Made in China' To Made For China'

Week in China
26 February 2010
www.weekinchina.com
From Made in China...
To Made for China

Week in China
Editor’s Note
26 February 2010
How ‘Made in China’ became

‘Made for China’
I t’s been embroidered on underpants, stuck onto sachets of shampoo and

etched into automotive parts.
The “Made in China” label is now a more-than-familiar one, although it has
2
5
China’s Real Revolution
Interview: Horst Pudwill
been getting a new coat of (non-toxic) paint in recent weeks, courtesy of China’s 8 ‘Made in China’ Today
Ministry of Commerce.
11 Why China’s Cheaper
15 The Quality Conundrum
Late last year, the Ministry commissioned a series of television commercials
18 Savers or Spenders
hoping to say something new about the ‘Made in China’ moniker. One ad showed
22 The 1.3 Billion Consumers
teenagers listening to an MP3 player and dancing at a bus stop. “Made in China 27 Selling to the Chinese
with software from Silicon Valley” was the tagline. Another showcased outfits at 31 A Heritage Reborn
a fashion shoot, with the message: “Made in China with French designers”.
The motives for the campaign were transparent enough. China wants to take
its manufacturing reputation up-market – and away from the notion that quan-
tity always trumps quality as far as its country’s companies are concerned.
But domestic critics think it an opportunity missed. They complain that the
message is still largely one of a country satisfied with its contract manufacturing
status (and reliant on others for design and innovation). What about a rebrand-
ing more focused on Chinese creativity?
International audiences might snigger at such pretensions, in light of the con-
veyor belt of safety scares that seems to afflict the country’s exports.
But the ubiquity of the Made in China label means that we should all have an
interest in what China is making. The producers behind the advertising campaign
knew this too. All the advertisements had the final sign-off “Made in China, made
with the world”. The subtext: we’re not the only country that benefits from the
Made in China phenomenon. Not a bad reminder at a time in which trade tensions
are rising again.
How did that phenomenon come about? And how might it be changing?
These are two of the questions that we will address in this first WiC Focus issue,
a format that is designed to address a key topic in more depth than our weekly
editions normally allow.
We’ll sketch an overview of the how the label first emerged, and what it has
meant for international companies operating in China. We will look too at how
times are changing, as manufacturers start to think about China not just as place
to make goods for export but also as a market in which to sell goods to Chinese
consumers themselves. n
Photo Source: Shutterstock
1
Week in China
26 February 2010
Open for business
Marriage guidance,
GM-style
How about a joint venture, General Mo-
tors asked?
It was late 1978 and Li Lanqing, a
Party senior who would go on to be-
come vice premier in the late 1990s,
was meeting with the US carmaker to
discuss potential collaboration. But the
GM request was met with silence. The
A towering influence: late Chinese leader Deng Xiaoping Chinese team had no idea what the
term meant.
After huddling briefly, the Chinese
I t was a rude awakening, if not an entirely unexpected one. By 1978, China’s top
leaders were receiving reports from the numerous delegations that had begun
to venture abroad the year before, following a generation of Maoist isolation.
asked the Americans for a definition.
Think of joint ventures like marriages,
They did not make for encouraging reading. China’s economy was trailing even GM’s Chairman and CEO Thomas
more than they had feared: it had less than a fifth of the production capacity of Murphy (below) told the delegation. The
West Germany, for instance, and was at least 20 years behind western Europe in two sides put their cash in together, and
technology terms. Even the factories of Romania and Yugoslavia – hardly at the make (or lose) their money as a couple.
capitalist cutting edge – were four times as productive as those at home. Li remembers that his team were
Paramount leader Deng Xiaoping discovered something similar himself on a unconvinced. Could a communist really
tour of Japan in 1978 – during a visit to a Nissan factory. He was told that pro- marry a capitalist, he thought?
duction levels were 94 vehicles per worker each year. But Deng knew that China’s But Deng Xiaoping was keen for his
top carmaker, First Auto Works, was managing just a single car per employee per colleagues to explore the idea further.
year. “Now I know what modernisation means,” he is supposed to have sighed1. For emphasis, he scrawled “joint
ventures are workable” on the summary
The Special Economic Zones report of the meeting sent up to his desk
To modernise, China would need foreign capital and foreign technology. And in for review.
the summer of 1979, work started on a special industrial zone to attract both, in
a two square kilometre area adjoining a seaside village at Shekou, close to Hong
Kong. The boundaries at Shekou would later be broadened to create the Shenzhen
Special Economic Zone. Zhuhai and Shantou – both in Guangdong province too
– would also be designated as SEZs, as well as Xiamen in Fujian.
The zones offered varying degrees of preferential tax status to foreign in-
Photo Source: Reuters
vestors, as well as lower tariffs, better support infrastructure and more flexible
labour markets.
Source: 1Li Lanqing: ‘Breaking Through: The Birth of China’s Opening-up Policy’, 2009
2
Week in China
26 February 2010
“At first it took them seven days to finish

one floor in the main building. From the
13th floor skyward, the speed reached one
floor every three days”
Li Lanqing recalls the construction of Shenzhen’s first skyscraper, the 53 floor
International Trade Building, an early demonstration of ‘Shenzhen speed’ at
work. Built in 1982, it broke (then) records for construction speed
They all grew quickly, especially Shenzhen. In 1979, the local authorities had to
ask the central government for a loan to cover the set up of rudimentary services
like telephone lines and sewage plants. But over the next five years, the town Li Lanqing was close to many of the
would attract $1.28 billion in investment – or 20% of the nation’s total. major decisions being made about
China’s new ‘open door policy’ in the
The first joint ventures five years after 1977. So his account in
Still, investment did not flood in at first. More deals were completed as “com- Breaking Through offers a first-hand
pensation trade” arrangements in which a Chinese firm would perform process- view of the tumultuous change of the
ing or assembly for the foreign customer according to the specifications provided, time, mixing detailed coverage of the
on equipment brought in from overseas. main events with plenty of personal
The first experience in running a factory with investment of this type came in recollections. Some of his anecdotes,
late 1979, with the opening of the Xiangzhou Wool Spinning Factory in Zhuhai, particularly those on the absurdities of
just over the border from Portuguese-administered Macau. the centrally planned economy before
Hong Kong industrialist KP Chao reached an agreement with the local gov- the reform era began, reveal much
ernment that specified that the mill would revert to state ownership after an ini- about the challenges facing those who
tial period. Chao’s contribution was never forgotten. "You were the first person to went on to steer China’s transition
build a factory in the Mainland [after the Cultural Revolution],” Jiang Zemin re- after Mao.
called publically on meeting him again in 1997. “Of this there is no dispute.” Li’s account fetes Deng Xiaoping as
One early problem was that there was no legislation to deal with how joint ven- the hero of the hour, and portrays the
ture relationships between foreign companies and the state should proceed. The reform process largely as one conceived
only template that the Chinese felt could be useful was for a crankshaft factory and steered by the elite. But his
operated by General Motors in Bulgaria. The Chinese embassy in Belgrade man- recollections airbrush Zhao Ziyang from
aged to get hold of the original agreement and by spring 1980, the first batch of the book completely, despite the fact
joint venture deals were on the verge of signature. that Breaking Through covers a period in
The first genuine joint venture turned out to be an unlikely candidate – a which Zhao was a key player in
maker of in-flight meals for airlines (and at first just 640 portions a day, which policymaking.
gives a sense of passenger numbers leaving the Chinese capital). Events after 1987 were to see Zhao’s
But joint venture number one still went ahead: the Beijing Air Catering Com- role downplayed entirely, of course. But
pany was formed through a tie up between the Maxim’s catering dynasty of it makes for a strange contrast: on the
Hong Kong and the CAAC, China’s Civil Aviation Administration. one hand, the inside track on the early
There were some early obstacles. Chinese chefs had problems cooking ingre- days of reform, on the other, one of the
dients that they had never seen before, like salmon and beef fillets, and there was leading contributors not even mentioned.
further disquiet with the new timekeeping system in which staff members were
required to “punch-in” each day. As workers they were the owners of the enter-
prise, the staff insisted. They refused to be subject to such capitalist techniques
of oppression and control.
Hotels also featured heavily in the first batch of ventures (the Jianguo Hotel and
the Great Wall Sheraton in Beijing, the White Swan Hotel in Guangdong). In 1978
there were only 1,000 hotel rooms deemed to be of international standard, so set-
3
Week in China
26 February 2010
ting up additional accommodation became a priority. By the end of the first year
of reform, China had received 1.8 million visitors – which was more than for the 72 million
previous 20 years combined.
Another of the early deals seemed to be a little less pressing. In 1981 French co- yuan
gnac maker Remy Martin and the rather-less-sophisticated Tianjin Municipal Shenzhen’s industrial output in 1978,
Grape Garden and First Bureau of Light Industry paired up to produce wine for prior to becoming a Special Economic
export. The Dynasty wine label – so titled because the US television series of the Zone. That equates to $10.5 million (at
same name was popular at the time in the targeted overseas markets - was the re- current exchange rates)
sult. Quite what the apparatchiks in Tianjin made of this introduction to glitzy
world of branding (Dynasty’s millionaire families, and Joan Collins in shoulder-
pads, no less) was not reported.
But by 1982 a further 48 joint ventures had also been completed, for a total in-
vestment of $223 million. More than half came from overseas Chinese living in
Hong Kong, Macau and Taiwan. The wider world was yet to be fully aware of it, but
Made in China was born. n
4
Week in China
Interview
26 February 2010
A ‘Made in China’ pioneer:

WiC talks to Horst Pudwill
C hain-saws, cordless drills and vacuum cleaners are never going to be the most
glamorous products. But Horst Pudwill, founder and chairman of the TTI
Group, has proved that they can still support a pretty spectacular business, and
one that is now competing head to head with long-established firms like Black &
Decker in their home markets.
Founded in Hong Kong in 1985, TTI started out as an original equipment man-
ufacturer but has since developed a global brand portfolio of its own (by buying
respected labels like Hoover, Dirt Devil, Ryobi and Milwaukee). Full year revenues
for 2008 exceeded $3.3 billion.
TTI and Pudwill were also early pioneers in the Made in China business model
and he spoke to WiC recently about his experiences.
You were one of the first Hong Kong companies to manufacture in China?
Not one of the first. We were the first power tool company – at least in terms of
having a wholly-owned manufacturing unit inside China. We didn’t set up joint
ventures like many of the others, as we’ve always preferred to own our manu-
facturing capacity
But back then few people were thinking about making a move into China, even
from Hong Kong. So when we started out in 1987 we were unusual. It was another
five years or so until others started to have the same idea.
Things were so different then. It took us at least six hours to travel up to Dong-
guan [the town in which TTI built its first factory] from Hong Kong. Now it takes
less than 2 hours to make the same trip. Horst Pudwill: Founder and
Group Chairman of TTI
How has your business evolved?
We started out with OEM contracts, manufacturing for international brands that
were sold overseas, mostly in the US.
At the start there were a few people that worried about the Made in China la-
bel. But we made high quality products with a great value proposition, so our cus-
tomers soon accepted us.
I think the Made in China tag became more generally accepted about 10 years
ago for most categories of goods.
And you remain China-focused in manufacturing terms?

