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.
For the past few years, we’ve been seeing an ascent of Chinese brands playing on retro themes and nostalgia. Whilst many of these brands were relatively unsophisticated in their heyday, they are increasingly striking a chord in today’s cosmopolitan China. State media and brands like Alibaba have been all over the trend launching festivals such as “Tmall China Day” and bringing Chinese fashion brands to New York Fashion week.
The trend is part of the much wider rise of pride in China – where they have come from and what they’ve become – which is seeing Mainlanders become more comfortable in themselves, and in their brands. The theme doesn’t mean the end of foreign brands in the market, but it points to a consumer who no longer blindly assumes international brands are better. They are scrutinising their branding, messaging and products more than ever before, and expect them to align with Chinese culture and expectations.
There are plenty of examples of foreign brands making cultural gaffes – every Chinese New Year there are misguided attempts to use zodiac animals, and a personal favourite, Nike’s Fa Fu “getting fat” imprints on their shoes; yet most of these mistakes have been fairly light hearted and consumers moved on soon afterwards. Last week’s clanger by Dolce & Gabbana set a new standard for cultural misappropriation from a foreign brand in China.
The Italian luxury fashion brand was just seeing the dust settle from its last blunder in 2017, after being widely accused of backward and racist associations with China. As a result, Chinese consumers were going to view them more critically, so you would expect the brand to err on the side of caution with China-related communications. Instead they went the other way, promoting their multi-million dollar Shanghai fashion show with three videos entitled “eating with chopsticks” starring an Asian female model in an outdated stall being told how to eat pizza, spaghetti and cannoli by a male voice-over in Mandarin. China’s social media ignited into a fury, with D&G taking all of the top-10 trending terms on Weibo, being accused of sexist and racist undertones, and continuing to portray a backward view of the People’s Republic.
Just when things didn’t look like they could get any worse, Stefano Gabbana stood by the ads, and when his local China team took them down his verified Instagram account was thrust into a rant against China. “From now on in all the interview [sp] that I will do international I will say that the country of (poop emojis) is China” and “China Ignorant Dirty Smelling Mafia,” among other abuse. The brand subsequently claimed their accounts had been hacked, but the damage was done.
China’s biggest names in fashion and entertainment and the 24 models scheduled to be on the runway announced they would boycott the fashion show planned that evening – the show that was eventually cancelled. Every major Chinese ecommerce platform and Lane Crawford stopped selling D&G products. There were even reports of guards hired to protect D&G stores.
Where does D&G go from here? Given the volume of satires and memes about the brand flooding Chinese social media since the videos were launched, its biggest challenge will be to be taken seriously by Chinese consumers. It will be a long road. To claw back some credibility in the world’s largest luxury market, they will need to do a lot more than the grovelling apology video from founders and a few slick ads (which are hopefully culturally sensitive). They will have to work harder at the grassroots level with some on-the-ground initiatives to show consumers they respect and understand China’s culture a lot better than they have to date. It might even be worth Stefano spending a sabbatical in China to learn more about how it really is today. We’d happily host him at the Skinny HQ to get the journey started. Go to Page 2 to see this week’s China news and highlights.
There has been much uncertainty about China’s new ecommerce laws which will launch in earnest on 1 January 2019. The unknown direction around cross border ecommerce and the daigou trade is likely to have kept a few businesses up at night.
We are thankful to finally have some clarity around the new laws. Here are some of the key highlights of the new regulations announced on 21 November:
Cosmetics, Health Food, Infant Formula & Other Consumer Imports
Cosmetics, health food, infant formula and other retail products sold over cross border ecommerce will remain exempt from mainland Chinese registration, filing and certification. Speculation that cosmetics not tested on animals could not continue to be sold in China through cross border ecommerce has been laid to rest.
Exporting to Chinese Consumers through Brand.com Sites
The new regulations state that brands selling direct to consumers in China from their website or ecommerce platform based outside of the Mainland will be required to register their platform with Chinese customs.
