Companies must react to new trends in China

02 August 2010

BEIJING: Companies hoping to make an impact in China must adapt to a variety of emerging trends if they are to avoid being subsumed by a "red wave" of rising competition.

According to a report by AT Kearney, the "primary purpose" for investing in the country has undergone a profound transformation from making goods for export to boosting domestic sales.

The automotive sector is a textbook example of this transition in practice, as China has overtaken the US to become the world's premier car market.

BMW, Mercedes and Audi have exploited this opportunity by launching many new models through local joint ventures.

General Motors has also upgraded its research centre in Shanghai this year, as it seeks to construct bespoke vehicles for Chinese drivers.

However, while Beijing, Shenzen, Shanghai and Guangzhou are ideal sites for business headquarters, other, smaller, cities should be drawing the attention of brand owners.

Qingdao, Xiamen, Hangzhou and Tianjin are among the rapidly-growing urban centres that may serve as a useful starting point for future expansion.

"In recent years, the purchasing power of tier 2 cities and some richer tier 3 cities has reached a level that is attractive for most foreign brands," AT Kearney's study said.

"With a big population base and a herd purchasing pattern, these cities can often trigger a nationwide demand surge for products that become affordable."

Building extensive, and highly organised, distribution networks will thus be one key way of achieving long-term success in China.

This is particularly the case given that "excessive competition" is now a defining characteristic of several major categories as multinationals and their indigenous rivals fight to establish a leading role.

"Any demand surge could result in a big wave of excess capacity it just one or two years," AT Kearney said.

"Such patterns can quickly turn an attractive market into a 'red ocean' – something that occurred in consumer electronics (televisions), consumer durables (cars) and consumer packaged goods in the past 15 years. This pattern is expected to repeat in the coming 15 years."

Looking further ahead, a seismic demographic shift means shoppers in the country are likely to require a range of innovative solutions.

By the 2050s, the largest single age-group in China will be comprised of individuals aged at least 80 years old in China, with 120 million people falling in to this bracket.

In terms of the possible challenges following on from this development, this will escalate the battle for talent and simultaneously push salaries upwards.

More positively, firms in the healthcare, insurance, financial services, nutrition, travel and leisure segments all have substantial opportunities to progress.

"Companies operating in these sectors should move quickly to enter China (if they have not done so already) and improve their market position to capitalise on this market trend," the study argued.

Data sourced from AT Kearney; additional content by Warc staff