China distribution the battleground of the future
With not much going on in the mainland export markets, the world’s transport and logistics operators are fast moving into the country’s domestic distribution arena.
A clearer picture of the Chinese consumer is emerging: He or she lives in the city, the household earns RMB78,500 a year (US$12,400) and probably has a car parked outside.
The annual income doesn’t sound like much but it continues to grow rapidly. It is projected that by 2015, the household income will be $15,000, and by 2021 it will be close to $25,000. Small wonder, then, that the world’s retailers are all expanding their China operations to try to entice the mainlanders to spend their hard earned cash.
The trend of privately owned cars is equally breathtaking, with the number of cars in the mainland growing from the current level of around 50 million to 203 million by 2020.
It is hard to argue with statements predicting that when China’s consumers start to unleash their wallets it will create the largest distribution market in the world.
Much of the population is moving from the poor dirt-scrabble rural areas to the cities. In fact, in 2011, for the first time the urbanized population exceeded the rural population. This is in line with government policy to improve the living standards and social circumstances of its two-point-something billion people.
The policy is having an impact, as the rising household income shows, and it is being driven by a government objective of raising the minimum wage by 82 percent in the next five years.
While the higher wages are stimulating consumer spending, they are negatively impacting manufacturers of low cost items, such as toys and garments. Many of the coastal factories have moved – Li & Fung exec Tommy Lui said their research had shown that 25 percent of factories had closed or left China altogether, 25 percent had moved inland and so far 50 percent were staying put.
No doubt the half that are remaining near the coast will be keeping their options open, because the export focused manufacturers are in a vulnerable position. The US and Europe economic woes have led to a slowdown in factory orders, and export volumes have fallen.
According to Lui, this has led to many factories in China seeking distribution licenses and the right to engage in domestic sales as they attempt to capitalize on the growing internal demand.
Complicating domestic distribution is the high cost of transportation and the fragmented logistics industry. The supply chain is inefficient with too many layers of distribution, and government subsidies allow weak players to control retail distribution.
The situation is slowly changing, but directives from the national government have a way of losing impetus by the time they reach ground level in far-flung provinces.
However, more money in pockets means more money to spend and the sheer force of demand will ensure that China’s domestic consumption keeps the world’s logistics operators fighting for market share for years to come.