Increased Purchase Limits
The single purchase limit will increase from ¥ 2,000 ($288) to ¥5,000 ($720) and the yearly purchase amount increases from ¥20,000 ($2880) to ¥26,000 ($2,745) per year. Cross border purchases that fall within the increased limits will be exempted from duties and receive a 30% discount on consumption tax and VAT.
Deterrents for Daigou
We noted in October that the road for daigou was likely to get tougher as Beijing tries to redirect cross border sales to the legitimate channels. The new laws have confirmed that all daigou who advertise online need to register with the government and pay full import taxes. In recent months, customs have stepped up airport checks, while Chinese courts have jailed several merchants for up to 10 years for tax evasion. We expect larger daigou will continue their trade, however tens of thousands of smaller operators are may see this as just too much trouble and quit – easy come, easy go.
Legislation as expected
Overall the regulations are not surprising news. Of late, Beijing has been promoting its stance towards free trade at events such as Davos and this month’s CIIE. Closing the door on cross border commerce would have seemed hypocritical and contradictory. Similarly, tech giants such as Alibaba and JD have invested significant sums in building their cross border businesses, and would have been in Beijing’s ear about the benefits of the service. Discouraging it would have driven more purchases to the less-trackable grey trade. Many Chinese consumers have also become fans of cruelty free cosmetics, imported health and formula products; taking these options away would have caused quite a stir, which no one needs right now.
The law is positive for cross border ecommerce and will see it continue to grow. However in most cases cross border should be seen a stepping stone to a wider range of online and offline sales channels in China. This will raise awareness and accessibility for your products and decrease your exposure to law changes and other risks. China Skinny can assist in developing a strategy for this.
As the old Chinese adage goes, away from home they will judge your clothes and outward appearance. At home, it’s what’s underneath that matters. In Chinese homes, they are increasingly looking at your clothes, and your furniture, drapes and other trappings that have allowed you to imprint your individuality. The role of one’s house has been changing from a functional place to sleep to a place to live, experience and share.
There are a number of factors driving Chinese consumers to make their homes places of self-expression. A Chinese consumer today basks in about four times as much space than the average Chinese resident did 40 years ago. Kitchens and laundries have evolved from humble shared facilities to shiny tiled spaces, with 90% now containing a fridge and washing machine.
Whereas Chinese have long been out-of-home diners, the mouth-watering rise of food delivery has given consumers more reasons to stay at home. Supermarkets like Hema can deliver quality fresh produce within 30 minutes, seeing more folk staying in and cooking – often with expensive imported utensils. Throw in a few polluted days and the safest place seems to be at home breathing purified air.
These are some of the reasons – coupled with rising affluence – which have seen Chinese pay more attention to sprucing up their abodes. Home decoration, furniture, home appliances and other related categories have been among the fastest-growing retail categories over the past few years; and like with most consumer goods, Chinese shoppers are trading up. This has inspired companies like Panasonic to partner with Porsche to create expensive, connected home appliances for the increasingly house-proud consumers.
But don’t just take our word for it. Alibaba has analysed their data and clearly cottoned on to the trend. In February the company invested almost a billion dollars in home improvement and furniture chain Easyhome. Earlier this month they invested $25 million in home decoration service platform Shengong007 as further reassurance that this is a sector on the rise.
Brands should be looking at China’s transforming homes as more than just higher value sofas, paint and fridges. The newfound comforts are changing how they consume food and entertain themselves. It is influencing the way they research and view products overall, and is even shifting expectations of travel, souvenirs and accommodation while away. There are few brands that aren’t impacted by the evolving home life of Chinese consumers, which should be factored into everything from marketing propositions to product development – some of things that China Skinny does best!
For our European readers looking to get out of home, China Skinny’s Mitchell Burns will joining the esteemed line up of speakers at Europe’s leading health, natural and nutrition show Hi Europe in Frankfurt 27-29 November. If you are at the event, please do come by and say ni hao. More information here. Go to Page 2 to see this week’s China news and highlights.
