Review: the two-sidedness of a richer China

August 31, 2012

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

For multinationals, “The End of Cheap China” is a mixed blessing. Shaun Rein, an American marketing consultant based in Shanghai, has written an interesting book with that title. The good news is that customers can afford to pay more. The bad news is that they’re increasingly reluctant to spend their higher incomes on anything multinationals have to offer.

Rein, who has advised Apple and restaurant operator Yum on their China strategies, has some useful advice. To start, China should be treated as a top trend-setting market. Apple inadvertently encouraged a grey market in its products by delaying the Chinese roll-out of new products. Porsche did that, launching its Panamera sedan in China before the United States. China is now the luxury carmaker’s second-largest market.

Up and coming domestic rivals are making life in China more difficult for foreign multinationals. While Chinese consumers trust foreign brands more not to cut corners, Chinese companies can often undercut foreign producers without much compromise of quality. They are often also more adept at catering specifically to domestic tastes. Western brands might need to launch cheaper secondary brands or acquire local rivals. Yum, which owns Kentucky Fried Chicken and already counts China as its largest market, acquired Little Sheep, a hot-pot restaurant chain, in 2011.

On the production side, multinationals have to recognise that not-so-cheap China is no longer obviously the right place for manufacturing. Factory work is better paid and often spurned by the most desirable potential employees. The right response for multinationals varies – some companies try to justify higher prices with stronger brands and others convert factories to sell to China and other emerging markets.

Corruption is an issue that doesn’t seem to be going away as the country develops. In China’s low-trust environment, building relationships is important. But Rein, who is half Chinese and speaks the language fluently, argues that connections can be a double-edged sword. “They will not get you everything, but they can cost you everything”, he writes, adding that whenever a key government official is arrested, so are the business leaders surrounding him, and the government often gives businessmen tougher sentences than officials. Just after the book came out, British businessmen Neil Haywood was murdered by his patroness, the wife of the former chief of Chongqing.

Rein also examines a broad range of other issues, including modern Chinese women, education and neo-colonialism in Africa. The founder of China Market Research Group would have been wiser to focus more on the proper positioning of multinationals. But his writing is engaging. “The End of Cheap China” is full of vivid anecdotes from different levels of the Chinese society, from Chinese billionaires to senior party officials to waitresses and even prostitutes. He gleaned some unique insights about how the Chinese society works from his wife, who comes from a well-connected Chinese family. For any foreigners thinking about doing business in the Middle Kingdom, “The End of Cheap China” is a good place to start.

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