How China’s factories are pivoting from an export-oriented business model to rely more on domestic sales
- Deteriorating relations with Western countries has accelerated China’s push to look inward for economic growth, putting its fate in its own hands
- Even as orders have been returning to China due to other producing countries still being ravaged by the pandemic, manufacturers say the trend unsustainable
If you build it, will they buy? That’s the big question facing China’s manufacturers as they are being told by the highest levels of government to embrace an inward-facing model of domestic consumption.
President Xi Jinping called on the nation in May to rely more on domestic demand for future growth – dubbing it a dual circulation strategy – and his directive requires significant changes in both internal supply and demand.
“The pandemic has made it difficult for us to sell abroad, but we do feel as though Chinese customers are less … enthusiastic for foreign brands, especially mid-level products,” said a sales manager at a fashion jewellery brand with shops all over the country.
“Frankly, it may be becoming fashionable and more politically correct to make and consume good-quality Chinese goods,” he added, asking not to be identified.
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Orders have been returning to China as other producing countries are still being ravaged by the pandemic, but manufacturers know the trend is most likely unsustainable.
“In the long run, it is inevitable that the supply chain of home appliances will move out of China,” said Liu Sui, a senior executive at Guangdong Xinbao Electrical Appliances, which ships household items mainly to Europe, America and the Asia-Pacific region, but is now looking inward.
Liu is also general manager of KCB, a newly created brand under Xinbao that is focusing exclusively on the domestic market.
“We had been focusing on the export trade, which [in the past] exceeded 80 per cent of our total sales,” Liu said, adding that they have begun “to invest heavily in developing products for the domestic market”, particularly as they have noticed that the appeal of domestic brands is growing among the younger generation of Chinese consumers.
“We hope that, by 2025, domestic sales will account for 80 per cent of our sales,” he added. “Even though we are very optimistic about exports for the whole of next year, once the pandemic eases, orders will quickly relocate back to other emerging manufacturing countries.”
“We used a lot of big data to understand the habits of domestic consumers in developing an electric baking pan. It has sold 420,000 units since September last year after being launched through China’s e-commerce platforms,” he said.
Another manufacturer embracing live-streaming to boost domestic sales is Li Zhiguang, the founder of Guangzhou-based Looksee, whose programmes focus on selling men’s underwear almost exclusively to Chinese consumers. In the first half of the year, Li was worried as he watched nearby clothing factories shut down due to the coronavirus’ impact on foreign demand.
In a desperate bid to survive, he and his team got creative. They came up with a bold campaign to attract domestic consumers – and it paid off. Looksee invited its regular customers to serve as brand ambassadors by posing for selfies in their underwear and posting pictures on social media.
“At the very beginning, we were worried that this idea would be too bold for Chinese consumers,” Li said. But the outreach effort quickly attracted hundreds of participants, many with tens of thousands of social media followers or more. Other marketing efforts followed, and business has boomed, with Li’s factory now operating at full capacity.
“We have launched more than 100 new styles this year alone, all specially designed to attract Chinese middle-class white-collar men aged 20 to 35. It’s a big group with strong spending power, who love fashion, even for their underwear.”
For his part, KCB’s Liu conceded that while domestic sales opportunities exist, transforming his company from an export-oriented model has been very challenging.
“European and American households own more than 20 types of small appliances, on average, while a Chinese household owns only four or five,” he said. “The penetration rate for domestic small appliances is still low.
“One key factor that determines the success of Chinese brands is whether the purchasing power of Chinese consumers can keep up with the pace of European and American consumers to consume more.”
In an article published late last month, he noted that growth has been slowing steadily over the past decade, and prospects have been further dampened by the trade and tech wars with the United States.
“Growth comes from investment and productivity increases; consumption is the consequence of economic growth, not its engine,” he added.
“The IMF said China’s economic growth could bounce back [to 8.2 per cent] next year,” he said.
China’s economy looks to grow 1.9 per cent this year, an upgrade of 0.9 percentage points from the IMF’s forecast in June. And the world’s second-largest economy is still expected to grow 8.2 per cent next year, unchanged from the IMF’s projection in June.
It still remains to be seen whether the shift among manufacturers to rely primarily on home-grown consumption pays off in the long run, but in the current geopolitical climate, particularly with the pandemic still raging in much of the world, manufacturers are hoping the purchasing power of Chinese consumers indeed pays off.
“I support the internal circulation strategy very much because it will be very helpful for domestic brands of our kind,” Li said.