Yes, for about 75% of our products.
We have factories in Mexico, the US and Europe too. Some of them make the
heavier-duty items that would cost too much to ship from China to international
markets. Most are more automated factories that we purchased when we bought
the international brands. So it is all the least labour-intensive products.
5
Week in China
Interview
26 February 2010
“A game-changing move”
Pudwill on the opening of the company’s new Manufacturing and Innovation
Campus in Dongguan – the first time that TTI has been able to bring together
its China-based employees in a single location
Where have China costs changed most?

Wages have gone up, of course. But we’ve managed to hold labour costs fairly con-
stant as a share of revenue by improving our productivity and selling more so-
phisticated brands at higher prices.
There’s lots of talk about labour shortages nowadays but we have never expe-
rienced any major difficulties. Factories making shoes or sweatshirts may have
more of an issue, as they tend to employ a lot more people and have less auto-
mated production.
What about the renminbi going up?

Yes, it has had a limited impact on our export business.
A stronger renminbi partially hedges our position, like paying less for imported
raw materials.
So no thought of moving your operations further inland, or to another coun-

try like Vietnam?
Moving inland might help in finding cheaper land and a lower-wage workforce.
But we need skilled people, who would be harder to find away from the coastal
zones. Plus it would add to other costs, like logistics.
What we have done instead is concentrate our operations in a large new facil-
ity in Dongguan. We call it our Manufacturing and Innovation Campus. We’ve got
warehousing, living quarters for staff, the assembly factories and an R&D centre
too.
Now we have all our people under one roof, not across a number of locations
like before. Our China headcount is down from 15,000 to less than 11,000 within
the last two years and the overall cost savings for the future are better than we had
projected.
It has helped improve our flexibility as well: we can release more new products
each year than our competitors, which is one reason why we have been gaining
market share.
Moving into the new site has been a real eye-opener. The campus has improved
our efficiency, production flow, and the range of new products that we can offer.
So, although we started out producing power tools there, we now manufacture our
floor care products and most of our outdoor products there too. Creating a new
China footprint on this scale is another ‘game-changing’ move. It would cost three
times as much to do the same thing now.
You are a German engineer by background. Is there anything made in Germany

today that couldn’t be made in China?
Probably not in the businesses that I am familiar with [Pudwill started out with
Volkswagen Asia].
6
Week in China
Interview
26 February 2010
But for some more specialised industries, maybe a bit less so. Another issue is
that German firms may be cautious about transferring their technology to China-
based operations and manufacturing.
So the China price advantage still exists?

Absolutely, especially when factories are labour-intensive.
The growing quality of the support infrastructure is another key point. The in-
vestment going in now is going to pay off long into the future. Countries like In-
dia just have not invested in the same way. Or even the US. Sixty years ago Amer-
ican automakers relied on the country’s railroads and ports to get their cars to
market. But 60 years on and not nearly enough new infrastructure has been
built. It makes it harder to compete.
That is completely different to China. Take something very simple, like the Chi-
nese New Year holidays. In the past we had to give our staff at least two weeks off
because of long travel times back to see their families. But now people are gone
and back within eight or nine days. So we can get the factory open again sooner.
It all helps.
TTI buys Hoover
Do you think of yourself increasingly as a Chinese firm rather than a multi-
national one? In 1907, inventor and asthmatic
No, we’re a multinational company. But we manufacture mostly in China and that Murray Spangler cobbled together the
is a major part of our competitive advantage. very first ‘suction sweeper’ from a
In the future we expect to sell more products in China too. It isn’t a big mar- soap box, a pillow case and a broom
ket for us right now – probably about 2% to 3% of revenues, with additional sales handle.
through imports from our distributors elsewhere. But we’re growing. The Chinese The following year he sold the patent
want to buy great brands themselves, and we are also very focused on creating tai- to WH “Boss” Hoover, who launched the
lor-made products for Asian markets. eponymous product on its path to fame
But in other ways we think differently to Chinese firms. A small example: as the most recognised vacuum cleaner
when we built the campus, we put high ceilings into the plant. It cost us more in history (Hoover’s brand awareness
but it has made the working environment much more pleasant due to better still regularly scores at close to 100%).
ventilation. So we have lower staff turnover, and that helps us keep our product TTI acquired the Hoover trademark
quality high too. n (for most non-European sales markets)
in 2007.
7
Week in China
‘Made in China’ Today
26 February 2010
Take off: from airline food to A320s
Timeline for foreign

investment:
1979-91: the ‘experimental’ phase.

Initial investment inflows are low
but grow steadily, characterised by
smaller projects in an incomplete
The first China-assembled Airbus A320 jet at the Airbus Tianjin plant legal and infrastructural
environment ($1 billion FDI in
How has multinational investment grown in the ‘Made in China’ economy since 1979, rising to $4 billion annually
Deng began the economic reform process? by 1991).
Taking foreign direct investment as a proxy, the expansion has been signifi-
cant, with an increase from just over $1 billion of FDI in 1979 to $92 billion in the 1992-2001: the growth period.
most recent annual data (for 2008), according to the Ministry of Commerce. Rapid increase in Made in China
The real acceleration began after 1992. By then the four original SEZs had been investment, although some
joined by the island of Hainan. Three larger regions (the Pearl River Delta, the restrictions on ownership and
Southern Fujian Delta and the Yangtze River Delta) had also been classified as business operations still apply ($41
Open Economic Zones, and a further 14 coastal cities had been opened up to billion in FDI in 2001).
wider foreign investment.
In 1986, Beijing permitted full foreign ownership in many sectors to en- 2002-today: the post-WTO era.
courage further investment. Rules were loosened further after China’s WTO en- Further liberalisation to trade and
try in 2001. investment rules. Multinationals
The advent of wholly-owned status has allowed multinationals who may have broaden their local capabilities; but
been concerned about joint-venture relationships, or more cautious about trans- some movement into services and
ferring technology to a local partner, to establish their own operations. That has finance sees manufacturing share
increased investment in technology and capital equipment – something that decline ($92 billion FDI in 2008).
the wholly-owned foreign enterprise (WOFE) policy was designed to encourage.
Another shift is evident in investment focus, with the services and finance sec-
tors now much more of a target. That means that the share of FDI flowing into the
manufacturing sector had fallen from around three-quarters of total investment
a decade ago to a little over half in 2008. Within manufacturing, the share of
higher-value added businesses has increased significantly. More money is going
into sectors like telecoms equipment, electronics and advanced machinery, and
less into textiles and garments, toys and shoes.
Still, manufacturing’s predominance points to the resilience of much of the
original Made in China model. Many of the world’s largest companies now have
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Week in China
26 February 2010
“This market is huge, and the Chinese

aviation industry will be one of the
biggest, if not the biggest, in the world”
General Electric chief executive Jeffrey Immelt, on announcing an avionics joint
venture with China’s Aviation Industry Corp (AVIC) late last year
a Chinese supply chain inextricably embedded into their business model.

Wal-Mart is one of the most obvious examples. Although numbers are difficult
to pin down (Wal-Mart has not released data on its Chinese imports since 2004)
the retail giant was thought to be importing at least $18 billion of goods from
China in 2008 (split roughly half-and-half between direct exports and goods
with a significant China contribution bought in other markets). Think you could go 365 days without
Wal-Mart bashers talk darkly of 70% of merchandise on the retailer’s shelves buying a single item made in the
as being China-made (that percentage looks too high) and that the company Middle Kingdom?
could account for 10% of total China imports to the US (possible five years ago, al- That is the predicament facing Sara
though it would be lower today). Bongiorni, at the start of a 12 month
Another American icon (albeit now a rather humbled one) is General Motors, boycott of Chinese goods. Her campaign
whose CEO gave that first joint venture lecture to the Chinese leadership in 1978. is not part of some deeper anti-Chinese
Despite filing for bankruptcy back in Detroit in June last year, GM was clear that diatribe. She just wants to see if it can
its China operations were not part of the deal. The company has been active in be done.
China for many years, establishing nine joint ventures and two wholly owned for- And it can, just about (although she
eign enterprises, and employing 32,000 staff. breaks the rules every now and then).
That has helped it establish a vibrant China business, with sales of its Buick, Unsurprisingly, she soon discovers
Chevrolet and Cadillac brands riding a wave of booming domestic demand. It also that the shelves are groaning with
plans to begin shipping more cars overseas from its China export hub. Chinese-made items. For some
The aerospace sector provides further evidence of the transition in the Made purchases (toys and shoes, especially)
in China model. From the starting point in airline food, joint ventures are now ac- finding a non-China exception takes
tive in component manufacture, avionics, engines and final airframe assembly. hours (or even days) of searching. She
Chinese suppliers now either make parts or have assembly responsibilities for all has to pay a lot more for the final
of the Boeing aircraft types. One of those commercial partners – the Xi'an Aircraft purchase, too.
International Corporation – recently delivered the 1,500th vertical fin for the Boe- A Year Without Made in China isn’t a
ing 737 aircraft, and signed an extended contract to supply the same amount again book full of business insight. Bongiorni
in coming years. Boeing has also been keen to point out this month (in the wake spends more time worrying about how
of the spat over Taiwan arms sales) that it has purchased $1.5 billion in aircraft the boycott is affecting her family than
parts and services from Chinese suppliers over the past 30 years. she does considering the wider issues.
Not to be outdone, Airbus claims that more than half of its own worldwide fleet But it does gives a sense of how
has components produced in China. The first Airbus A320 assembly line to operate inescapable the label has become in
outside of Europe was also established in a Tianjin-based joint venture two years everyday consumer life.
ago. Airbus says that it expects to spend $200 million on procurement in China
this year.
And record exports the result?