Since 1990, the People’s Liberation Army (PLA) has accounted for more than 60% of the growth in global defence spending. In close to three decades, China has built a remarkable armament, with military drones and the odd unreliable stealth fighter, and is making some solid progress with AI. Just like the superpowers before, China aspires to have strong armed forces. But any good military needs good soldiers – for now at least.
Last September we noted the PLA slammed young Chinese males’ high failure rates in fitness tests, attributing unhealthy lifestyles, too many fizzy drinks, masturbation and video games, which has contributed to a complete freeze of new game approvals. But it turns out the Military’s issues with the male gene pool span far deeper.
It seems China has a masculinity crisis. Whilst Beijing has banned hip hop culture and tattoos from TV, for now it is a free-for-all for ‘feminine-looking’ boybands, which has led to much debate online. In September, state media outlet Xinhua declared “these sissies promote an unhealthy and unnatural culture which has a not-to-underestimate negative impact on the youth. The sissy culture, driven by consumption, challenges the public order and worships a decadent lifestyle”. Niángpàonán, or ‘sissy-boys’ has become a popular term online for Chinese males paying much attention to their clothing, hair, and make-up.
In some Chinese cities, males born in the 80s are more likely to own a pair of platform shoes than work boots or cleats. Yet effeminism is less of a concern than other trends seducing Chinese males. One teenager in eastern China bankrupted his parents by tipping a livestream host $37,000, claiming she was his girlfriend. China has more than 150 live stream sites, mostly funded by tipping from the 80% male viewership.
Whilst every male in China isn’t a gaming, live-stream-addicted ‘sissy boy’, as marketers it’s important to consider that this group has more spending power than the total consumption of many countries. They have their own distinct needs and respond differently to marketing than males on the streets of Sydney or Seattle, and even other sub-tribes in China. China Skinny can assist your brand with defining their needs and planning how to best resonate with them.
Not all is lost for concerned parents across China. Their desperation for their one-child to be a boy saw the male:female birth imbalance hit 1.15:1 in 2016 (second only to Liechtenstein). For those wanting their boy to be a hǎohàn – a real man, there are ¥10,000 ($1,400) training camps aimed to tackle the “crisis in boys’ education” and “help them find their lost masculinity.”
On another note, a big hat tip to Alibaba who continue to reach new heights with their 11.11/Singles’ Day extravaganza, growing 27% from last year’s massive base (in RMB terms) to $30.8 billion in gross merchandise value. See the infographic here. JD had similar growth of 26% on their 11-day Single’s Day festival, with sales climbing to $23 billion.
Your Thoughts: We received some passionate responses to our article about CIIE last week, not all of it positive. Over the past week we’ve spoken to a number of brands who exhibited at the event – some considered it a roaring success, other reviews were mixed. We’d love to hear your thoughts if you were there. Similarly please let us know how Singles’ Day went for you. Just reply to this email with any comments or feedback. Go to Page 2 to see this week’s China news and highlights.
Another year, another huge hit for Alibaba!
By 4pm Alibaba announced it had already surpassed 2017 Singles’ Day. By midnight, it had sold 27% more than the enormous record set last year. We can see below that beauty and wellness products are still the top selling products in the festival of shopping. South Korea climbed from the 5th to the 3rd top-selling country, illustrating that the country is again in favour with Chinese consumers. So far, the US-China Trade War seems to have had little impact on sentiment towards US products, with America retaining its number 2 spot.
Scroll down for more Double 11 facts:
The number of those bearish on the China market have swelled and grown in voice as of late, making this year’s Singles’ Day a particularly intriguing spectacle. Serving as a proverbial yardstick, the surging performance of this year’s festivities surely have not only Alibaba HQ but those in Beijing fretting over economic models breathing slightly easier, if only for the moment.
It is no secret that an air of uncertainty has crept into China forecasts. In the wake of Trump’s buffoonery, a battered stock market, the unknown trajectory of the all-important property market, whispers of steepling consumer credit taking hold and market saturation closing the window for fanciful market entrants – for many the outlook is as gloomy as a Baoding winter.
