The mystery of the Chinese consumer
In the first of a two-part series on Asian consumers, we ask what makes the Middle Kingdom’s shoppers tick
Jul 7th 2011 | SHANGHAI | from the print edition
LILY LI wears a lanyard with a little plastic card around her neck, even at weekends. It is a badge of honour: it shows that she has a white-collar job. (She is a secretary at Access Asia, a retail-research company in Shanghai.) She uses Apple earphones for the cheap Chinese mobile phone in her pocket, so it looks as if she owns an iPhone. And she drives to work, though it takes four times longer than public transport, just to show off her little car.
After decades of deprivation and conformism, Chinese consumers regard expensive consumer goods as trophies of success. In public, they show off. In private, they pinch pennies. The owner of a gleaming new BMW will drive around for half an hour to avoid a 50 cent parking fee. And she will hesitate to spend much on interior decoration, because only her family sees the inside of her flat.
By some forecasts China will be the second-largest consumer market in the world by 2015, not far behind America. Chinese people already buy more cars than people in any other country: 13.5m last year to Americans’ 11.6m. China is on its way to becoming the biggest luxury-goods market. The central government made an increase in domestic consumption one of the priorities of its latest five-year plan.
Small wonder that Western firms are piling in. On July 4th Nestlé, the world’s largest food maker, confirmed that it is in talks with Hsu Fu Chi, one of China’s biggest makers of confectionery and baked goodies, with a view to buying the firm.
If a deal is sealed, it would be one of the largest foreign takeovers yet seen in China: Hsu Fu Chi is valued at $2.6 billion on the Singapore stock exchange. China is currently Nestlé’s ninth-biggest market, with sales of SFr2.8 billion ($2.7 billion) last year. That is less than half what Nestlé sells in Brazil, although China has seven times Brazil’s population. Hence Nestlé’s hunger for Hsu Fu Chi’s distribution network, and for its knowledge of what tickles Chinese taste buds.
“Understanding the consumer is the most important thing for us,” says Paul Bulcke, the boss of Nestlé. The food business is more local than almost any other—trying to sell cheese in China is like trying to sell stinky tofu in Switzerland. Nestlé has been sniffing around for takeover targets in China for the past two years. Hsu Fu Chi is not its first bite. In April it took a controlling stake in Yinlu Foods Group, a family-owned maker of peanut milk and canned rice porridge.
雀巢CEO保罗·薄凯Paul Bulcke 认为“我们深知消费者对我们至关重要。”较之其他行业，食品行业是非常本土化的—在中国卖奶酪就像在瑞士卖豆腐。过去两年，雀巢在中国四处搜寻收购目标，并没有一眼挑中徐福记。4月雀巢对银鹭食品公司控股（60%），银鹭公司是国内一家生产花生牛奶和灌装粥类的公司。
Multinational firms trying to woo Chinese consumers have so far concentrated on the country’s thriving coastal regions. P&G, an American maker of shampoo, toothpaste and other sundries, has its Chinese headquarters in Guangzhou. Its Anglo-Dutch rival Unilever’s home is in Shanghai. Yet both firms are preparing for a “second consumer revolution” among the 665m Chinese who live in rural areas. The income gap between China’s coastal cities and rustic interior is still six-to-one, but rural incomes are rising and 665m heads could use a whole lot of shampoo.
跨国公司竭力赢得中国消费者青睐，目标集中于中国沿海地区。宝洁公司（美国洗发水﹑牙膏及其他杂件生产商）在广州成立总部。它的对手联合利华（荷兰Margrine Unie人造奶油公司和英国Lever Brothers香皂公司于1929 年合并而成）中国总部位于上海。两家公司都在准备6.65亿中国农村消费者的“第二次消费者革命”。中国沿海和内地乡村收入差距依然是6:1，但农村收入已在提高，6.65亿人的日化产品使用量相当可观。
The Chinese government presents its own unique challenges. “Everything is political,” says James McGregor, a former head of the American Chamber of Commerce in China. “This is a government that lets foreign companies build market share when it needs them.” Its longer-term goal is to learn enough from foreigners so it can build its own national champions. To this end, it pushes foreign carmakers, among others, into unhappy partnerships with Chinese state-owned firms.
Almost all Western consumer-goods makers have felt Beijing’s heavy hand. Bernard Arnault, the boss of Moët Hennessy Louis Vuitton (LVMH), a luxury-goods firm, was summoned by the Chinese ambassador in Paris in 2008 for a high-decibel dressing down after Nicolas Sarkozy, France’s president, said he would meet the Dalai Lama. In the following weeks scores of women marched into Louis Vuitton shops in China with fake Louis Vuitton handbags and brazenly demanded their money back.