Another proxy for Made in China’s success is export volume: a little over 30
years on from the onset of the economic reform era, China passed a key milestone
in 2009, when it became the world’s biggest exporter. Exports reached $1.2 trillion
for the year, squeezing past Germany by about $100 billion.
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Week in China
26 February 2010
As the Economist magazine noted at the time, it has been a remarkably rapid
rise: from 3% of the world’s exports in 1999 to 10% a decade later. The magazine 18%
speculated too that – at current growth rates – a quarter of world exports might High tide for US share of global exports
be Chinese ones within 10 years. (in 1950). China has a 10% share today
Of course, that presupposes that Chinese factories can maintain their com-
petitiveness, and that grumpy foreign governments don’t erect trade barriers to
staunch the flow of incoming goods.
But even then, it is hard to see how Chinese exporters could sustain such sales
volume growth without cutting prices. Will margins allow for that? It looks un-
likely, the Economist concludes.
In fact, it would be a mistake to trumpet China’s new export title without a lit-
tle circumspection. Export statistics are calculated from the value of merchan-
dise leaving Chinese shores, even if only a small percentage of export value
may actually be made up of local labour, materials and overhead. So $1.2 trillion
of trade flow does not equate to a trillion-plus dollar of contributed value to the
domestic economy – as the study below on the iPod demonstrates. It serves as a
useful reminder on why the Chinese leadership wants to see more local firms
move on to more sophisticated capabilities in research, design and value-added
manufacturing. n
Why Steve Jobs comes out on top in China –

the tale of the Made in China iPod
Want to know who does best from the sale of an iPod? Three academics at the
University of California asked themselves the same question. Their conclusion:
Apple’s products may be assembled in China but its profits are very much earned
back in the US.
The authors calculated that Apple was selling iPods (the 30GB variety) to retailers
for a $224 wholesale price. The retailers were then adding a $75 mark up in selling
them on to their customers at $299.
Still, with $80 in gross profit on each unit, Apple was deriving the best returns.
It was actually costing about $144 to manufacture an iPod, from parts supplied by
Korean, American and Japanese firms. Toshiba’s hard drive ($19 in gross profit)
delivered the highest margin for a single component.
What about the Chinese factories that were putting the iPod together? They were
seeing no more than $4 of profit in contract assembly fees at best. (The factories even A bigger bite of the Apple: the
turned out to be owned by the Taiwanese as well). iPod study highlights how
Lesson one, the authors conclude, is not to lose sight of the innovation premium. designers capture more profit
China may have been assembling the iPod (or ‘making it’ in common parlance). But it
was Apple, an American company with predominantly American employees and
stockholders, reaping the greatest benefit.
Lesson two: none of this would show up in the trade statistics.
For each iPod heading off a Chinese production line, another $150 would have been
added to the US trade deficit (the cost of the manufactured item, plus a small amount
for shipping).
But clearly that tells us little about who was grabbing the lion’s share of the iPod’s
final sale price. Made in China, yes. But not, it turns out, for much more than a few
dollars of upside.
Source: ‘Who Captures Value in a Global Innovation Network? The Case of Apple’s iPod’ Greg Linden, Kenneth L. Kraemer,
and Jason Dedrick, 2007, University of California - Irvine
10
Week in China
Why China’s Cheaper
26 February 2010
The China price
Dolled up for the Wal-Mart shelves...
I t is five years since BusinessWeek magazine christened ‘the China price’ as

“the three scariest words in US industry”.
That was an oversimplification. The China price might well terrify companies
with operations concentrated purely at home. But for most companies – the
massive majority of the Fortune 500, for instance – the China price has been good
40%
for profits, in offering opportunities to source cheaper goods or to relocate proof China’s price advantage derives
duction to Chinese factories. from its lower labour costs
Of course, that’s not much of a positive for the employees who may have lost
their jobs as a result of a shift of operations to China, or to lost business resulting
from the more competitive environment in the supply of parts and finished
goods. Some multinationals are now experiencing something similar in direct
competition from Chinese companies too.
Where does the price advantage come from?

The best insights on how Chinese firms conjure up their price advantages are in-
dustry specific – and usually proprietary. But one analysis that tried to run the
numbers on a wider basis – an influential study from the Merage School of Busi-
Photo Source: Associated Press
ness – found that lower wages accounted for 40% of China’s price competitiveness
versus American firms1. Chinese hourly worker compensation came in at least
80% below North American levels.
Source: 1Peter Navarro, Report of the China Price Project, Merage School of Business, University of California - Irvine, 2007
11
Week in China
26 February 2010
$141 a month
The minimum wage in Jiangsu province, one of China’s more prosperous export
regions (minimum wages are $1,830 a month in France, and $2,214 in Australia,
by way of comparison)
The information used in the Merage study is now three years old, so some of Author Leslie Chang studies the
that gap may have narrowed. In theory, rapid economic growth leads to more job bustling factory city of Dongguan and
creation. As labour markets tighten, wages should then rise. There are signs that the young migrants from the
this is happening in the wealthier provinces. Jiangsu province, the country’s sec- countryside who work there. The book
ond largest exporter, raised its monthly minimum wage by 13% in mid-February. begins by describing the conditions the
Even after the increase, Jiangsu’s minimum wage is still only $140 a month, so girls work in: the long days, the low
it trails salaries in developed markets by some distance. Others think that this gap wages, the lack of real friends and so
will continue for some time, thanks to China’s abundant labour resources and the on. At this stage the text could easily
role of its huge migrant labour force as a shock absorber on rapid salary growth. become an indictment of China’s
Despite recent reports of shortages of migrant labour in Guangdong and Zhejiang, Dickensian working conditions and
most China commentators think that there are enough potential new workers exploited masses.
around to keep wages low in most industries for a while. But what makes Factory Girls
Still, the China price isn’t only about pay. Even for industries in which labour different is that she prefers to get to
makes up a lower proportion of total costs (more sophisticated electronics, for in- know the girls better, to understand
stance) Chinese factories enjoy a sizeable advantage. what drives them, their choices and
What’s more, most of the production capacity for export goods is concen- what they have left behind.
trated in four or five eastern provinces close to the coast, where pay is the high- Rather than class them as victims,
est in the country. If the China price relied on sweatshop wages alone, you’d ex- Chang focuses on what the girls can
pect to see many more companies heading inland (or leaving China altogether, for achieve. In the chaotic world of
Vietnam or countries in Africa). Dongguan, no one cares about resumes
or diplomas. The key thing is how quick
Not just low wages… you are to learn on the job, and the book
One factor in China’s favour versus its low-cost rivals is its infrastructure (see the charts the upward mobility of the girls
interview with Horst Pudwill on page 5). China ranked 27th recently in the World that Chang befriends. They start at the
Bank’s logistics rankings, well ahead of its low-cost competition2. It was also a “sig- bottom and through sheer force of will
nificant over-performer” relative to national income levels. (and a fair dose of dishonesty) jump into
But critics also complain that subsidies underpin its cost advantages. That clerical jobs. Some even start their own
means factories enjoying cut-price electricity and water rates, for example, or pay- companies.
ing little for land. Also important are implicit subsidies like access to cheap cap-
ital (soft lending from state-owned banks) and continuing tax rebates on many
types of exported goods.
Another factor often cited is supply chain clusters – the townships in which
hundreds of factories have gathered to produce similar goods or merchandise.
There are now well over a 1,000 supply clusters for exports, covering almost
every major product category.
Source: 2World Bank: ‘Connecting to Compete 2010: Trade Logistics in the Global Economy’, 2010
12
Week in China
26 February 2010
Major Industrial Clusters in Zhejiang province
Huzhou
Jiaxing
China
Zhoushan
Hangzhou
Ningbo
Shaoxing
Quzhou
Hangzhou: autoparts, chemical fibres, umbrellas
Ningbo: apparel, toys, electrical applicances
Jinhua
Taizhou
Shaoxing: socks, neckties, furniture
Jiaxing: leather, silk and woollen products
Lishui Huzhou: building materials, bamboo and textiles
Zhoushan: aquatic wholesale, ship repair, electrical appliances
Wenzhou
Wenzhou: plastics and auto parts
Taizhou: plastic products
Jinhua: magnetic materials and knitted apparel
Lishui: parasols, shoes and wooden toys
Clusters help firms compete by smoothing uncertain demand patterns. Firms

who have trouble filling an order can outsource part of it to a neighbour. The cus- Former Financial Times reporter
tomer need never know (so no lost business opportunity) so the factory hasn’t Harney paints a bleak portrait of life in
needed to waste investment on capacity that may be underutilised in quieter pe- factories making goods for the “lowest
riods. On the cost side, they also offer opportunities to pool purchases of raw ma- price possible”. She accepts that
terials or to consolidate shipments of finished goods. industrialisation has lifted millions out
The exchange rate is another factor on the list (it was thought to be around a of poverty. But her focus is more on the
tenth of China’s price competitiveness at the time of the Merage study). And the dark side of the China boom: the
other contributors were the usual suspects too: avoiding R&D expenses by coun- miserable working conditions, the
terfeiting or copying goods without much fear of legal redress; the costs reduced sweatshop pay, and the environmental
by spending less on working conditions for employees; and the savings on lower consequences.
thresholds in environmental protection and compliance. Harney’s account is good at looking
at the experiences of ordinary people
Will the cost advantage endure? living difficult lives. She is also clear
Meaningful data is difficult to come by at an aggregate level. But a report out that, until Western consumers are ready
this month from AlixPartners, a corporate consultancy, does at least offer per- to pay more for Chinese products, the
spectives on where the China cost model is most sensitive to competition3. negative consequences of the China
The study looks at baseline costs to manufacture a range of components then boom will be difficult to overcome.
assemble and package them. It compared the cost of the finished goods if made
in the United States versus 11 other countries.
In previous surveys dating back to 2005, American manufacturing for the
items concerned had always been more expensive than outsourcing to China. But
the gap had been steadily narrowing. From a 20% cost advantage in 2005, the dif-
ferential was down to 6% for a ‘landed’ good by the end of 2008.
But the latest data shows that, by the end of last year, the differential had re-
covered to 20%. That’s because the factors behind China’s relative decline in
Source: Li & Fung Research Centre
competitiveness in the preceding three years (the renminbi’s appreciation against

