Why European Companies Have More Success Than American Businesses in China
In a recent New York Times article, NPR’s Adam Davidson reflects on the problems American companies face when they try to tap into the Chinese consumer base. With a population of over 1.3 billion and a ballooning middle class, China is seen as the ideal growth market to expand American business. But, as Mattel and many other American corporations have discovered, Chinese consumers haven’t provided the profits many expected to see. Davidson raises two interesting issues related to this phenomenon: 1) The success of European companies; and 2) The policy of China’s Central Bank to undervalue the renminbi (RMB).
Davidson briefly mentions that European companies often have more success in China than their American counterparts. He suggests that the main reason is that European companies have more experience cross-culturally adapting their products. While there is certainly truth to this, the central cause is even simpler: Many European companies happen to sell the high-end luxury brands that the Chinese covet. The fact that the sale of luxury goods in China has increased consistently indicates that little, if any, adaptation was required to make these goods popular. While Chinese are known savers — the nation’s saving rate is over 25% — they are willing to spend top dollar to get their favorite luxury name.
When analyzed at a micro level, this conundrum actually makes sense and explains the limited success of many American companies. Though frugal on a day-to-day basis, Chinese consumers are deeply image conscious and choose to save in order to splurge at conspicuous stores such as Versace and Louis Vuitton. This means that casual names like The Gap are overlooked. Consumers instead buy locally or utilize the vast and inexpensive black market for necessities leaving no reason to seek out American products. A pattern seems to develop that, in terms of foreign goods, Chinese buy luxury or not at all. Businesses need to stay mindful of this trend as they make bold projections for expanding in China.
With this in mind, deregulating the RMB, effectively making American products less expensive, will not guarantee a sudden increase in demand. The Chinese have demonstrated that they are willing to spend on the right products, but only the right products. While Apple and GM stand out as success stories, few American companies have properly developed their brands to attract the typical Chinese consumer. But if American companies can effectively translate their goods, mindful of the image-driven mindset, Chinese consumers will respond despite the unfavorable exchange rate. This puts the onus on American businesses to find creative methods to develop their products rather than wait for the U.S. to pressure the Chinese to deregulate their currency.
This is important to realize because discussing government non-intervention of the RMB is likely pointless. Realpolitik dictates that the Chinese are going to use whatever mechanisms necessary to protect their economy, which hinges on inexpensive labor and exports. The government is trying to stimulate domestic consumerism as part of its current 5 Year Plan. But, before this plan takes hold, the national GDP could continue to taper off. China’s economy has over a 9% annual growth rate but still struggles to create enough jobs for its burgeoning urban population. The last thing policymakers want to do is jeopardize their economy further by allowing the RMB to appreciate.
Therefore, as of right now, the Chinese are not going to bend to international demands to float the RMB. But, rewards will come to those companies that accept this and adapt their ventures accordingly.