In October 2015, China announced plans that it would be abolishing its one-child policy the following year, in hope of rebalancing its top-heavy population which is expected to see 500 million folk aged over 60 by 2050. The announcement, coupled with the earlier one-child policy changes, had brands selling everything from infant formula to educational toys readjusting their sales forecasts north. Even Disney invested an additional $800 million in the construction of the Shanghai Disney Resort to add extra capacity to account for the fertility spike.
On the surface things started off well, with birth rates jumping 7.9% between 2015 and 2016. But it was always likely to be just a blip. 2016 was the Year of the Monkey, which was a much more desirable zodiac for childbearing than 2015, which happened to be a Sheep Year. Superstitious Chinese don’t want their kids to be the docile followers associated with our woolly friends.
There was also some pent up demand from parents who had always longed for more than one child. Yet for most Chinese couples, the 37-year-old One Child Policy had reengineered the national psyche making it socially acceptable to have a single child. The competitiveness of China’s education system also sees parents invest significant sums into their child’s education and development, coupled with the premium paid for safe food and beverage and other extras to ensure their child gets the best start at life. Most couples consider it too expensive to have more than one child.
Since 2016, birth rates have fallen off a cliff, dropping by 12% in 2018. In another troublesome sign for China’s fertility planners, marriage rates hit record lows in 2018. Couples need to be married in China to legally have a child. Beijing will be banking on the country’s investment in robotics and Artificial Intelligence to help make up for the falling working population.
So should those infant formula brands, Lego, Disney and other companies hoping to sell their wares to Chinese youngins be revising their revenue forecasts down? Not at all. As Chinese families’ affluence rises, a disproportionate share of the increase goes to their child. As they only have one, few cut corners. A child born today will have parents earning 130% more than those born a decade ago. There have been countless surveys with Chinese consumers over the years about how they would spend additional wealth, and a large percentage always cite they’d spend it on their child’s education and development. Even extra budget directed at travel will often be to take the kids away, with families one of the fastest growing outbound tourist segments.
To get a real taste of how important the market for children’s goods and services is, take a trip to the town of Zhili in Zhejiang Province this November. The town famous for its child garment factories has a population of 100,000, which swells to around 350,000 around peak times such as Singles’ Day. The population boost comes from families relocating there in the hope that their kid will become China’s next top child model. Kids can earn up to ¥10,000 ($1,500) a day, with the most popular models reportedly earning a million ($150K) a year. The modelling rates highlight just how lucrative the children’s fashion category is, but also its competitiveness.
Although birth rates are falling, there were still 15.23 million children born in China last year – and a greater portion with affluent parents than ever. Citi Research, in their short video about the infant formula category, summed the situation up well: “having the right route-to-market, especially in the online channel, matters more than the underlying market”. That could be said for virtually every category in China, where there remain enormous target markets still willing to spend, regardless of slowing population or economic growth. China Skinny can assist with your route to market. Go to Page 2 to see this week’s China news and highlights.
Since Australia established formal diplomatic ties with the People’s Republic of China in 1972, the country’s fortunes have become increasingly linked to the Middle Kingdom. No Western country’s economy has benefitted more from China’s rise than Australia. Much of China’s unprecedented economic growth has been built with Australian iron ore and powered by Aussie coal and liquified natural gas. In a way, Australia’s resource traders blazed a trail for Australian exporters, teaching cultural lessons about doing business in China, and raising China’s profile as a destination for exports.
Since Chinese consumers have started entering the middle class, Australian brands have been relatively quick to make their goods and services available to them. Over the past couple of Singles’ Days, Australian products have been the third and fourth highest ranking country for product origin, even though Australia isn’t even in the top-50 countries by population.
Australia’s success in exporting to China always had pretty good odds. Australia’s relatively close proximity to China, in both flight time and time zones, makes it easier to get up to the market to do business. And unlike other major western economies, Australia doesn’t have a large domestic base or similar countries close by to send their wares, so it has always had to be a little more adventurous when prospecting for export markets. It is also the often-unthanked Chinese residents in Australia and visiting tourists who have helped promote many Australian things to their friends and family back in the Mainland. No country outside of Asia has more people of Chinese heritage per capita than Australia, on top of the 1.4 million Chinese who visited Australia last year.
In 2017-2018 Australia’s exports to China were $123.3 billion, or 30.6% of total exports. This dwarfs Australia’s number two destination of Japan where exports were $51.3 billion. Over the past five years, exports to China have surged 56%, whereas Japan grew by just 6%. Yet it’s not all Kumbaya and shrimp and steak barbecues, Sino-Australian relations have deteriorated lately, particularly over the past-12 months.
Australia’s position as one of the pioneering, best practice and reliant exporters to China – balanced with its increasingly precarious stance on geopolitics – makes it one of the most important and interesting relationships to monitor in today’s globalised world. That’s why China Skinny was honoured to be back again this year working with Austcham Shanghai on the second annual Westpac Australia-China Business Sentiment Survey which launched yesterday in Sydney. The survey provides a platform to really understand how Australian businesses on the ground in China are faring in light of the geopolitical tensions and slowing economic growth.
To Australian businesses’ credit, we had 211 complete the survey this year – 33% more than last year. Overall, sentiment was down 6.7% from last year but remained largely optimistic – with 71.6% either optimistic or slightly optimistic about the next 12-months; 81.5% in their five-year outlook. The results also pleasingly demonstrated an increase in Australian businesses’ forecasting profitability in 2019 – a strong 78.9%, from 62.5% in 2018.