the dollar, oil prices driving up transportation expenses, and higher commodity
Source: 3AlixPartners: ‘US Manufacturing-Outsourcing Cost Index’, February 2010
13
Week in China
26 February 2010
“Within Guangdong’s borders are some of

the largest factories on earth, including an
electronics plant with 270,000 workers”
From Alexandra Harney’s The China Price
costs) had been largely reversed, allowing for a fuller cost advantage to re-emerge.
One problem here: the recessionary environment that drove down these ex-
400,000
penses has probably also dampened demand for some of the goods that the Chi- The number of factories reckoned to
nese manufacturers were producing. Another issue: the growing pressure from have been built in Guangdong. However,
the international community for Beijing to allow the yuan to recommence its some estimate 60,000 may have closed
steady appreciation. during the recent global downturn
The AlixPartners material is useful in highlighting a couple of further points.
For the basket of items covered in 2008, China had been overtaken by India and
Mexico as the lowest cost producer for the American market. In this year’s report
Vietnam, Russia and Romania (new additions to the country comparison list) were
ahead too, although the gap between the group is a narrow one at a few percent-
age points.
The message? China has competitors for its low-cost-producer crown.
The data is also interesting in pointing to the factors that are likely to influence
the China price in coming months and years. Will the recent reports of wage in-
flation in Guangdong and Zhejiang feed through into a loss of competitiveness
on labour costs, for instance? What about the widely anticipated strengthening
of the yuan in the foreseeable future? And how will Chinese manufacturers react
to further spikes in two of the more significant ‘uncontrollable costs’ (oil, and
many of raw material inputs)?

Made in China manufacturing may be a dominant force for now. But the na-
ture of the Chinese response to each of these challenges will shape its success in
the years ahead. n
14
Week in China
The Quality Conundrum
26 February 2010
Still “happy with crappy”?
Wuhan hires Werner

China’s first quality controller was…
from Deutschland.
No great surprise, perhaps, to get the
Germans in when precision is called for.
But no doubt it served as a
considerable shock to the workers at the
Wuhan Diesel Engine Plant in the winter
of 1984, when Werner Gerich turned up
for duty.
Gerich was the first foreign manager
to be employed by a Chinese firm in four
decades. And he took to his task with
gusto, donning white gloves to check the
factory’s instrumentation for dust, and
sacking a senior manager he deemed
responsible for quality shortfalls.
Cue consternation: how could a
T oyota’s current crisis (9 million cars recalled, and counting) show that any-
one can make mistakes – even the Japanese.
But its quality woes are largely unexpected ones. Fewer of us would have been
foreigner dismiss
a Party
surprised to hear that it was a Chinese carmaker with an accelerator inadvertently appointee? Gerich
stuck to the floor. himself was
It is an understandable reaction, what with repeated scares over Chinese exports unruffled: “I firmly
in anything from poisonous pet food to toxic toothpaste. As far as the critics are believe that the
concerned, the country needs to sort out its “happy with crappy” mentality. days when those
But how do we judge whether product standards are improving (or not)? On the who contribute
one hand, the massive majority of Chinese exports pass muster, including some much and work
pretty iconic ones (on the back of iPods and iPhones; “Designed by Apple in Cal- hard should have the same pay as those
ifornia. Assembled in China”). who contribute little or do no work at all
But a steady stream of stories about shoddy (and often dangerous) items still should be finished,” he explained to a
finds its way into the international press each year. Check the US Consumer dumbfounded factory floor.
Product Safety Commission website for a long list of China-related scares. Werner’s hard work paid off. Engine
One challenge is a lack of comprehensive information. Buyers might moni- quality improved. Most of the locals
Illustration: www.benitaepstein.com
tor their own shipments but there is no readily available aggregate data, at an were won over. He died in 2003 but is
industry or export market level. But one of the more detailed studies (of recalls remembered by a bronze statue in a
in the toy industry) did turn up some interesting findings1. The initial evidence Wuhan industrial park, and in frequent
seemed to point to a dramatic rise in toy failures, many of them from Chinese appearances in China’s ‘favourite
foreigner’ polls.
Source: 1 Paul Beamish and Hari Bapuji: ‘Toy Recalls and China: Emotion vs Evidence’, Management and Organization Review, 2008
15
Week in China
26 February 2010
“Importers were thinking checkers,

while manufacturers were playing chess”
Paul Midler, a China manufacturing expert, on how Chinese suppliers
often seem to outmaneouvre their importer clients
Paul Midler pulls few punches in Poorly

Made in China, which recounts his
experiences as a factory middleman.
Although he weaves useful
concepts into the book (‘quality fade’
and ‘profit zero’ among them), he
largely avoids bigger-picture analysis
and focuses more on the individual
factories. But when the 550 recalls were reviewed again, three quarters turned struggles between factory bosses and
out to be down to design deficiencies (detachable beads that can be swallowed; their clients.
string that strangles etc). Only about 10% were attributable to manufacturing- That puts the cut-and-thrust
related defects. relationship between a US importer,
Paul Midler, a manufacturing specialist who has spent much of his recent ca- ‘Bernie’, and ‘King Chemical’, a factory
reer on the factory frontline in Guangdong, is still convinced that too many man- filling small plastic bottles with personal
ufacturers have been dodging their share of the blame. That includes a responsi- care products like soap and shampoo, at
bility to point out poor design. In the recently published Poorly Made in China (see the centre of events, although there are
sidebar) Midler recounts one example: a factory boss who receives a faulty shoe other revealing narratives too.
prototype (a nail protruding through the sole) from a Turkish client. Unper- Midler admires the business savvy of
turbed, the factory still cranks out the full order of shoes – all of them with a nail the factory bosses. But he questions the
protruding from the requisite spot. view that they will necessarily become
Midler’s recollections are forceful ones in outlining how factory bosses make more Westernised in their business
money on their deals with buyers or importer middlemen, often by agreeing to outlook as China rises further towards
an initial price that is at (or below) breakeven but then creating profit by cutting prosperity.
corners on quality as time progresses. Midler calls this “quality fade” and contends In fact, in the final analysis, his
that it is common practice. assessment is more pessimistic – that if
He also talks about “profit zero” – an observation that many factory bosses who the manufacturer-importer relationship
accept nominally pitiful margins on early contracts still seem to grow wealthy as is anything to go by, the world now finds
a result. How? It is not just the potential to make up lost ground through “qual- itself interdependent with a Chinese
ity fade” shenanigans. Midler says the bosses view the initial deals as opening nation “…whose reliability is
doors to other opportunities, like running secondary production lines surrepti- questionable”.
tiously with client designs, or borrowing money against the value of the contract
to speculate in property.
Midler’s account paints a picture of an ongoing struggle between foreign buy-
ers and Chinese suppliers, in which the home team often ends up with the upper
hand. Andrew Reich, who runs quality control firm InTouch Services, helping US and
Europe clients work with their China-based suppliers to monitor quality, prefers to
stress an increasing collaboration between the two sides.
Reich also thinks there is an overall improvement in export quality, although
he admits that it is difficult to quantify. Not that he ignores the darker side of the
Made in China phenomenon completely: his company blog (www.quality-
wars.com) features a ‘Recall of the Week’ column highlighting items that have
16
Week in China
26 February 2010
Mattel: crisis in toyland

Sorry is reputedly one of the hardest
words. All the more so when you have
to say it across the sofa to the Chinese
government – and on national TV.
That was the task facing Thomas
Debrowski, an executive vice president
at American toy giant Mattel, in 2007,
following five separate recalls on Mattel
products, involving close to 20 million
toys. The large majority related to
design faults (small magnets that came
loose from toys too easily). But 10%
You’ve been a very naughty boy: Mattel’s Debrowski arrives in Beijing were prompted by concerns at lead
levels in paint.
By the time that Debrowski got to
China, Mattel was in a nasty position.
Back in the US, the class action lawyers
failed to make the grade, including choke-inducing baby dummies and explod- were sharpening their pencils. But the
ing barbecue grills. Chinese authorities were enraged by
Like the Beamish and Bapuji study (see page 15), Reich points to the role of de- company statements that seemed to be
sign faults in many recall scenarios. He predicts too that, as US businesses look to saying that Mattel had been let down by
cut costs in the design process, this could become a growing trend. its suppliers.
In the meantime, Reich stresses the importance of getting partner selection Of course, Mattel then conceded that
right at the outset (sourcing references, asking to see evidence of existing qual- it was the design of the magnets – and
ity control procedures, and auditing production sites). Next up is being very not how they were manufactured – that
clear about what is expected (putting it down on paper in English and Chinese, and was at the root of the recall crisis.
then setting up agreed communication channels and review processes). After that But the state media took the Mattel
come the inspection and monitoring activities themselves (covering checks at var- apology as a general mea culpa,
ious stages of the production process from initial prototyping through to pre- something that Mattel officials later
shipment inspection of the final goods). where the lead paint lapses were
A lot of that sounds like common sense. But Reich says that many importers concerned.
still don’t do enough to lay the ground rules, or ensure that their requirements But why risk further friction with a
are kept to. Companies with brands clearly associated with the goods being man- country producing 65% of your products
ufactured are more likely to be more attuned to potential problems, as they have (and perhaps soon to be buying an
reputational skin in the game. But there are many who just assume working increasing number of them, too)?
practices in China will mirror those in Denver or Dusseldorf. They are the ones Back in the US, many fumed at
who are left exposed when things don’t go to plan. n Mattel’s climb down. “It’s like a bank
robber apologising to his accomplice
instead of the person who was robbed,”
raged Democrat Senator Charles E
Schumer. “They’re playing politics in
China rather than doing what matters.”
17
Week in China
Savers or Spenders?
26 February 2010
No longer just exports

in a ‘Made for China’ world
Queuing to get in: China’s committed bank savers
How Chinese consumers enter the story…

