Thank god for the Chinese consumer.

[kalbi]

http://online.wsj.com/article/SB121815318990122419.html?mod=opinion_main_comment aries

Some great tidbits in this one.

[nskripchun]

For those too lazy to hit the link.


Thank God for the Chinese Consumer
By ZACHARY KARABELL
August 8, 2008; Page A15

Don't count out the U.S. consumer. For the past decades, that has been a ready rebuttal against predictions of economic doom and gloom for America and the world. The average American's spending capacity has proven more resilient than anyone could have predicted. At various points over the last 60 years it has supplied the ballast for companies domestic and world-wide.

Many believe that those days are now over. With stretched balance sheets, declining home values and stagnant incomes squeezed by rising fuel and food costs, the legendary U.S. consumer is certainly wobbling, even if not down for the count.

But in the year of the Beijing Olympics, the assumption that a tired U.S. consumer will lead to a long period of stagnation is about to be challenged by the new kid on the block. The health of the global economy used to rest on the back of the American consumer. Now it will rely on the Chinese.

In the U.S. and Europe, public debate centers on China as a low-cost producer that puts workers in the developed world out to pasture; hence the popularity of antitrade legislation. But the real story is the rise of the Chinese consumer, whose passion for spending is remarkably American.

In the past two years, the average gross domestic product per capita in China has passed $2,000, and now is close to $2,500. That average lumps together 250 million affluent and "rising affluent" urban residents with another 500 or 600 million people living in rural areas (and whose income may or may not exceed a dollar a day). Another several hundred million more Chinese are somewhere in between.

That core of perhaps 250 million Chinese consumers -- especially in coastal cities -- actually earn closer to $10,000 a year on average. Given modest living expenses, they are left with considerable disposable income.

They are eager to spend this income. True, China has one of the higher personal savings rates in the world -- in excess of 40%. But this doesn't reflect a wariness to spend as much as the absence of things to buy, places to put money other than state-bank savings accounts, and concern about health-care costs. That is now changing. According to a recent McKinsey survey, the Chinese love to shop and spend 9.8 hours per week doing it. The average American shops 3.6 hours per week. Forty-one percent of Chinese said that shopping was their preferred leisure activity.

Chinese consumer spending is currently at about $2 trillion, still barely a fifth of U.S. consumer spending. But the gap is closing: Whereas U.S. spending is growing by about 2% a year, Chinese consumer spending is growing by 20% a year. For many global companies, the rise of the Chinese consumer is the only thing standing between them and a decline in their business.

Take Yum Brands, with its Kentucky Fried Chicken and Pizza Hut restaurants. In the U.S. and Germany, it is barely growing and has anemic margins. In China, KFC is hugely popular and growing more than 25% a year. It has 2,000-plus outlets that constitute a fraction of KFC's global presence but account for a staggering 20% of the company's total profits.

KFC is one of hundreds of struggling U.S. and multinational companies doing booming business in China. Proctor & Gamble and Oil of Olay found new life selling to the Chinese. Nike has long been an avidly desired brand for young Chinese. Caterpillar, which has seen its U.S. business contract because of a weak residential construction market, has hardly been able to keep pace with the demand for its combines and earth movers in a rapidly industrializing China. Otis Elevators, a division of United Technologies, has an enviable backlog servicing China's endless skyscrapers.

Luxury companies ranging from Louis Vuitton to Versace to Coach look to Chinese affluence as the next wave to replace a waning Japanese market, an aging European one, and an unpredictable America. And, let's not forgot gambling. Macau recently surpassed Las Vegas as the most lucrative gambling destination on the planet. You can always tell a country's proclivities to spend based on its eagerness to gamble.

The rise of the Chinese consumer isn't simply a boom for global companies. Chinese exports to the developed world generate controversy, but China is now importing nearly as much as it exports -- $1.2 trillion a year -- and its imports from the U.S. have been skyrocketing. That doesn't factor in the goods consumed in China made by Chinese subsidiaries of U.S. and foreign companies.

At just about $4 trillion, China still accounts for less than 9% of global economic output. But many would say that, adjusting for purchasing power, it is actually quite a bit larger. In any event, China's rising affluence, uneven though it is, is one reason for the strong feelings of optimism and nationalism on the eve of the Beijing games.