One of the promising findings from the survey was that Australian businesses appear to be maturing and realising that China is a market that requires tailored initiatives. 61.1% of businesses surveyed will offer unique products and services for the China market this year – and are 32% more profitable as a result.
Domestic consumption was again considered the most important opportunity for Australian businesses and is also being supported by 26.6% investing in market research and development – 10.7% more than last year. 74.9% have a digital strategy in place or in development, with 59.7% having one that incorporated ecommerce. For those businesses already selling online, they are selling on an average of 2.5 platforms, versus 2 last year. Almost a quarter of businesses surveyed are early adopters of New Retail, with 66.0% of these businesses experiencing a 10% rise in revenue and 55.4% benefitting from increased brand and market insights.
There’s many, many more interesting insights throughout the report. The results aren’t just a barometer for other Australian businesses exporting to China; they provide any company working in China with a great benchmark to understand the common challenges and opportunities. We’d recommend you download the report and see for yourself. You can get it by clicking/tapping here.
A special acknowledgement to our own Alexander Kelso and Austcham Shanghai’s Stephanie Smith, who have worked tirelessly behind the scenes to bring the survey to life. Go to Page 2 to see this week’s China news and highlights.
Many people in the West still believe that China’s tech giants are built on thieving IP, not creating it. Those folk will probably be startled to learn that the US-based magazine Fast Company ranked a Chinese firm as the world’s most innovative company in 2019.
Perhaps even more surprising is that the Chinese company is not the well-known Tencent of WeChat fame, or even Alibaba (they were 15th on the list), but a mere $43 billion company, Meituan Dianping, which most people outside of China have never heard of, and probably can’t pronounce.
Meituan is best known for food delivery, restaurant reviews, hotel booking, movie tickets and acquiring bike share giant Mobike. The company topped the table for “pioneering transactional super apps” making the most profound impact on both industry and culture while showcasing a variety of ways to thrive in today’s volatile world. In the first half of last year, the company facilitated 27.7 billion transactions (worth $33.8 billion) for more than 350 million people in 2,800 cities. That’s 1,783 services every second of every day, with each customer using it an average of three times a week. The company leverages user consumption data, including price sensitivity, to recommend other services they’ll like, taking advantage of its consolidation of service offerings, much like China’s other all-serving tech giants.
One of Meituan’s core services, food delivery, is representative of one of the most exciting consumer developments that has been happening in China over the past few years. We’re not talking the meandering Postman Pat or the daily milk round, these are on-demand delivery services that can have everything from noodles and coffee, to meds and adult toys, delivered around the clock in less than 60 minutes, often in half that time. It is a service that plays to a Chinese consumer who craves convenience and possesses little patience.
Delivery in China takes advantage of its densely-populated cities, allowing a concentration of delivery people. In addition, the broadening of products being delivered that are core to the New Retail explosion means delivery is no longer just at meal times, or located around ecommerce logistic hubs. Instead, this revolution is creating economies of scale across wider geographies, spreading the costs of delivery workers throughout the day.
One of the most powerful innovations in delivery is what happens behind the scenes. Like many things in China, companies are utilising their enormous pools of data, and making sense of it with Artificial Intelligence. Meituan’s Smart Dispatch system, for example, calculates 2.9 billion route plans every hour to optimise the delivery for its 600,000 electric bike riders to pick up and drop off up to 10 orders at once in the shortest time and distance. Since Smart Dispatch launched in 2015, it has reduced average delivery time by more than 30%, and riders complete 30 orders a day, up from 20, increasing their income.
Whilst economies of scale and tech systems are increasing efficiencies in the delivery space, this is accompanied by challenges forcing companies to continue to innovate. Labour costs of delivery folk seem to be increasing every few months and new laws are being rolled out to protect the workers. In answer to this, JD has been making deliveries by drone and is testing unmanned vehicles. Mckinsey estimates that autonomous vehicles and drones will deliver 80% of all products within 10 years.
For brands selling in China, the penetration of delivery is another example of the unique way that Chinese consumers shop and their expectations. This and other distinct purchase behaviour in China should be factored into development of marketing strategies. China Skinny can assist with this. Go to Page 2 to see this week’s China news and highlights.
Chinese buyers have been the top foreign buyers of US residential property for six years straight. Similarly, no other overseas vendees buy more in Australia, New Zealand and a host of other countries. One common characteristic purchasers share is a preference for the shiny and new over the battered old character home.
In China, you won’t find locals spending their weekends combing garage sales for deals, and even the ecommerce-mad populous buy a much smaller share of second-hand goods than the eBay-Craig’s List-Gumtree-Trademe-type shoppers of the West.
Chinese consumers’ reputed love of all that is new comes down to a number of factors. We don’t need to look back far in history – during the reign of Mao – when new goods were in scant supply, creating a sense of prestige when buying something brand new. This has been passed over a generation, and its legacy has contributed to the all-important status that comes with buying new versus the stigma attached with goods that have been loved by someone else.
Another contributor is Chinese consumers’ inherent lack of trust. In China it is far more common to fake a second-hand good, and more difficult to trace, than a new product that can be bought directly from the source or a trusted vendor. There are also more reliable courses of action if something goes wrong. Couple that with the seemingly-infinite supply of cheap, new things, and all roads appear to lead to brand spanking new.
Nevertheless, the single-minded view that everything must be shiny and new is starting to waver. One of the most notable signs is the car industry. Half a decade ago, five in every six cars purchased smelt new (although not the new car smell as we know it in the West). Last year, as new car sales contracted 2.8%, there were 11.5% more secondhand cars bought. Although the ratio is still far behind America, where pre-loved outnumber new by more than double, China’s split is growing fast, from 43.0% in 2017 to 49.1% last year. The rise in the desirability for second-hand cars is followed by other segments from luxury goods to clothing swaps.