Until the late 1990s, the Made in China story was primarily about exports to de-
veloped markets. Multinationals sourced parts and components in China, or as-
sembled finished goods there, and then shipped them overseas.
Ten years ago more of a complementary trend started to emerge – one in
which Chinese consumers began to have more of a role. It began with a focus on
the elites (most obviously in burgeoning sales of luxury goods to the wealthy) but $586 billion
is now widening to a much bigger market of ‘middle class’ locals. Spending in the current government
This growing focus on Chinese consumption is being given more emphasis by stimulus plan, initiated in late 2008
the need for a ‘rebalancing’ of the domestic economy. The argument is one that
regular readers of WiC will be familiar with. Beijing is committed to delivering at
least 8% GDP growth each year and its planners have tended to rely on two tech-
niques to make their numbers. One is to favour policies that promote the sale of
Chinese goods overseas. The other is to rely on government investment in infra-
structure to generate demand for locally produced goods and services.
It looks like a strategy that could be approaching its sell-by date. Shoppers in
the US and in Europe are tightening their belts, so exports are unlikely to take up
the strain like they once did. And the massive stimulus spending of the last 12
months cannot be maintained indefinitely. Indeed, there are signs that it is al-
ready being reined in.
So attention turns to a new growth driver: the Chinese consumer. It’s time to
go shopping.
18
Week in China
Savers or Spenders?
26 February 2010
Key motivators for saving in China
Kid’s education
Retirement
Medical care
Home purchase
Kid’s wedding exp.
0% 10% 20% 30% 40%
Key motivations for saving
S Source: PBoC, HSBC
But the Chinese prefer to save, not to spend…

However you choose to measure it, the Chinese opt to save a lot more of their in-
comes than the rest of us. At around 35% of GDP, private consumption is “off-the-
charts” low, according to consultancy McKinsey, and only about half of the equiv-
alent figure in the United States1. It is much lower than the other BRICs too (65%
in Brazil, 62% in Russia and 57% in India).
What’s more, the savings rate has actually been increasing in recent years. That
seems a little counter-intuitive for a period in which incomes have also been on
the rise. HSBC’s research shows families now keep back almost 40% of their dis-
posable income each month, well up on levels in the 1990s2.
747 million
Number of Chinese mobile phone
Why the reluctance to spend more? subscribers
Fear of what might need to be spent in the future is one generally accepted fac-
tor – or ‘precautionary saving’ in economist-speak (see chart above).
One contributory cause is the one-child policy. That means fewer mouths to
feed in the here-and-now. But the Chinese have traditionally counted on their chil-
dren in old age, so when they look ahead and see fewer relatives to rely on, they
put more money aside.
The collapse of the ‘iron rice bowl’ means that many now try to save more too.
Up to the end of the 1990s, the state-owned enterprises were still accounting for
three quarters of urban jobs. Pay was low but at least there was a rudimentary wel-
fare system, with housing, education and basic pension. But as restructuring
kicked in, many of these benefits disappeared.
1
Sources: McKinsey Global Institute: ‘A Consumer Paradigm for China’, 2009
2
HSBC Research: ‘China’s New Deal II, Unleashing consumer power’, 2010
19
Week in China
Savers or Spenders?
26 February 2010
More money for rural schools: will it allow farmers to spend more?
So fix the fear factor?

Beijing is beginning to make the right noises about addressing the issues.
Take education, where government spending as a percentage of GDP (3%) is cur-
rently among the lowest in Asia. At the moment, families bear the financial
brunt of educating their children. It can be a substantial commitment: HSBC es-
timates it costs nearly three times average household income to get a child
through secondary and college education. Rural families with lower incomes
have been hit particularly hard.
But state funds for education in poorer provinces are now on the increase, and
00.12
the government has announced a commitment to nine years of free (and com- Credit cards per head in China,
pulsory) education. compared to 5.4 in the US and
Health reforms are also on the cards, with the announcement last year of 3.0 in Japan
Rmb850 billion in new spending over a three-year period. This will expand basic
healthcare to the large majority of the population by the end of next year, via a
medical insurance scheme that will provide cover based on a multiple of the pa-
tient’s income. Money is also being spent on building new hospitals and health-
care centres, as well as subsidies for prescribed drugs.
Lending helps spending, too…

Most experts agree that the structural health and education reforms will take time
to have an impact on Chinese saving habits. Getting the population borrowing
more is likely to have a more immediate effect on consumer spending levels.
Chinese consumers still hold only 0.12 credit cards per head. And with only 1%
of consumer spending made on credit cards in China (versus 30% in the US) that
leaves a lot of slack for locals to put more on the plastic, according to HSBC.
The banks are keen to grow their consumer loan books, especially as lending
on infrastructure projects starts to slow. Lending to individuals is also regarded
as a safer prospect than to corporate borrowers, if China Construction Bank data
20
Week in China
Savers or Spenders?
26 February 2010
“Plastic is playing a more and more impor-

tant role in spurring consumption and
boosting economic growth”
China UnionPay, the clearer of credit card and bank card transactions. Its bullish
view on swiping was confirmed this Lunar New Year when $8.3 billion was spent
on the nation’s bank cards during the seven day holiday, a 43% increase over 2009
is anything to go by (CCB estimates a 1% consumer finance default rate versus a

2.1% corporate one).
Consumer credit is already growing faster in percentage terms than total
loans: at an annualised rate of 22% over the last five years (mostly in mortgages,
but also in car loans and student loans). Improvements in credit infrastructure
should see the rate pick up further. There are now 640 million people covered by
credit rating systems, although only a little over a fifth have taken the chance to
borrow money. Further reforms are still needed – the country lacks a personal
bankruptcy law, for instance – but the growth rate in credit supplied at least sug-
22%
Annual growth in consumer loans
gests that some Chinese consumers are starting to close some of the gap on their
over the last five years
international peer group.
So when will we see more being spent?

Hopes that Chinese consumers will take up the baton in spending from de-
pressed markets in the US and Europe need to be measured ones, says Michael Pet-
tis, a professor at Peking University3.
Pettis points to data that suggests that Chinese households spent roughly $1.2
trillion in 2008, only a little more than those in France ($1.0 trillion) and a lot less
than Japan ($3.2 trillion) and the US (still the consumer-supreme with $9.4 trillion
in household spending last year). And it is not just a case of consumption having
to grow in absolute terms, he says. It has to grow faster than GDP if rebalancing
is really to occur.
Still, most market commentators do expect to see China’s savings rate begin
to fall. HSBC forecasts a decline of at least 5% in the next three years, and McKinsey
has similar expectations. And even if Chinese spenders will not be overtaking their
counterparts in Europe or the US any time soon in per capita terms, they will still
constitute a substantial market (and one of the few rapidly growing ones).
So who are they and what does their emergence mean for the Made in China
label? n
Source: 3Michael Pettis: ‘The difficult arithmetic of Chinese consumption’, December 2009
21
Week in China
The 1.3 Billion Consumers
26 February 2010
Made for China... but for whom?
The Nine
Nations
The Back Door
(South coast, around Hong Kong,
population 112m)
The Metropolis
Welcome to the new crowd? Beach-goers in Dalian (Shanghai,Jiangsu and Zhejiang,
population 147m)
“
C hina is a big country, inhabited by many Chinese” is never going to win prizes
for insight.
It comes courtesy of Charles de Gaulle, who pushed through French diplomatic
The Yellow Land
(Beijing, Tianjin, Shandong, Hebei, Henan,
recognition of the People’s Republic under Mao in 1964. Shanxi andf Shanxi, population 359m)
Critics sniped that the General had his eye on a potential market for French
goods. Almost 50 years on, and no one would disagree with him. But China’s great The Refuge
size and population, as well as its decades of seclusion under Mao, mean that the (Sichuan, Chongqing, population 110m)
tendency to lump its people into an amorphous mass is an enduring one.
How to break the Chinese down from a 1.3 billion monolith? The Crossroads
One recent classification talks about the “nine nations” within Chinese borders1. (Anhui, Jinagxi, Hubei, Hunan,
It mixes in geographical, historical and cultural colour to create a list of quasi-re- population 226m)
gions, each with its own character, resources and dynamics. For example, The Rust
Belt is the three provinces of the far northeast (109 million people, once a bastion Shangri-La
of the Party and heavy industry but now in need of investment and regeneration). (Yunnan, Guizhou, Guangxi,
The Back Door is the South Sea coast, including Hong Kong and Macau, which is population 132m)
a land ‘far from the Emperor’, where reform came first under Deng, and where the
export juggernaut has been strongest). As an overview, it is a simplified one and The Rust Belt
still full of generalisation. But it is helpful in highlighting some of the differences (Liaoning, Jilin, Heilongjiang,
across China, and not just the nation’s similarities. population 109m)
Another technique is to look at how the country’s different generations have
been shaped by their experiences, and what that might mean to their attitudes The Frontier
today. For instance, the dwindling number of “traditionalists” (those born before (Inner Mongolia, Gansu, Qinghai, Xinjiang,
1945) could be classed as a generation exposed to years of war, hardship and so- Tibet, Ningxia, population 86m)
The Straits
Source: 1Patrick Chovanec, ‘The Nine Nations of China’, The Atlantic, November 2009 (Fujian, Taiwan, population 59m)
22
Week in China
26 February 2010
Not white or blue...