Unilever got into trouble recently for hinting that the price of some of its products would rise. The Chinese government is terrified of inflation, which it fears might spark unrest. It accused Unilever of inciting shoppers to hoard its products, and slapped it with a hefty fine. Yet Harish Manwani, Unilever’s chief operating officer, is undeterred. He is planning to increase Unilever’s business in China four- or fivefold in the next few years.
Buttering up local party bosses
The central government is not the only problem. Companies need to cultivate cordial relations with local potentates, too. Often the provincial governor’s say-so is needed to obtain land, employment licences and a stack of other bits of paper a firm needs to operate. Local party bosses tend to favour local Chinese firms—another reason why tie-ups can be helpful.
Another big challenge for Western multinationals is that their Chinese rivals are catching up fast. “Domestic players will be ferocious competitors,” predicts Derek Sulger at Lunar Capital, a private-equity firm in Shanghai.
西方跨国企业另一难题是中国对手赶超速度快。云月投资（Lunar Capital ）公司苏丹瑞Derek Sulger（Managing Director at Lunar Group and a Partner at Lunar Capital Management Ltd.云月集团总经理，云月投资公司合伙人）预测“中国厂商会成为强劲对手。”
For now, Western firms enjoy a lucrative reputation for quality and safety. Lead pollution from local tinfoil-making workshops in Zhejiang province recently injured 103 children and scores of adults. Chinese consumers are as averse as anyone else to being poisoned, so such incidents persuade many to buy Western brands. But domestic companies can make things much more cheaply, and their quality is improving.
Some Western consumer-goods firms that are also-rans at home do surprisingly well in China. Back in America, Kentucky Fried Chicken (KFC, part of Yum! Brands) is dwarfed by McDonald’s. In China it has 3,300 restaurants—more than three times as many as its rival—and opens a new one each day. The secret of its popularity is local managers with the freedom to adapt KFC’s offerings to the Chinese palate. That means fewer bargain buckets of wings and more congee, a rice porridge with pork, pickles or mushrooms.
Other Western firms can’t cope. Home Depot, an American DIY chain, is retreating from China after trying for years to persuade middle-class Chinese people to decorate their own homes.
Home Depot “didn’t understand the market for home decoration,” says Ben Cavender at China Market Research in Shanghai. Chinese people typically have no garages in which to store tools. And there are legions of poor people who will paint and decorate for low wages. The middle classes tend to hire decoration companies, which subcontract to whichever construction firm pays the best kickbacks. At the beginning of this year Home Depot closed its last shop in Beijing. It now has only seven stores on the Chinese mainland.
In a recent report on market dynamics and a profile of the Chinese consumer, Bernstein Research offers several tips to help Western consumer-goods firms profit from the “second consumer revolution”. Don’t offer too many brands: offer only a few, but produce in quantity to exploit economies of scale. Keep improving your products and (crucially) the packaging; otherwise you won’t keep pace with such a fast-changing market. Build an efficient distribution network early on—delivering goods to inland shelves is hard. And court talent tenaciously. Few employees are loyal, and few want to work in the countryside, even if they were born there. Finally, be patient. It may be years before your Chinese operations make money.
Bernstein could have added: beware. The rules in China are still being written. Different arms of government may interpret them differently (see next article). And if someone in power changes his mind, there is not much you can do about it.
Will the Chinese government allow Nestlé to buy Hsu Fu Chi? In 2009 it rejected a $2.4 billion bid by Coca-Cola to buy Huiyan Juice Group, a drinks firm, for no apparent reason. Analysts say that this is unlikely to happen again, however. “The company is not strategically important and together Nestlé and Hsu Fu Chi would control only about 5% of the market,” says Jon Cox at Kepler Capital Markets in Zurich. As the world’s largest chocolate-maker Nestlé has high hopes for a market of more than a billion people who currently eat shamefully little chocolate.
中国政府会允许雀巢收购徐福记吗？2009年政府拒绝了可口可乐24亿美元收购汇源果汁集团，没有明显原因。但是，分析家认为这种事不会再发生了。Kepler Capital Markets开普勒资本市场公司苏黎世分部Jon Cox 认为“徐福记没有战略重要性，而且雀巢加上徐福记也只能控制大约5%的市场。”作为世界最大巧克力制造商，雀巢对中国这块有超过十亿人口的市场寄予厚望，中国目前巧克力消费太少了，这就太寒酸了。
Much could go wrong. Many economists think Chinese households save too much. Some fear a property bubble or a banking crisis. The risks of selling consumer goods in China are immense. But so is the opportunity cost of staying away.