The trend is being driven by millennials who don’t have the same historic hang-ups as earlier generations and seek value. They’re familiar with consuming things used by others with the explosion of the sharing economy, covering everything from fashion to bicycles.
What does that mean for brands? In many product categories, the competitor set will increasingly span beyond the other new things for sale online and in stores to include second-hand goods. Consumers may also look to resale value, service and even sell-back options when making decisions around purchasing.
The trend spans beyond goods too, contributing to preferences in the service industry such as tourism. More Chinese travellers are finding allure in the edgy, hipster interiors for hotels, restaurants, attractions and stores, when in the past, it would have been considered dirty and rundown. It is another sign of maturing Chinese consumers, driven by the youth – one which will hopefully giving the environment a small reprieve.
On the subject of Chinese tastes and preferences, if you’re looking to learn more while taking in a few memorable spring days, China Skinny’s Mark Tanner will be speaking at China Connect in Paris on March 12-13. It is one of the most-established and thoughtful China-focused conferences outside of China – we hope to see you there! More information here. Go to Page 2 to see this week’s China news and highlights.
We have just passed the 200-day mark of the US-China trade war, and what a 200 days it has been! Whilst we are finally seeing some positive signs that an agreement could be imminent, there has been plenty of commentary about the beating that America’s reputation has taken in China.
There’s no discounting that the spat has sped up the rise of nationalism in China, and there are consumers who may have directed their spending away from American businesses, but the impact has been much less severe than it could have been.
If we look back to the row between China and Japan in 2012 over the Daioyu/Senkaku Islands, many Japanese brands were hammered and some even shuttered. Similarly, the South Korean fiasco over THAAD in 2017 was estimated to cost the Korean economy $6.8 billion that year. Apple has attributed its poor results to the trade war, and Ford and GM have had better years, nevertheless all-American brands like Coke have reported no impact, and Nike saw a stunning quarter last December. Even Tiffany & Co. saw a double digit rise in Mainland China sales during November and December of last year.
One of the key differences between the US-China trade war and the disputes with Japan and South Korea is that the propaganda machine has not yet ramped up criticism of the US. China also hasn’t introduced regulations such as it did banning tour groups to South Korea. Such plays wouldn’t be well timed during the already-precarious trade negotiations with the US.
Tourism to the US was a sector that many commentators expected would take a hit as a result of the frosty relations, much like Japan’s visitors fell 34.3% in 2012, South Korea’s dropped 60% between March to October 2017, and numbers sunk at other ‘out-of-favour’ countries like the Philippines and Vietnam.
In late September, Ctrip reported that flight bookings to the US were down 42% for the October Golden Week holidays – one of the busiest weeks of the year for international travel. Other anecdotes have flooded in from travel agencies, echoing similar falls. So it will come as a surprise that Chinese tourist numbers to the US actually looked quite healthy in 2018. Although the national figures are yet to be published, Los Angeles reported a 6.9% increase in Chinese tourists last year to 1.2 million visitors. New York also hit record numbers last year, hosting 1.1 million Chinese visitors. It appeared Chinese tourism to the US took a hit in the early months of the trade war, but by November, the US Commerce department was projecting a 2% increase in Chinese tourists.
Like we’ve noted in previous Skinnies, tourism generally builds an affinity with the country, its cuisine, culture and lifestyles, which has a halo effect on preference towards many other product categories. In a world that seems to be more divided than it has been in a long time, China’s tourist growth to the US is refreshingly good news!
On the subject of tourism, China Skinny’s Mark Tanner will be sharing some insights at the beautiful Terranea Resort in Los Angeles for the Visit California Outlook Conference on February 12 & 13. Please pop by and say ni hao if you’re there. More information here. Go to Page 2 to see this week’s China news and highlights.
While you may be lamenting the need to constantly evolve your marketing mix to stay ahead in China, you can rest assured that even WeChat faces a similar challenge.
Although China’s super app hit 1.083 billion monthly active users in September last year, each sending any average of around 45 messages a day, WeChat faces headwinds to stay relevant to Chinese consumers. Readership for articles referred by friends on Moments has been dropping and Tencent’s share of screen time is being cannibalised by newer, easier-to-use and more entertaining alternatives such as short video platform Douyin.
That’s why all eyes were on WeChat’s founder Allen Zhang’s four hour speech at Tencent’s conference last week, about how he plans to reinvigorate the app to mitigate the risk of it becoming obsolete. Zhang got philosophical in acknowledging that WeChat has lost the veneer of authentic discovery that endeared it to users, because people were becoming too sensitive to their online personas on Moments.
Across the board, Chinese consumers are seeking more authenticity: from the way they travel, to the brands they buy, to how they project themselves on digital platforms. Women ‘beautification’ app Meipai discovered this as user numbers plunged 55% as Chinese women sought more natural and less formulaic portrayals of themselves. WeChat is hoping to evolve from photoshopped and choreographed Moments feeds, to a more real account of what people are really experiencing. To enable this, WeChat has launched a new video-streaming feature, not unlike Instagram’s feed, so people share their lives in real time, not through carefully curated photos and messages. Even the user interface aims to keep it real, with the typical ‘send’ button, replaced with ‘this will do’ to remind people their social feed doesn’t have to be airbrushed and polished.
