Friday, November 28, 2008

Global Economy: No Help from China's Consumers

Global Economy: No Help from Chinas Consumers

Jack Tan was a Western marketer's dream. The 24-year-old bank manager from the southern Chinese city of Shenzhen regularly spent a big chunk of his $1,200 monthly salary at Pizza Hut (YUM), McDonald's (MCD), and TGI Friday's. He wears Nikes (NKE), carries a Nokia (NOK) phone, and listens to Linkin Park and Green Day on his iPod (AAPL) nano. His pick-me-up? A latte at Starbucks (SBUX).

But lately Tan has changed his ways. Much of his $30,000 in savings has evaporated with the Chinese stock market, down more than 60% this year. When he eats out, Tan frequents local Chinese noodle and dumpling shops, and his plans to buy a car have been put on hold. Instead he expects to salt away half of his salary next year. "Everyone is saving so we can make it through the hard times to come," he says.

Economists had hoped China's burgeoning middle class might pick up where U.S. shoppers have left off. But even big spenders like Tan have tightened purse strings as stocks plunge, real estate values fall, and thousands of factories close their doors. While China has long been a big contributor to worldwide expansion, that has been largely fueled by factories that churn out ever more goods to fill U.S. malls.

Beijing understands that it needs to boost consumption at home to achieve healthier growth, but Chinese consumers have been reluctant to spend without an adequate safety net. "Only when the Chinese are sure their government will take better care of their social welfare will they decide they are saving too much," says Andy Xie, an independent economist. "Growing consumption is a gradual process. It cannot immediately become an economic engine."

This is bad news for multinationals that were counting on China to make up for tough times elsewhere. Retailers and manufacturers alike are seeing Chinese sales slow. Cell phone sales, for instance, have grown by 30% a year over the past half decade, but over the next five years they'll be lucky to hit 9% annual growth, says researcher BDA China. The slowdown has crunched margins for the likes of Nokia, Motorola, Wal-Mart, and Carrefour, though the companies declined to discuss the details of their China business. "No one involved in China today is unaffected," says Joerg Wuttke, president of the European Union Chamber of Commerce in China.

The gloom was apparent at the annual Guangzhou Auto Show. While there was no shortage of sleek concept cars and models in miniskirts at the annual event, which opened Nov. 18, auto executives painted a glum picture of their prospects and called for a handout from Beijing. China's car market has grown by more than 20% annually since 2001, but next year it could contract by 2%, researcher J.D. Power & Associates (MHP) predicts. China has long been a bright spot for General Motors, but the company says Buick sales will likely tumble by 12% this year, and J.D. Power predicts they'll fall by another 21% in 2009. GM says the decline won't be that steep, but acknowledges that the financial crisis is taking its toll in China. Nissan Motor (NSANY) had expected China to pick up the slack from the U.S., but that now looks unlikely. "This year is O.K., but I have some concerns about next year," says Yasuaki Hashimoto, president of Nissan's affiliate in China.

As multinationals suffer, their suppliers do, too, completing a vicious cycle: Ailing factories fire more workers, who then stop spending. The impact of the crisis on Chinese exporters in the Pearl River Delta north of Hong Kong has gotten so severe that Premier Wen Jiabao made a special tour of the region. On Nov. 14 he stopped in at Li Kai Shoes Manufacturing, a Dongguan company that makes New Balance sneakers. With orders at the plant down from9.3 million in 2007 to 7 million this year, Li Kai has laid off 22% of its 9,000 workers since January. "Consumers are unsure about the future so they're cutting down on expenses," says Stanley Chen, China boss for New Balance.


Longer-term, it's not unreasonable to expect China's middle class to become an engine of global expansion. But it may be years before they open their wallets enough to make a difference. Despite efforts to get citizens to spend more, consumption as a percentage of gross domestic product has shrunk in recent years, to 37.1% in 2007, from 46.8% a decade earlier. In the U.S., by contrast, consumption makes up 70% of GDP. And while China's $586 billion stimulus plan includes some measures aimed at boosting consumption, the bulk of the money will go to megaprojects such as new highways, railroads, and airports.

The stimulus also aims to boost real estate, but housing prices are flat or down. In Shenzhen, for instance, they have fallen by 15% this year—leaving the likes of Xu Shungang in the lurch. Construction has ground to a halt, so the 38-year-old laborer sits with other migrants at the railway station. After just 20 days in Shenzhen, Xu is cutting short his planned three-month stay and heading back to Henan province. Though he is looking forward to Chinese New Year at home, he won't be bringing many presents. It's better to save for the future, Xu says, eyeing a plastic duffel bag stuffed with his belongings. "There are no more jobs now," he says. "We'll come back when the economy is stronger."

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