Tuesday, December 30, 2008

Let Old Disasters Be Forgotten

It was Queen Elizabeth II who first publicly used the term “annus horribilis” (before that it was considered to be in poor taste to refer to certain parts of anatomy in public). She was, of course, referring to the miserable year that she had in 1992, where most of her children parted company with their spouses and her house (Windsor Castle) caught fire. More recently, the Economist referred to the year 2008 as the Wall Street’s annus horribilis – at the end of which, of Wall Street’s five big securities firms, only Goldman Sachs and Morgan Stanley still remain in recognizable existence.

The Chinese started the year 2008 with great expectation and anticipation. After all 2008 should have been a lucky year - an “annus mirabilis”, as all years, months and days which include the number “8” are expected to be. However, the year had merely commenced when tragedy struck in the form of the worst snow storm ever witnessed by China, with millions of workers stranded on the road, trains and railway stations and unable to make the almost mandatory trip back home for the Chinese new year. The snow had hardly melted and the workers barely resumed their roles in turning the economic wheel of China, when the earth trembled viciously in Sichuan province, and destroyed thousands of lives, and hundreds of thousands of home and livelihoods.

China did have its day in the sun when it unveiled the opening ceremony of the Olympics on the 8th day of the 8th month of 2008 and dazzled the world with its technical prowess and cultural richness. As widely expected, it brought down the curtain two weeks later with the largest haul of gold medals - even though their favourite 110 metres hurdles runner, Liu Xiang, broke the nation’s heart by limping away from the track nursing an ankle injury.

The glow of national pride was blindingly bright and many thought that it had changed China for ever. But then the “melamine” tragedy struck, a grim reminder of the hazard of greed overshadowing a sense of right and wrong. Thousands of children in China were hospitalized as they developed kidney stones as a result of drinking milk which was contaminated with melamine – an industrial chemical which found a new revenue stream as an aid to showing a high protein level reading, even when the milk has been diluted.

Already hurting at the monumental collapse of their stock market, the financial sentiment further deteriorated as all hell broke loose on Wall Street. Initially the economists and the government shrugged off the threat and felt reasonably secure and “decoupled”. However when the American consumers stopped buying the toys made in Guangdong province in South China, and workers were seen arguing for their unpaid wages, a realization dawned that this would be as much a Chinese crisis as an American one. China’s exports actually declined by 2.2% in November 2008 – first decline seen in the last 7 years.

Today, gloomy economists are speculating whether China (along with India) will be one of the worst affected economies from the credit crunch. Particularly China, which depends so heavily on exports (accounting for 37% of its GDP). How it is going to run those factories and pay the wages when the orders dry up as American consumers either do not have money or do not feel inclined to spend it. Will it be able to find alternative routes to maintain the growth? Will the traditionally thrifty Chinese (with 25% household savings rate) want to hoard even more when they see the gloom in the West? The car sales in China have already seen a negative growth in recent months. Consumers are reluctant to buy houses, an activity that added significantly to economic growth in the last decade.

That China will slow down and that the current crisis signals the end of the uninterrupted double digit growth which made China the cynosure and envy of the world is not disputed now. However, will it merely decelerate to a more modest, but still a healthy growth, while continuing on the path of striving for a better life for its citizens, or will it derail and cause ruin and mayhem. So far the government has been responsive. Interest rate has been reduced as many as five times in the last 5 months to stimulate lending and borrowing. The government has also announced that it will spend as much as 4 trillion yuan (US $ 586 billion) over the next couple of years to stimulate demand. A mammoth amount is planned to be spent on infrastructure projects, including adding 41,000 kms of railroad by 2020 and providing six million jobs on the way. However, this alone is unlikely to suffice to ensure a continued ride for the Chinese on the train to economic prosperity. To continue on the joy ride, the Chinese economy will need a nimbleness and openness with which it can reinvent itself and wean itself from the export dependence that it has been flourishing on so far.

