business analyst Shaun Rein in an interview with the Sourcing Journal. “What works now, will certainly no longer work in three years time, says the author of The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia.
SJ: How can brands and manufacturers compete with the Asian giant?
SR: What worked in China three years ago might now work anymore and certainly won’t work three years from now. It is important that brands and manufacturers really understand the drivers changing the economic landscape—the consumer and political driven ones—and re-address how they approach China. Before the market was relatively small and there was little competition so it was easy to forgive small mistakes but now the stakes are too high. China is the largest market in the world for Porsche, Qualcomm, and KFC so profits are to be made but savvy, well-capitalized domestic Chinese brands are rising.
SJ: How are rising costs in China affecting the market? And how is China dealing with these increases?
SR: The government has set urbanization of 3rd-5th tier cities high on the priority list. This is causing rents to go up, so it is very difficult for retailers and expensive to get good locations. Rents are higher in suburbs in China than in most other urban cities in America, so the hypermarket model for instance just does not work here as in America. Moreover, pollution problems are so bad right now that many consumers tell us they do not want to shop outside. The result is consumers prefer to shop online, and retailers are finding it is cheaper and more profitable to push e-commerce.
SJ: What has Alibaba in particular done to position itself as the e-commerce leader that it is?
SR: Alibaba has become the giant in the country for e-commerce—they have so much eyeball traffic that retailers want to sell there and because so many retailers are there consumers keep shopping there. We expect e-commerce to grow 35 percent a year for the next three years with Alibaba benefitting the most. That said, Alibaba is facing a serious threat from mobile shopping. Another Chinese internet giant, Tencent, dominates mobile so Alibaba has been on an acquisition spree in the past six months scooping up mobile players.
SJ: What’s next for China?
SR: China’s growth will undoubtedly slow over the next few years. The 10 percent growth rates of before are gone, and frankly, that is good because there was too much overcapacity in some sectors, rising non-performing loans and too much pollution. President Xi is now focused, rightly, on more sustainable growth. The real exciting opportunities will come not in tier one, famous cities like Shanghai and Beijing, but in the central and western part of the countries like Sichuan. Those are the regions that the government is pushing urbanization and where costs are still attractive enough for companies to relocate to.
The world also better get used to innovative global Chinese brands. Companies like Tencent (specifically with their WeChat tool) or handset maker Xiaomi are becoming global brands in southeast Asia. Sooner than people realize they will make great inroads into the U.S. and Europe.
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