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Welcome To The Next Chinese Century: Part 2

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Back in February 2019, I wrote a piece called “Welcome The Next Chinese Century.” At the time, I focused on (mostly) the sudden appearance of signs advertising the chance to use Alipay and WeChat at the Miami airport. Shortly thereafter, I was buying a bottle of wine up in Merrick, NY and discovered that the liquor store I was shopping in also advertised and took Alipay. Merrick? Seriously? Last I knew it was primarily a Jewish and Italian suburb of New York City.

Since that time, we’ve watched the US go back and forth on tariffs, and we’ve heard about the current debacle in Hong Kong, which many of our brands have taken a stand on, while our government remains mute.

However, in any war with China, we appear to be coming out on the losing end. On October 12, the Wall Street Journal published a piece entitled “ America Is Losing The Chinese Customer” (paywall). The long and the short of this article is that for political and taste reasons, the Chinese consumer is losing interest in American-made products. Our original logic beyond finding the lowest cost source of supply, was to create new markets for our goods and services, and it’s turning out to be flawed.

It’s easy for me to take a shot at tariffs, and I’ve certainly done so before. But the situation in Hong Kong is a bit more… complicated.

As I said in my first piece on the Chinese century, I’ve long supported reducing our dependence on China as a source of goods. But China is now a powerful enough market that it can also say “Never mind, we’ll buy our own domestic stuff, not yours,” too. And according to the WSJ, they are doing just that.

China is buying local. The WSJ took a look at 30 categories of merchandise and found around two-thirds of all retail sales in those categories are domestic brands. That could spell more trouble for US-based companies who rely on China for a real part of their overall sales growth. This applies to luxury and sport brands, but also apparently on food products. Here’s a quote from the article that should worry all of us:

For years, American companies looked to China as a land of new opportunity. Now a new reality is settling in: The Chinese consumer isn’t about to save the day for Western brands.

“Now the quality is similar, so why not buy China?” said Gao Yang, 39, who works in home decoration, as he browsed in a Beijing mall. Once an avid buyer of Nike and Adidas products, Mr. Gao said he has switched exclusively to Li-Ning, a Beijing-based sportswear brand that has become fashionable in China. In a Hill+Knowlton Strategies survey in 1998, virtually no Chinese respondents said they thought Chinese brands were cool.

This is not the best time to continue pressuring China. Pain is already being felt in the heartland. I spoke to my friend Rob Klingberg, President, Enthusiast Enterprises, LLC, a Minneapolis-based maker of lighting and other parts for LEGO. Tariffs are already causing him great heartaches. To quote:

We have three primary competitors, two based in china and one in Australia (who has their product made in China). All are undercutting us by being able to sell a very similar product to our customer base without the need to pay tariffs.

His business is down. Certainly, tariffs aren’t the only reason, but they are clearly a big part of it.

The bottom line here is simple. I can (and have) railed against tariffs, but I can (and have) also railed against the situation in Hong Kong. It’s terrible. The Chinese can have an iron fist when they want to. And they’re not afraid to use it.

In other words, whatever your political bent, China has an answer for it. If you don’t agree with them, there will be pain. “You want to impose a tariff? Fine: we’ll buy elsewhere. You don’t like how we run our politics? Fine: You don’t quite understand our market anyway, so we’ll buy from our own country.”

We MUST find other sources of supply and consumption. We must act in a thoughtful precise way because, boys and girls, we really are into the next Chinese century. And if the rest of us want to compete, we’ve got to be a lot cleverer. Tariffs are not a field I’m willing to die on. The obstruction of liberty? Well, I can get into that fight. But the way we pick and choose our battles is less and less logical, less and less strategic. We’re not keeping up. Seriously.

As I’ve said before, retailers need an “or else.” Right now, we don’t really have one. We bluster, and we tweet (on all sides) but China is in the catbird seat. We put them there, it’s true. But they’re not stepping off it so quickly.

RSR is about to run a supply chain study that looks at apparel sourcing in the western hemisphere. That’s a start. Have factories become more responsive? Have retailers bought technology like PLM to help them get the job done? Do we have an “or else” there, at least?

But we haven’t looked much at the demand side of the equation beyond railing about tariffs. Perhaps that’s a topic we should also take a look at. We know retail is global now. But what does global look like if you take China out of the equation? This is not a small question. Are retailers and brands ready to take it on? We’re going to have to.

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Articles & Opinions October 15, 2019
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