Another area in which WeChat is pinning its hopes to counter the app’s saturation and encourage more engagement per user is Mini Programs. The WeChat-embedded ‘light apps’ are already hugely popular, but curiously, the majority of traffic isn’t coming from the famous mini programs you may have heard of, but rather the long-tail applications used by niches such as parent-teacher groups or your neighbourhood grocery store. Given WeChat is installed on virtually every smartphone in China, app developers are not concerned with having to create separate tools for Androids and iPhones, it is one simple app, seamlessly installed and launched from the comfort of WeChat. Tencent is thinking, if ‘there’s an app for it’ wouldn’t it make sense to make it a Mini Program?
Something that hasn’t received due airtime is the impact that the new ecommerce laws will have on WeChat. Commerce is one of the areas showing great promise on WeChat, with its transactional nature providing a logical way for the platform to grow revenue. Yet many of those stores have been run by smaller vendors and daigou, attracted by WeChat’s low barriers to entry. The new laws mean that it will be a lot more trouble to set up and maintain a simple WeChat store – or any online store – with the new taxation and reporting requirements. There are already signs of changes in the way smaller vendors promote their wares on WeChat as they try and skirt the laws, but for many, the effort won’t be worth the reward.
Regardless of its challenges, WeChat remains China’s super app with no other app being better positioned to evolve and stay relevant to Chinese consumers. To Allen Zhang’s and Tencent’s credit, they have recognised that they need to do this. There are some good lessons for any brand in China – you may be ‘killing it’ in China today, but you need to constantly review your position to stay that way. China Skinny can assist you with just that. Go to Page 2 to see this week’s China news and highlights.
If you’re already exporting to China, we’re guessing you’re probably also selling to a host of other countries – markets like Dubai and the other six emirates could be on the list. In the UAE, there’s a good chance you’ve engaged some localisation for the country – culturally sensitive and resonant branding & communications, legal & regulatory allowances, logistics & distribution, and possibly even some new product development and packaging. In China, it’s probable that you’ve also localised the mix. But how local is your localisation?
Few people come to China without hearing that the country is like Europe; made up of varied and diverse regions. Yet in the same moment of acknowledgement, many will turn around and ‘localise for China’ with a homogenous strategy that they hope will win the hearts of consumers spanning the country.
China Skinny does a lot of research across different cities and provinces in China, and we usually find notable variances between the regions. There are the obvious differences in food tastes, climates, lifestyles, pollution and even body size, but it is the emotional cues that are often the most pronounced. We only need to look at one of the most common themes in Chinese advertising – families. Even in Guangzhou and Shenzhen – two tier 1 cities just 30 minutes apart on the fast train, the reality for families can be quite different: a large share of millennials in Guangzhou live with their parents and see them most days. In Shenzhen – a city built by domestic migrants – many millennials may only see their parents every few months, or just once a year during the Spring Festival.
Whilst some overarching localisation should be implemented across China, there is often a case to get city-specific with marketing and other initiatives. Take Shanghai, it has population greater than Australia, and a 13% larger GDP than the UAE, yet unlike the UAE-specific localisation, many brands will roll out the same strategy for Beijing, Guangzhou, Shenzhen and many other cities across China.
China’s metropolises are of a scale and affluence that they justify an element of localisation. The hyper-competitive nature of marketing in Chinese cities is finding it increasingly harder to connect with consumers without it. That means localising messaging, and even sometimes the digital platforms you use to share it. In certain demographics in some cities, digital channels aren’t always the best option to reach Chinese consumers, highlighting the need to have regionally-specific plans.
Over the past few years, brands have become increasingly focused on cities beyond tier 1, and even tier 2, with good reason. These ‘smaller’ cities are often much less contested and less apathetic to interesting, new foreign products. Half of the 50 million Chinese households entering the middle to affluent classes between 2016-2020 are expected to reign from cities outside of the top-100 cities according to BCG. They’re buying more imported products, and travelling abroad more which influences more purchases. The number of direct flights between cities in China and Thailand grew from 69 to 148 over the past three years for example. Yet with such variances between lower tier cities, brands would be wise to do their due diligence before entering and localising for them.
On the subject of cities, China Skinny has launched a new tool on our site to help you make sense of it all. We’re often getting questions about which cities fall into which tier, so we have created out City Tier Calculator which provides detailed information about which tier Chinese cities are, some of the key indicators, their rankings in that tier, and even how many Starbucks they have. Use the tool here. The tool is part of an overall redesign of chinaskinny.com, which is long overdue – we’d suggest you take a look. Go to Page 2 to see this week’s China news and highlights.
You’ve got to give it to China: This week’s inaugural China International Import Expo (CIIE) in Shanghai – the ‘Canton Fair for exporters’ – has attracted representatives from 85% of the countries that the Olympics attracts, all hoping to sell their wares to China.
President Xi Jinping officially opened the expo speaking to political and business leaders from 172 countries. Xi pledged to increase goods imports to $30 trillion over the next 15 years, and services to $10 trillion. The goods figures were $6 trillion higher than the existing target of $24 trillion that the Ministry of Commerce had re-stated just hours before. However the figures are parallel with – actually below – how China has been tracking. China’s goods imports grew 16% last year to $1.84 trillion in 2017. The $30 trillion target averages $2 trillion a year indicating a very unambitious official growth target as Caixin pointed out. Comparing the import growth targets to the rise in GDP is even more underwhelming as illustrated in this graph, posted on Twitter by Economist journalist Simon Rabinovitch.
Among other announcements, Xi vowed to “firmly punish behaviour that encroaches on the lawful rights and interests of foreign companies, particularly IP infringements.” He promised looser restrictions on foreign ownership in the education and health care sectors, expansion of the Shanghai Free Trade Zone to another area, stepping up of cross-border e-commerce, along with reduced tariffs and lower “institutional costs” of imports.
