Foreign firms bet on larger consumption

08:22, March 08, 2010      

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Chinese consumers unnerved by escalating industrial closures in the West are becoming increasingly cautious about spending money, according to one leading foreign multinational company.

The fears of a consumer slowdown were expressed as the National People's Congress (NPC) and Chinese People's Political Consultative Conference meet in Beijing to discuss economic measures, including ones to boost consumption.

Peter Tan, president of Burger King Asia Pacific, one of the world's leading fast food companies, which is planning to open up to 400 outlets in China over the next five years, said global problems could spill over into China.

"In this era of the Internet, world news is available to people in China. They can see what is happening in the car industry and the financial industry and they wonder when some of these cutbacks are going to happen here in China, whether that is likely or not," he said.

As the economic stimulus package is about to be reined back this year, the NPC is set to look at measures to boost consumption in a country with one of the world's highest savings ratios.

According to the National Bureau of Statistics, savings as a proportion of GDP were 51.3 per cent in China in 2008, more than four times the 12 percent level in the US.

Measures to boost consumption could include continued sales tax reductions for people buying cars and expensive consumer goods, particularly in rural areas.

Tan said he welcomed such measures because they were likely to impact also on the fast food sector. "I think they are likely to have a trickle down effect and they would have a positive impact on our industry generally since they are likely to bring people out shopping," he said.

"In the early onset of recession fast food tends to do well since people trade down to eat in quick-service restaurants. The challenge for us is when the downturn gets a little bit more protracted and people don't go to the shopping centers. We rely on impulse purchases when people are out and about."

The NPC is unlikely to bring in panic measures. With the stimulus package in full swing last year, retail sales in China grew by 15.5 percent to 12.53 trillion yuan. The Ministry of Commerce said in January that sales were on target to rise by a further 16 per cent this year.

Wu Changqi, professor of strategic management at the Guanghua School of Management at Peking University, insisted that foreign multinationals were less likely to be as solely focused on China this year as they were in 2009.

"Last year China was seen as something of a safe haven with the US and European markets in the depths of recession. The size of the China economy is still relatively small compared with the US economy and so there will be an inevitable refocusing on Western markets," he said.

Alex Liu, senior research analyst at retail researcher Euromonitor in Shanghai, believes the major foreign food retailers such as Wal-Mart, Tesco and Carrefour will make further inroads into the second and third tier cities.

"One of the advantages of these locations is that they face less competition," he said.

Liu said the worry for the major retailers was inflation taking off and reaching 5 percent.

"The forecast level of 3 per cent is fine but any higher and it would begin to erode profit margins with labor and other costs rising," he said.

One of the major opportunities for foreign multinationals in China could be private healthcare. The government is said to be planning to allow Chinese people to use their yibao, or public health insurance, at private hospitals.

Roberta Lipson, who launched China's first foreign-invested hospital, Beijing United Family Hospital, in 1997, said it could transform the market.

"It would be a measure that would be welcomed by consumers, private health insurance companies and by private hospital investors, " she said.

Howard Abe, Asia Pacific retail and consumer industries practice leader for management consultants A.T. Kearney in Shanghai, said Chinese consumption patterns make it difficult for consumption-boosting measures to work.

"Chinese consumers behave differently from those in the West. They tend to wait for sales and just go out and buy multiple items all at once.

In the West, people buy items on a more regular basis, every month or two," he said.

He added that foreign multinationals remain optimistic about trading conditions in the China market.

"Last year, for many of them, it was like printing money. There was no holding back," he said.

Multinationals in other sectors are optimistic about economic activity in China this year.

Laurence Barron, Airbus China president, expects the aviation industry to return to pre-crisis economic levels ahead of the rest of the world.

"We will see recovery in China one year or even more earlier than the rest of the world," he said.

The energy sector also continues to present a number of opportunities for foreign multinationals.

Chen Liming, China president of BP, the UK energy giant, said opportunities abounded.

"China has done great work in energy conservation and pollution control and the country still has big potential in this area, " he said.

Wu at the Guanghua School of Management said it was inevitable that China would remain a strong market for foreign multinationals for some time to come because they offer the brands that Chinese consumers want.

"As more and more Chinese people move up into white collar and professional middle class groups, the more they will demand quality products and the foreign multinationals offer better brand name recognition," he said.

Source: China Daily

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