However balancing out all the cynics, bright projections around consumer behavior are still keeping the faith. Nielsen’s surveys show an increased consumer confidence – showing a 10-year high at the midpoint of 2018. While the 1 million credit cards issued every 4.5 days and widening debt-income ratios may scream debt-trap to some, they reflect the little concern China’s only-child consumers have for taking on debt armed with the knowledge of immense portfolios and inheritances supporting them.
It also bears repeating that this segment is a point of emphasis, with consumption growth estimated to make up 80% of the China’s prestigious GDP growth figure. The willingness of the average Chinese consumer to part ways with their hard-earned yuan is of critical importance to all facets of China and those engaging with it.
So with all the background noise and China heads going back and forth on hypotheticals, Singles’ Day provided a tangible glimpse into the current consumer landscape. The point of interest of the 2018 edition for the humble market researcher, was that (by Alibaba’s standards) this year’s Singles’ Day was relatively gimmick-free compared with previous years – as was detailed in our lead-up newsletter. How would it go with slightly less glam?
Quite well, it turns out. Without any flashy innovations to whirl up a frenzy, $30.8b of GMV passed through Tmall and Taobao in the 24-hour period. Growth rate went down from 39% in 2017, to 27% this year, however in a collectively slowing economy and without a driving inspiration, the result can no doubt be looked at positively. The vocabulary pushed out by western media describing the growth – be it “plunged”, “disappointing” or “all time low”, seem to come at the event with little context.
Much has been reported on the day, and a quick visit to Alizila will give you all the juicy stats and highlights. But beyond the gaudy numbers, Singles’ Day 2018 has provided some respite from the Chinese consumer doomsayers. In current economic and political conditions, it has become iconic and perhaps ‘too big to fail’, representing a consumer base that must keep chugging along. 2018 was the biggest ‘challenge’ to Alibaba yet in reaching an impressive growth target like the 27% achieved, and its tangible success inspires a confidence that a survey or murky outlook cannot provide.
As urbanization increases and spending power and sophistication continues its spread, Alibaba’s forethought in bringing convenience and accessibility to China’s lower tier cities should ensure the party will go on for a few years yet.
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.
11.11 or Singles’ ‘Day’ 2018 officially launched last week, with about 500,000 items available for pre-order on Tmall. The world’s biggest shopping festival has long been a yardstick for Chinese consumer sentiment and spending, and this year it will be watched particularly closely. Sales over the 24-hour period will provide some indication of the impact that slowing GDP and the Trade War is having on consumption – the sector that Beijing hopes will keep the economy chugging along. This year will mark the 10th anniversary of 11.11 and will be Jack Ma’s last before he ‘retires’, so there are plenty of reasons Alibaba will be wanting to blow last year’s $25.3 billion in gross merchandise volume out of the water.
Each 11.11 festival is a display of Alibaba’s might, and a signal of its areas of focus for the year ahead. 2014 was all about getting consumers to shop on their mobiles, 2015 drove international products through cross border commerce, 2016 was about blending entertainment with shopping, and 2017 took New Retail and offline integration to a new level. This year will demonstrate the depth of Alibaba across China’s online and offline worlds.
Fancy some caffeine to keep you awake as you find the deals? Starbucks will be delivering discounted coffee through Alibaba’s Ele.me. Or how about a bite to eat, some beauty treatment or a spot of karaoke to provide a break from shopping on your smartphone? 150,000 of Alibaba’s Koubei merchant partners will be offing half price fare. This Singles’ Day will be the first time Alibaba has exhibited full might (almost) of Alibaba’s bricks and mortar investments.
The 11.11 promotions and festivities will be very present on Alibaba’s supermarket chain Hema, its hypermart operator RT-Mart, Intime malls and home improvements chain Easyhome which will all be showcasing New Retail. 200,000 mom-and-pop stores using Alibaba’s LST will provide online sales promotions and augmented reality-based red packets. Partners such as L’Oreal and Hasbro are coming to the party online and in stores.
