Letter from… Beijing

Forget China’s old image as a low-cost manufacturing base. The country is now a burgeoning market for high-end Western goods and services. The Daily Telegraph’s Beijing correspondent Peter Foster charts the challenges and opportunities ahead.

Anyone doubting the latent power of the new middle-class Chinese consumer need only look at Apple’s skyrocketing sales in China to see the country’s dizzying potential.

Not so long ago, many analysts were predicting that Apple could only ever be a niche product in China – too expensive, too aspirational, they said – but that theory underestimated the globalised desires of even provincial Chinese consumers.

Apple’s sales in China more than quadrupled in the year to September 2011, from $3 billion to $13 billion, vaulting China to rank as the company’s second-biggest market and driving the kind of demand that saw the new iPhone 4S selling for more than the equivalent of $2,000 on the black market when it went on global release in October.

Of course, not everyone can be Apple, but those numbers show that it’s not just millionaires who buy expensive toys in China.

If the product is right, then Chinese consumers, even outside the great cities such as Beijing and Shanghai, will save to buy. Foreign companies looking for new markets should therefore not neglect consumers in China’s new “great cities”, the so-called second- and third-tier places, such as Wuhan, Ningbo, Dalian or Shenyang.

That’s why the British shoe designer Jimmy Choo is planning to open 50 stores in China over the next five years – selling high-end shoes for the equivalent of $600 a pair.

On a more mundane level, it’s also why SABMiller, the brewer, now owns the world’s best-selling beer. And it’s not Carlsberg, Budweiser or Heineken, but a brand unknown in the West called Snow that is barnstorming a beer market growing at 10% a year.

Driving up consumer incomes – average incomes are expected to rise 7% a year – is a key part of China’s overall policy direction for its next five-year plan, which identifies that it is at a fulcrum moment in its development.

Over the next decade, as the pools of cheap labour that drove the first stage of Chinese industrialisation start to dry up, China needs to exit its old growth model – snapping together cheap stuff and exporting it to the West – and enter a cleaner, greener, more high-tech world.

To that end, China plans to spend nearly 2,553 billion yuan ($400 billion) to boost seven key strategic sectors between now and 2016 that will provide opportunities in IT, communications, aerospace, green tech, health care and infrastructure, particularly for those willing to share technology.

And you don’t have to be big, like Apple, to succeed. Take a company such as Allinea, a small software maker based in Warwick, UK, that has signed a deal to sell its world-beating debugging software as China embarks on a supercharged expansion in the number of supercomputers it needs for advanced industries.

On the green front, China expects 100 million farmers to move from villages to cities by the end of the decade and is planning to spend nearly 3,829 million yuan ($600 million) on trying to conserve and clean up its horribly polluted waterways.

The desire to manage that wave of urbanisation more efficiently, with reduced environmental impacts, is why a group such as the British Research Establishment (BRE) – a consortium of architects, engineers and scientists based in Watford, UK – has been commissioned to help create a £100 million ($161 million) green buildings innovation park in Beijing this year.

But if the opportunities are significant – and doubly enticing given the sluggish or nonexistent growth in developed world markets – then so should be the warnings that anyone hoping to get a slice of the China dream should carry uppermost in their minds.

Firstly, China is now a very competitive place. New foreign entrants must not only compete against other growth-hungry foreign businesses, but increasingly against smart, cash-rich, price-sensitive Chinese companies that have all the advantages – regulatory, cultural and political – of playing on home turf.

Secondly, there are far fewer free passes in China for foreigners today than a decade ago. Wages are rising, tax breaks are disappearing, employers’ obligations increasing, regulations piling up: In short, China’s government wants foreigners to apply the same standards in China as they do at home.

And finally, for all Apple’s scintillating numbers, it’s worth planning for the reality that the China party isn’t going to rage on forever, at least not at the hedonistic levels seen in the past three years as a tsunami of cheap credit flushed into the economy after the Lehman crisis.

Systemic inflation is rising, the labour market is tightening, and the property market that has fuelled much of the growth in personal wealth in China is cooling, with the aim of slowing annual GDP growth to sustainable single-digit levels.

All of which is for the best, in the long term, say economists, but it will probably mean the next decade in China is, in many ways, tougher than the last.
Peter Foster is China correspondent of The Daily Telegraph.