The Times They Are a-Changin’

Published on Author andrew

According to the front-page story of The Economist this week, “China loses its allure,” China is losing its appeal. In the early 1980s, the then leader of China, Deng Xiaoping, welcomed foreign firms with open arms. The incentives for going to China were irresistible and for the last 30 years this factor has made China one of the biggest and fastest growing markets in the world. However, the opportunity may be vanishing.

In many ways, the market is still enticing, but the window is closing. For one, the country only accounts for 8% of private consumption in the world. At the same time, business is getting harder for foreign companies. The government has always placed undue burdens on tech firms, forging banks, and brokerage houses. But new sweeping consumer-protection laws are going into place and recent regulations are limiting business opportunities. This tighter control may cause serious trouble for China down the line. In fact, some firms like Revlon have already pulled out of the country entirely. If China does not want to lose all of its foreign business they better take some advice from the immortal Ice Cube and, “check themselves before they wreck themselves”.

6 Responses to The Times They Are a-Changin’

  1. Be careful: “only” 8% needs to be compared to the shares of other countries – only the US is bigger, and the Euro Zone, and not by all that much. No international firm ignores the latter two, and China is “overweight” in luxury goods.

    But in the background they’re arguing that domestic firms are now far more sophisticated. So increasingly US and European and Japanese firms – and the article focuses on consumer products – find that there are already brands present that are marketed in a manner cognizant of local idiosyncracies, and that have a better sense of how to reach consumers.

    The most interesting part of the article is the claim that China is the first market in which consumers have always known smart phones and net shopping. Elsewhere retailers all started with bricks and mortar; Amazon is an upstart. But many retailers in China have never been wedded to a piece of real estate and to hard-copy advertising. That is another challenge facing foreign firms, who still are still wedded to (and whose executives grew up knowing only) the old ways.

  2. I agree with Professor Smitka that the increasing success of domestic consumer-product firms and the decline of the willingness of consumers to pay a premium for foreign brands is what is causing the withdrawal of (or at least greater competition with) foreign firms. And as Professor Smitka notes, Chinese consumer-good firms have seemed to adapt more quickly to a changing retail landscape based more on online and mobile shopping.

  3. I agree with Professor Smitka too especially on the last point about the competitive advantage of Chinese firms in providing consumer goods. Foreign firms that are attached to the “old ways” are facing the disadvantage of bearing start up and operating costs that domestic Chinese producers do not face. There are land, capital and labor costs that can be avoided in a new technology driven, online consumer based global economy. Unfortunately for older and foreign firms, these costs have already been internalized in their operations, thus putting them at a disadvantage.

  4. As the economy gets bigger and bigger, Chinese markets have become more competitive. The trend in the past was that Chinese consumers preferred foreign brands (esp. the luxury ones). However, many Chinese firms learned how to survive in the competitive markets now (with more strategies), which led to better quality and price.
    One of the major reasons that there was high foreign investment was that there was cheap labor. However, as I mentioned in previous posts, cheap labor might end in China and these foreign companies might want to leave thinking the wages will soon increase.

    • So you all should look for news about recent FDI in China: in what sort of goods or services, and aimed at (domestic) Chinese or export markets?