The Chinese consumer is the only thing standing between hundreds of global companies and the abyss. While some U.S. companies may have cut jobs to outsource to China, think of how many more jobs they might be cutting if they were losing money or barely profitable. Caterpillar keeps its factories open in the U.S. because of what it currently needs to sell in China. So do countless other companies.

This is not a passing phenomenon, any more than was the rise of U.S. consumption. Given the chronic underestimation of China's growth, it's likely that Chinese purchases of foreign goods will increase more quickly than we imagine.

Yes, the Chinese like their own brands, such as Li Ning sportswear and Lenovo computers (Lenovo bought out IBM's personal computer business and itself represents a potential future wave of hybrid U.S.-Chinese consumer enterprises). But the Chinese are even hungrier for foreign brands, which are signs of rising affluence and modernity. That hunger is nowhere near sated.

To be sure, there are environmental costs to China's rapid growth, and tensions inherent in its rise. But as we turn to this controversial Olympics, it's worth asking whether any major country has emerged without causing concern elsewhere, and whether the world would now be better off if China were still wedded to rigid communist ideology and mired in poverty -- economic rights are, after all, a vital part of human rights.

Faced with the challenges of domestic growth in the U.S. and Europe in the years ahead, things would look a whole lot worse without the Chinese consumer.

Mr. Karabell is president of River Twice Research. His "Chimerica: How the United States and China Became One," will be published next year by Simon & Schuster.


As happy as American companies are about Chinese consumers, I have my own mixed feeling about the people of China adopting a "modern lifestyle" of heavy consumerism and materialism.

[RebelAzn]

For those too lazy to hit the link.



As happy as American companies are about Chinese consumers, I have my own mixed feeling about the people of China adopting a "modern lifestyle" of heavy consumerism and materialism.

For someone who has been watching CNBC alot, this is certainly not news. USA companies are expanding like mad into China. I just finished watching documentary of American Apparel's (LA based clothing company) quest to open 17 stores by 2009 in China. While people have tried to demonize China and blame losing jobs to China etc, everyone here is giving a free pass to all the companies who are transferring jobs to China, India and other places. Most companies are becoming true multinational companies where they will go make products at places at lowest cost. This is inevitable effect of economic equalization globally. It is how capitalism works.

You are right about Chinese people becoming more materialistic. I am not sure it is a good thing either. There are now golf courses in China with membership fee starting at $250K USD.

People in China can get housing from the government for essentially free along with basic health care. This is why they got money to spend. People with money always have the option to buy huge houses with many Chinese choose to do so. Let's hope they don't all turn into bunch of snobby materialistic pricks in the future.

[wuwei]

For the companies that are just going into China now, they are already way behind.

The American/international companies who went into China early enjoyed and still enjoy huge tax breaks, lenient administration, and a more favorable view from Chinese consumers. Companies like Motorola, KFC, Audi, who are relatively unremarkable internationally, enjoy a huge market share in China, simply because they have been in China for 10, 15 years.

[ktkbs]

America loves to demonize and hate China but they also love China's money. I like how Americans get treated well in China but when Chinese people first went to America they were murdered in the streets.

[awong]

For the companies that are just going into China now, they are already way behind.

The American/international companies who went into China early enjoyed and still enjoy huge tax breaks, lenient administration, and a more favorable view from Chinese consumers. Companies like Motorola, KFC, Audi, who are relatively unremarkable internationally, enjoy a huge market share in China, simply because they have been in China for 10, 15 years.

Motorola still has a good image in china? I know they are falling apart internationally, but are chinese still buying their crap? I wonder if having david beckham, jay chou, etc helps

[wuwei]

Motorola still has a good image in china? I know they are falling apart internationally, but are chinese still buying their crap? I wonder if having david beckham, jay chou, etc helps


Relatively, I think Motorola is still stronger in China than it is in other countries, however, they are really not competitive anymore in the cellphone market at least.

It's very costly to play catchup in certain markets. Like UPS is trying to do with Fedex, which entered China quite a few years earlier. A lot of companies are fairly set in which express mailing service they use, so its very hard to get them to switch.