The Chinese central government has made improving the living standards of China's urban citizens, through an increase in per capita living space, a major priority in the Ninth Five-year Plan (1996-2000). Current residential housing does not meet demand, and policy makers are aware that a projected 35 per cent of the country's population will be residing in urban areas by the year 2000 ? up from the current level of 18 per cent.
A number of affordable housing programmes have thus been initiated in most of China's cities. These initiatives are expected to result in major residential building programmes throughout the country, and subsequently increase demand for associated products and materials. Growing demand for building materials and consumer durables in particular, and significant changes in the ways in' which they are purchased, present new opportunities for both Chinese and foreign suppliers. Importers and foreign-invested ventures stand to benefit as quality standards rise, and builders and residents alike begin to gravitate toward foreign brand names.
In the early 1990s, both foreign and domestic investment poured into China's real estate sector to build service apartments, hotels, villas and luxury residential housing for expatriates and China's wealthier citizens. The result was a boom in the real estate sector and huge growth in overall residential and commercial space.
However, most urban Chinese residents cannot afford to live in much of the residential space that has been built to date. Current government statistics show 50.3 million square metres of vacant housing nationwide, while tens of thousands of Chinese urbanites are either technically homeless or doubled up with multiple families in unsafe, cramped housing conditions.
In an effort to remedy the problem central government has issued several policy initiatives, currently awaiting State Council approval. These policies aim to stimulate residential housing sales in two ways. First, channelling future real estate financing to affordable residential housing projects is designed to ensure that a larger percentage of the newly built space will serve to ease the current housing imbalance. Second, the government plans to convert through tax incentives and fee waivers, middle- to high-end residential complexes into more affordable housing.
The Ministry of Construction's (MOC) stated goal is to increase the national per capita living space from 7.9 square metres in 1995 to 9.0 square metres by 2000. This projected increase translates into 1.2 billion square metres of new housing to be completed by 2000, or 240 million square metres a year. Directed at the national level by the MOC, the nationwide campaign is being implemented and partly financed at the municipal and provincial levels. More than three-quarters of China's provinces and autonomous regions and almost half of the country's major cities have developed targets of their own. For example, the Shanghai Municipal Government has set an ambitious per capita target of 10.0 square meters by 2000.
One of the more highly publicised projects is the Comfortable Housing Project (Anju Gongcheng ). The Anju project, initiated in 1995, targets China's middle and low income families, defined as those living in a per capita space of 4 square metres or less. The scale of the project continues to grow as the MOC reports that 13.5 million square metres of new Anju residential space were completed in 1995 nationwide, and 12.8 million were completed in the first half of 1996 alone.
While the Anju project has been criticised on several fronts from its financing to its construction quality, the project has had tangible success as many urban Chinese have moved into larger, safer, higher quality homes. In 1995, Shanghai alone completed 500,000 square metres of Anju housing, which allowed 1,500 families to move into new, larger homes. Nationwide, approximately 62,000 Chinese families moved into more spacious homes in 1995. The Shanghai Municipal Housing Bureau reported it will meet the 1996 target of 600,000 square metres of Anju housing, allowing a further 1,500 households to move to better living conditions.
The Anju project is just one of several initiatives designed to increase the living space of China's urban citizens. In Shanghai, for instance, the Anju project only accounts for about 10 per cent of the new residential space built each year. Relocation programmes are moving residents from urban centres to suburbs ? where homes tend to be larger ? and simultaneously making urban real estate available for commercial and infrastructure projects. In 1994, according to the Shanghai Municipal Housing Bureau, 18,000 families were moved to new, larger homes in the suburbs in order to make space for the city's new North-South Highway. Other programmes involve tearing down older buildings in China's urban areas and replacing them with larger, safer structures. During the Ninth Five-year Plan, the Chinese government plans to demolish and rebuild 2.9 billion square metres of old housing.
In addition to increasing the amount of living space, the MOC and the State Administration of Building Materials Industry (SABMI) are working to improve the. quality of residential space in China through a three-tiered residential housing programme. The first tier consists of a handful of pilot residential projects built with high quality building materials. The second tier is made up of about 60 projects nationwide which are being built using a combination of middle to high quality materials produced by both foreign and local producers. The third tier of projects primarily uses locally produced materials, often of lower quality.
