Quality in China. Is it Valuable Enough to Pay for?

Wednesday, January 18, 2012 5:29

While the typical conversation about “quality” in China will be one of manufacturing failures, I was asked by a good friend to comment about my thoughts on whether or not the “Chinese” market was ready as a consumer of quality.

A topic that I would say I brush past on a regular basis as in the last few years it is easy to see there is a market of Chinese consumers who are looking to enjoy a higher level of standard in products (middle market and luxury), but more widely there was a mass who were engaging in what I call fear based consumerism as a result of the countless consumer scandals in China.

And in answering her questions below, I really felt it was best to focus on the later group because (in my mind) these are the consumers that are going to be far more interesting, stable, and loyal in the future. And that for all the hub bub of China’s growth in luxury, it will ultimately be the middle market where firms focused on “quality” should be focusing their efforts.

Question 1: How will Chinese consumers be thinking about Quality (Durability, Safety, Longevity, etc) for products in 3-5 years

This is ultimately the question that will drive brands nuts going forward because there are going to be some very clear markets that develop, and some which pop up and then die quickly, all depending on the “consumer”.

If one views the government as a consumer who is looking to by “quality” for their projects (think cleantech, healthcare, security, etc).  This is a very large market already, and is one where the “buyer” is looking for quality (even in the face of domestic innovation policies), and it is a market that is largely owned by foreign firms like CISCO, GE, and NALCO

If the market is of the average consumer, this will obviously re-frame a bit, but buying quality if becoming something important to them, particularly if one considers food, children, and healthcare markets.  In these markets, there is a lot of anxiety, and foreign pharma and overseas Organic labels are selling at a premium to the local alternatives.

… and this trend will only continue consumer income increases, awareness of local product safety issues increases, and access to “quality” items increases.

Question 2: Will they pay more

Yes.  They already are.

Looking at food alone, you have markets for local organic and imported organic, which both carry a premium.

In areas of education, parents are more likely to pay the 20% premium to send their kids to Disney English, than to the even the best nationally branded schools, and there are parents who are (currently) willing to spend the 20% premium to send their kids to the nationally branded English schools than to a local English school

.. and in the area of healthcare, Shanghai and Beijing hospitals have up to 50% “waidi” patients who have opted not to visit local/ provincial options.  They are seeking the best in care, and are willing to pay (above and below the table) what it takes.  Even if that means selling land.

Question 3: What will be top of mind for them

Depends on category, but product safety will be one of the biggest drivers for consumers to seek out, and remain loyal to, a product.  However performance and durability will also be at the top of the list.  There will be a point where consumers locally understand that there are some products whose short term savings will have a much higher long term cost due to their design, materials, etc, and these consumers will begin moving towards quality in that regard as well (even at a premium) so as to reduce their own time suck.

Question 4: How should companies be thinking to cater their offerings towards these needs

Companies that succeed will be the ones that understand the undercurrents the best. A lot of firms who have entered China do so without considering the big picture.  They have researched a specific market, or group of people, in a vacuum environment without considering the what ifs, and a year later they are shuttering operations (or hemorrhaging cash keeping it on life support)

Entering the market doesn’t just require a good product, it also requires good technical support (for the development of future products) and after sales service (for when things go wrong), and anyone who is operating a model without either is either going to burn out quickly or have a pack of angry consumers banging on their door. Either way, they are not developing a loyal consumer base.

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7 Responses to “Quality in China. Is it Valuable Enough to Pay for?”

  1. Alexandra Stone says:

    January 18th, 2012 at 9:10 am

    What do you believe is driving Chinese consumers to start demanding quality products? Increase in GDP? In the U.S. there is the stereotype that all Chinese assembled/made products are of lower quality, what is the opinion in China? How do the Chinese feel about purchasing counterfeit goods? Considering the large amount of the Chinese population lives in rural areas, even if they are starting to demand quality goods, will they be able to afford them? As you said, there is fear based consumerism and how will people know that their ‘quality’ products truly are quality products?

  2. Rich says:

    January 18th, 2012 at 9:53 am

    Alexandra

    Great questions.

    There are a number of factors that I believe contribute to the ABILITY of consumers to buy quality. first, is the increase in income within the urban centers, but in addition to that, access is also a big one as distribution of products nationally has increased greatly over the last 15 years. So, while “quality” products from foreign and domestic may have always been available to the gateway cities of Beijing, Shanghai, and Guangzhou, it is only in the last 5 that I would say you could consistently find national level Chinese brands that offered a higher quality than the local brands.

