China may still be a top priority for American companies, but the outlook for business there is moderating.
At the American Apparel and Footwear Association’s (AAFA) Executive Summit last week, Erin Ennis, vice president of the U.S.-China Business Council (USCBC) and Debra Weinswig, executive director and head of global retail research and intelligence for Li & Fung’s Fung Business Intelligence Centre spoke about China at its tipping point.
USCBC did a five-year snapshot of where China factors in terms of business strategies and found that more companies are less optimistic about opportunities in the Asian nation.
“We’ve seen about a 40 point shift [in optimism] over the last four years,” Ennis said, attributing the dip to multiple uncertainties like economic reform, for one. “It’s still a priority market, and with 7 percent growth per year, it is going to outperform probably every market. But that optimism about where the future prospects are is starting to get questioned.”
Companies surveyed for the snapshot are still seeing profitability increase, though in low double digits rather than high double digits, Ennis said. Eighty-six percent of companies noted they would still accelerate and maintain investment plans in China, and the remaining 14 percent reduced their presence there citing business reasons. Of that 14 percent, 31 percent left because of better business prospects in another country.
Contrary to popular chatter, however, none of those who cut back on business in China said they left because of rising costs.
“While cost may factor in,” Ennis said. “It is not shifting their entire models.”
One shift Weinswig said LF has seen is the rise of Chinese cities. Chinese cities are among the fastest growing in the world, and the country currently has 10 big cities with a population between 5 and 10 million — and is expected to add one more megacity (10 million or more) and six more big cities by 2030, according to the 2014 update of the United Nations’ World Urbanization Prospects. And that growth has contributed in part to a boom in mall openings.
According to Weinswig, nine of the top 10 newly completed malls are in China. The China Chain Store & Franchise Association (CCFA) estimates that roughly 300 new malls open in the country each year and that the total number of malls there is expected to reach 4,000 this year.
Urbanization and the rise of the middle class are the key drivers behind this boom.
As Weinswig noted, 4 percent of all of China was middle income in 2000 and now that number totals 68 percent.
So, with all of these economic changes, what’s really working in China and what isn’t?
Steve Lamar, AAFA executive vice president, and the discussion’s moderator, posed the question to the panel.
According to the panelists, businesses are relocating inland as costs force the move, affordable luxe is outperforming traditional, and consumers there, as everywhere today, are looking for localized, customized and personalized experiences.
Whether brands are balking at increasing costs doesn’t change the fact that they are rising, and Ennis said USCBC has seen a “significant trend” in companies moving out of tier one and tier two cities, and heading inland to cities in even the fifth and sixth tier, in an effort to manage the “exponentially increasing costs in China.”
And with higher household incomes, Weinswig said, turning the talk to the consumer, there has also been a rise in quality conscientiousness.
“As luxury has waned, affordably luxury has taken over,” Weinswig said. “There’s more of a move to localization, customization and personalization. We have heard more of that in 2015 that we’ve heard before, and retailers who have tapped in have had more significant success.”
Shopping in China is almost a sport, Weinswig explained to the room of retailers. “It’s a different sport for them that it is for us, and I think because of that, you have to be able to move faster and you have to be willing to test and trash.”