While the majority of construction for the Anju' housing project has traditionally fallen under the third tier, the government intends to use the first and second tier projects as models for future Anju projects. In the next two years, the MOC hopes to bring the current Anju projects up to the quality standards of the 60 second tier housing complexes. By 2000, the MOC plans to build all Anju projects to the same quality standards as the current first tier buildings.
Demand for appliances
Urban Chinese citizens moving into new, more spacious homes will have room for more and larger appliances. The Confederation of Light Industry (COLI), the central government entity responsible for the planning and production of a range of products including consumer durables, is confident that Chinese families moving into new and larger homes will be one of the key factors driving demand for household appliances. COLI reported that during 1996 refrigerator sales increased by 10 per cent, air conditioners by 21 per cent and microwaves by 30 per cent. It attributes this growth partially to the gradual increase in per capita living space.
A concurrent increase in the number of newly married couples moving into their own homes will also stimulate demand for household appliances. Due to traditional housing allocation systems in China, newly married couples typically move in with the husband's parents. However, with economic reforms and the rise in living standards, a growing number of couples are saving to buy or rent their own homes.
Shanghai's largest refrigerator manufacturer, Shangling Electrical Appliance Company, echoes COLI's confidence in the growth of the consumer durables market in China, and particularly in Shanghai and east China. Shangling is increasing production capacity in response to three major trends: a relocation to larger homes in suburban areas; the tendency among relocating families to discard old refrigerator units in favour of larger, newer models; the creation of new households as several families sharing one apartment branch off into their own homes.
Microwave oven producers also report that larger kitchen space in new residential housing complexes is a factor that has contributed to the dramatic increase in the sales in 1996. They expect projects such as Anju and the various relocation initiatives to continue to drive demand for microwave ovens.
Television manufacturers also report that they are benefiting from these developments. The Shanghai Electronics Group Holding Company, the government-owned television producer, anticipates two key factors will drive demand for televisions in the near future. The increase in living space will result in more rooms per household, and in line with consumer patterns in more developed countries, Chinese consumers will aspire to a television set in more than one room. They will also tend to replace current size 58cm televisions with large screen, 80cm-plus models.
Foreign building materials suppliers have historically been successful in supplying medium- to high end residential projects in China, such as villas and service apartments typically built for foreigners and overseas Chinese, but have not been able to supply the higher volume, lower cost residential housing projects. In recent years, however, importers and foreign-invested manufactures of building materials, have found that even government-funded residential housing projects have the funding to pay a premium for higher quality building materials, and thus represent a growing target market. With the high-end residential market approaching saturation, evident in the 50.3 million square metres of vacant housing, the medium to low-end projects will see the most future growth.
Foreign producers of building materials which have supplied first and second tier building programmes view these residential developments as showcases for future sales as quality levels among government-financed projects improve. Foreign building materials producers are now promoting their goods to customers who were previously largely supplied by domestic Chinese companies. In November 1996, an MOC conference in Shanghai's Pudong New Area brought together policy makers, construction companies, real estate developers and building materials suppliers. Among 80 building materials and related product manufacturers participating in the conference, over half were foreign companies already actively supplying the market.
Rising quality standards in China are being driven by government policy and by, the trend toward home ownership. Under the planned economy, housing was either owned by the state or the work unit. With the emphasis on affordable, often near-cost housing, and the developing mortgage industry, urban Chinese are increasingly able to buy their own
homes, and pride of ownership is becoming a factor in choosing building materials. For instance, until recently the MOC required construction companies to build residential housing complete with finished kitchens, bathrooms and fittings, which would often be replaced with higher quality products once residents moved in. Increasingly, even government-sponsored residential construction projects are being built unfinished. SABMI cites this as a "major change" for China's residential housing market, one that keeps the costs of new homes down and allows new residents to build out their homes with higher quality fittings suited to individual tastes.
