Download R&C Trendwatch E-commerce a bright spot for retail and Executive summary

R&C Trendwatch
March 2016
E-commerce a bright spot for retail and
consumer goods companies in China
Executive summary

China’s senior leadership will pursue
robust economic reform over the coming
years as it works to put the economy on a
more sustainable footing.

But the economy faces real headwinds in
2016 as growth slows and the
government focuses on “supply-side”
reforms meant to reduce production
overcapacity and promote a transition
toward consumption and services.

For retail and consumer goods firms, the
e-commerce sector is a bright-spot: Highlevel political backing will promote new
investments and growth, along with
opportunities for foreign firms.

That said, local growth realities will
diverge, with weaker consumption likely
in provinces with the highest
concentrations of resource-intensive
heavy manufacturing industries.

R&C firms will need to adapt their China
strategies to accommodate for this
shifting outlook in regional growth.

Policies meant to encourage urbanization
will move only incrementally, with
limited upside for consumption in the
near term.

The recent relaxation of the One Child
Policy will do little over the longer term
to deter the mounting fiscal burdens of an
aging population.
Introduction: Reform will progress in 2016
The Communist Party’s senior leadership, led by President Xi Jinping,
faces a difficult year as volatility flares in domestic financial markets
and economic expansion slows. For the retail and consumer goods
sector, consumption could face near-term headwinds, particularly in
regions where local economies are driven more by heavy manufacturing
or resource production. But while 2016 will be fraught, the country’s
leaders remain committed to robust economic reform. And they should
have the political strength and support necessary to make real progress,
even in the face of a slowing economy. The hope is to facilitate a shift
away from exports and investment and toward growth based on services
and consumption. This should equate to a short-term adjustment, but
healthier and more sustainable growth over the longer term.
The Xi administration has a window to drive home its agenda through
the end of 2016, ahead of a major political transition in the fall of 2017.
Key items this year will likely include state-owned enterprise (SOE)
reform, environmental policy, industrial consolidation, and debt
restructuring. The leadership made specific commitments in each of
these areas at its Fifth Plenum in October 2015 and at the Communist
Party’s annual Central Economic Work Conference in mid-December.
The leadership enshrined its reform intentions in the 13th Five Year Plan
(FYP) for 2016–2020 that was approved at the National People’s
Congress this March. The FYP’s guiding document, published last fall,
focused on more sustainable, market-oriented growth, promising to
pursue innovation, a lower-carbon development path, capital account
liberalization, and financial services reform..
This publication is produced in collaboration with Eurasia
Group (www.eurasiagroup.net). Eurasia Group is a leading
political risk research and consulting company.
Economic outlook:
Headwinds to growth
in 2016
As a result of this structural
adjustment, the economy looks set
to slow further, with mainstream
forecasts expecting 6.2%–6.5%
growth for the year. Still, downside
pressures loom larger than they
have in past years, with China’s debt
profile (240%+ of GDP) risking a
more substantial slowdown than
currently expected.
On the upside for the consumer
sector, Beijing is also looking for
new mechanisms to stimulate the
economy beyond its traditional
reliance on infrastructure and
investment. This will mean
increased funding for social welfare
and discrete measures to boost
consumption, such as January’s
reduction of mandatory down
payment rates for home buyers and
a program initiated last October to
cut taxes on the purchase of
small cars.
Growth of the digital
marketplace and
e-commerce as a
policy priority
In an effort to drive the transition
to services, Beijing will support the
e-commerce sector in 2016.
E-commerce, including both
Internet and mobile sales, has
become a bright spot in the
economy and a major opportunity
for retail and consumer goods firms.
As the leadership looks to move
toward a more sustainable growth
2
model and enhance the role of
services and consumption, the
e-sector is viewed as playing an
important role in unlocking
consumer demand and
developing and marketing new
Internet technologies.
The online market has huge
potential: Research from CCID
Group, an institute affiliated with
China’s Ministry of Industry and
Information Technology (MIIT),
showed that mobile Internet users
exceeded 875 million in 2015, and
that the mobile Internet
consumption market exceeded 2.3
trillion RMB ($350bn) in total value
in the same year. Market research
firm eMarketer estimates the size of
the broader retail e-commerce
market will hit $900bn in 2016.
There is high-level political backing
behind e-commerce initiatives.
Premier Li Keqiang has made the
sector a signature policy item over
the past year, and he has been
working closely with leading
