Conspicuous Consumption, Made in China 

07/16/2009 12:01 am EST

Focus: GLOBAL

Robert Hsu

Editor, China Strategy and Asia Edge

New fortunes forged during the current boom are stoking the appetites of Chinese yuppies, writes Robert Hsu in China Strategy.

China is one of the few markets where global hotel chains like Intercontinental, Hilton, Marriott, Ritz Carlton, Four Seasons, and Shangri La are expanding aggressively. As a result, most of the five-star hotels in China are newer and offer the latest in hardware and design.

So Chinese hotels—unlike hotels elsewhere in the world—are offering even more amenities and expanding their businesses despite the global economic slowdown. The reason is simple: Chinese consumers are learning how to live the good life and are starting to spend like never before.

Three years ago I predicted that Chuppies would replace US Baby Boomers as the most influential consumer group in the world by 2020. Well, with the current global economic crisis and US consumers drastically cutting back on their spending, it seems that this will happen sooner than I expected.

Chinese consumers have been able to continue to spend because the country's huge savings pool coupled with the $586-billion stimulus package and its resulting growth in bank lending are creating new wealth throughout the land. Many well-connected individuals are making new fortunes at speeds rarely seen in the West during the post-Lehman Brothers era. This is especially true in sectors dealing with construction, real estate, and restaurants that are currently experiencing a new boom.

[But] not all of the industries and businesses in China are showing strength. In fact, many foreign-owned businesses are struggling to stay afloat. My cab rides in Taipei provided me with some interesting insights. Three of the taxicabs that I rode in there were operated and owned by former Taiwanese entrepreneurs and business executives whose businesses failed in mainland China.

All of these failed executives had one thing in common: They were involved in China's labor-intensive, low-margin export manufacturing industries such as shoe or garment production. Given the long-term up trend of the Chinese yuan, low cost alone is not a sustainable competitive advantage for Chinese companies any more.

These businesses also suffered from government regulations, cutthroat competition, and lack of intellectual property protection. And it is difficult for most small businesses to receive bank financing in China. In industries with a low barrier to entry, there are simply too many "copy cats" in China that will mimic a successful business and try to undersell it. Businesses that want to succeed in China need to have an edge over the competition—such as strong brand name, technological edge, superior management, or favorable economy of scale—to succeed on a large scale.
 
I've also seen many Taiwanese-owned service-oriented businesses that cater to the growing domestic markets thriving in mainland China. Because China's service industry still lags Taiwan's and America's significantly and is growing rapidly, it is easier to gain an edge in these types of businesses. Sometimes, items that consumers take for granted in cities like Taipei and Los Angeles, such as cleanliness in restaurant bathrooms, can be a competitive edge in second-tier Chinese cities.

So, rather than trying to start a business in China, the best way for most foreigners to profit from China's economic boom is to invest in leading Chinese companies [that] have created difficult-to-replicate barriers that protect them from competitors and maintain their profit margins.

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