Although many details of the expo have been shrouded in mystery until opening day, the show floor attracted over 3,000 businesses sparing no expense, exhibiting everything from flying cars to Maori food to an estimated 150,000 buyers from across China. To signify China’s importance for global trade, 130 countries are represented in the enormous four leafed clover-shaped exhibition centre, just shy of the 132 who have signed up for Dubai’s World Expo in 2020.
Attending the opening day were around a dozen prime ministers and presidents from countries like Russia, Vietnam, Egypt, Hungary, the Dominican Republic, Pakistan, the Czech Republic, El Salvador, Kenya and Laos, the President of the World Bank, Director-General of the WTO, MD of the IMF, Jack Ma and Bill Gates and Australia’s trade commissioner in the country’s first high-level ministerial trip in over a year.
Like any big show in China, there is the obligatory mascot – Jinbao the panda, commemorative stamps, countless convoys disrupting traffic, and numerous deals announced such as Alibaba’s pledge to bring ¥200 billion ($28.8 billion) of imports over five years and JD.com’s ¥100 billion ($14.4 billion). It is anyone’s guess as to how many of the deals signed this week come to fruition, but the expo is an unquestionably positive step in promoting imports and potentially spreading their presence deeper into the hinterland. See photos of the expo here. All the best to our readers who are at the expo. Go to Page 2 to see this week’s China news and highlights.
China’s daigou are both loved and loathed, depending who you talk to. For Chinese consumers, they deliver quality western products – from vitamins to luxury handbags – that are sometimes unavailable in the Mainland, often at a lower price, and more likely to be authentic. For consumers in places like Australia, they have been known to empty supermarket shelves of products like infant formula, prompting supermarket chain Woolworths to reintroduce the two-tin limit this week.
Some brands detest daigou for undercutting their traditional sales channels and diluting their branding with rogue messaging, however brands who used to oppose them have increasingly embraced daigou as another channel to build awareness and preference for their products. The success of brands like Blackmores, Swisse and A2 Milk in China can be widely attributed to the daigou trade. Even Unilever is targeting Chinese in Australia to sell their soup in the Mainland.
By some estimates, there are half a million people working as daigou globally, from large sophisticated operations, to easy-come-easy-go students studying abroad who can earn some extra money as easily as sending out a few WeChat posts. These foot soldiers can be another powerful marketing and advocacy channel, particularly when they are harnessed strategically.
Yet daigou can be a fickle bunch. Bellamys discovered this in 2016, when they alienated the same daigou who had built their brand in China and saw their stock price collapse by more than half and the CEO ousted. Bellamy’s isn’t alone with its reliance on Daigou. Earlier this month, the share prices of many of the world’s luxury giants took a hit as Chinese customs ramped up anti-daigou efforts with prosecutions for people bringing in over ¥5,000 ($728) of undeclared goods for ‘personal consumption’, with one flight seeing 100 passengers arrested after arriving at Pudong Airport.
The Chinese Government is another player in the daigou-loathing camp. They have little view into daigou trade and would much prefer legitimate cross border commerce through the big platforms so they can better monitor, control and tax imported products. Now there is also increased impetus as Beijing hopes to maintain consumption growth in light of the trade war and a slowing economy. Shifting some of the estimated $100 billion annual daigou goods trade to legitimate channels will further increase official retail growth.
The new ecommerce laws coming 1 January, although still vague, are likely to impact daigou in the most concerted effort yet to temper the grey trade. It is expected that daigou will be made to register with the industrial and commercial administration departments and pay tax on imports. This will include Daigou who have traditionally been less visible by conducting business on WeChat Moments and streaming on live platforms. Beijing is unlikely to be able to stamp out all daigou trade, but it can certainly have an impact as we saw with the daigou tax in 2016 which froze virtually all grey trade before being retracted.
The new regulations should be a wakeup call for many brands on the vulnerability of Chinese regulation and fickleness of the daigou themselves. Since 2016, numerous brands have shifted from having all of their eggs in the grey trade basket to more balanced strategies. For those who haven’t, you’d be wise to start as soon as possible. China Skinny can assist with identifying these risks and developing such a strategy. Go to Page 2 to see this week’s China news and highlights.
There’s no shortage of coverage about China’s New Retail revolution, its mouthwatering rise of shared bikes and its 227 million active users, along with WeChat, ecommerce, mobile payments and other uniquely China trends such as cream cheese tea and face-kinis. Yet there are many other phenomenons happening in China that attract less attention but are also impacting consumers at a level that brands should take notice of. Here are three trends that Skinny readers are likely to be aware of, but maybe less familiar with the full scale and speed of their rise:
1. Consumer Credit
Consumption has been the most robust sector of China’s economy in recent years, with growth trucking along at double digits as long as most can remember. While other factors such as manufacturing, investment and house prices haven’t maintained the same momentum, three contributors have allowed Chinese consumers to defy the odds and keep spending more and more: record consumer optimism, soaring wage growth (with China’s hourly incomes now exceeding every Latin American country except Chile) and rising consumer credit.
Although China is well known for its high saving rates, these figures are skewed by older folk. The younger generation haven’t lived through the same periods of austerity and feel much less need to save for a rainy day. They’ve seen their wages grow every year, their parent’s real estate assets soar, and have been lured by the bright lights of consumerism – often calling on easy credit to spend more than they earn. Between 2015 and 2017 consumer credit grew fivefold, with those aged 24-35 making up more than 70% of consumer borrowers in China.
