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China’s Playbook to Increase Domestic Consumption Is Facing Challenges in a Post-Covid World

Apr 04, 2023

China’s initiative to maintain economic prosperity through domestic consumption and production marks its efforts towards self-reliance, self-sufficiency, and dual circulation. These terms have dominated Xi Jinping’s speeches since his confirmation at the 20th plenum, highlighting his desire to reduce the PRC’s dependence on western technology, trade, and knowledge. In past attempts to accomplish this goal, Beijing has invited western companies into the domestic market, learned about their products, empowered domestic competitors, and used mass media to discredit the western companies. However, increasing domestic consumption is ever challenging, with the country’s poor economic performance over the last three years and a slower-than-expected recovery from the COVID-19 pandemic.

China has been heralded as the factory of the world for the last four decades, benefiting from American policies and aid from multilateral organizations such as the World Trade Organization (WTO). These favorable policies, access to affordable labor, and large manufacturing capabilities have attracted many western companies to establish factories in China. Companies also hoped to gain access to China’s large and developing consumer base. Some of these companies were enticed to give proprietary processes or institutional knowledge to gain access while others lost these competitive edges and intellectual property (IP) to corporate espionage. IP theft from American firms accounts for over $600 billion in lost revenue annually.

Nike and Adidas are two examples of massive companies that sought to gain access to the Chinese market. They both shifted their supply chains to China and marketed heavily to capture the Chinese people’s patronage. Since entering the market in 1981 and 1990 respectively, these two corporate giants have jockeyed for the top spot in Chinese sportswear markets and consistently ranked as the top two most valuable athletics brands in China for years.

Historically, some western brands have been considered luxuries and were often sought after as status symbols in global markets. In my experience, Haagen-Dazs ice cream plays into this notion of “luxury,” serving as one of the premier locations for impressing a first date in China. And upon their initial entry into the Chinese-market, Nike and Adidas both found success by being considered exclusive, with products that signified a certain status. But as manufacturing opportunities increased over the years, leading to more affordable prices, their status began to wane.

In 2022, Nike and Adidas fell in revenue by over 20% each within ‘Greater China’ and were overtaken by domestic brands Li-Ning and Anta Sports. These domestic competitors were founded after Nike and Adidas entered the Chinese market, with Li-Ning being introduced in 1990 and Anta Sports making its debut in 1991. Both brands have effectively competed against Nike and Adidas over the past few years by providing a local alternative that is both affordable and available. Therefore, when Nike and Adidas became cheaper and more accessible, and hence viewed on the same level as other brand competitors, they lost significant market share to domestic companies.

It’s common for western companies to make cultural mistakes when crafting marketing and branding strategies for China, which can in turn hurt demand for their products or local perceptions of said company. But the largest impact on their reputation often comes from the Chinese multimedia, which holds significant sway over consumer spending habits.

No company knows this more than Tesla which has faced considerable competition from domestic companies, such as Nio. Tesla has faced a slew of public lawsuits in China alleging fraud and faulty vehicles that have led to crashes. They also face an uphill battle in supply chains as CATL has agreed to offer price cuts to domestic competitors. Following these events, Tesla has had to slash prices three times in the past few months.

The majority of these efforts and the drive to increase domestic consumption are facing considerable setbacks as China’s economy has slowed and is struggling to recover from Zero-COVID conditions. In 2022, China reported a lower-than-expected GDP growth of only 3% instead of its 5.5% goal. Much of this slowdown comes from the real estate crash surrounding Evergrande and the reduced spending by consumers during lockdowns. Real estate makes up a large portion of GDP growth while consumer spending only accounts for a third of GDP. Another challenge that domestic consumption faces is the slow increase of demand.

Following the easing of Zero-COVID measures, many expected to see an economic recovery on the same scale as in the United States and the West. However, the demand for products has been slow to materialize. China’s economic activity increased in the first two months of 2023 but still fell below expectations. This may be because the economic hardships that the Chinese consumers faced over the past three years wiped out their excess savings or Chinese consumers are fearful of future financial difficulties and are choosing to abstain from excess consumption at this time.

Despite these challenges, Xi Jinping and the PRC still see increasing domestic consumption as imperative to the continued economic prosperity of China. They will continue to use the knowledge gained from western companies to improve domestic capabilities and enable domestic companies to compete against massive, global brands like Nike and Adidas. In addition, they will need to focus on stabilizing the real estate market and improving the economic situation of the middle class to achieve their goals.

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