At the heart of 11.11, Tmall will engage 180,000 Chinese and global brands. Tmall Global will provide 3,700 categories of imported goods from 75 countries and regions. And beyond China, Alibaba’s Lazada will aim to make Singles’ Day as much as an event in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam, helped along by Google and Line joining together to promote the event. Altogether, Alibaba hopes to break the billion order mark on November 11. Given last year’s orders grew from 657 million to 812 million, and the many new dimensions in 2018, we think this could be conservative.
One of the interesting dynamics for Singles’ Day this year is Pinduoduo entering the mix. Singles’ Day was built around special deals, which no one does better than the Pin. It also has a stronghold in lower tier cities which have been more challenging to reach over previous Singles’ Days. There are reports of Tmall pressuring some brands to choose between its platform and Pinduoduo, so clearly Alibaba feels they will make an impact. One thing for sure is that it will make the day even more interesting.
For our readers who are participating in Singles’ Day, we wish you all the best in building awareness, launching new products or whatever else you are planning to achieve. We hope you are using it as a Trojan Horse to build more sustainable engagement with consumers.
In other news, China Skinny is proud to again be working with Austcham Shanghai and Westpac on the second annual Australian-China Business Sentiment Survey. The previous survey gave rich insights into the health, opportunities and challenges in the Australia-China economic relationship, provided a valuable benchmarking tool for all organisations working with China and strengthened the Chamber’s advocacy efforts to advance Australia-China business relations. Any readers representing Australian organisations connected to China please spend 10-15 minutes to complete the survey – we’ll all be better for it! Take the survey here. Go to Page 2 to see this week’s China news and highlights.
Ten years ago, the average dairy farm in China had three cows. With millions of peasants tending postage-stamp sized lots, educating them on basic farming techniques such as responsible pesticide use was nigh impossible. Each batch of milk from each farm needed to be picked up by someone, who’d deliver it to a slightly larger carrier, who’d deliver it to a slightly larger operator, and so on. The fragmented supply chain was inefficient, difficult to track and the number of connection points made it more susceptible to scandals.
The melamine scandal that year proved to be an eye-opener for Beijing – it was the catalyst to increase focus on building a more efficient and professional agricultural sector. This was never going to be an easy task. After China opened up in the 1980s, the government broke up Chairman Mao’s giant communes into individual plots which were dished out to rural households. Still today, China has about 200 million farms and more than 90% of them are less than a hectare.
Although average wages in China remain much lower than in the US, it is cheaper to produce pork in the US due to industrialised farming and cheaper feed. It can cost three times more to produce a bottle of wine in the popular wine growing regions of Western China than in Australia.
Food security is vitally important for China, and has been declared a “class one issue.” One impact of the trade war is the wakeup call concerning China’s reliance of US Soybean imports, providing more impetus for self-sufficiency. On September 26, Beijing released a five year ‘Rural Revitalisation’ plan to achieve a delicate balance of simultaneously opening the agricultural economy to the world while upgrading its domestic agricultural sector and forging links between farms, processors, input suppliers and service providers.
The plan is likely to speed up the farming industrialisation that is already happening, albeit not as quickly as Beijing would like. Chinese dairy farms with more than 1,000 cattle have increased from 10% to 19% between 2009-2018 with the top end of town being driven by large corporates/SOEs. Traditional smaller plots are seeing farmers retire and, with their children in the cities, there is no one to tend the land so they are consolidating and being managed by larger operators using more modern equipment. Even foreign brands are investing in local farming and bringing much needed skills and technology with them, such as Zespri kiwifruit grown in Henan Province, Starbucks and Nestle coffee beans in the hills of Yunnan, and Fonterra farms in Hebei.
China is increasingly adopting new technology in its rural sector. Agritech is improving efficiencies in farming, from China’s DJI drones that fertilise the land, to modernisation of equipment and integration of the Internet of Things. Taobao and JD have long been an avenue for farmers to sell their produce directly to consumers, and a host of under-the-radar platforms are becoming large businesses in their own right. A good example is Meicai, a B2B app which helps farmers sell their vegetables to restaurants. Its latest round of funding has valued the app as much as $7 billion. The little-known app founded in just 2014 is now worth almost five times what Geely Auto paid for Volvo eight years ago.
