The Past, Present and Future of Consumerism in China - An Interview With Karl Gerth

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 |  Includes: BGM, GE, LVMUY, MCD, PDRDF, SBUX, VOLVY, WMT, YUM
by: Joel Backaler

In order to understand the future trajectory of China’s domestic consumer market, it’s important to gain an understanding of the historical context of consumerism in China. Karl Gerth is a professor at the University of Oxford who teaches modern Chinese history with an emphasis on consumer culture. He brings a truly unique perspective combining both a deep understanding of contemporary Chinese history with actionable business insight for the present day and beyond.

Joel Backaler: In your new book, As China Goes, So Goes the World: How Chinese Consumers are Transforming Everything, one of the questions you aim to answer is, “what are the implications for China and the world of hundreds of millions of Chinese people adopting Western lifestyles?” Can you please highlight the most significant implications?

Karl Gerth: There is, of course, no single positive or negative implication of Chinese consumerism. Rather than focus on the good or bad implications, I think it is more helpful to think of them as wide-ranging, interconnected, and often both good and bad.

Take automobiles. A few decades ago few Chinese owned cars; now China has surpassed the US as the world’s largest car market. This is good news for any number of reasons. Who would begrudge tens of millions of Chinese the opportunity to enjoy some of the same things that we do? And thanks to Chinese consumers multinationals such as GM, which now sells more cars in China than the US, rely heavily on China for their profits. You might say many who have invested in the stock market have already been benefiting from Chinese consumerism.

But there are many more implications. China has vast ambitions to create its own national brands of everything, including automobiles. It wants to move up the value-added chain and create a regulatory environment to promote Chinese brands. The strategy has successes. Already some two million Chinese work in their auto industry, including Chinese manufacturers such as Geely, which just bought Volvo. Like the US with its recent “cash for clunkers” program, in China it has become a national economic necessity to promote car ownership. We’ll see how Detroit handles China doing for cars what it did for plastic deck chairs and so many other consumer goods: make them so inexpensive they become ubiquitous. If Americans cannot name a Chinese car brand yet, I suspect they soon will. And, of course, we’ll also see how well the planet can handle the extra carbon emissions and the intensifying competition for oil.

Joel Backaler: So what you are saying is that in China as elsewhere consumerism begets more consumerism?

Karl Gerth. Yes, the most significant implication of Chinese adopting Western lifestyles is that, in doing so, China, like the US and EU countries before it, is deeply committing its economy and society to consumerism. China is increasingly implementing policies designed to get its citizen-consumers to consume more and more, regardless of the implications. The spread of consumerism in China will accelerate some opportunities for companies such as GM, Yum! Brands (NYSE:YUM), McDonald's (NYSE:MCD) and Starbucks (NASDAQ:SBUX) but it will also continue to create serious global challenges. Once you have millions of people working in the car industry and once you have built the largest roadway network in the world, there is no simple road back to bicycles. The same can be said of so many other aspects of Western consumer lifestyles: once Chinese are accustomed to things such as fast food and indoor plumbing, it’s hard for them to go back. Likewise, it’s hard for politicians whose credibility and promotions are riding on hitting economic growth targets. This deepening commitment to consumerism is creating a stream of opportunities and a tidal wave of new global challenges.

Joel Backaler: In As China Goes, you argue that deliberate government policies aimed at reducing the country’s overreliance on exports is transforming China from a country of scarcity and frugality to one in which the consumer ethos rules. In your opinion, when will Chinese consumers, who are traditionally thought of as savers, be renowned for their spending?

Karl Gerth: The consumer ethos clearly rules now for many tens of millions and yet remains irrelevant for hundreds of millions. For many decades to come, China will remain both a spectacularly poor country and enviably rich country.

There is plenty of evidence that tens of millions already have become more free-spending than frugal. This certainly applies at the top end, where the Chinese luxury market is quickly becoming the world’s largest, leading to the success of LVMH (OTCPK:LVMUY), Richemont and Pernod Ricard (OTCPK:PDRDF). This is already having worldwide repercussions not only for the bottom lines of luxury brands but also in areas such as tourism. Major shopping streets such as Bond Street in London and Fifth Avenue in New York are already heavily dependent on Chinese tourist spending.

We can expect much more. Encouraging consumerism is, after all, the new party line. Chinese have new opportunities to borrow and reverse the country’s culture of saving, creating what is known in popular parlance, as mortgage slaves, car slaves, and a new class of young big spenders that has become known as the “tapped-out-by-the-end-of-the-month class.” There are plenty of other policies designed to get Chinese to spend more, for instance, by giving civil servants pay raises, raising personal income tax exemptions, abolishing agricultural taxes, and allowing the Chinese currency to appreciate (within limits).

Of course, there are serious concerns about inequality. China appears to be on its way from being one of the world’s most equal to one of the world’s most unequal societies. Aside the political and social justice issues, this inequality may mean that the long-desired massive Chinese middle class may never emerge. But, then again, maybe this problem is not unique to China. Noble-prize winning economists such as Paul Krugman say the US is quickly losing its own middle class. China may just skip the middle, or middle class, stage and go directly to solidifying a two-tiered society.



Disclosure: No positions