Foreign suppliers and foreign-invested manufacturers of sinks, toilets, flooring, ceiling tiles and paint are developing strategies to capitalise on these trends. A foreign bath and kitchen product manufacturer, with local production in Shanghai for instance, has developed a product line which specifically targets the medium to high-end Anju projects. The line is priced 30-40 per cent lower than the company's high-end products, but still commands higher prices than its domestic counterparts.
Foreign manufacturers of building materials have also developed showcases in Beijing in cooperation with the MOC for the purpose of displaying their products to both Chinese construction companies and potential end-users. Importers of building materials are also seeking direct sales opportunities, as demand grows for higher quality, premium-priced building materials, supplies and fittings. The emergence of DIY outlets is also providing new channels for imported products, as home owners making purchasing decisions are beginning to invest in higher quality products.
Future residential market
China's national housing campaign has been criticised on many fronts. Some say the national government has set unreachable residential space targets that cannot be financed by local governments. Local governments have also resisted Beijing's push to lower land rental prices in an effort to keep new housing affordable, as traditional rates represent a significant source of revenue. Finally, China's mortgage loan industry is still in its infancy and its development will be a critical factor in the success of the country's effort to increase the housing standards for its citizens.
While every city across China may not reach its construction targets in the stated timeframes, and such government initiatives rarely proceed exactly according to plan, China's per capita residential living space will continue to increase, and the quality of materials and fittings used to build them will gradually rise. Larger scale, higher quality residential housing programmes present an opportunity for importers and foreign-invested. suppliers of consumer durables and building materials. Foreign companies have already started to capitalise on these trends, and these sectors are becoming increasingly competitive as foreign-invested enterprises come on line and domestic Chinese manufacturers upgrade their quality.
Opportunity will continue to exist for suppliers which enter the market with a solid understanding of the competitive environment, traditional and emerging sales channels, and appropriate price points and product offerings.
Pacific Rim Resources, Inc., headquartered in San Francisco, is a management consulting firm which specialises in market entry, investment and growth strategies in the Asia Pacific region. Brett Tucker is an analyst in the Shanghai office. For more information, contact Tel: (1) 415 896 6715 Fax: (1) 415 495 1821.
China expects an economic growth of 8-9 per cent this year and with inflation under control, this is a stable environment for the development of the bathroom ceramics industry, writes SRG. According to the national Building Materials Bureau, the estimated market size for items such as bathtubs and toilets was 45-49 million units in 1995.
The are about 180 manufacturers of bathroom ceramic ware in China, with Foshan and Tangshan being the two most famous production bases. However, in terms of function, design and appearance, China still lags behind producers in Japan, the UK, France, Italy and the US. For this reason, many top-class hotels still import bathroom ceramics. About 85 per cent of the demand in the housing market is for low-end products, much of which is made in Guangdong province.
The increase in demand for bathroom ceramic ware up to 1993 was a result of the booming real estate and housing market. Many international companies have established a presence in China either through joint ventures or direct importing operations, including American Standards, Toto, Kohler, Cotto, Delta, Jason, Imperial Dynasty and Meilin. However, the introduction of the austerity policy depressed the market and led to over-supply of products. This has had a particularly negative impact on state-owned enterprises because of their slowness in responding to market forces. Many manufacturers are still running below capacity despite the relaxation of measures.
The market is highly dependent on the real estate and housing markets. While there are many real estate projects which will help remedy the shortage of properties, few people will be able to afford to purchase houses or apartments. There are also initiatives to re form the structure of the market. For example, the government has put four ward a plan to tie prices of state-owned apartments to income levels, making accommodation more affordable to the general public. It is also anxious to develop a modern mortgage system.
The decoration and renovation market is also important for the bathroom ceramics industry. Rising incomes have made Chinese consumers more willing to spend on improving their home environment. The government has been a source of encouragement in this area. For example, Beijing housing authorities have decreed that all new apartments must have a Western-style toilet, rather than the old squat variety. The current interior decoration and renovation market, of which bathroom ceramics forms an important part, is estimated to be worth Yn80bn (US$9.6bn).
The future ceramic ware market is likely to become more diversified with more varieties and types of product and more intense quality and price competition. Larger manufacturers will invest in the production of higher quality products, which are less easy to imitate through the use of modern technology.