A few days ago another food scandal came out in China: authorities had found tons of rotten frozen food –some of which were 40 years old – being sold to consumers all over the country. This is just one example of the many scandals that happen every year in China. Not surprisingly, there’s little trust in domestic produce and brands in general. Foreign brands enjoy a better reputation and consequently are the preferred choice of those that can afford it. The question is: how much longer will foreign brands have this advantage?
Chinese consumers have little trust in domestic brands & products
A few years ago when I was living in Hangzhou, I saw a man with a basic filtering machine lower a hose down into the city sewer. A bystander told me the man was extracting oil from the sewers – also known as gutter oil. Little did I know, gutter oil was being used as cooking oil in many of the smaller restaurants across the country.
In 2008, China’s melamine scandal became world news after multiple babies succumbed of tainted milk. Every year, there are new scandals being unravelled: rice that contains plastic, rat meat sold as lamb, toxic bottled water, glow-in-the-dark pork, et cetera. At some point there were even thousands of dead pigs casually floating in the Yellow River, heavily contaminating Shanghai’s drinking water.
Chinese consumers pay great attention to the produce they buy and religiously wash their vegetables and fruits before consuming them. But they know they still run the risk of consuming harmful products, which is why increasing amounts of consumers are now purchasing imported foods and products. More and more biological farms are opening up as well to satisfy the demand for reliable and fresh produce.
Foreign brands are reaping the benefits
Foreign brands have always enjoyed a good reputation in China. In general, foreign brands offer higher quality and service levels and are considered safer and more durable. Particularly in the health and food sectors, foreign brands are the preferred choice.
To give you an example, we recently surveyed Chinese consumers about drinking water in their homes and the use of residential water treatment devices. Nearly 80% of respondents noted they would prefer to purchase foreign branded water treatment devices.
The Chinese companies we spoke with mentioned they felt foreign brands had an unfair competitive advantage over domestic brands.
However, this ‘unfair advantage’ does not apply to all industries and market segments. In the lower market-segments and low-tech industries where price is most important, Chinese brands are usually at an advantage. Which is why even brands such as Pizza Hut and Papa Johns have positioned themselves as high segment brands to avoid competing with low-cost competitors.
Premiums of foreign products will eventually need to go down
There’s a scarcity of high-quality, reliable products in China. As a result, foreign brands can demand a high premium. For example, foreign-made residential water treatment devices are usually at a 200-400% premium compared to domestic brands.
The question is: how much longer can this continue? Chinese brands are becoming stronger and are gaining a better reputation as the years progress. The gap between foreign and domestic product offerings is becoming smaller – creating more competition in the higher segments of the market.
Because of the high premiums on foreign brands, consumers are increasingly purchasing products abroad or are ordering them online through foreign retailers. It’s simply cheaper to import than to buy locally. For example, luxury brands have started decreasing their prices in China, and increasingly more industrial companies are relocating their manufacturing to China to stay competitive on price.
The time for foreign brands to enjoy high premium prices is limited. There is a shift towards quality for a fair price and the only way to compete is to localize your manufacturing. Then again, if you’re in the food sector you will likely be able to leverage your “Made outside of China” label for a few more years.
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