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China: Still Room for Growth

China's growth as an economic powerhouse has so far been remarkable, and that may be only half the story. (See: High-Tech Sun Rising and Setting in China.) Electronics companies such as {complink 2125|Foxconn Electronics Inc.} are looking to expand into China's rural interior, which will have a positive impact on the buying power of a so-far untapped population.

Approximately 56 percent of China's population still resides in rural areas of the PRC, making rural residents the largest consumer group in the country, according to a survey done by the China Electronic Product Association. After many years of economic reforms, the average income of people living in China's rural areas has gradually increased. The rural market is largely untapped and has enormous potential for growth. This rural consumer group has tremendous purchasing power and is increasing as the Chinese government encourages rural communities to modernize.

The PRC central government has decided to expand internal demand by increasing the income of the rural population. Continuous improvements in the rural power network, rural transportation, and rural communication make the rural market extremely favorable for home appliances and electronics.

China Electronic Product Association's survey showed that 14 percent to 33 percent of rural families are willing to spend their money on televisions, DVDs, washers and dryers, and telephones in the next few years. For example, refrigerator ownership in big and middle cities of China is over 95 percent, even 99 percent in some cities. However, the ownership of refrigerators is only 22.7 percent in rural areas of China.

Companies that have already established themselves in rural markets are showing significant growth. China Electronics Holdings Inc., one of rural China's major retailers of household appliances and consumer electronics, recently reported a 247 percent sales increase year-to-date.

To further spur growth, the Chinese government has initiated a rural home appliance and electronics rebate program, called “Rural Consumer Electronics” plan, which provides that the maximum sales price of electronics is fixed at a price which is usually equal to or less than the market price in urban areas of the same product. Meanwhile, rural consumers can get a 13 percent government rebate on their purchases of electronics.

The question is, how much of China's rural markets are foreign companies likely to reach? For example, China Electronics Holdings –through its Lu'an Guoying Electronic Sales Co. Ltd. subsidiary — is the exclusive wholesaler in China's rural Lu'an area for products under the brand names Sony, LG, Samsung, Shanghai Shangling, Chigo, Tsinghua Tongfang, Huayang and Huangming. Exclusivity is a good deal for suppliers, but limits consumer choice and competition within the market. It may also make it more difficult for brands from the West to break in to rural China. For many electronics companies, the second half of China's expansion may still be an uphill climb.

10 comments on “China: Still Room for Growth

  1. Ariella
    January 3, 2011

    If the Rural Consumer Electronics plan sets a cap on the price of electronics that could even be lower than that of the market price, wouldn't there be a built in disincentive for companies that would have considered selling to the rural market? 

  2. AnalyzeThis
    January 3, 2011

    I certainly agree that there's great potential for massive growth in China's consumer market and I don't think you'd find that many people who did not agree.

    But like you say, the question is how likely it is that any foreign companies will be able to capitalize off this growth. On this, I think the answer is, “not very likely.”

    I don't foresee any Western companies coming in and making significant money off the Chinese consumer market. There are obviously a lot of issues preventing such an occurrence anyhow. Sure, it'd be nice if there was… you know… a more balanced trade situation happening between the U.S. and China, but even with an increasingly spend-happy Chinese consumer market, I just don't see any significant changes happening.

    China's growing consumer market mostly only benefits Chinese companies, unfortunately. Especially in the tech sector.

  3. Mydesign
    January 4, 2011

          Barbara, you are right. China has the largest population in world and hence its internal consumer market is also very vast. During one of my previous visit to china I had realized the spending power of Chinese people’s also. They are spending much money for purchasing electronic gadgets, but the funny thing is that they are giving much importance to the local made only.  All the Chinese products are somewhat cheaper when compare with the global brands, irrespective of quality. If we are considering that scenario it may difficult for the branded companies to compete with them in terms of price. More over the local governing bodies are offering tax benefits and trying to promote the Chinese made products massively.

           But at the same time, Chinese government opens its market for global companies also for foreign investment. The basic aim of such invitation is purely for foreign investment and to create job openings for Chinese peoples, but they didn’t show much interest to promote the global products. So in my opinion the only benefit for global companies are, they can get labour at low cost.

  4. Barbara Jorgensen
    January 4, 2011

    I agree with your comments–while I find the opportunity in China to be significant, the government's influence on the market doesn't level the playing field for foreign operations. For example, GE is the biggest appliance brand in the US yet doesn't show up in this particular research. Much of GE's stuff is assembled in China already–maybe they go under a different brand name?

    The pricing is also peculiar–it doesn't seem like it would work for the appliance makers. Can they raise prices once the market has adequate penetration?

    I chalk it up to being in a capitalist society for so long, where price is determined by the market

     

  5. Ariella
    January 4, 2011


    I chalk it up to being in a capitalist society for so long, where price is determined by the market

    Barbara, aren't the companies who go into China — whether for the labor or for a market for their products — motivated purely by capitalistic concerns?  The seek to lower cost and to maximize sales.  It wouldn't make economic sense for them to seek out a market that will pay below market price, rather than the price that would be determined at the point where supply and demand meet. Profit is the ultimate motive in capitalism.

  6. Barbara Jorgensen
    January 5, 2011

    Companies are going into China for purely capitalist reasons, but the market itself isn't a capitalist model. Western companies cry “foul” when the market in China doesn't act like other markets where the playing field is level. The appliance model gives the advantage to Chinese companies. Maybe it's not worthwhile for Western companies to target the rural Chinese consumer, but that 56% of the population is still a pretty big number.

  7. Ariella
    January 5, 2011

    I understand the temptation of a large number of consumers, but it still has to make economic sense.  Selling at cost or even just slightly above may not be worthwhile. Otherwise, one is acting like the salesman in that old joke who says he loses money on each piece he sells, but he makes it up in the volume.

  8. mfbertozzi
    January 5, 2011

    Just quoting interisting point raised by Ariella, second half of China's expansion is bringing up new frontiers in doing business there. Success collected previously by foreign firms a recent past, was quite limited for the fact they have approached the market with western business plan template (seeds, prototyping, investors, funds, % of market to reach) even for branches to launch there. Foreign companies are learning that model didn't bring back results so to achieve (a % of) huge market as featured Barbara, a sort of accelerators are starting as “missing link” between doing business in West and doing business in East. Special support from them is focus in particular on chinese business laws. Have you heard any stories about it?

  9. Ms. Daisy
    January 5, 2011

    Barbara, thanks for this article. Obviously the room for growth is for the Chinese manufacturer to grow. The few options for the foreign companies is to package their products under other names or promote their brand names as more superior. The playing field is steeply tiltled up against non-chinese companies with the government incentives for Chinese products.

    I wonder if the incentives are the Chinese government's preparation for the West's revolt to its rapid growth and potential dorminance in manufacturing of many products!

  10. Barbara Jorgensen
    January 5, 2011

    Lots of good stuff here. From what I hear, it's still better to partner with or even acquire a Chinese company to succeed in business there.  I haven't heard about the “missing links” but I certainly can understand the appeal of such an organization. Anyone who can broker deals between the East and West is probably in demand.

    As for the policies, I just find them interesting in light of what we see as capitalism. Price fixing is illegal in the Americas in Europe, yet what China is doing in the appliance market sounds suspiciously like price fixing (although it might be OK if the government and not businesses do the fixing.) Exclusive distribution contracts are another hurdle–I can't tell from the research if this is the only outlet for these products or if others will spring up. I can tell you that the regional subsidiary of China Electronics is a joint venture between China Electronics and a Japan-Chinese trade group, and that all of the brands sold are either Chinese or Japanese.

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