Misconceptions Around Geopolitics and Exports to China
Geopolitics is a major consideration for most foreign brands in China these days. Whereas brands used to mostly be able to steer clear of any issues by avoiding reference to the 3-Ts: Taiwan, Tibet and Tiananmen, the scope has broadened to include Hs, Ks, Xs and others. There are few markets where politics and commerce are so intricately linked as China.
There is a perception that Chinese consumers will abruptly stop buying products from any country out of favour with Beijing. This can sometimes happen in the short term, but is often quite different in reality. Smartphones are a good case study. Chinese consumers are among the most dedicated smartphone users on the planet. Whereas people in most countries are glued to their devices, Chinese consumers are affixed with cement adhesives, using their mobiles across a far broader range of activities than their equivalents in most countries.
As a result of this usage, smartphones are the most visible item that most Chinese own. So it is interesting, even as Chinese smartphone brands have become popular the world over, it is an overtly American brand, Apple, which is leading the growth of the sector in China. While smartphone shipments in China sank 14.7% last quarter, the premium category - those ¥2,750 / $400 and above - grew 31%. Much of that growth was attributable to the ultra-premium segment - those worth $1,000 of more - grew 110%. Apple's share of the premium category increased to 46% from 43%.
The ultra premium smartphone sales growth not only illustrates that many Chinese consumers continue to buy well-marketed upscale goods, but they're buying some of those goods from origins who aren't on the best of terms with China, geopolitically.
We've noted in the past that almost all countries and brands who've been in the bad books with China typically bounce back quickly. During a territorial disagreement in 2012, Japan was villainised in China, with Japanese cars destroyed, bricks thrown through Japanese retailers' windows and tourists dropping by nearly half in the month that followed. But things had bounced back swiftly, with Chinese tourists to Japan increasing from 1.4 million in 2012 to 7.4 million in 2017. Many of those visitors were filling up the suitcases with Japanese goods, which saw a new term coined to describe the "buying explosion."
A more recent example is China's trade with Australia during a period of challenging geopolitics. It is an area we've followed closely at China Skinny, so we were interested to see a study published last week by the China Economic Journey and Routledge. The study tracked Australia’s monthly merchandise goods exports to China between 2001 and 2020 and quantified the effects of shocks in bilateral political relations.
The study concludes that short-term fluctuations in political relations had no long-run effects on Australia’s aggregate export growth to China over the two decades, nor in any of three sub-periods analysed. Political events typically had an impact which lasted just one to four months.
One of the most interesting findings from the study was the unexpected relationship between political conflicts and export growth. This is the likely result of what the authors referred to as "doubling down", where challenging times drive businesses to put more effort into building positive brand perceptions and strengthening relations with customers and government officials. Interestingly, the opposite happens during politically harmonious periods, where businesses get complacent and "drop the ball."
Whilst Australian exports have been largely unaffected as a result of political conflicts - even after removing the dominant mineral exports from analysis, the findings are unlikely to comfort those industries most impacted, such as wine. The report acknowledges these categories, highlighting the adaptable nature of some of the country's largest exporters, such as Treasury Wine Estates, which has remained committed to China and is working through different ways to approach it through sourcing wine from the US and France, and investing in China's domestic wine industry.
The study echoes insights from our Trackers, which monitors consumer perceptions towards countries for specific products over time. Sentiment for a country of origin usually increases again shortly after a geopolitical conflict.
The analysis should be heartening for brands in these increasingly geopolitically sensitive times we live in. Notwithstanding, the complexity of the market means that brands still need to work harder and smarter than ever to win the hearts of Chinese consumers. Contact China Skinny to learn how we can assist with that. We hope you enjoy this week's Skinny.
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