What does this all mean for foreign food and beverage brands? The natural advantages of safe and efficient imported food sources are likely to continue to diminish in China. Brands will need to adjust their positioning and messaging, and continue to innovate in the medium term to retain a point of difference over local competitors. This has happened in the electronics industry, and is currently happening in the auto industry, cosmetics and even fashion. Virtually all industries should be keeping an eye China’s homegrown production upping their game. There will remain a premium for foreign food and other category brands who understand the market well, but they may have to work a little smarter – something China Skinny can assist with. Go to Page 2 to see this week’s China news and highlights.
Welcome to this week’s Skinny on China; we hope it was a great break for those who were off over Golden Week. Aside from the annual inundation of tourist sites, transport hubs and highways, the most talked-about news of the break was the reappearance of China’s most famous actress, Fan Bingbing, who vanished without a trace three months ago.
Whilst there was countless speculation as to her whereabouts, the most plausible explanation of her being held for tax fraud turned out to be true, following a public spat with TV presenter Cui Yongyuan who circulated Fan’s tax-evading employment contract.
Fan Bingbing’s comeback was marked with a grovelling confession to her 63 million Weibo followers and a whopping ¥883 million ($129 million) fine for tax evasion. Less than a third of the fine was for unpaid taxes and overdue fees and majority for hiding income through studio fees and contract fraud.
Fan earned an estimated ¥1.4 billion ($204 million) between 2003 and 2016 and has been China’s highest paid celebrity for the past four years. It’s no surprise that her profile contributed to her being made an example of, in what will likely become a far wider crack down on China’s commonplace tax dodgers in showbiz. Much like we’ve seen in China’s gaming industry with no new game approvals since March, Beijing is becoming more resolute in wide scale influences that it sees as negatively contributing to Chinese society.
Brands should pay heed to the latest developments in the Fan Bingbing saga. The use of celebrity and KOL endorsements has become commonplace in China marketing plans seeing China’s influencer economy double since 2016 to $17.2 billion this year. 78% of Chinese consumers are receptive to brand recommendations from celebrities – two to four times the rate of consumers in the US, Japan, UK, France and Germany.
Beijing sees the fetishism around money and power of China’s nouveau celeb culture getting a little out of hand, and humbling the queen bee will be a reminder for others to stay grounded and ‘pure’. Brands should already be doing extensive due diligence before engaging brand ambassadors and endorsers – particularly as almost 70% of KOLs partake in fraudulent practices such as fake fans and engagement according a 2017 study. With the latest crackdown, brands should also be considering whether there is a likelihood that their influencers will be targeted for such behaviour.
On the subject of KOLs, last week saw an interesting stunt by beauty blogger Hao Yu – ‘Doctor Big Mouth’ – who sued Estée Lauder of deceiving Chinese consumers over the ability of its Crème de la Mer to heal burn scars, while taking a jab at foreign brands overall. The lawsuit follows a similar strategy Luckin Coffee used by suing Starbucks in May to get some cheap airtime. Don’t be surprised if you see more lawsuits creeping into Chinese strategies to build awareness. Hao Yu’s litigation is further reinforcement that marketing claims need to be airtight, not just to keep on the right side of the regulators, but also to avoid being targeted by KOLs and competitors using it to build their own brands. Go to Page 2 to see this week’s China news and highlights.
The brains trust at Amazon are likely to be scratching their heads wondering how that happened. After spending hundreds of millions of dollars and 14 years to wrestle market share from the almighty Alibaba and JD-Tencent-Walmart syndicate, they have managed just a meagre 0.7% share of ecommerce retail in China. Ebay suffered an even worse fate after throwing hundreds of millions at China before effectively giving up on the market in 2006.
