China’s Two Markets
My recent interview with Laura Ramsey of Canada’s Financial Post focused on China’s two markets, one of my favorite topics. I devote an entire chapter to this subject in my book, Managing the Dragon, and believe that the way in which these two markets evolve in China in the coming years will have a profound impact on nearly every global industry.
Before China began its economic reform program in 1978, every market in the country was by definition purely local. Little, if any, foreign goods were imported into the country, and there were no foreign invested companies in China to produce the higher priced, higher technology products commonly found in developed economies. The trucks, industrial equipment, household fixtures and other products used in the Chinese economy were produced by local, Chinese companies that did not have access to more advanced technologies and had to keep prices low because income levels for the vast majority of China’s population were very low. Because both the consumers and the suppliers in this market were local, China had one market, an entirely local market, at the onset of its economic reform program.
As China’s economy developed and expanded under Deng’s reforms, it became “glorious to be rich” and more and more Chinese reached levels of affluence that enabled them to afford better, higher priced products. This dynamic created a new market, characterized by higher priced, higher technology products, which was layered on top of China’s purely local market and which I refer to as the “foreign/local market in China. In this higher end market, imports and products made by foreign invested enterprises in China compete head to head with the products from other foreign companies and the best of the local, Chinese companies.
One only has to look at the streets of any major city in China and see the vast number of modern, foreign made vehicles, or stroll through any one of the many new department stores in China, to understand that China’s foreign/local market alone has become one of the largest in the world. China’s annual demand for over 10 million trucks, buses and passenger cars, for example, is only second in the world to that of the United States. In product after product, China has already become one of the largest, if not the largest, market in the world.
But that’s not the end to the story. As the China economy, and its foreign/local market, has grown, so has its purely local market. That is because China’s economic growth has been distributed disproportionately across its 1.3 billion people. Although as many as 400 million people in China have average incomes of $7,000 per year, there are 900 million or so who have not benefited to nearly the same degree from China’s economic development and have annual incomes that average less than 10 percent of that amount. This vast number of people at the bottom of China’s income ladder keeps China’s local market alive—and growing. In this segment of the market, a company can sell any product, no matter how bad its quality or how low its technology, as long as it’s cheap enough. In this rough and tumble, purely local, price driven market, few foreign companies dare to tread.
China’s vast local market makes it a fertile breeding ground for future global competition. Companies that could not survive in a more uniformly developed, uniformly priced marketplace live to fight another day in China. While many of these companies will ultimately fall by the wayside, others will manage to survive, pull themselves up by the bootstraps, improve their quality and become battle hardened, low priced competitors to the foreign invested companies in China. With the glint of global domination in their eyes, the next step for China’s local companies as they successfully compete with the best of the foreign companies in China is the global market.
My advice: Pay attention to China’s purely local market. That’s where your next, and perhaps toughest, competitors will come from.
