In order to find out more about the impact of the Chinese government’s stimulus package on China’s consumers, I interviewed Shaun Rein, Managing Director of the China Market Research Group (CMR). CMR conducts ongoing research into Chinese consumer culture and Rein writes extensively on the subject in publications such as Seeking Alpha, BusinessWeek, the Harvard Business Review, The Wall Street Journal and many others (For more on Rein’s background, click on this link).
JB: The stimulus package does not include tax breaks for Chinese citizens, but the government has been distributing spending coupons—how largeof an impact do you see this on overall consumer expenditure?
SR: Various local governments have introduced 2 types of coupons/ vouchers. One strategy some local governments have taken is to pay government employees in part with a voucher that must be spent within a certain time period. This obviously has caused spending to be done immediately so that government employees at any rate are not hoarding money. Governments such as in Hangzhou have also been giving away discount coupons to area attractions to boost tourism.
However, consumers in general remain optimistic and are continuing to spend, so the coupons are not actually needed right now. In research my firm has conducted in the last 2 months in 10 cities in China, 60% of consumers said that they would spend more in 2009 than in 2008 except for in the auto and real estate sectors. The numbers go much higher for consumers between the ages of 22 and 28 and consumers in 2nd and 3rd tier cities. 70% of consumers in those regions that many MNCs forget to target said that they would spend more in 2009 than in 2008. Confidence still remains high which is why we have seen 15% retail sales growth this year so far. Smarter brands like Pepsi or Apple (AAPL) are taking advantage of the downturn to penetrate regions that MNCs often ignore.
Going forward, certain sectors and specifically certain brands are going to do better than others going forward. For instance, we see online games booming at 70-80% growth this year. Companies like Netease (NTES), Shanda (SNDA) will do very well this year, driven by younger consumers.
We also think home appliances will do well, especially because of the 13% rural subsidy the government has put in place. You will see companies like Haier and Samsung benefiting from this. Cosmetics like the Olay line from P&G (PG) will also do well as consumers are looking for value now in their purchases.
JB: Given that China is trying to boost consumer spending to offset the sharp declines in exports, could the government have done more in this area?
SR: Exports are definitely hurting in China, and it is going to take a long time for that sector to come back again. While I remain cautiously optimistic over China's short and long-term future, I am very pessimistic about the US. I said in the summer of 2007 when Bear Stearns was starting to shake that we were about to hit a 5-7 tough patch for the US. I think we still have 3-5 years where the American consumer is going to be very cautious on buying items, even if the economy gets better. We still have 6-12 months where people are seeing if the credit and financial markets stabilize before you see a rebound there and most likely you are going to see a jobless recovery. As a result, I am not sure that exports are going to bounce back quickly. I do think that the US has a high risk of finding itself in a state similar to Japan but I think less acute -- but I do think we will see a decade or two of slow growth.
Basically, you are seeing a crisis of confidence more than anything. Americans have lost decades of savings and are scared of the future. As a result, you will see increased savings rates, more cautious spending and business behavior, and as a result a long-term weak export market.
We need to give credit to the Chinese government -- they have moved incredibly fast to implement policies to ensure a soft landing in China. Even adding the number of graduate student positions in universities has helped keep too many of China's 6 million university graduates from entering a terrible job market. According to our research, 80% of Chinese have expressed confidence that the Government will implement the right policies to right the Chinese economy.
What the Chinese government needs to do more of is make it easier for small, 3-15 person shops to get loans and start companies. 60% of job creation in the US in the last few decades has been in companies with fewer than 50 employees. It is still way too bureaucratic for small business owners. I am also worried about over investment in certain sectors -- it is filling up those huge real estate developments in the middle of nowhere with small businesses that will be key for making sure we don't have worthless infrastructure projects.
JB: Consumer packaged goods (CPG) multinationals in China are reporting more favorable numbers in March as compared to January and February; do you think this is an indicator of rising consumer sentiment and a perception that the economy has bottomed-out, or could this be an artificial spike due to Chinese consumers cashing in and spending their coupons? Is this sustainable?
SR: Both consumer and business sentiment and confidence rebounded dramatically after Chinese New Year based on our interviews in different sectors throughout the country. Even the auto sector rebounded with GM (GM) and Mercedes posting huge growth numbers over 2008. The big banks like Bank of China and ICBC opened up their coffers and liquidity flooded the system. The quick actions by both the central government (for instance, letting local governments greenlight foreign investments under $100 million USD) and local governments have made businessmen and consumers feel that the government is on top of things. And they are. While there is a risk to the economy if the US hits another cliff -- if a big bank like Citigroup (C) or Bank of America (BAC) posts some terrible numbers, then confidence will smack China again.
But here, we are not seeing a credit or any type of crisis, in large part because there have been no runs on banks or brokerage houses like what happened with Lehman and Bear Stearns. In the US, FDIC accounts had to be raised to $250 K USD from $100 K because so many consumers wanted to take money out of banks and stuff it in their mattresses.
Unless you see a major bankruptcy and major renewed fear in the US or political risk in Eastern Europe like in an Ukraine or Russia, then I think you will see continued confidence in China. It was never that bad here, and I don't think it is likely to get much worse.
JB: China’s 4 trillion yuan stimulus package is largely focused onrural development, infrastructure and social programs; do you see any of this trickling down to the consumer and benefiting them in any way?
SR: One of my problems with the stimulus package is that it has been too focused on large projects that can take a year or even more before money really starts flowing through the system. You also lose the multiplier effect with these large stimulus projects. I would much rather see more venture capital and loan type initiatives. I also think this is a great time for the government to use this downturn to push through more systemic reforms that will improve the efficiency of the business climate in China... such as less bureaucracy or pushing towards more energy efficient and less polluting businesses. I have seen in the last month more of these smart, long-term strategic planning initiatives such as the government's push for the adoption of electric cars.
JB: What are the different retail trends seen in urban China, and rural China? Do you see multinational CPG firms positioning their products differently between the two market types?
SR: Despite being optimistic for the most part, Chinese consumers are looking for more value in the products and services they buy... this is true in rural areas as well as tier 1 cities. Even if they buy 6 products now instead of 10 on a shopping trip, they might actually spend more per product this year than last year. So companies really need to focus on their branding. In downturns, the well-branded companies will do the best because consumers are counting their pennies and only want to put their money in brands and products that they trust.
In rural areas, the same is true. Consumers just might not be able to afford big containers of high-end products so perhaps brands need to introduce smaller sizes and prices that are more palatable... even if the per gram price is the same between rural areas and big cities. Brands need to determine which regions and segments to target and make sure that their marketing campaigns are efficient -- you can no longer just rely on media buyers like Mindshare to choose where you spend your ad dollars. You also need to figure out where to place money where consumers really are.
Overall, I would recommend that most MNCs take a good, long look at 2nd, 3rd, 4th, and even 5th tier cities in the coming years. That is where the next great growth opportunity is going to come from.