domestic private industry players
such as Alibaba and JD.com to help
with state efforts—including
government-industry partnerships
for boosting rural e-commerce and a
new Internet Plus plan. Beijing has
also actively encouraged Internet
entrepreneurship, including setting
up a 40bn RMB ($6.1bn) venture
capital fund that is backed by central
and local governments as well as the
private sector. In December
meanwhile, the State Council
issued a decree to promote online
consumer financial services.
Internet Plus as
primary policy
platform
The government is using its Internet
Plus initiative as the main policy
platform to direct state resources to
bolster the growth of e-commerce.
Unveiled last March, the approach
aims to upgrade industries such as
manufacturing, finance, health, and
logistics through integration and
development of Internet technology
focusing on sectors such as cloud,
big data, smart manufacturing, and
mobile technology.
In December, officials released a
directive for implementation of the
Internet Plus plan outlining specific
targets for using the Internet to
advance China’s service sector,
emphasizing e-commerce. It calls for
developing e-commerce zones for
logistics, as well as new online
platforms for Internet finance and
the use of industrial big data.
Key players in China's domestic
industry are already showing
support for the initiative. During the
government-sponsored World
Internet Conference in December
Alibaba and other private companies
formed the Internet Plus Alliance to
help advance implementation. Even
SOEs in heavy industries such as
steel and electricity are trying to find
ways to demonstrate that they too
are committed to these initiatives.
For example, State Grid, the
behemoth electricity utility, has
been seeking to enter the market.
R&C Trendwatch
New openings for FDI
in e-commerce, but
domestic firms to
mostly benefit
There will likewise be opportunities
for foreign firms. Indeed, Beijing is
seeking greater foreign investment
in e-commerce by lowering barriers
to market entry. This shift reflects a
recognition that foreign help is
needed to aid the development of
China's service sector. Providing
expertise, technology, and capital
will play a vital role in the country's
economic restructuring process. The
government currently allows wholly
foreign-owned enterprises in ecommerce nationwide. Moreover, on
15 January, the State Council
approved 12 cross-border ecommerce pilot zones in Tianjin,
Shanghai, Chongqing, Hefei,
Zhengzhou, Guangzhou, Chengdu,
Dalian, Ningbo, Qingdao, Shenzhen,
and Suzhou. Foreign firms in these
zones will face reduced regulatory
barriers when it comes to online
transactions with Chinese
consumers. Authorities aim to
encourage international
e-commerce and foreign trade by
streamlining technical standards,
business processes, and
other regulations.
Slower growth in
locales with high
concentrations of
overcapacity sectors
and weakening
consumption
As the economy adjusts away from
resource-intensive manufacturing
and toward services and
consumption, local and provincial
economic outlooks will diverge.
Provinces most exposed to China’s
heavy manufacturing sectors will
experience slowing economic
growth, weakening consumption
growth in those locales.
Policy shifts will accelerate this
development, as Beijing’s focus on
supply-side reforms will result in
factory closures in industries with
heavy production overcapacity. This
will mean less consumption growth
as cut-backs and layoffs increase
where local economics are driven by
heavy manufacturing.
Already, available data show
consumer rates falling in the most
industrial provinces. According to
statistics from provincial
governments themselves, for
example, growth in retail sales of
consumer goods in Liaoning is
falling sharply: It grew at 7.7% in
2015, down from 12.1% in 2014 and
13.7% in 2013. In Shanxi, the
province most affected by weaker
energy prices and consolidation in
the coal industry, growth in retail
sales of consumer goods fell to just
5.5% last year, from 14% in 2013.
retail sales grew by 10.1% in 2015,
slightly down from 11.9% in 2014. In
Chongqing municipality, retail sales
grew by 12.5%, slightly down from
13% in 2014.
Retail and consumer goods firms
will need to adapt their China
strategies accordingly in order to
position themselves to benefit from
the country’s strong and growing
consumer centers while anticipating
weaker consumption in provinces
exhibiting slower growth. In Beijing,
the government is also aggressively
focused on transitioning those
economies away from heavy
industries and toward consumption
and services. Retail and consumer
goods firms that can demonstrate
their role in helping to accelerate
this transition, especially through
the development of digital platforms
and infrastructure, will
be better positioned to win support
from key government and industry
stakeholders at local and
national levels.
At the same time, China’s major
urban centers and consumer hubs
show much slighter moderations in
retail sales growth in recent years. In
Guangdong province, for example,
E-commerce a bright spot for retail and consumer goods companies in China
3
and pensions, in the places they are
registered. With China’s aging