but black
References to “white collar" workers
first cropped up in American academic
debate shortly before the First World
War. Blue-collars (blue for the overalls)
were a notch down the social scale.
Lang Xianping, a Hong Kong-based
academic, says that we need to add
another stereotype to the working list
as far as China is concerned – a ‘black
collar’ version.
Lang, who made a name for himself
as a fearless talk show host, began
publicising the term last year. He says
that there are at least two million black
cial upheaval – and the most attached to the anchoring traditions of Chinese so- collar types, or people for whom
ciety as a result. “everything is hidden”.
The “boomers” (those born in the 18 years after 1946 and brought up during the The typical black-collar? He dresses
Mao years) are said to be more likely to look to the state than family or history for nattily in black, drives a luxury (black)
their identity. Those born between 1965 and 1979 are luckier. As “Generation X”, vehicle (like the Audi pictured to the left),
they are beneficiaries of the rising living standards unleashed by Deng’s reforms. enjoys the company of a secret mistress
Although not fully savvy in their world-view or consumer identity, Generation X or two and earns hidden income from
rejects ideology for a more pragmatic outlook on life. the murky world bridging officialdom
And then finally “Generation Y”: those born between 1980 and 1995. These are and more nefarious activity.
the Little Emperors of the one-child policy era. They are far more self-confident Lang says black-collars know how to
and demanding consumers, largely familiar with technology and increasingly play the system. Many have done well
proud of China’s place in the world. recently on the back of the stimulus
spend-and-lend campaign.
What about income-based definitions? So forget blue-collar industriousness
What is clear is that incomes are on the up nationally. Spending power is on the or white-collar self-improvement. Black-
rise with them. Chinese GDP per capita has risen from Rmb1,893 in 1991 to collars flourish in the more secretive
Rmb22,698 ($3,324) in 2008, according to HSBC data2. world of personal connections and
That leads analysts to look for thresholds that signal new phases of consumer corrupt practice.
vigour. One commonly-discussed trigger: it is reckoned demand for home ap-
pliances accelerates when households reach Rmb9,000 in annual disposable in-
come. Another more recent trend to get attention is “regional catch up” – espe-
cially from central China – as they close the wealth gap with the more prosperous
coastal zones.
Retail sales growth in more rural provinces has also been outpacing that of ur-
ban areas for the first time in a decade (up 16% up year-on-year for the first 10
months of 2009, versus 15% in the cities). Government programmes like the
‘Home Appliances and Cars to the Countryside’ scheme, in which shoppers have
been benefitting from voucher-based discounts, have helped.
Still, much of the discussion on Chinese consumers still tends to focus on those
with the most readily available disposable income – particularly the ‘affluent’ elite
but also the growing number of ‘middle classes’.
Definitions for both groups differ, and are usually further sub-divided across
a variety of income levels. But although the Chinese wealthy get their fair share
Source: 2HSBC Research: ‘Consuming China; it’s not that simple’, January 2010
23
Week in China
26 February 2010
China’s cities can be grouped into tiers
Beijing
Shanghai Tier 1 “Big Four”
Guangzhou Four largest cities with
Shenzhen highest income, large
population base, and
Chongqing Foshan largest GDP scale
Tier 2a “Climbers” (11 cities)
Tianjin Chengdu
Large population, high income, Wuhan Shantou
and large GDP Hangzhou Xi’an
Nanjing Shenyang
Ji’nan
Tier 2b “Niche” (10 cities) Dongguan Fuzhou Taiyuan Tier 2c “Mainstream” (16 cities)
Wealthy consumers, Wenzhou Qingdao Kunming
Taizhou Changsha Harbin Relatively low income, but large
but relatively small population base
overall market size Ningbo Yantai Tangshan
Zhongshan Dalian Changchun
Suzhou Putian Shijiazhuang
Wuxi Xiamen Zibo Huai’an
Zhuhai Changzhou Zhengzhou Guiyang
Tier 3a “Next frontier” (136 cities)

Linyi Xuzhou Urumchi Jilin
Example cities Nanchang Xiangfan Huizhou Daqing Growing markets with population
Zaozhuang Baotou Lanzhou Huzhou... larger than 1 milliion
Quanzhou Shaoxing Shaoguan Pingdingshan Bengdu Tier 3b “Poor cousins” (484 cities)
Jinhua Zhoushan Liuzhou Xinxiang Zhengjiang
Small cities with urban population
Jiaxing Yueyang Baoding Hengyang Langfang
smaller than 1 million
Dongying Quzhou Xianyang Baoshan ...
Jinzhou Nantong Zhuzhou Huludao
Source: China Statistical Yearbook; MGI analysis.
of press attention – particularly when it comes to luxury goods consumption – it

is the growth of the middle classes that has most of the marketers salivating.
Who are they? In one of the more influential studies (which dates back to
2006), the McKinsey Global Institute defined them as households with annual in-
comes of Rmb25,000 to Rmb100,0003.
It seems like a pretty wide income band, and not especially substantial when
translated back into euros or dollars, especially for earners in the lower half of the
range. But adjusted for local purchasing power, McKinsey thought it corresponded
to $13,500 to $53,900 in earnings – and enough to support a middle class lifestyle.
McKinsey went on to predict that an incredible 612 million Chinese would fall
within that bracket by 2025. More recently it has revised the qualifying range up-
wards slightly – primarily at the lower end – to reflect continuing income growth.
But the expectation of a revolution in income and consumption is unchanged.
612 million
How about ‘city tiers’? Likely number of ‘middle class’ Chinese
Classifications that talk about city type have also been popular. by 2025, according to the McKinsey
Most agree that Beijing, Shanghai, Guangzhou and Shenzhen sit at the top of Global Institute
the pyramid on an income per capita and population basis. But the slicing up of
the secondary and tertiary tiers becomes a little more contentious. Cities like
Chengdu, Chongqing, Tianjin and Wuhan might classify as ‘leading’ tier 2 on
population size and GDP, for instance, while smaller Dongguan and Wenzhou
Source: 3McKinsey Global Institute: ‘The value of China’s emerging middle class’, June 2006
24
Week in China
26 February 2010
364,000
millionaires
Getting rich really did turn out to be
glorious for the 364,000 High Net
Worth Individuals (those with net
financial assets above $1 million) now
resident in China.
Giant in the luxury business: Louis Vuitton in Shanghai The most recent data, from 2008,
saw China’s ultra-rich overtake both
France and the UK in total numbers. But
it will take a little longer before the
could be classed more in the niche tier 2 mould. super-affluent in Japan (1.37 million) or
The pyramid then descends down through other tiers of cities until it reaches the US (2.46 million) are hauled in too.
its “poor cousin” – the smallest cities with the lowest incomes. The point, of How is China’s wealthy elite
course, is that the city tiers can be segmented in different ways, even if there is different? No great surprise in that it is
usually general agreement on the pyramid’s basic outline. almost entirely made up of first
Some think city tier analysis is too simplistic and prefer to focus on ‘city clus- generation entrepreneurs rather than
ters’ instead. In this approach, cities within a short distance of one another are some of the ‘old money’ that appears in
grouped into hub-and-spoke relationships4. The analysis also looks beyond in- the rankings in the Western world.
come to other factors that might be shaping consumer behaviour, such as gov- Less than 1% of the Chinese group
ernment policy and demographics. made their money through inheritance,
Under city cluster analysis, Shenzhen and Guangzhou are treated as very dif- compared to a little over a third of the
ferent markets, even though they would both be classed in the same group in a Americans (and a quarter of the Brits),
standard tier-based approach. says HSBC.
Despite being only three hours apart, the two cities have very distinct profiles. A third of the Chinese elite also turns
Shenzhen’s inhabitants are much younger and much more transient (rural mi- out to be a member of the Communist
grants figure heavily, and only 10% of Shenzhen’s population was born locally). Party. Proof that politics and profit are a
That makes Mandarin the preferred language – acting as a lingua franca amid a compatible mix?
wide range of provincial dialects. It is also a factor in shaping consumer prefer-
ences. These differ from Guangzhou, where the average local is older, much more
likely to be a city-native (three quarters of the population is locally born) and con-
verses overwhelmingly in Cantonese.
Still, the different variants of city-based segmentation will maintain their ap-
peal long into the future, especially as urbanisation continues as a major driver
in economic development. Estimates for the number of city dwellers in China by
2030 are now reaching 1 billion at the high end of the range.
And foreign companies already acknowledge that sales efforts must respond to
the differences in urban income levels and growth rates. Most luxury goods firms
have concentrated their retail presence in tier 1 cities but they are now realising
that tier 2 markets are often the ones promising the greatest potential growth.
Source: 4McKinsey: ‘The 2009 Annual Chinese Consumer Study’, September 2009
25
Week in China
26 February 2010
It is a theme discussed in recent HSBC research on the luxury goods market in

China5. Elsewhere in the world the luxury companies are expanding into smaller,
“tourist destination” markets like Cannes, Las Vegas and Geneva from pre-exist-
ing strongholds in capital cities such as London, Tokyo and Paris. Yves Carcelle,
chairman and CEO of Louis Vuitton, has even gone on record as saying that cities
with populations above a million can probably justify a store opening. China has
at least 200 cities in that category. HSBC’s research doesn’t go quite that far, con-
46
centrating instead on the 46 Chinese cities with two million inhabitants, or dou- The number of Chinese cities with
ble the Carcelle threshold. populations above 2 million people
In fact, HSBC thinks that Chinese consumers will already account for as much as
35% of the luxury sector’s global growth this year. And the growth potential will re-
main strong for those that get it right in opening new stores in under-served loca-
tions. One example given: Paris has five Louis Vuitton locations for a population the
same size as Hefei (China’s 49th largest city), which has no LV store of its own. n
Source: 5HSBC Research: ‘Luxury “red bull”; why China brings excitement and a potential headache’, Jan 2010
Shanghai Banking Corporation Limited, HSBC Securities (USA ) Inc., member of NY SE, FINRA and SIPC, and HSBC Bank USA , NA . 09-035
HSBC operates in various jurisdictions through its affiliates, including, but not limited to, HSBC Bank plc, authorised and regulated by the Financial Services A uthority, The Hongkong and
Take a view on China.
Anhui, China
Talk to the bank that lives in emerging markets.