    With regard to perception of brands, there are going to be brands in China that have value to the consumer, but many of those brands will struggle against foreign competition. Fast food firms like Kung Fu and Little Sheep (now owned by Yum) are good examples of this. they offer a known product that has a quality standard along the lines of McD’s and KFC. but, if one were talking about luxury items, then it would be a different story. Electronics, HTC has done a great job (globally) to build a competitive brand, but Li Ning is still sucking wind against Nike and Adidas.

    Purchasing counterfeit goods is tricky as many Chinese do not necessarily purchase these knowingly. sure there are DVDs and bags that ;are purchased, and research has shown that consumers of fake LV bags do buy real LV when they are financially able to. however the big counterfeit markets are in daily items like alcohol, cigarettes, pharmaceuticals, tickets, etc where the consumer is getting screwed unknowingly…

    Inflation is a problem that will be faced (today)., and will continue to be for some time to come.. As will issues of environmental degradation and imbalances in access to resources, as manufacturers dig up every last resource to be turned into a consumable.

    To answer your last question, I have to circle back to he counterfeit problem a bit and say that consumers (in certain categories) are having issues trusting the credibility of claims and labels now and are doing more work to find true sources. I was interviewed a month or so ago about organics, and the reporter had just returned from Chongming island where she was speaking to consumers who no longer trusted organic labels and were buying direct from the farm.

    Thanks again for the retweet and your questions.

    RB

  3. Today on China from the blogosphere January 18, 2012 | China You says:

    January 18th, 2012 at 10:32 am

    […] All Roads Lead to China » Quality in China. Is it Valuable Enough to … While the typical conversation about “quality” in China will be one of manufacturing failures, I was asked by a good friend to comment about my thoughts on whether or not the “Chinese” market was ready as a consumer of … […]

  4. Chris Devonshire-Ellis says:

    January 21st, 2012 at 9:42 pm

    Rich, the piece doesn’t really deal with the source of the quality. Clearly, when China manufactures quality products a market is there and the success of that then has to cater for marketing, price point and supply chain. Where the product is imported, other issues, not least import duty can skew the market big time. Also, I suspect that more imported goods are faked than domestic ones. Accordingly the question needs to be split into two: domestic and imported quality as they have differing aspects affecting their success or failure. And Happy New Year! – Chris

  5. Rich says:

    January 21st, 2012 at 9:55 pm

    Chris

    there are no doubts a numebr of ways to split the market, and the costs/ retail price. One of the markets that I was working with receintly was food, and the retailer I was assisting is certainly slowed down by the import duties. That being said, the fact is that they are seing 40-50% Y-o-Y growth… largely off the Chinese consumer who are (when scared) will to pay for quality regardless of the premium. Were the conversation focused on clothing, then the situation would be very different, and the seller would certainly not find China to be a viable mass market (niche yes).

    With regard to the importation of fake goods, this is something I have not seen (not because it doesn’t exist), but I think this also gets back to quality as well. Chinese consumers know the regions to be trusted for different goods, and will likely focus their efforts on buying from those areas directly through diverted supply chains. Think milk powder… but, I can see where groups abroad would see selling fake brands into China as an opportunity. Any sectors you know to be of higher risk for imported fakes?

    Gongxi fa cai

    R

  6. Chris Devonshire-Ellis says:

    January 22nd, 2012 at 4:22 am

    Fake foods, and of course fine wines are a huge problem at the top end, easy profits for expensive single items and a naieve buying market. The same I believe in high end engineering components. So it seems where there’s value, coupled with price sensitivities – there’s fakes. – Chris

  7. Etienne says:

    January 23rd, 2012 at 3:36 am

    Chris,
    This trend toward quality is really clear in areas like food and even medicine. I really can feel this with all my Chinese friends and network.
    The better off Chinese professional are now very well aware of the risk of the food and really concerned about it. Many young parents will buy powder milk abroad and bring it back in China as they do not trust what they can buy here. I believe there is also a similar trend with cars. So quality product business can be driven by safety concerns.
    Obviously this is a great potential for marketers, but it is also a tricky situation: Chinese consumers will not trust the official line and will cross check image and reputation through multiple informal and social channels. Weibo and various BBS will be one of the sources. Chinese more than half of Chinese consumer are giving their opinion online while the Western equivalent does it much less. Therefore, marketers will ave to fully integrate this situation in their strategy.

    In the service area, like tourism and hospitality, I think that this is also coming. I was surprised to learn recently that close to 70% of Chinese travelers were not satisfied by their travel experience (organized tours). Also the average age of Chinese 5-star hotels customers is much lower than their Western equivalent. Young professional will expect the attention and service of top class hotel when traveling, much more than Western ones who will want to show independence.