population and shrinking workforce,
this kind of social welfare support is
increasingly vital to freeing up
discretionary spending and driving
consumption growth.
The goal for the hukou urbanization
rate in 2020 is 45%, which appears
much less attainable given that the
rate was only 35.9% as of the end of
2014. In other words, roughly 200
million migrants currently live in
cities and townships in China
without hukou that would grant
them access to public services. The
lack of services limits their abilities
to build up savings or enhance
productivity, thereby reducing their
contribution to consumption.
Urbanization and fiscal
reforms will be only
incremental
For retail and consumer goods
firms, China’s urbanization has long
been a bright-spot. The numbers
are impressive: By 2020, the
country aims to reach an
urbanization rate of 60% (up from
roughly 56.1% in 2015), which would
mean 850 million urban residents.
The migration of rural residents into
urban areas was one of China’s
primary growth engines in recent
decades, providing abundant cheap
labor to the manufacturing sector.
The outlook for the pace of
urbanization over the coming years
4
is optimistic. On average, 20 million
migrants move into cities every year,
setting up China to comfortably
meet and probably exceed the 60%
target by 2020.
But for retail and consumer goods
firms, the story is more nuanced.
When considering the relationship
between ongoing urbanization and
consumption rates, the real question
is not simply how many residents
move to cities, but specifically what
is the percentage of the urban
population that has urban residency
under China’s household
registration (hukou) system. The
system grants residents access to
social services, such as healthcare,
employment services, education,
Labor for the manufacturing sector,
meanwhile, is becoming scarcer,
especially in east-coast population
centers, in light of the aging
population and efforts to slow
migration into those locales. This
situation is presenting new strains
on the government’s fiscal
resources, heightening the
immediacy behind reforms meant to
help migrants resettle into cities—
particularly in smaller cities in
central and western provinces—and
access social services. Doing so
would provide crucial support for
consumption rates.
Hukou and fiscal
reforms will be key
Reforms to the hukou program are
likely, in order to encourage
migration and help new migrants
settle and build up savings,
ultimately contributing to
consumption. This, however, hinges
on fiscal reforms, including easing
the massive local debt overhang to
allow expansions of social services
for new residents, which will move
slowly.
R&C Trendwatch
What is the takeaway for retail and
consumer goods firms in China? The
short answer is that urbanization
will no longer be an easy “win” for
the government in driving new
growth and consumer centers, at
least not over the medium-term.
Over the longer term authorities will
likely make some progress on
reforming the hukou system,
expanding access to social services,
and reforming the fiscal system. But
even then, new migrants will need
time to accumulate savings and
generate consumption.
Demographic policy
shifts not enough
to avert an
aging population
Beginning in January, Beijing
officially replaced its One Child
Policy, implemented in 1980, with a
policy allowing all couples to have a
second child.
For retail and consumer goods
companies, here too the change is
likely too little too late. The policy
shift will be insufficient to reverse
the shrinking labor force or avert the
huge fiscal challenge of providing for
an aging population over the
medium term. The government’s
own estimates suggest that the
relaxation will add 30 million people
to the working age population of 15to 59-year-olds by 2050. However,
the correction puts only a small dent
into the expected decline of 250
million people in this age bracket by
2050.
Beijing’s policy shift. It is eroding
China’s labor advantage, which has
driven its emergence as the world’s
leading manufacturer, by
diminishing the labor supply and
putting upward pressure on wages.
It likewise heightens the strain on
fiscal resources, especially those
spent on social services such as
pensions and healthcare.
For the retail sector, this will mean
changing demand patterns in
consumer goods commensurate
with an aging population. It will
also mean persistent upward
pressure on manufacturing costs,
particularly wages.
Accordingly, the looming
demographic challenge still poses a
longer-term threat to growth despite
E-commerce a bright spot for retail and consumer goods companies in China
5
Resources
John G. Maxwell
Global Retail & Consumer Leader
[email protected]
Mike Brewster
Global Retail & Consumer Marketing
[email protected]
Susan Eggleton
Global Retail & Consumer Marketing
[email protected]
Denis Smith
Global Retail & Consumer Marketing
[email protected]
Eurasia Group
New York headquarters,
149 Fifth Avenue, 15th Floor,
New York, NY 10010,
+1 212 213 3112
Nicolas Consonery
Director, Asia
Eurasia Group
[email protected]
Samm Sacks
Senior Analyst, Asia
Eurasia Group
[email protected]
Ben Wang
Researcher, Asia
Eurasia Group
[email protected]
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