04 Jan Outside the Box: Want to make money in China? Invest in marketing, not manufacturing
The Chinese economy has reached an inflection point, and as a result, is poised for healthy economic growth over the coming year. Underscoring this growth is the stabilization of China’s economy that has occurred as a result of its maturation from a manufacturing-based economy to a consumer-based economy.
As a result, U.S. companies may need to rethink their investment strategies in the China’s economy in 2018 and beyond.
Post-Industrial Revolution, China’s economy was largely manufacturing-based. However, beginning in 2010, we began to see a manufacturing exodus in China, which will continue to decelerate in 2018 as a result of three coalescing forces.
First, changes in government policy. As the Chinese government looks to consolidate control and subsidize less, fewer loans will be provided to manufacturers, leading to decreased investment in the manufacturing industry as a whole.
Second, the U.S. dollar BUXX, -0.09% is softening while the yuan USDCNY, -0.0861% is strengthening. The resulting wage growth is leading to more expenses for manufacturers, making it less cost-effective to outsource manufacturing to China.
Lastly, China is facing increased geographical competition. Other countries in the region are offering quality manufacturing at a cheaper price. In fact, China’s manufacturing wages have gone up 284% over the past 10 years. Even Chinese companies are looking outside their own borders when it comes to investing in factories.
However, while manufacturing may be on the decline, the Chinese economy experienced accelerated growth in 2017 for the first time since the manufacturing exodus began six years ago. This indicates that the economy has matured to the point where consumers are able to support it even as manufacturing continues its deceleration, and is evidenced by the fact that the service sector accounted for more than half of China’s gross domestic product.
This is a positive indicator that the Chinese economy will continue to experience accelerated growth in 2018 through the consumer. So while China may not be the place to invest for companies looking for cheap manufacturing options, retail brands, consumer packaged goods and travel companies should be investing their marketing dollars to reach this “new” Chinese consumer, according to the following economic indicators.
• Consumer sentiment in China continues to rise. With confidence high, Chinese consumers are more likely to spend.
• The yuan has strengthened and the dollar is weakening, so the Chinese consumer will be able to afford American products.
• Wage increases. The manufacturing exodus has paved the way for higher-paying jobs in China, resulting in Chinese consumers having more disposable income.
• A stable cost of living has also led to more disposable income as wages have grown.
• Generation wage growth. Millennials have better access to education than the previous generation and securing higher-paying white-collar jobs. They have more disposable income, and have similar traits to American millennials, such as an affinity for “experience” over product.
Perhaps the only outlier to China’s economic forecast in 2018 is auto sales and manufacturing. As a result of wage growth, a stable cost of living, and positive sentiment, many Chinese consumers are buying their first cars, a huge potential growth opportunity for the auto industry in China.
Overall, however, 2018 will see the rise of a more empowered Chinese consumer with more disposable income. The takeaway for U.S. companies: When it comes to China, invest in marketing, not manufacturing.
Andrew Duguay is a senior economist at Prevedere.