In the past month, American trade competitiveness against China has been a hot topic in the media. Mainland Chinese can make just about everything cheaper than the rest of the world, and the quality of their goods has improved significantly during the past decade. But price is not everything. What does it take to sell to the Chinese?
China runs a huge trade surplus against United States. Against other Asian countries such as Japan, South Korea and Taiwan, however, China runs a substantial trade deficit. What are businesses from these countries doing right? I believe that a key factor in their China success is that businesses from these economically more advanced Asian countries have better product designs and aesthetic tastes.
A quick study of businesses thriving in China reveal that affluent Chinese consumers are increasingly willing to pay a premium for intangibles such as design, image and taste. South Korea, for instance, has replaced Japan as the entertainment center of East Asia. Korean TV soap operas have the highest number of viewers in Mainland China, Hong Kong and Taiwan. Korean pop and drama stars command the highest fees now for shooting commercials in China. Korean goods are now trendy and hot in China, Hong Kong and Taiwan. Is it any wonder that Samsung Electronics, the Korean electronics titan, became the world's most profitable technology company and took cellphone market shares from Nokia and Motorola?
Most Mainland Chinese pop stars, for the most part, lack the "hipness" and "coolness" that newly affluent urban consumers throughout China crave. An exception is China's reigning pop queen Faye Wong, who sang in obscurity for years until she took moved to downtown Manhattan. At SoHo and East Village, Wong learned what it takes to be hip and cool. After Faye Wong returned to Asia, she quickly became a leading trendsetter and the top female pop singer in the Chinese speaking world.
Although there are over 1.3 billion people in China, "only" 15% of the population, mostly urbanites, make enough money to count as target consumers. Keep in mind that 15% of the Chinese population is 200 million people, around 70% of the total U.S. population. Most of the wealth in Mainland China are concentrated in large cities such as Beijing, Shanghai and Shenzhen, controlled by people under 50 years-old. Like young city dwellers everywhere, these Chinese consumers care more about fashion and design trends, as well as other intangibles that set them apart from "old China.".
In 2000, my wife and I shopped at the Louis Vuitton boutique in the Beijing Peninsula Palace Hotel, where we stayed. The store manager said that we were the only customers there that afternoon. Things changed rapidly. Despite mass counterfeiting, Louis Vuitton opened eleven stores in Mainland China during the past five years, including a giant flagship store in Shanghai. Another success story based on design and taste is Beijing's largest private residential real estate developer, SoHo China. Founded by a husband and wife team with international background (like me, the wife is a Goldman Sachs alum), SoHo China sells high rise apartments with cutting edge designs for a big mark up.
Three years ago in Hong Kong, I had an interesting encounter with some Mainland tourists. I was on my way to meet a prominent investment banker that day, and was dressed in typical Wall Street business attire - Zegna suit, Hermes tie, custom made French cuffed shirt, and Testoni loafers. When I walked down the street, a group of Mainland Chinese tourists in shabby suits gawked and looked at me studiously. I overheard them whisper about how my outfit looked good and they wanted to dress like me. Not surprisingly, during the past couple of years, Mainland Chinese tourists became the biggest shoppers at high-end designer boutiques in Hong Kong.
Products with good designs command a premium price, but often do not cost extra to produce. Ikea and Target Stores successfully sold well-designed products at cheap prices. Sure, one can probably buy similar products at WalMart for a little bit less, but the shopping experience is not worth the little money saved. My kids are usually thrilled to visit Target, but they would rather stay home than shop at WalMart. If you want to learn how to sell something in China, you'd be well advised to stay away from the tacky little shops in Chinatown, and go across Canal Street to SoHo. The bottomline: as China continues to grow and its affluent urban consumers become more sophisticated, intangibles such as good design, brand image and hipness will increasingly determine success in selling to the Chinese.
ROBERT HSU is the founding managing director of Absolute Return Capital Advisors LLC., and executive editor of http://www.themoneyfactory.com. In addition to managing private client funds, Mr. Hsu advises hedge funds, financial institutions, and individual investors regarding global macro investing, quantitative investment strategies and alternative investments. He also serves as the Program Chairman for the Los Angeles Chapter of American Association of Individual Investors, the largest non-profit investor education group in the United States, with over 70,000 members. Prior to forming Absolute Return Capital in 2004, Mr. Hsu managed personal funds as a private investor with an average annual return of consistently far outperforming the S&P 500 Index. For instance, in 2002, Mr Hsu was up 30% versus down 23% for the S&P 500 Index, outperforming the S&P 500 Index by 53%. Before retiring in 1999 at 30 years old, Mr. Hsu served as a hedge fund trader at Goldman Sachs, Wall Streets leading investment bank. Before joining Goldman, he was a quantitative analyst and trader at Willowbridge Associates, a $1.9 billion global macro fund spin off of Caxton Corp., the $12 billion legendary hedge fund headed by billionaire Market Wizard Bruce Kovner.
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