Yet in less than three years, ex-Google engineer Colin (Zheng) Huang has managed to defy all odds with his ecommerce platform Pinduoduo. Not only has he blindsided Alibaba’s rural operations, he has also surpassed JD’s daily user count by cleverly targeting China’s underserved smaller cities. 65% of his 343.6 million active buyers live in third tier cities or lower.
“The new consumer economy isn’t about giving Shanghainese the life of Parisians. It’s about providing paper towels and good fruit to people in Anhui province,” says Huang. The strategy has paid off. Pinduoduo’s IPO last week valued the company at $23.8 billion, catapulting him to become China’s twelfth richest person.
Pinduoduo has also changed the online shopping experience into a social one where users are constantly reminded of other shoppers and their friends incentivised to join – something that has a struck a chord with lower tier shoppers who have traditionally been less forthcoming about buying online. Every Chinese consumer loves a deal, but those in smaller cities are the most price sensitive, unable to resist ten boxes of tissues for $1.90, bed sheets for $1.50, umbrellas for $1.51 and PCs for $150, even if there’s a good chance of fakes. Unlike the search-focused interfaces of Taobao and JD which deliver thousands of results, Pinduoduo displays products more like a news feed with a few hero products, making the whole experience less overwhelming and more fun for many.
There are countless takeaways that we can learn from the success of Pinduoduo; here are four that we found particularly interesting:
- Pinduoduo’s success is a metaphor for many businesses hoping to tap the China opportunity. They have gone beyond the overcrowded megacities and into the less glamorous outcrops in the hinterland. Given half of the 50 million new households expected to enter the upper and middle classes between 2016-2020 will be located outside of China’s top 100 cities, there is no shortage of opportunities out there. The right products, targeted in the right smaller cities, in the right way, can be very fruitful in China;
- Pinduoduo is further proof that investing squillions in building your own app could be better spent developing a Mini Program inside WeChat. Users need a very good reason to download a standalone app, whereas something embedded in WeChat is seamless, hence the 62% of users who shop on Pinduoduo through their WeChat Mini Program;
- The power of social advocacy shouldn’t be underestimated in China. Pinduoduo has done a remarkable job of tapping into shoppers’ WeChat contacts and taking them along for the ride by incentivising them with discounts, prizes and even free goods;
- And lastly, much like we saw with Luckin Coffee a few weeks ago, even markets like ecommerce that appear to be sewn up by the giants can still be ripe for the picking. The speed, complexity and fragmentation of China’s growth is constantly opening up gaps and new opportunities, some which may turn into $23.8 billion operations giving the gorillas a run for their money.
But don’t go flipping the birdie to Alibaba and JD just yet – they may be expensive, hyper-competitive and in many cases unprofitable, but Pinduoduo is unlikely to be a white knight for many foreign brands at this point in time. The average order value is just $6, compared to $60 on JD and $30 on Alibaba’s platforms. Discounts as much as 90% are not a sustainable strategy we’d recommend for the guardians of premium products that form the faithful Skinny readership. But take the opportunity to learn some good lessons from Pinduoduo’s success, keep abreast of how it evolves and give China Skinny a call to ensure you have the optimal ecommerce and marketing strategy for China. Go to Page 2 to see this week’s China news and highlights.
No holiday period provides a better barometer for the state of tourism and general consumer sentiment in China than the October Golden Week. Unlike Chinese New Year when the majority of Chinese return home to their families, October National Day Holiday is all about leisure travel with around 700 million Chinese going on vacation.
This year’s Golden Week will see nearly seven million Chinese travelling abroad – well up on last year’s six million travellers. Japan is the top choice for the first time, with Thailand second and Hong Kong third.
Japan’s spot at the top of the list provides an interesting takeout for the US and other countries in the midst of a geopolitical spat with China. Many readers probably recall how fast Japan fell out of favour in China due to the Diaoyu Islands dispute in 2012, which saw anti-Japanese protests across China and plummeting sales of everything from Toyotas to trips to Tokyo. With the tone of Chinese state media and social feeds becoming less positive about the US of late, there is a likelihood that sales of some US brands may take a dip as the result of less favourable consumer sentiment, in addition to the tariffs. Yet based on Japan’s return to favour, even if sentiment does change, it won’t be irreversible.