2. ByteDance’s Douyin
At a much more micro level, some brands looking for ‘the next WeChat’ could be heartened by the remarkable rise of Douyin and the overall ascent of short video. Launched less than two years ago, Douyin’s user numbers have quadrupled since January to boast more than 150 million daily active users watching an average of 82 short videos a day. The 15 second videos serve Chinese millennials’ craving of instant gratification, to fill any down-moment with cheap entertainment. Douyin’s growth has been so drastic that even Tencent has felt threatened and banned the service on WeChat last month. Douyin’s popularity and rapid rise has enabled fast-moving brands to use the platform to build awareness and preference with those indebted young consumers at a fraction of the cost of the more crowded and mature platforms like WeChat, Tmall and Weibo.
What makes Douyin, and its sister app Musical.ly, special is that they are two of the few Chinese apps that have been able to crack the elusive Western markets. Douyin, known as Tik Tok outside of China, was the most downloaded iPhone app in the world in Q1 of this year. Any concerns in the US about the Chinese Government monitoring your every move, something which has plagued brands such as Huawei and even WeChat, seems to be irrelevant for the Western millennials shooting and watching short videos on Tik Tok.
3. DJI Drones
Drones, while not on the same scale as consumer finance or Douyin, are making an impact across many sectors in China. One company leading the way – DJI – has beaten out formidable American competitors such as GoPro and 3DR and now owns 70% of the world’s drone market. DJI’s confidence is represented by their new HQ being built in Shenzhen complete with a skybridge for testing drones and rings for fighting robots.
DJI is creating efficiencies in industries as diverse as agriculture and food delivery, which will have a downstream impact on supply and consumption in China. It is representative of increasing automation modernising China’s supply chain and logistics, particularly in the online-to-offline categories. DJI is symbolic of the rise of China’s ambitious mega-businesses who are investing real money in R&D, while remaining nimble and long term-focused to lead their category. Expect more to come.
Those are just three of the numerous developments coming from China daily, many which are likely to be relevant to your brand, or how you market it. Agencies such as China Skinny will ensure you keep up with those trends and develop a plan how to make the most of the opportunities they bring.
Speaking of trends, China Skinny’s Mark Tanner will be sharing more in Brisbane next Thursday July 5 speaking at the ACBC-Brisbane Airport Welcome for the Air China Direct Flights Between Beijing and Brisbane. If you’re at the event, please pop over and say ni hao. More information here. Go to Page 2 to see this week’s China news and highlights.
Just as live sports are helping prop up the old world of television advertising, they can also be a potent force in international relations and trade. We saw it with the ping pong diplomacy of the early 70s, and as sport becomes an important part of life in China, it will be an increasingly significant driver for geopolitical relations and the goods and services trade. FIFA, the NBA, snow sports and other physical activities are taking advantage of this. As proud supporters of rugby in Asia, China Skinny would be grateful to start seeing some real rugby love in the Middle Kingdom.
With the FIFA World Cup kicking off in Russia tomorrow, the trend is looking positive. During the month-long football festival there may be times visitors feel like they’re at a Guangzhou Evergrande Taobao match. Although China hasn’t played in a World Cup Finals since 2002, an estimated 100,000 Chinese are expected to visit Russia for the Cup, dwarfing the 10,000 football-mad English expected to be there – and their team qualified! On top of that, Chinese brands Hisense, Mengniu, Vivo, electric bike maker Yadea and Dalian Wanda are joining the party to plug the World Cup sponsorship gap.
Like many things in China, Xi Jinping’s passions and policy are helping drive China’s enthusiasm for the beautiful game. The avid football fan Xi hinted last year that China will be bidding to host a World Cup in 2030 or 2034 and will be a “world football superpower” by 2050. Feeding into the grand plan, Xi has announced that the number of football fields in China will grow from less than 11,000 in 2015 to 70,000 by 2020. China will have 50 million regular football players including 30 million students by then, and 50,000 schools will have a strong emphasis on football by 2025 – up from just 5,000 in 2015.
The 100,000 visitors are a sign of changing times in China. They illustrate how Chinese are increasingly able and prepared to spend big bucks on their leisure pursuits. Back in 2002 – when consumers were much less affluent than they are today – no more than 50,000 Chinese went to the World Cup Finals in South Korea and Japan when China was actually on the field.
The swathe of Chinese visitors ascending on Russia will have been further tempted by visa-free travel to its northern neighbour. On top of that, China’s blossoming relationship with Russia will also drive preference – as geopolitical circumstances usually do with Chinese travel trends. Russia seems to be the flavour of the month with Beijing as they look to provide a scalable alternative to Western ideologies. The friendship comes at a good time for China as its dog box is marred with imprints of South Korea’s THAAD, ASEAN-contested island building and river damming, Japanese-disputed islands and historic invasions, the encircling of India and territory skirmishes, undermining of Australian sovereignty, Europe’s wariness of Chinese investment, lack of reciprocal access and sporadic trade disputes, and Trump.
As a symbol of their bond, Vladimir Putin was presented China’s first ever “friendship medal” by President Xi at a lavish event broadcast live from the Great Hall of the People. Since becoming president, Xi has visited Moscow more than any other capital city and Putin said that Xi Jinping was the only world leader who celebrated his birthday. Putin was in China last week for the enlarged Russia-China led Eurasian SCO bloc meeting as the G7 floundered. Russia, which is managing its own diplomatic challenges elsewhere has recently signed a series of deals with China who announced relations between two countries were at “the best level in history.”
In short, this year’s World Cup couldn’t have been better timed for Russia to tap into the opportunity that China presents. For the Russian businesses that stand to benefit from an influx of Chinese visitors – let’s hope you make them welcome. Mobile payments and the slew of other China-ready initiatives will ensure they have a better time, spend more and advocate Russia to the masses at home. And good luck to the 32 nations who made it to the finals! Go to Page 2 to see this week’s China news and highlights.