And let HSBC’s global network open up a world
of opportunity for your business.
GLOBAL BANKING AND MARKETS
26
Week in China
Selling to the Chinese
26 February 2010
Tailor-made for China shoppers?
Confused? Many Chinese shoppers think Pepsi is a local brand...
Y ou are a multinational firm with a presence in China. You know that there
are local consumers that have the income to purchase your products. But
how should you encourage them to do so? Will they want to buy what you have
to offer?
The Chinese are a patriotic people, and increasingly so as the country rises to
international prominence in economic and political terms. And one expectation
23%
is that patriotism plays a role at the checkout too, especially when local products Percentage of consumers questioned by
are cheaper or perceived to be more aligned to local tastes. BCG who thought Chinese company TCL
That was a hypothesis that the Boston Consulting Group, a consultancy, sought was foreign: probably because the
to test in a revealing survey two years ago1. A large sample of shoppers was asked company name uses Latin letters rather
if it preferred homegrown brands to international ones. True enough, the majority than Chinese characters
said that it did, in every category except consumer electronics and luxury goods.
But when BCG started looking at what the shoppers were actually purchasing,
it found that foreign brands were more than holding their own.
This was more than a case of an overstating of patriotic credentials. Shoppers
had bought foreign goods assuming them to be China ones – particularly so in
personal care products like Pantene, Colgate, Crest and Head & Shoulders, where
foreign products were mistaken as local as much as 80% of the time. A quarter of
respondents even thought that Pepsi was a Chinese brand.
Some of the confusion was understandable. Companies like Procter & Gamble
and Unilever had been so adept at tweaking their shampoo, soap and toothpaste
to appeal to local tastes (BCG calls them “chameleon brands”) that shoppers had
Source: 1Boston Consulting Group: ‘Foreign or Local Brands’, September 2008
27
Week in China
26 February 2010
“Never dilute your brand’s Western-ness”

Radha Chada, luxury goods specialist and author of The Cult of the Luxury Brand
genuine problems identifying them as non-Chinese. In this respect, at least,

‘Made for China’ was working very well indeed.
No loyalists in luxury?
In other categories, foreign brands have a leadership position for wholly differ-
ent reasons, most notably in luxury goods. At the opposite end of the spectrum
to the chameleons’ experience, luxury brands actively champion their interna-
tional credentials. In this marketplace, Made in China won’t cut the mustard. It is
precisely because of notions of overseas craftsmanship and cachet that the brands
are so desired. Diluting the ‘foreign’ quotient is a risky move.
That sounds like excellent news for the high-end handbag merchants and sell-
ers of sophisticated suitcases. As WiC has discussed previously, the luxury brand
companies now see Chinese demand as critical to future profits.
But some are now ready to challenge the local prejudices, and produce a specif-
ically Made for China range. Luxury China offers a good overview of
French luxury house Hermes is in the middle of launching an “affordable China’s luxury landscape, including
luxury” handbag brand, Shang Xia, that, according to reports in the French news- case studies on global brands such as
papers, will be the first Hermes brand to be designed, manufactured and sold en- Alfred Dunhill and Rolex, and aspiring
tirely within China borders. ‘local’ ones from the Greater China
Hermes must believe that a two-tier approach is possible: maintaining the in- region like Shanghai Tang and Liuli
ternational cachet of its premium-priced products but also offering an alternative Gongfang.
range that appeals more to local consumers on tighter budgets. Particular features that stand out?
Competitors will be watching closely to see if consumers accept Shang Xia in The China market is unusual in being
its own right and not reject it as a second-class experience, too distant from the dominated by male buyers (although the
pleasure of buying the “real thing”. proportion of female customers is
Swiss watchmaker Longines faced just such a situation in the 1980s, says McK- growing). Watches remain a top seller (a
insey, after launching a brasher product line meant to appeal to wealthy Chinese. $1.3 billion market), with three quarters
It failed. Consumers were suspicious that they were getting a product that was- given as business gifts.
n’t on offer elsewhere2. And men will shop at the same store
for gifts for their wives and their
Running on auto… girlfriends, apparently. The wife gets the
Few sectors are generating as much buzz as the Chinese car industry at the mo- more traditional-style gift, the mistress
ment. As WiC has noted, companies like General Motors look a lot healthier in something flashier.
their China-based operations than they do back home in Detroit. Co-authors Michel Chevalier and
But GM has been doing a lot more than trying sell its US-centric models to Chi- Pierre Xiao Lu also offer a word of
nese drivers. Instead it has been taking the advice of a China-based design team caution amid the wider excitement
to make brands like its Buick more popular. surrounding market prospects in China.
The best example: the 2010 Buick LaCrosse, which has been styled internally The battle for profitability will be a hard-
with Chinese tastes to the fore – these include items like a rear-window power sun- fought one, they say, and smaller brands
shade and two seatback display screens for a DVD system. will have to invest heavily to build
Five years ago, when the latest version of the LaCrosse was shown to the Chi- awareness.
nese marketing team, the response was lukewarm. The design might appeal to the
Source: 2McKinsey: ‘Understanding China’s wealthy’, July 2009
28
Week in China
26 February 2010
brand's ageing US consumers, head office was told, but it was a lot less enticing
for Chinese drivers, who were half the age and looking for something much more
fashion conscious.
So GM allowed a local redesign – and the sleeker-interior Chinese version sold
well as a result. In fact, it easily outsold the Buick model that was available on US
release and has continued to do so (for the first nine months of 2009, Buick sold
312,798 vehicles in China, approaching five times sales in the United States).
So for the 2010 LaCrosse, the team was given the interior design brief on a
global basis: an early example of the Made for China ethos going on to become
the product standard for customers further afield.
Stretching for status

In fact, redesigns to accommodate Chinese car buyers are becoming much more
common practice in the industry, especially in the premium segment.
For example, government high-flyers (or successful businessmen) don’t drive
themselves. They are chauffeured. So space and comfort for back-seat passengers
is the priority. The result: premium cars are being stretched further than the in-
ternational average, with longer wheelbases. The Audi A6L is tailored to be 10cm
longer, for example, and the BMW 5 Series and Mercedes-Benz E Class are both
stretched out an additional 14cm too.
That must be a comforting thought for foreign executives – a successful mar-
rying of local tastes with their premium brands.
It is an issue getting plenty of press coverage at the moment in the wake of
Geely’s efforts to consummate its lengthy courtship of Volvo. The consensus
coming out of international media – that Geely would be mad not to maintain
Volvo as a standalone brand, safe in its Swedish reputation for safety and relia-
bility – underlines the point.
Interestingly, the Chinese press does not wholly disagree, noting an underly-
ing consumer bias against vehicles that roll off Chinese production lines, espe-
cially for expensive cars. And it is true that wealthier car buyers who can afford
to buy a foreign-brand car have often opted for imports rather than the made-in-
China, joint venture-produced models.
But if the global manufacturers can persuade more China customers to buy ve-
hicles built on a local cost base, tailored with China features, but still priced at an
international brand premium, then ‘Made for China’ could turn out to be the life-
saver that they’ve been looking for.
14cm
The increased wheelbase on
the BMW 5 Series for Chinese buyers –
designed to keep back-seat drivers
happy
Chinese-made BMWs on show in Guangzhou

29
Week in China
26 February 2010
“A foreign brand with local characteristics” KFC in China, Secret Recipe for
Success has become a go-to guide for
Warren K Liu, former member of Yum! Brands Greater China executive
committee, on why KFC has been so successful in China company executives wanting to break
into the China marketplace. But the
author Warren Liu (a senior executive
at KFC holding company level during
the brand’s China push) keeps things
high level. There is little detailed
Local taste, local profit financial or operational focus. But the
The search for the right local flavour goes on in the food and beverage industry basic lessons are still worth retelling.
too, and by some of the biggest brands in the business. Among them: KFC choose its local
Coca-Cola is a good example. Late last year it introduced its first milk-based partners well at the outset; its business
product in the Chinese market, which had been developed at the company’s strategy was ‘context-dependent’ i.e.
Global Innovation and Technology Centre in Shanghai. Minute Maid Super Pulpy China-appropriate and not mandated
Milky (a mix of fruit juice, milk powder, whey protein and coconut bits) was con- by US head office; and once it found a
ceived specifically for the China market. Coke has done this before, launching successful formula it opted to grow
Minute Maid Fruit Grain of Orange, which was pitched around having pulpy bits quickly in search of competitive scale
in the juice (or “fruit meat” as it is known locally). (and outside of tier 1 cities).
The US drinks giant was one of the first American companies to return to China The other strong theme in Liu’s
in 1979. But it wasn’t really until 20 years later that it began to think about di- account is that the management team
versifying more widely from soda-based drinks. But today, it is looking at much was largely ethnic Chinese (a “Taiwan
more of a Made For China product portfolio. Gang”). This allowed for a sense of
Another American icon to earn its China stripes is Kentucky Fried Chicken (or, cultural intuition that meant decisions
more specifically, KFC’s owner Yum! Brands). The restaurant chain has become could be taken quickly, without reams of
something of a case study for how best to grow profitably in China (see sidebar) market research. And that then led to
by positioning itself as a foreign brand with local characteristics. the product localisation that kept
KFC opened its first restaurant close to Tiananmen Square in 1987 and it took customers happy.
almost nine years to grow to 100 outlets. But then expansion took off. In the next The way Liu tells it, Ronald McDonald
nine years another 1,400 restaurants were opened and by last year KFC had never stood a chance.
passed 2,500 outlets nationwide. The fried chicken chain is regularly voted among
the top 10 of China’s favourite brands and still contributes a sizeable chunk of
Yum! Brands annual profit.
But not just by concentrating on sales of finger-licking chicken US-style. Menu
options like Golden Butterfly Shrimp, Fragrant Mushroom Rice, and Preserved
Sichuan Pickle and Sliced Pork Soup (and many more) were designed for the Chi-
nese palate.
True, KFC had an advantage over rival McDonalds in the Chinese preference for
chicken over beef. But the KFC management of the time insists that success was
much more about their ability to adapt to the local environment. KFC was able to
outgrow its rival by two-to-one in store numbers as a result.
KFC is still regarded as a quintessentially American fast food chain by most of
its customers. That can occasionally lead to problems. The firm’s trademark face,
Colonel Sanders, is sometimes mistaken for Uncle Sam and KFC restaurants have
even found themselves in the firing line during anti-American protests.
But most days, being thought of as American chain works in KFC’s favour. It is
something that Warren Liu, the author of KFC in China, is very clear about. From
the very beginning, KFC was never a ‘fast food’ thrill for Chinese consumers. In-
stead, it was more of a sit-down, dining experience. “Dining at a KFC was like tak-
ing a brief tour of America, with all its connotations: political, cultural, time and
space; real or imaginary,” Liu says. n
30
Week in China
A Heritage Reborn
26 February 2010
Made in China: a history revived?
Abacus Mouth organ

