Such efforts have aimed to reassure two key constituencies: foreign consumers, and, increasingly, ordinary Chinese buyers themselves. Yet Beijing will need to do a lot more work before it can persuade its increasingly affluent citizenry to buy Chinese. According to a little-noticed report issued last year by China’s Ministry of Commerce, the country’s domestic markets are dominated by foreign goods. According to the ministry, in the 10 years leading up to 2004, the market share of foreign manufacturers in China quadrupled, to 31 percent. In textiles, clothing and footwear, foreigners control 48 percent of the market; in IT equipment and electronics, 82 percent, and in furniture, 51 percent. This suggests that the real manufacturing crisis facing China today is how to get Chinese consumers to value domestic brands as much as foreign ones (many of which are also made in China).
Foreign dominance even extends to Chinese exports, suggesting that there’s something hollow about the much-touted Chinese manufacturing miracle. In numerous coastal regions where China’s manufacturing boom is based, 90 percent of exports in some sectors are now produced from mostly imported components or materials. And close to 60 percent of China’s total exports come from firms that are either completely or partially controlled by a foreign entity. According to Global Insight’s forecasts, China could indeed become the world’s largest manufacturer by the end of 2008. But this will be dominance in nominal terms only. The value added to products assembled in China remains low. As a result, so do China’s profits; most of the money made from selling such goods goes to the overseas firms.
The question all this raises is why Chinese consumers seem to prefer buying foreign brands, especially given the fact that Chinese-branded ones can be had at much lower prices. In part, because foreign logos confer status. But also because of manufacturers’ response to safety and scares. Foreign producers tend to be proactive: the mere possibility that a child might be harmed by lead paint can be cause for a recall. Chinese manufacturers tend to be purely reactive: until problems surface, they behave as though there is nothing to worry about. While about 20 percent of Chinese products are deemed substandard by official statistics, only about 1 percent sold abroad are, reflecting the fact that so many exports are made in factories owned by more-safety-conscious foreign firms. China has been growing so quickly for so long now that there has not been much time to plan for contingencies. The recent scandals have shown the need for an attitude change.
Especially in the electronics sector, Chinese firms have failed to develop either organically competitive products or a reputation for quality. Foreign retailers in China are also much better at creating pleasant shopping experiences. And they devote much greater resources to advertising.
Beijing is finally starting to respond to these shortcomings. In recent months it has dispatched inspection teams throughout the country to investigate quality problems, shuttered hundreds of factories and pledged to strengthen monitoring mechanisms throughout the supply chain. Most notably, two weeks ago China signed a joint product-safety agreement. China’s government, quite understandably, wants to see more products designed by, manufactured by and sold by competitive domestic companies. And it wants to see more Chinese buying more locally made goods. The payoff of such a shift would be immediate: anyone who has seen Chinese shoppers abroad can speak to their growing spending power. Unless Beijing and local manufacturers learn how to harness it, however, they, too, will be chasing the fabled China market.
