On October 1, 1949, after two decades of civil and international war, the lurking dragon to our east formally became The People’s Republic of China under the leadership of the “Great Leader” Chairman Mao, who famously declared: “The Chinese people have stood up.” Yet, in the years that followed the Chinese economy didn’t exactly accelerate at a breakneck speed. Instead, Mao found converting a vastly agricultural economy to mass industrialization was much harder, especially while waging war and purging those that questioned his power. Nevertheless, China slowly began to rise, unified, and over the past few decades Mao’s groundwork allowed modernization to take root and cultivate China into the economic powerhouse we see today. Just ask the U.S. Treasury.
photo credit: Onion
Unfortunately though, a scary, unforeseen externality creeped up when more and more of the Chinese populace increased their purchasing power parity through better work, resulting in an increased demand for luxury goods, premium pricing, and a slow shift in China’s economy from that of production to consumption (like the U.S.’s). Essentially, the best bargain is no longer the top priority for Chinese consumers.
Why is this potentially bad? Well, the world’s economy acts like a giant checkbook that needs to balance out every year. For years, China ran a trade surplus (producing and selling more abroad than they consumed and bought abroad). All of their surpluses made up for our huge trade deficits (consuming and buying more from abroad than producing and selling abroad). If more and more of the Chinese population demand higher quality, often foreign goods, then the world economy can potentially get out of whack. Let’s explore this fascinating phenomenon a bit more by looking at the three factors contributing to increased demand amongst the Chinese population and how it impacts pricing strategy.
The counterfeit market is waning and the name-brand market is waxing
A recent article from The Economist, talks about how consumers in China are shifting away from counterfeit products. While the country’s counterfeiters once thrived on a high demand for fake Louis Vuitton shoes, Gucci bags, and Apple iPhones…or Hi-phones, counterfeiters are gradually losing business to authentic products.
A new attitude of “do unto others as you would have them do unto you” has emerged amongst larger Chinese brands, such as Lenovo, leading to pressure on the U.S. government to crack down on counterfeiters. Additionally, the simple act of having more purchasing power has allowed the Chinese population to move toward real, name brand products, which is compounded with a new “keeping up with the Joneses attitude.” Add on top of that counterfeit food scares, like the nitrite milk poisoning in northwest China, and you have a perfect storm of the fakes being driven out of the economy.
Price has diminished as a purchasing factor
Price is no longer the most significant variable in the equation and it is not solely the cheapest deals that are sought after anymore. Instead, the minute details of a quilted, calfskin Chanel bag, the pride of majestically driving around your Jaguar XJ, or the safety of drinking a cup of Nestle milk are the main factors being considered in a purchasing decision. Of course, not everyone in China can afford these products, but even switching from off-brand to imported food results in lasting impact.
Luxury brands flocking to the extra cash
The growing consumerism nature in China has introduced many foreign brands. An article from CNN Money shows us that besides luxury fashion brands that are making a presence in China, sales of high end cars such as Tata Motors’ Jaguar, Land Rover, and Range Rover increased by 60% in 2011 and have now started manufacturing in China. Despite the jump in Tata’s sales, the growing economy is still demanding Volkswagen’s Audi, Daimler’s Mercedes-Benz and BMW cars, as well as American brands Ford and General Motors. Wine is also gaining popularity in China. LVMH recently announced its plans to open a vineyard in China to produce a premium red wine within the next two years.
With dwindling counterfeiters, less price sensitivity, and more luxury brands being sought, the Chinese population is surely in for at least a few cash filled decades. Time will tell how the deficits and surpluses will even out (India is creeping up in production). Yet, there’s one thing for sure: Mao’s great leap forward took a little while and isn’t quite complete, but China has surely come a long way from when the Great Leader took over.