Foreign brands scanning the news over the past week may have been sent on an emotional roller coaster. Although China Bears have been doom-talking about the economy for years, the World Bank’s latest update points to China’s GDP continuing to grow at a healthy 6.9% last year and 6.8% in Q1 this year. Consumption remains China’s growth driver, which is likely to continue given consumer confidence reached a 10-year high in the first quarter of 2018.
But on the flip-side, an FT article about increasingly wealthy Chinese consumers trading up referred to McKinsey research illustrating a pronounced consumer preference for local brands. Across 17 categories, infant formula and wine were the only two segments where foreign brands were preferred over domestic – and only by a whisker.
This is contrary to what China Skinny is seeing in the market. Consumers are often more familiar with domestic brands and their perceptions have become more positive – but we’re still seeing more favourable views for foreign products overall. Based on the feedback we’ve had from our extensive industry networks in China, we’re sure many foreign brands on the ground are seeing similar sentiment.
China Skinny has done deep, intimate and personal research and analysis with thousands of consumers across China. The numerous projects spanning many categories has found Chinese consumers virtually always still believe foreign brands are better – higher quality, more stylish, safer, healthier, etc.
In reality there is a disconnect. Whilst Chinese consumers usually favour foreign products, those brands aren’t servicing their needs well enough and aren’t where they want them to be. As Bain pointed out in the FMCG category, domestic brands grew 8% versus 1.5% for foreign brands in 2016. This result is not so much that they are seeking local products over foreign, but more reflective of nimbler Chinese brands who are reading the market better and acting more swiftly, coupled with stronger distribution networks and more resonant marketing.
As we highlighted in this infographic 18 months ago, dairy is a classic example of foreign brands not meeting needs. While the wounds of the 2008 melamine scandal may still cast a cloud over Chinese milk, domestic dairy commands a 38% premium per litre over imported. This is due to more appropriate format sizes, better-suited value-added products, more specific segmentation and more targeted marketing. China Skinny analysis has found similar results across many other categories.
Research by China’s Ministry of Commerce found 31% of surveyed consumers expect to spend more on imported products in the next six months and over 20% claim imported products account for at least 30% of their total consumption. Similarly, Chinese retailers plan to increase imports of over a third of 92 products surveyed. Although the results could be somewhat glossy due to current US-China trade negotiations and November’s massive China International Import Expo, they do reflect the general sentiment that Chinese consumers still relish imported products. It’s why Alibaba and JD with all of their data are busy opening up offices globally to source foreign products.
So with the good news from GDP growth to positive consumer sentiment, foreign brands are still well placed to tap into it if they ensure they interpret the market well and act quickly from it. Agencies like China Skinny can assist with the market interpretation stage, and help guide the resulting actions. Please contact us to find out more. Go to Page 2 to see this week’s China news and highlights.
There are many relatively unknown cities in China with GDPs as large as countries. For example, the city of Zibo has an economy the size of Panama’s and Tangshan’s GDP ranks up there with New Zealand by some measures. These smaller cities are helping drive China’s consumer demand, and by proxy, the global economy. Morgan Stanley forecasts that lower tier cities will account for two-thirds of the increase in consumption between now and 2030.
As China’s biggest cities have become the most crowded and contested markets on the planet, more and more brands are looking to cities like the Zibos and Tangshans where growth is often faster and competition less fierce. We only need to look at FMCG which has been growing 2-3 times faster in lower tier cities than big cities over recent years. In tourism, the 10 fastest growing airports by passenger numbers are all tier 2 cities and below. A third of all Cadillacs sold in China were bought in tier 3 & 4 cities.
Yet while it’s become common to talk about China’s less-competitive lower tier cities, brands shouldn’t just be throwing darts at maps and reviewing GDP figures in determining where to focus. Consumers in many lower tier cities don’t yet have a level of sophistication to demand many products and services.
Before looking to the hinterland, brands should critically assess consumer behaviour and preferences in those cities. Lifestyles, climate and travel habits are often as much of a contributor to demand for a product than GDP per capita. Ecommerce data, although much less developed than tier 1 and 2 cities, can also provide hints into potential demand. Even local government policy can impact consumer demand – just look to Electric Vehicles, where six cities contribute to 40% of sales.
In many cases, the hyper-competitive cities like Shanghai and Beijing can still be the most lucrative markets to target. They have become incredibly wealthy with GDP per capita adjusted for purchasing power now comparable to Switzerland. They have been wealthier longer, were allowed to travel abroad sooner, and as a result, have much more mature and sophisticated tastes. As a result, they are more ready for some Western products and services.
With both cities having more than 20 million people, just focusing on specific demographics or districts can itself produce material sales and a beachhead for further expansion.
A good example is American wholesaler Costco. Four years of testing the water with cross border commerce has given them confidence in demand for their products and formats. This month they announced they will launch two large Costco bricks & mortar stores in Shanghai. Unlike most of the 226 brands who opened their first stores centrally in Shanghai last year, Costco is opening in the outer districts of Minhang and Pudong New Area.
The bulk sales model like Costco hasn’t really taken off in China yet. Consumers have smaller kitchens and less storage than in the US, lower car usage for shopping, and a preference for freshness. However Costco is likely to have evaluated the last 4-years of ecommerce sales data to make informed decisions. If it will work anywhere, Minhang and far-flung Pudong are good bets. They are affluent areas with many large villa residences and a population who is more reliant on driving for daily needs. Costco’s first 33,000 square metre store opening in April 2019 will have 1,000 carparks. One would hope that they are integrating New Retail into their stores to ensure they are relevant and engaging for consumers.
