China Rising Through the Crisis

Over the course of the current global financial crisis, there has been a perception in some circles that China will lead the rest of the world back into strong economic growth.

At first glance, this appears to be a possibility. In November, the Chinese government announced a disciplined and structured $586 billion stimulus package to boost the economy. A wide range of measures were implemented, including infrastructural spending and loosening of credit by banks, lowering of taxes and mortgage rates to stimulate property sales, and up to 10 percent subsidies for trade-ins for automobiles, white goods and computers. Results have quickly followed. In the first quarter, retail sales were up 15 percent, according to the National Bureau of Statistics. Industrial output grew by 7.3 percent in April, according to Xinhua, and China became, for the moment, the world’s largest auto market. At the end of the first quarter the country experienced GDP growth of 6.1 percent — not as high as in previous years, but steady nonetheless. Goldman Sachs projects that it will achieve 8 percent annual growth this year.

One key lesson of the crisis for China was the need to be less reliant on exports, and the stimulus package was aimed at shifting the economy from being export driven to domestically driven. The economic structure that is emerging from the ashes is a very different beast to the one that came before it. In April, China’s exports fell 22.6 percent from a year earlier, an even bigger drop than the previous month, when exports dropped 17.1 percent. Imports in April also dropped — 23 percent from a year earlier, according to The Wall Street Journal. Yet the Asian Development Bank projects that economic growth remains somewhere in the realm of 5-10 percent, so what gives?

The message here is that Chinese consumers are not going to come to the rescue of Western economies, but the continued growth means there is still great opportunity. The new-look Chinese economy is responding to government measures to crank up domestic economic activity, and will likely be more consumption focused than it has been in the past. What remains to be seen is if China is at the bottom of a V-shaped recovery, or at the cusp of a false dawn in a W-shaped recovery.

Understandably, many global companies have a serious case of the jitters when it comes to investing in this climate. Multinational companies in particular have been noticeably tightening their belts in China and many have been aggressive about cutting spending. Interestingly, their local competitors have not, and in some cases, domestic brands are jumping at the chance to invest and leverage the opportunities available.

It is important for multinational brands in China to remember the economic reality here is different to more developed economies, and perhaps more optimistic. For one thing, current estimates project that China will be the world’s second-largest economy in five years. Therefore, staying committed to Chinese consumers should be a no-brainer, and it is certainly not the place to cut investments.

Local Chinese brands — even those professing to have overseas ambitions — have long understood the importance of winning in the domestic market. A great example of this was the huge efforts made by iconic domestic brands such as Li Ning Sportswear, Tsingtao Beer, Bank of China and Haier Domestic Appliances at the Beijing Olympics. Even with a global audience watching, most local marketers believed the real value was the national stage and the opportunity for brand building with Chinese consumers. Local Chinese brands know the future is in their own backyard, and have maintained, and in some cases increased ad spending, even in the face of the downturn.

This is crucial for mid- to long-term growth prospects, as small increases in market share in downturns are proven to yield heightened returns in the recovery. A study from a private education service, New Oriental, found that, after the Japanese recession in the early ’90s, companies that increased their marketing budgets by at least 10 percent gained 6.7 percent market share during the recession period — and an average 3.8 percent post-recession. On the other hand, brands that cut their spending lost an average of over 4 percent market share in the recovery. To fully suggest that marketers leave their budgets intact would be to not fully understand the economic crisis; however, it’s important for companies to make the right cuts and simultaneously, the right investments. Perhaps there is a case to be made for “de-coupling” marketing spending in scalable emerging markets such as China, even if the real economy is, increasingly, globally integrated?

The Chinese advertising world is complex and changing fast. It involves 300 million Internet users and well over 600 million mobile phone users, yet TV is still the medium of choice for many. Marketing services are extremely important here, especially in going beyond tier-one cities. Chinese consumers are increasingly open to international influences and brands, yet are truly proud to be Chinese and are increasingly confident in the quality of homegrown brands. It is a market in which the cultural heritage of China is highly valued, yet technology and foreign luxury goods are aspiring purchases for an upwardly mobile population.

While the government has taken proactive steps to combat the crisis, and local brands have remained committed to investing in their home market, it is no exaggeration to say this is crunch time for global brands. Whether we are at the bottom of a V-shaped recovery or yet to face greater uncertainty, one thing is clear: China’s future as a consumer market looks bright. Are you ready?

Joseph Wang is chairman of Euro RSCG North Asia. He can be reached at joseph.wang@eurorscg.com.