190 AD 9th century BC
Anti-malarial drugs Toilet paper

3rd century BC 589 AD
Ball bearings Seawalls

2nd century BC 80 AD
Suspension bridge Silk

6th century AD 2850 BC
Coal as fuel Stirrup

1st century AD 300 AD
Decimal place value Tea

13th century BC 2nd century BC
Gunpowder Weather vane

9th century AD 120 BC
A small selection of Chinese inventiveness: from The Man Who Loved

China, by Simon Winchester
O ne danger in talking mostly about multinational firms and their ambitions

in China is to overlook the tough opposition that they encounter from local
players.
In fact, domestic brands feature heavily in apparel (Li Ning), home appliances
(Hai’er) and food and beverages (Huiyuan, Mengniu) where catering to local 1 in 6
tastes is critical, and in internet-based businesses, where regulatory support has People on the planet that rely on
helped firms like Baidu and Tencent’s QQ take leadership positions. Huawei hardware to make calls and use
Foreign firms are also struggling to make inroads into the overwhelmingly the internet
state-dominated industries of banking, insurance and telecoms.
But outside the country, Chinese brands are not as well known, even though
there are signs that some pioneers are beginning to make their presences felt in-
ternationally.
In part that is because many have focused on a business-to-business sales
strategy, often through OEM deals. Until relatively recently, few have made the ef-
fort to sell direct to foreign consumers themselves.
Dig a little beneath the surface, and the picture changes. One in six people on
the planet rely on Huawei hardware, for instance (internet routers and phone
switches). By 2007, Galanz Group was making 50% of the world’s microwaves (un-
der 80 different brand names). Midea Group, a leader in household appliances and
white goods, now exports to over 130 countries.
31
Week in China
A Heritage Reborn
26 February 2010
“To date, Chinese firms have had only

limited success in building strong global
brands”
One of the findings of a Boston Consulting Group study of 100 ‘New Global
Challenger companies’ (a third of them Chinese) in 2009
Which Chinese brands

The label bites back…
do you recognise?
Of course, being a global business is not the same as being a global brand. In fact, Percentage of respondents (total 776)
there were no Chinese companies at all in the Best Global Brands List for 2009, familiar with Chinese brands (top 10
compiled by Interbrand, a brand consultancy1.
brands only, Interbrand data, 2008).
Similarly, although the Boston Consulting Group applauded the 36 Chinese
companies that made it into a top 100 ‘Global Challengers’ study last year, it Lenovo
also admitted that few were ready to reach the top tier in terms of respected
brand status2. Only China Mobile, Haier and Lenovo had been successful in gen-
personal computers 46%
erating wider international awareness. Tsingtao
The problem: although awareness of China brands overseas is still relatively beer 32%
weak, the negative perceptions surrounding the Made in China label are endur-
ing ones. Bank of China
Reputations take time to build. The Japanese and South Koreans didn’t win in- financial services 24%
ternational respect for companies like Sony, Samsung and Hyundai overnight. In
Air China
fact, they faced “country of origin” challenges very similar to the Chinese today.
But their response was to focus unremittingly on product quality, often at the
airline 23%
prompting of industry-wide improvement campaigns initiated at a governmen- Haier
tal level.
Have Chinese firms begun a similar effort? Many would say not yet, espe-
white goods 23%
cially in terms of industry level initiatives. China Mobile
The 1964 Olympics in Tokyo and the 1986 Games in Seoul also helped in the
boosting of national reputations, with subsequent benefits for Japanese and Ko-
telecoms operator 17%
rean companies. Chery
Beijing will have targeted similar dividends in its own $40 billion Olympic in- carmaker 13%
vestment two years ago, although research from Interbrand says that success was
mixed3. Surveys indicate that there had been an improvement in China’s image Alibaba
immediately after the Olympics but that much of the halo effect was then tar- ecommerce platform 13%
nished by international coverage of the melamine milk scandal.
Huawei
All in all, it is probably too early to draw any definitive conclusions on the
Olympic impact, and this summer Shanghai will get its own chance to fly the flag,
telecoms solution provider 12%
at its World Expo. China Eastern
But Interbrand’s study hints that a lot more work needs to be done. Two-thirds
of respondents (“business professionals” based primarily in North America and
airline 10%
Europe) thought that the Made in China image continued to hurt China brands TCL
abroad. ‘Quality’, for 80% of those questioned, remained the main concern and consumer electronics/
a little over half of respondents felt that Chinese companies had no real com-
petitive advantages except low prices.
home appliances 8%
1
Sources: Interbrand: ‘Best Global Brands 2009’
2
Boston Consulting Group: ‘The 2009 BCG 100 New Global Challengers’, January 2009
3
Interbrand: ‘The Challenge for Chinese Brands Going Global’, 2008
32
Week in China
A Heritage Reborn
26 February 2010
How to make Made in China less of a factor…

Despite poor awareness of Chinese brands in general, Interbrand’s research sug-
gested that there were some signs of breakthrough, with the country of origin-
becoming less of a factor.
Top of the list was white goods, where fewer shoppers regard the Made in China
tag as an issue. Consumer electronics and personal computers, mobile phones and
sporting goods also feature as China-made items in which the country of origin
stigma is diminishing.
That can’t be completely unconnected to Chinese corporate M&A activity in
which local firms have decided to acquire existing brands, rather than build
them up organically. The way that author Simon Winchester
Lenovo’s acquisition of IBM’s personal computing division is probably the best tells it, Joseph Needham’s fascination
known of the recent deals, although TCL was another early acquirer of foreign with China began over a post-coital
brands. The two companies struggled early on with their acquisitions, although cigarette, when his young Chinese
there are signs of both now beginning to pay off. lover explained how the Mandarin
Other companies have been active too, either in buying brands (Haier has characters made up the ideogram for
purchased several US appliance makers, for instance) or investing in interna- ‘fragrant smoke’.
tional distribution (sportswear maker Li Ning is now taking on Nike in its home- It was the starting point for a life
town of Seattle). devoted to the study of all things
But others countenance a more cautious expansion, beginning with emerging Chinese. Enough work, in fact, to fill 24
markets, where concerns about quality are easier to offset with lower prices. This volumes of Science and Civilisation in
is a path that many Chinese firms are choosing to take. But it is hard to see many China – Needham’s classic contribution
of them contenting themselves with African or Indian market share – they will to a reawakening of understanding of
want to command more respect in developed markets too. Chinese inventiveness through history.
Another way of achieving that is through innovation. Traditionally, Chinese The Man Who Loved China tells the
corporate investment in R&D has trailed its peer group. Critics say that the lax reg- story of how all of this was achieved.
ulatory environment also serves as a disincentive; why bother going to the ex- and is worth reading just to marvel at
pense of investing in an idea if there are few barriers to someone else copying it? Needham’s genius (an incredible
Some indicators suggest that may be changing. China’s State Intellectual Prop- polymath, nudist and Morris Dancer too).
erty Office reported a 30% surge in patent applications in 2009, for instance. But the real eye-opener is China’s
There is still some way to go – filings were still only at a fifth of US levels. record of invention. Air-conditioning,
Of course, Chinese history contains a rich heritage of invention and design (see stirrups, toothbrushes, playing cards,
graphic on page 31), and one that has made a massive contribution to human civil- toilet paper, flamethrowers, blast
isation. It is a point worth further reflection. The Made in China label may have furnaces and fertilisers (to name just a
suffered in reputation terms in recent years. But in the broader sweep of recorded few) were all being introduced by the
history, it has enjoyed a wholly different status altogether. Chinese hundreds of years before they
The challenge today is to rediscover that heritage, shape it in a commercial di- would appear elsewhere in the world.
rection, and use it to achieve success once more. n If the country can rekindle only a
small portion of its innovative tradition,
Made in China might well sweep all
before it.
33

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Week in China

From Made in China...

To Made for China

How ‘Made in China’ became

I t’s been embroidered on underpants, stuck onto sachets of shampoo and

Open for business

“At first it took them seven days to finish

A ‘Made in China’ pioneer:

And you remain China-focused in manufacturing terms?

Where have China costs changed most?

What about the renminbi going up?

So no thought of moving your operations further inland, or to another coun-

You are a German engineer by background. Is there anything made in Germany

So the China price advantage still exists?

Take off: from airline food to A320s

Timeline for foreign

1979-91: the ‘experimental’ phase.

“This market is huge, and the Chinese

a Chinese supply chain inextricably embedded into their business model.

And record exports the result?

Why Steve Jobs comes out on top in China –

The China price

Dolled up for the Wal-Mart shelves...

I t is five years since BusinessWeek magazine christened ‘the China price’ as

Where does the price advantage come from?

Major Industrial Clusters in Zhejiang province

Clusters help firms compete by smoothing uncertain demand patterns. Firms

competitiveness in the preceding three years (the renminbi’s appreciation against

Source: 3AlixPartners: ‘US Manufacturing-Outsourcing Cost Index’, February 2010

“Within Guangdong’s borders are some of

many of raw material inputs)?

Still “happy with crappy”?

Wuhan hires Werner

“Importers were thinking checkers,

Paul Midler pulls few punches in Poorly

Mattel: crisis in toyland

No longer just exports

Queuing to get in: China’s committed bank savers

How Chinese consumers enter the story…

Key motivators for saving in China

Kid’s wedding exp.

0% 10% 20% 30% 40%

Key motivations for saving

S Source: PBoC, HSBC

But the Chinese prefer to save, not to spend…

So fix the fear factor?

Lending helps spending, too…

“Plastic is playing a more and more impor-

is anything to go by (CCB estimates a 1% consumer finance default rate versus a

So when will we see more being spent?

Made for China... but for whom?

Not white or blue...

China’s cities can be grouped into tiers

Tier 3a “Next frontier” (136 cities)

Source: China Statistical Yearbook; MGI analysis.

of press attention – particularly when it comes to luxury goods consumption – it

It is a theme discussed in recent HSBC research on the luxury goods market in

Take a view on China.