Whether you are Costco, a fashion brand or selling vitamins, there is no consistent answer about which city is best to target. Brands would be wise to analyse different cities and regions before making a call. The cities a brand chooses to target should be an important factor in developing localised marketing strategies, selecting distributors and even lawyers familiar with local laws and regulations. Agencies such as China Skinny can assist with that. Go to Page 2 to see this week’s China news and highlights.
In the first quarter of 2018 China’s GDP growth continued to bubble away at 6.8%, largely driven by consumption which accounted for 77.8% of the growth. Powering this critical economic driver is the ever-evolving millennial; higher-earning, freer-spending, and in many cases with child in tow or one not far away.
17.2 million babies were born in China last year – the population of the Netherlands – expanding the already-significant demand for child and family related products and services. A child born in China today will have parents earning 130% more than those born a decade ago. Their parents will be four and a half times more likely to have travelled beyond Greater China. The millions of new parents are more educated, open minded and worldly than any generation before them, and as a result are more inclined to Western products and lifestyles.
The shifting profile of Chinese parents has also changed the way they research and shop and the products they are seeking. Although parenthood remains steeped in culture and tradition and is heavily influenced by family structure, mothers are the least-trusting consumer group in China and among the most digital. They are large contributors to the rise of China’s ecommerce which grew three-and-a-half times faster than traditional retail last year. One of the fastest growing categories online is FMCG, where 43% of the value of products sold are bought by families with children aged below 14. Similarly, two-thirds of cross border shoppers have children, a result of easier access to trusted, safer products from abroad.
Yet family-relevant products aren’t exclusively focused around health and safety. Brands have found success catering to families’ busy lifestyles with products that are also attractive to kids. An example is animal-shaped dumplings that are easy to prepare within a few minutes. Products that understand and minimise those pain-points of hectic family life or contribute to the happiness of families are well placed to appeal to the lucrative segment.
China’s young families are an incredibly important demographic for relevant and well-marketed products. Yet for a larger share of Chinese at child-rearing age, parenting WeChat groups, imported infant formula and panda-shaped dumplings are not relevant. Despite initial enthusiasm from the loosening of the One Child Policy and youths having sexual intercourse earlier, Chinese millennials are becoming more indifferent about sex and less likely to be parents.
China’s fertility rate of 1.24% is even lower than Japan’s 1.46%. Slowing birth rates mean there remains plenty of opportunities in products and services unrelated to families such as health, travel, entertainment and fashion which can seize a share of spending that may have otherwise been used on childcare. Go to Page 2 to see this week’s China news and highlights.
Australia and China’s relationship has become a fascinating representation of the delicate balancing act between politics, economics and sovereignty that this modern age of globalisation presents to nations. And with no Western country more dependent on trade with China than Australia, this particular balance holds great intrigue.
To date, Australia has managed to strike a fine balance with the Middle Kingdom. It negotiated the ‘most favoured nation’ clause into the China Australia Free Trade Agreement and was a founding member of the China-led Asian Infrastructure Investment Bank (AIIB). Yet it has deviated from China’s influence in several ways. Australia has remained firmly in the US camp for defence-related policies, it is yet to support President Xi’s pet Belt & Road project and is even exploring alternatives with China foes the US, Japan and India. It has been overtly distrustful of Huawei due to national security concerns, and its recent claims of Chinese espionage have prompted Chinese state media to call Australia an ‘anti-China pioneer’.
Regardless, Australia’s continued prosperity is becoming increasingly dependent on its relationship with China. Australian exports to China grew 25% last year to US$86 billion accounting for 29.6% of exports, with Japan being the next most important market at 12%. China is Australia’s highest-spending source of students and tourists. Australia has also been the world’s second largest recipient of Chinese investment since 2007, accounting for more than $90 billion of accumulated investment. In short, virtually every Australian is impacted by the flow of trade, people and investment from their Asian neighbour.
There are few better barometers to gauge the continued opportunities and threats in this relationship than the diverse range of Australian businesses on the ground in China and those with strong trade relationships. China Skinny was honoured to work with Austcham on the 2018 Westpac Australia-China Business Sentiment Survey which launched in Sydney yesterday.
161 businesses generously gave their time and information to help Australia understand the direction of its connection with China, identifying positive areas, and those that need work. The resulting report is full of fascinating insights from challenges, risks and competition to macro influences impacting Australian businesses in China.
Australian business sentiment was remarkably upbeat. 78% were positive about the next twelve months – higher than similar surveys of American, European, British and Canadian businesses – increasing to 83% for the 5-year outlook. This positive sentiment was particularly striking given the survey was conducted in November and December last year, a time when the China-Australian bilateral relationship was turning awry.
For 58% of respondents, China revenue outpaced other markets. These results have contributed to over half of businesses planning to increase their investment in China this year – with more investing than in 2017 and at a greater rate than their American cousins.
Arguably the most concerning finding from the survey was engagement of digital platforms which have become an important channel for B2C and B2B segments in China. Whilst we found the majority of respondents recognised innovation in technology, media and communications as the number 1 trend shaping businesses in China for the next 3-5 years, just 16% currently have a detailed China digital/ecommerce strategy in place. Those who did were 12% more likely to turn a profit in China and were 18% more likely to see China revenue outpace other markets.
The beautifully presented report (thanks Charlotte, Kate and Stephanie) delivers a valuable perspective into the overall health and opportunities for Australian businesses in China. It also provides a benchmark for your own performance – not just as an Australian business, but any foreign firm trading with China. Download your free copy here. Go to Page 2 to see this week’s China news and highlights.