By John Richardson
THE charts below, provided by fellow blogger Paul Hodges, are of great value for any chemicals company looking beyond the current cycle of deflation and debt in China. If you want to be a winner in the world’s most-important market once this cycle is over, the charts are a key starting point.
Based on data from China’s National Bureau of Statistics, they show incomes since 2000 divided into quintiles (e.g. the Top 20% are the High Income earners etc.)
Breaking this down:
- High Income groups in urban areas had $9,000 income in 2013, versus $4,000 in 2007. Great progress, but, of course, this is a long, long way from being middle class by Western standards.
- The Middle Income group in urban areas had $4,000 in 2013 versus $1,600 in 2007, and the Low Income group had $,1900 versus $700.
- And the High Income group in rural areas had just $3,500 income in 2013 versus $1,300 in 2007.
- The rural Middle income in rural areas had only $1,300 in 2013 versus $500 in 2007, and the Low Income had only $400 versus $180.
Take away the “wealth effect” of China’s 2008-2013 economic stimulus – which, of course, is now happening – and there are three priorities for any chemicals producer or chemicals service company operating in the China space: Affordability, affordability and affordability.
That’s the challenge. Here is the opportunity:
As you can see from the above chart, most households own two mobile phones, but we should have known years ago from common sense analysis of income levels that these mobile phone would never be mainly top-of-the-range Apples. Sure enough, we have seen the emergence of a low cost domestic smartphone business.
Moving from left to right of the chart, we can the opportunities for finished goods where penetration is low. But it seems very logical to assume that this opportunity lies with the poorest and so rural segments of Chinese society, who, as yet, have been unable to afford a computer, a vacuum cleaner, a landline telephone or an electric bicycle etc. Hence, this further emphasises my three priorities: Affordability, affordability and affordability.
Consumer goods manufacturers will thus need to employ a great deal of ingenuity and creativity to tap into these markets. They will need to build a computer which retails for, say, $100 – and that computer must also last a long time, as $100 will be a once-in-several-years financial commitment for many households. With this ingenuity and creativity must obviously come ferocious cost-control.
Local manufacturers will have a big advantage over their foreign competitors here because:
- They have a much-better understanding of the rural, developing markets in China. Many foreign companies have been heavily focused on the “low hanging fruit” of the booming developed eastern coastal regions of China.
- Local manufacturers will have State subsidies to support their innovation and creativity. This will greatly support their cost control.
We then need to apply this to the chemicals industry. Here are two immediate headline thoughts:
- Overseas chemicals companies will need to work very closely with these finished-goods producers. It will no longer be a case of just handing over a cargo of, say, polymers to a trader with the simple instruction “go and sell this in China, please”.
- This closeness to the consumer goods companies will involve even more good people on the ground in China – and more regional offices.
The detail of what this means, sector-by-sector for the chemicals industry, is something that I plan to study over the coming months and years.