Hainan Island, off the coast of Southern China, increasingly referred to as the ‘Chinese Rivera’
In 2010, China’s GDP per capita reached $4,200 and was 9% of that of the US – a huge increase from its level in 1983, when it was just 2%. At this time very little was happening in China with regards to luxury: Lane Crawford had just started and many Chinese were still walking barefoot through Macau’s casinos.
Things in Mainland China have clearly changed but despite it’s rapid progress, the standard of living today is still only comparable to Japan’s in 1954, Taiwan’s in 1972 and to South Korea’s in 1976. In fact, China still likely has twenty to thirty years of growth and catching up to do. Or you could see this as China bouncing back to its rightful position as the world’s largest economy: as late as1820, China accounted for some 30% of global GDP – more than America’s share today!
China’s overall electricity consumption – a good indicator of economic activity – increased by 12.4% in the first four months of 2011, compared with the same period in 2010. China has now become the world’s largest consumer of electricity, even overtaking the US. Again, this illustrates the country’s rapid rise: China’s total electricity consumption 15 years ago was only one third of the US level.
“ Despite rapid progress, China’s standard of living today is still only comparable to Japan’s in 1954 ”
The markets for luxury goods is exploding not only in China but also in countries across Asia. In India, sales of luxury goods are expected to triple from $4.8 billion in 2010 to $15 billion by 2015. In China, the luxury goods market rocketed from $0.9 billion in 1998 to $12.2 billion in 2010 – and it is expected to reach $27.6 billion by 2015, when it is slated to overtake Japan as the largest luxury market in the world. According to Goldman Sachs, the number of people who may buy luxury goods in China – which it defines as people who earn more than $30,000 per year – will expand from 12.5 million this year to 200 million in 2025.
The Chinese are also more and more conscious of problems in the European Union – the recent issues with the Greek economy and concerns for Portugal, Spain and Italy. They also acknowledge that companies like Prada are choosing to launch their IPO’s in Hong Kong, demonstrating their homegrown position of power. Mainland Chinese are not coming to Paris or Milan looking for luxury brands because there are so many brands coming to them. Why should they fly abroad when so many things are happening in their own country?
New residential areas for wealthy people are blooming in China: no less than 7000 upper standing houses by area, with inside and outside swimming pools, jacuzzis and wine cellars. Some even have their own organic fields with vegetable and fruits, as well as nearby shopping malls, sports and cultural facilities. Dragon Lake in Nanjing is a very good example of how wealthy people live in paradises made expressly for them, as opposed to the well documented conditions of major Chinese cities.
Crowds on the streets of Shanghai
The time when a rising tide lifts all boats is coming to an end in the Chinese market. We see strong evidence that there will be fewer successful Western companies in China in the future, competition is now becoming brutal. Already the world’s largest market for most product categories, China is getting very crowded with international competitors, as well as many strong local competitors – who are learning fast – often leading to hyper-competition and razor-thin profit margins.
If your market position is number 17 within your industry in China, profitability tends to be elusive. It is becoming increasingly important to measure market share and understand your share of the profit pool within your industry segment. Without a meaningful market share, or high share of the profit pool, companies are doomed to fail in China.
So what are the critical success factors for companies wanting to take advantage of opportunities in China? Effective strategies and flawless execution can only be developed and sustained by those possessing deep understanding of the Chinese market, its competitive dynamics and cultural aspects of the country.
“ China can be paradise if you understand the way China is moving and how the Chinese are thinking ”
The longer we observe foreign companies in China, the more clearly we see how five areas are critical to sustainable growth and profitability: high speed, competitive differentiators, cost leadership, high performance sales and the local leadership team.
China can be a paradise if you fully understand the way China is moving and how the Chinese are thinking. China is a complicated country to conquer and it cannot be approached like any other country. The country in itself is divided in many regions including different partners, real estate owners and different rulers.
If China is for companies the new Eldorado, China could also be a hell for those flocking to the flame, only to be burnt like an insect.