Another interesting takeout from the increase in Golden Week tourists is that Chinese consumers appear as positive as ever. With around 15% growth in tourists heading overseas, consumers remain willing to spend like never before. This is supported by sales of the hockey-puck-calorie-bomb – Moon Cakes – which increased 5-10% on last year, despite Chinese consumers’ pivot to healthy eating. And one of the most important indicators affecting how wealthy Chinese consumers feel – house prices – rose at the fastest pace in two years following six straight months of acceleration.
There are countless theories about how much the trade war will affect China. One of the common beliefs is that it will be consumers and their domestic buying power who will cushion the economy from a dip in exports. As we have learnt in the past, imploding stock markets have much less effect on consumer sentiment than they do in the US. Many of the indicators and theories that form the foundation in Western economies hold less relevance in China’s unique system.
It is still too early to understand what impact Trump’s tariffs have made on the Chinese economy and the global economy as a result. Nevertheless, Trump is unlikely to be happy about the swathes of unfazed tourists boarding planes next week, a little heavier from their portion of lotus seed paste moon cakes.
For readers in the tourism sector, we hope this Golden Week brings you plenty of good things from China. For our China-based readers, we hope you have a wonderful break and manage to avoid the airports, stations and roads at their worst. China Skinny’s office will be closed over the week and we’ll be back delivering our unrivalled research and strategy services from October 8, and this newsletter from October 10. Go to Page 2 to see this week’s China news and highlights.
Chinese males have an obsession with gaming, so say the numbers. China’s $38 billion gaming market is worth more than four times its movie industry. The country’s infatuation has contributed to eSports becoming a medal event at the 2022 Asian Games and even a possible demonstration sport at the 2024 Paris Olympics. Some estimate that gaming will soon match regular sports for popularity in China.
While the inclusion of eSports in major sporting events is likely to increase China’s medal count and patriotism, Beijing isn’t looking on the national pastime so fondly. Cracks have been appearing for some time, such as last year’s reports from the People’s Liberation Army which blamed excessive video gaming – along with too many fizzy drinks and masturbation – for high failure rates on physical tests, reaching 56.9% in some Chinese cities. Similarly, China’s Ministry of Education slammed gaming for the disturbingly high rates of myopia – near-sightedness – among children, contributing to a halt in new games being licensed since March, with no new games expected to be approved until next year.
One of the underreported consequences of 530 million gamers in China is that it provides a distraction to finding a mate. This doesn’t bode well for Beijing’s aspirations to increase fertility rates. It has also contributed to the millions of charming and successful urban women in their late 20s who are still single – a.k.a. the “leftover women”.
Many of those “leftover women” – and countless other women in relationships – are finding companionship in a furry friend. Women accounted for 87.5% of China’s pet-related purchases in what has become one of the China’s fastest growing industries. The pet category is on track to hit ¥170.8 billion ($26 billion) this year – 27% up on 2017 – which is more than three times the growth rate of retail overall.
The soaring sales are unlikely to come as a surprise for anyone browsing WeChat avatars, Moments feeds and Douyin videos, which have more affectionate profiles of felines and pooches than an online pet store.
Much like many other categories in China, a large portion of the pet industry’s 27% growth is coming from consumers trading up. Consumers are no longer feeding their pets rice and food scraps, they’re trading up to better quality products, with natural food accounting for a quarter of the market and growing at 55% last year. Research has also revealed that 40.9% of Chinese dog owners take them to a beauty salon.
The news is obviously great for well-marketed brands in China’s pet industry, but other brands should also take note. They say the way to a girl’s heart is through her furry best friend, and smarter businesses are realising this; through their communication plans and even providing pet-friendly facilities such as cafes and stores. Like everything, it is about understanding what pushes your target market’s buttons and how best to service them – China Skinny can assist with that. Go to Page 2 to see this week’s China news and highlights.