Three Trends

Apart from the headline making stories about China’s growth rate, its currency, and sky-high property prices, three major trends are developing that are changing the competitive landscape in the country. All three, in one way or another, deal with the vast local market which largely exists in China’s interior.

In the broadest terms, approximately 400 million of China’s 1.3 billion population have annual per capita income equivalent to $8,000, while the remaining 900 million have per capita incomes one-tenth that amount. The lower income group tends to live in the countryside and China’s interior provinces, while the individuals with the higher incomes tend to live in the country’s large cities.

This vast income disparity in China creates two markets for every product — a foreign/local market that is characterized by high price and high technology and that caters to the higher income group; and a large, purely local market at the low end of the price/technology spectrum. In the higher price market, which is not too dissimilar from markets one might find in the U.S. or Europe in terms of price, quality and technology, international companies compete with the best of the Chinese companies. Few international companies, though, venture into China’s lower price local market.

Three important trends are now creating a dynamic whereby the lower income segment of China’s population will play an increasingly important role in the country’s future development. As these trends unfold, international and local companies that are able to address both markets will have the greatest amount of success.

1. The local market is getting larger and more important as an increasingly restless workforce demands higher wages and a path to higher income jobs.

Wages are rising and workers in China are no longer content to accept whatever factory bosses in their sole discretion decide to pay them. Today’s workers are better educated than previous generations and aren’t satisfied with assembly-line jobs that offer few transferable skills and little prospect for advancement. They are demanding higher wages, a better work environment, and a path to higher income jobs.

Much as Henry Ford’s decision to dramatically increase the wages of the workers at his factories created a new group of potential buyers for the company’s low-priced Model T, rising wages for migrant workers in Chinese factories are increasing the spending power of those at the bottom of China’s income pyramid. China’s local market will continue to grow and will become even more important in the future as a result.

2. As economic development evens out in China, growth will be fastest in the interior, further increasing the size and importance of the local market.

Shanghai’s per capita income is over eight times that of China’s poorest province, and more than three and one-half times that of all but a handful of the country’s other provinces. By comparison, the per capita income of Connecticut, the wealthiest of America’s 50 states, is less than twice that of the poorest.

Traffic is also becoming a problem in China’s largest cities. Beijing officials estimate that, if the vehicle population continues to increase at the same rate, the average speed will slow to 15 miles per hour in China’s capital city by 2015.

The inner provinces are where growth will be the fastest going forward. The government is encouraging this trend, and many companies are now establishing large manufacturing facilities in the interior that employ hundreds of thousands of workers.

3. As the local market expands, local companies are gaining market share.

As China’s local market expands, and the demand for goods and services extends to a greater portion of the country’s population, local companies are gaining market share at the expense of their international rivals. China is the largest truck market in the world. Yet local companies produce 98 percent of the trucks used in the country, and 90 percent of the diesel engines that power them. In the commercial vehicle market, price and affordability are the key issues. Ditto for construction equipment, where local companies now dominate the wheel loader market and occupy one-third of the market for excavators.

From virtually zero when passenger cars were first introduced, local brands now account for 33 percent of the cars being sold in China. As demand for cars broadens, smaller, less expensive models where local car companies are most competitive increases in proportion to the larger, more expensive models.

Even the newest industries are increasingly being dominated by local companies. In wind turbines, local companies account for 80 percent of the market, up from 13 percent in 2004. And the list goes on.

So far at least, the local Chinese companies appear to be benefiting the most from the expansion of China’s local market. Stay tuned.

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