Written by Ashok Sethi

Thursday, December 18, 2008

China's lower-tier markets get a fillip

Published in South China Morning Post, November 24, 2008

Moving to lower tier markets

Concomitant with the spread of economic prosperity from large cities and coastal areas of China to inland and lower-tier cities, the market for consumer products is also expanding to wider geographical areas. While the sword of current economic crisis hangs perilously over China, there are indications to suggest that the economic measures initiated by the Chinese government to stimulate domestic demand (particularly the plan to spend 4 trillion yuan or 586 billion dollars in the next 2 years) will actually accelerate the spread of consumer products to lower tier cities and rural China. For marketing companies, this is an opportunity to move resources and investments in lower tier cities to secure a firm position in these markets of ever increasing importance.

Penetrating China

According to a survey done by AmCamb Shanghai among its members in 2007, 40% of the surveyed companies had no presence in the lower tier markets. Even successful companies like McDonald’s only operate in less than 200 of the over 600 main cities and 20,000 towns in China – not to mention the countless villages which dot the country. The fact remains that the companies operating in the big cities are only scratching the surface the four top cities only account for 3% of the population – in fact the total urban population together is only 45% of the population of China. It is not surprising, therefore, that the most successful companies in China are those who have been able to penetrate the lower tier and rural markets of China.

Though the transition from the large metros to the lower-tier and rural markets is imperative for growth, it is not always easy to implement. The lower tier cities and rural areas differ significantly from the large cities in many ways – not only in lower incomes but also in terms of the profile of the consumers, the way we can access them, the retail infrastructure, consumers’ media habits and the way they think and make brand choices. Marketers need to carefully decide their expansion strategies, and modify their marketing tactics in sync with the local consumer preferences, lifestyle and habits.

Financial crisis and China

In the meanwhile, as the world bemoans its financial woes, after some debate, a consensus has emerged among the economists about the potential impact on the Chinese economy. China, most now opine, can not escape unscathed from the global financial mess. The official figures also suggest a slow down (GDP growth of 9.9% in the first 3 quarters of this year, 2.3% lower than the same period last year) and a shadow of nervousness over job cuts and future uncertainty mars the mood of the Chinese consumers.

The biggest worry comes from the likely impact on Chinese exports. China is the factory of world, and its low priced products sit smugly on the shelves of Walmart in America, from where the consumers have been scooping them into their super sized shopping baskets with a flourish and getting past the tills with their over stretched credit cards. With American consumers losing their jobs, seeing their houses plummet in value, and their credit cards less yielding, the Chinese products seem to sit longer on the shelves, and the orders for factories in Guangdong seem to be approaching a drought.

In anticipation of further accentuation of the impact on growth, the Chinese government is naturally and logically hastening to stimulate the domestic demand. Last month the State Council announced that China will spend a generous 4 trillion yuan over the next two years to offset adverse global economic conditions by boosting domestic demand. This money will be spent on 10 major areas – which include rural infrastructure, build more affordable housing, including rural housing, transport, raising average incomes – particularly in rural areas.

While all these measures are targeted at stimulating the overall domestic demand, their effect is likely to be even stronger in lower tier markets, including rural markets. In essence, the importance of lower tier markets in China has received a big boost from the global economic crisis. This stimulus package will give a fillip to the lower tier markets in a number of ways:

- Firstly, it will provide employment opportunities related to the investment in infrastructure and other accelerated economic activities in rural China. It is estimated that investment in railway construction alone will create 6 million jobs.
- Secondly, the government plans to spend on poverty relief and try to raise the income of the lower income groups to raise their consumption ability, thereby facilitating another objective of the Chinese government – that is narrowing the ever increasing urban rural income divide.
- Thirdly, it will improve physical access to lower tier and rural markets through construction of new and improved road and railways infrastructure and hence ease the expansion of distribution networks. l
- Lastly, by providing low cost housing, it will increase the disposable income available to lower tier residents.

While the stimulus package would boost the overall economy, it would also ensure that the benefits accrue more to the lower income consumers, and those who are away from the more accessible large cities, and thereby paving the way for faster expansion of consumer goods to lower tier markets.

Written by Ashok Sethi, TNS China