Things that go around again
January 26th, 2009 by Technomic Asia News
Question: Can you pull out of the biggest financial freefall in modern history by encouraging your people to go shopping? The recent Republican administration in the U.S. tried to do this with their rebate checks of 2008, encouraging people to go spend on feel-good stuff to wipe away the icky sensation that we were circling the financial drain. However, people used those checks to pay for frivolous things like food, clothing and utilities and it had zero effect on the economy; it was like trying to stop a runaway train with nothing but an extended palm and a stern, disapproving look. Score: train 1; erstwhile train-stopper nil.
But here in China, the authorities are betting it is going to be different. The rumor on the street is that we will soon see a move by the Chinese government to provide huge subsidies on a basket of goods that will be pushed out into the countryside and small towns in China. This cornucopia of goodness, supposedly, will include things like washing machines, motor scooters, TVs, rice cookers and other small appliances. And by “subsidies,” the word is that this stuff will be practically free to the buyers — like they will pay only 10 percent of the retail price of the goods. Its like one day Sears and Best Buy throw open their doors and help patrons loot the place.
Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.
As we have said many times before in this podcast, rumors are rampant in China and we must be careful not to plan market strategy on the basis of what is called “back alley news” ( 小道消息 xiao dao xiao xi). However, as I thought about what this program might do, I wondered if it might actually work. Remember that, despite the spectacle that is the big cities like Shanghai (where you can’t throw a chopstick without hitting a Starbucks or McDonalds) the rest of China is decidedly less urban and an estimated 65 percent of China’s population still lives in rural areas. There is a lot of disagreement as to exactly what the rural population number is, but it is impossible to determine. The several hundreds of millions of migrant workers make it tough to count them when they won’t stand still.
The backlash of lower growth in China is going to hit the migrant workers the hardest, and many of them have lost their jobs in China in recent months. The timing of these losses might diffuse the situation a bit: We are in the Spring Festival holiday this week where many of these workers have returned to their homes and turnover at factories can be as high as 40 percent in a normal year. Still, if factories are shutting down, there will be less for these workers to return to after the holiday so the unemployment gap will increase.
The biggest challenge for the Chinese government is to find a way to keep many of these workers “down on the farm,” so to speak, and moderate the flow into the cities. Certainly, workers are going to be needed to support the growth that is still happening here (remember our rants last week that “only” 8 percent growth is still growth?!), but not as many. Adding to this challenge is that many of these workers have been to the circus and seen the elephant — they know what lives many Chinese urbanites are living with all the standard trappings of wealth (funny how a Mercedes E-Class communicates the same thing in any culture. It says: “I am a 55-year-old male, I have money and I am compensating for something”).
So the first bit of encouragement the government can bring to the rural worker is to start them on the road to the better life by providing the starter-kit of bling: call it “Pimp my Farmhouse,” if you will. When I first came to China in the ’80s, people lusted after the “4 Things that Go Around,” which included a bicycle, watch and sewing machine — and I forgot the fourth. A pizza cutter?
Not much has changed except that the expectations have risen. We need to get places faster, so the bike has become the scooter. No one makes clothes any more but they do want to avoid washing them by hand. Hence the washing machine.
And you know what? Bully for them! There is nothing wrong with wanting –- and getting -– this stuff. I love my washing machine, TV and my rice cooker. Probably couldn’t live without them (at least, I could not properly parent teenagers without a TV!). Why should others be denied these because they can’t currently afford them? If the Chinese government can find a way to get these things to people who want them, that’s great. And contrary to the U.S. approach where people collect credit cards like Yugioh, if the rumors are correct, then people here will still be paying cash for these goods like they always have. They are just going to pay a lot less than they otherwise would.
As we have seen, economic recessions have a huge emotional and psychological component and the path of a county trends in the direction of the collective consciousness of its citizens. The revolution in China in 1949 was a radical departure from the socialist revolutions in Europe. While the Soviet Union and its satellite protectorates came into being through an urban/worker revolt, China’s came about through revolution in the countryside. Mao Ze-dong and his compatriots harnessed the anger of the abused peasant and swept themselves into power. Since that time, there is a tension in Beijing that, on the one hand, celebrates such peasant roots while, at the same time, wanting to guard against a repeat performance.
China’s leaders now are decidedly urbanized intellectuals and one of their primary concerns is how to avoid rural unrest. There have been many protests in the countryside in recent years, and interestingly, the Chinese media has reported on some of them. But so far, the “big one” has not come about. Deng Xiao-ping’s twist on socialism was to say that its OK if some got rich before others –- which is all fine and dandy if you can see the path out for yourself to boldly go where others have gone before. These subsidized goods, if true, would be a step in that direction.
The second benefit this program could bring would be to help keep factories open that are making these goods. Yes, people would like stuff, but they also need a job so they can keep buying more stuff. I have heard figures of unemployed migrant workers range from 3 million to nearly 6 million (so much for data accuracy in China). Whatever the figure, there are not enough factories making washing machines, TVs and rice cookers to absorb all of these displaced workers. But every little bit helps.
And the Chinese leaders’ growing sophistication in PR could come into play here. Have some of the leaders visit the factories where these products are made and then accompany these goods to the countryside to pass them out, shaking hands and kissing babies in the process. Splash that around the newspapers and online chat rooms and get some buzz going, some good buzz that might transfer to the foreign press. Radical? Not by Western standards, but it would be very different here in China. And it might even do some good.
For every happy, smiley, feel-good tingle that this program might engender, there is a potential darker side to it, as well. Getting someone a washing machine for cheap will make one feel pretty good, but before the warranty is up, you can be darned sure that the receiver is going to be saying, “OK, thanks for the washing machine, but what’s next?” If the government is using a program such as this as a quick-fix finger in the dam of emotions in the countryside, they are going to be very shocked to find out just how short-term this solution will be.
The reality is that, despite the amazing growth of the past few years (or maybe because of it), true rural reform has to be high on the to-do list for Chinese government leaders. The opening of the economy has gutted the social programs that were tied to state-owned factories and farms and, while many individuals have been able to make more money on the freer market, they don’t often make enough to purchase affordable housing or good health care. Cheap motor scooters are nice, but if you can’t get emergency health care following your inevitable mash-up, is it that much of a benefit?
So we should be monitoring two things in the coming months in China: First, let’s see if the rumors are true and we see a subsidy program hit the street. Again, I hear enough rumors every day to listen to all of them and trust none of them, but this one seems to have a lot of internal logic to it. But secondly, keep your eyes on the real reforms that have been promised in the countryside: new schools, clinics, hospitals, affordable housing, etc. We have several clients for whom we are exploring these rural opportunities (particularly in medical devices and building products), and things are looking pretty good so far. But until real people get real and lasting benefit from real reforms, there is always the danger of people using their cheap scooters to drive to the nearest protest. And I don’t think the warranty is supposed to cover that!
Thanks again for listening. Happy Year of the Ox to everyone, and remember our motto: “In China, everything is possible but nothing is easy.” We’ll see you next time on the China Business Podcast.
Photo courtesy of JSolomon on Flickr
November 14th, 2011 at 7:59 am
Strange this post is totaly irrelevant to the search query I entered in google but it was listed on the first page. – Wagners music is better than it sounds. – Mark Twain 1835 – 1910