by Toffler

Toffler

Toffler

Business in Shenzhen, China

October 14, 2006, by TofflerN, category Business Climate, Uncategorized

When I was looking up a new mutual fund on Morningstar yesterday, I saw this article headlined:

The World’s Biggest Investment Opportunity?
A quick take on the Chinese boomtown of Shenzhen.

Although the author makes it clear that he was only there for a week and therefore is no expert, he makes some very accurate observations. For example,

Speaking of consumption, I pity the American (or European) consumer goods firm that thinks its next big growth leg is coming from hundreds of millions of Chinese consumers. I visited one reasonably upscale mall filled with name brands like Columbia COLM , Nike NKE , and Nautica, that was thronged with shoppers. Unfortunately, very few had bags–they all seemed to be there for the experience and the air conditioning rather than the products.

Unfortunately for those consumer goods companies, this is true in Shanghai as well. As Shanghai is generally considered the richest city in China, followed by Shenzhen, if people aren’t buying American brands in these cities, there not buying them anywhere in China. However, I believe the theory is to go into China early, even as it continues to go through the process of economic development, to start creating brand recognition and association, so that the people have something to idolize and aspire to buy. That way when the masses do have the money, they will already recognize the American (or European) brand names.

The other problem with this situation is the soon-to-be overcapacity of shopping malls in Beijing and Shanghai. Mall developers see the glitz and glam of stainless steel & glass structures as well as upscale stores and so they take cheap loans to build build build. This creates a ripple effect as people are displaced, land becomes more expensive, citizens become angry because they can’t afford new homes, and either developers are disappointed when merchants don’t sign up, or merchants are disappointed when people don’t buy. To limit this, the government has started regulating loans for real estate development, but even that can’t curb the investment and speculation. But some do still suffer the hard way: the largest mall in China, and perhaps the world, was supposed to be built in Hong Qiao (Shanghai), but the developers ran out of money, so now it stands half-built, a blight in the area. Land speculation is big business in China, but as with anywhere, and even more so in China, due diligence is necessary, especially regarding the government’s recent attitudes and regulations.

And from my previous blog, to answer the question about Shenzhen’s population (it is far less than Vietnam):

Consider that Shenzhen had about 300,000 residents in 1980 and now has around 12 million, and the local economy has seen compound growth at something like 25% to 30% annually. (For comparison, the fastest-growing city in the U.S. over the same time period was Las Vegas, which merely tripled in size from about half a million to just more than 1.5 million.)

With that kind of growth in the economy as well as population, it’s disappointing more people aren’t buying genuine brand names. But then again,

it’s a very young city–I barely saw anyone over 40 during the week I was there.

This is generally true of the eastern China boomtowns. The young and able, but often poorly educated, leave the countryside in hopes of earning just a little more in the big, fast growing cities. And any extra money they do earn is sent back home to their families. China is also one of the largest saving nations in the world, so they’ll choose the cheaper alternative whenever possible. This partly explains the next phenomenon he discusses:

[T]he commercial neighborhood I visited the next day–which had lots of small shops selling locally branded or knocked-off goods–was mobbed with people actually spending money (judging by how many had shopping bags). From fairly bad iPod nano knockoffs for $20 to pretty decent fake Patek Philippe watches for $40, it was all there. … As the availability of $20 iPods and $40 Patek Philippe watches (both of which I was offered) might indicate, there’s not much hesitation in leveraging Western brands. I saw a local restaurant chain with a logo that looked suspiciously like an Asian Colonel Sanders, and in the lobby of the state-owned hotel where I stayed, there was a store called “Gulao & Shark,” which appeared to be a copy of an apparently popular sportswear manufacturer called “Paul & Shark.”

Gotta love the readily available fakes in China and the willingness of non-sophisticated consumers to buy them ::sigh:: Where’s some IPR protection and respect for brand names when you need it?

Starbucks, on the other hand, has been very successful in China, despite the fact that,

you can buy a good lunch for $1.50, but Starbucks SBUX coffee costs more than it does in Chicago.

Of course, Starbucks is always expensive, but I would expect Starbucks to tend to price according to the living standards or the country. Maybe Starbucks is trying to go SUPER-premium in China? Well, despite outrageous prices, Starbucks certainly has a lot of shops that are nearly always full in Shanghai. Wow, the success they have had, truly amazing. But definitely, you can get a decent lunch (assuming you don’t mind the service or the atmosphere) for $1.50. Although, even this price range is becoming harder to find in Shanghai, but it still certainly exists outside of SH & SZ.

This is an astute observation, as I discussed at length in my Xanga blog:

Almost without exception, the stores I saw were overstaffed by a factor of two or three compared with what we’re used to here in the States. Enter a store and you’re swarmed with polite folks eager to help. Why have so many employees help customers to buy so little? Because they’re so cheap it doesn’t really matter. After buying some beer at Carrefour, I asked which aisle had the bottle openers, and one employee scrambled to dig a (free) promotional opener out of a box somewhere while four others supervised and offered helpful commentary.

The difference is, he actually got service. Most of the employees I encounter in Carrefour just chat with friends, play on their cell phone, or twirl their hair.

To put this whole article in perspective and to make it more universally applicable to greater China, Pat Dorsey discusses:

how Shenzhen seems to be a microcosm of China’s development path as a whole. The city was one of the first parts of China to tap foreign capital eager for access to low-cost labor, so the first couple decades’ worth of growth were fueled by labor-intensive industries with relatively low value-added content. But wages have surged in the past several years, pushing some labor-intensive businesses further into the Chinese interior where costs are much lower. So, the local authorities are doling out financial incentives to tech firms and financial-services operations that can push the local economy up the value chain.

At the end of the day, this is the same challenge facing all of China over the next few decades. While there’s still plenty of infrastructure to be built, and large portions of the country that have barely industrialized at all, the country’s long-term future lies in creating things, not just assembling them. How well Shenzhen manages this transition from a labor-based economy with cost advantages to a knowledge-based economy with skill advantages could be one interesting leading indicator for the country’s development challenges as a whole.

What has been done in Shenzhen and Shanghai, will definitely set an example for the rest of the country. Let’s just hope the govt can learn from the mistakes and make improvements on the system as the rest of the country goes through its own regional economic development.

Will China’s transition to a knowledge-based economy built on skilled labor and value-added products surpass the US’s own capabilities?

So, what do you think ?