Pulling their weight?

It’s probably a bit early to argue that Chinese consumers are the new fat Americans (I am an overweight Kiwi myself so please don’t take offence) but they are certainly the next fat Americans.

The Economist did a great job here and here analyzing the gradual decline of the US consumer as an engine of economic growth and the growing, though largely unrecognized, power of Asia’s consumers so I will spare you the macro analysis.

On a micro level, manufacturers and shopkeepers are responding to the call of China; news reports appear almost every day of another foreign company setting up a manufacturing plant, R&D facility or shopfront in China.

While the latter are certainly here for consumers, the former increasingly are also, with a China presence seen as a way of "buying" market access, or at least putting production closer to the end market, geographically and culturally, rather than simply as a way of accessing cheap labor.

But are Chinese consumers really pulling their weight? The answer, as always in China, is "it depends".

I spoke to a CFO of a major foreign clothing brand late last week. It was a social occasion so I will hold back the name of his company, but he was generally unenthusiastic about the response of Chinese consumers to his store’s presence in one of Shanghai’s larger and more glamorous department stores. His neighbours were doing no better, he said.

I asked him how long the company could survive in China if it continued to chalk up losses, and his response was that he would recommend retrenchment (a smaller store, not a complete China exit) if things didn’t turn around in one year.

Naturally, his marketing team was not keen at all on losing a prime location for brand-building, which begs the question of whether losses incurred by a presence in China should come from the marketing budget rather than the operations one. The CFO certainly seemed to think so – the store was clearly an exercise in brand-building rather than sales.

I wonder how many foreign companies are in the same boat, holding out for the Chinese consumers to start spending and live up to their potential.

According to Charles Merkle, president of CBC Consultants, the boat is pretty crowded. His advice? Unless you are a global brand with buckets of cash to spend on building that brand in China, there is no rush to come to China.

"The chances to survive here in a low price market with sophisticated high-end luxury products are very small," he told me.

Only those that have done their research and have a business model where they can make money in two years should make the trip now, he said. The rest should wait for the market to mature.

"You can come in anytime. There is no reason to come in today. If you have no clear plan how you can make money today, you should keep yor money in your Swiss bank account and come in when the market is ready."

Sounds like reasonable advice to me, and I suspect the CFO agrees. But I also suspect the lure of China’s consumers carry more weight than any tonnage of sensible business advice.