In keeping with China's WTO commitments, the Ministry of Commerce in December removed impediments on store location (anywhere), corporate structure (no more JVs required) and capital requirements (down from RMB10m to RMB300,000) for foreign retail operations.
The reforms were especially welcomed by the big offshore retailers anxious to run their own retail shows as wholly foreign-owned enterprises (WFOEs), not least because they can shed the deadweight of joint-venture partners, raise efficiencies and often cut costs.
But while announcements from the foreign giants kept coming – like Wal-Mart's revealing plans for three new Beijing Supercenter mega-stores last month – the lower capital requirement raises the issue of where smaller-scale international chains will fit in the picture.
The fact is, says one analyst, there is only a score of international- standard malls in all of China, while malls of substandard quality and design continue to be slung up in anticipation of an endless consumer boom, as developers try to exploit retail liberalization ahead of the chain operators.
"It is disappointing that so much of the supply that exists, and even what is being built, will not attract these retailers," says Bryn Davis, property analyst for CBRichard Ellis, in Beijing. "There are about 20 shopping malls in China that meet these standards – three or four in Beijing, one or two in Dalian, Guangzhou and Shenzhen. The rest are in Shanghai."
Experts see a deepening mall malaise, given the fact there are not enough quality malls and an overpopulation of substandard ones diluting commercial prospects for everyone.
That said, Shanghai has more malls, good and not so good, than any other Chinese city. And with retail vacancies down to only 5%, Shanghai is becoming expensive by Chinese standards. Some mid-market players like Japan's Mitsukoshi, for example, are thinking about expanding elsewhere, into cities like Chongqing deep in the country's interior. The more mass-market chains have been heading inland for years. Metro of Germany, for example, pushed out to Wuhan in central Hubei province and now boasts 20 outlets throughout the country. France's Carrefour, too, has been in Wuhan and other interior cities for years, sometimes establishing JVs with local governments ahead of Beijing's liberalizations, and sometimes to the chagrin of regulators, it must be said.
Shanghai remains the big draw, which is why there are more quality malls there than anywhere else. Britain's Tesco bought 50% of Shanghai's Hymall at US$260m last year.
The biggest and most active player to surface recently has been CapitaLand of Singapore. Through its subsidiary CapitaRetail, it just acquired Beijing's new Anzhen Shopping Mall as well as Wangjing shopping mall (still a work in progress) for RMB1.746bn (US$210.36m) – from big domestic retailer Beijing Hualian.
CapitaLand already made its mark in Shanghai, building its 51-storey Raffles City tower and mall in the heart of the city – setting the new benchmark retail rental rate of US$5/m when it opened the complex in 2003. For foreign developers now, the aim is to build super-malls with world-famous anchor tenants, such as Wal-Mart, with adjacent "big-box" facilities that might typically house do-it-yourself giants like Home Depot. (While the malls will have parking, they will have nothing on the scale of American and European car parks because car ownership, while rising rapidly, is still well behind the West.)
Last year, in its boldest move yet, CapitaLand tied up with Shenzhen's investment arm, Shenzhen International Trust & Investment Co Ltd (SZITIC) which already had an alliance going with Wal-Mart.
The two partners opened 10 Wal-Mart stores before CapitaLand came into the picture. Now plans call for opening a score more stores in the next five years. Underscoring the importance of Shenzhen in its overall operations, Wal-Mart, which sources most of what it sells in China, just announced it was relocating its Asia headquarters from Tokyo to Guangdong's boomtown.
Putting a roof over the heads of honey-pot tenants like Wal-Mart is critical to CapitaLand's strategy, Asia's biggest international developer, which now has RMB6.8bn, or 8% of its global portfolio, invested in China, its second largest offshore target market after Australia. And investments are set to grow.
"We are seeking opportunities to acquire retail malls in Shanghai since it is a big commercial metropolis," CapitaLand China Holdings Group President Lim Ming Yan has said. "Negotiations are under way. We will possibly double the investment in the next several years to expand our property business in China."
That should help raise the stock of Grade A retail malls. If his main complaint is the lack of that now, CBRichard Ellis's Davis has not lost his enthusiasm for the WTO reforms. The 97% cut in capital requirements opens up a vast array of possibilities. So too does another deregulation waiving the obligation to use Chinese distributors, so often involving damage and loss of goods in transit.
"Everyone is looking at China now," Davis says, "even people who had not thought of opening here. These changes remove huge obstacles. If only 25% of them come to China, it will create a huge market."
While the road is open to wholly foreign-owned businesses, some Chinese analysts still expect them to be more the exception than the rule, "Foreigners will depend on Chinese partners to gain low-risk and low-cost access to business networks," Li Fei, a professor at Tsinghua University's School of Economics and Management, observed in China Daily. "The Chinese market is a mix, and its vast territory makes it safer and more efficient for foreigners to get help from local partners."
Tony Wong, president of Lifestyle Company, a boutique mall developer in Shanghai, agrees, contending the reduction in capital requirements is more important than rule changes allowing WFOEs. The reduction will ease the entry of Prada-scale operations, he says. "But you still need a local partner – it is a difficult to market to enter without one."
Like Davis, Wong worries about the current mall mania. "There are too many. They are too big and too close together. The Chinese consumer style is different from America's. The big mall is an American phenomenon; it isn't even European," he says.
Developers bent on building the biggest mall ever will be disappointed, he says, because customers do not want to trudge through endless corridors. "Retailers do not like it either," he says. "These malls will be empty."
Scale, in fact, is the watchword with this developer. Lifestyle creates and manages retail property in Shanghai in what Wong calls "lifestyle centers" and seeks human-scale operations to match the needs of consumers, and the mid-scale commercial tenants who are most likely to enter the market.
As for the often-neglected interior of the country, Wong predicts impediments to foreign retailers will remain for some time yet – mostly because of traditional consumer behavior. "There is less spending on lifestyle items and more on business entertainment," he says.
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