China’s overseas consumption maintained an annual average growth of 25.2% from 2005 to 2014 and the consumption rose to a record of 1,200 billion CNY in 2015, of which 680 billion CNY was for overseas shopping. At the same time, slowing export earnings and investment have left national consumption the only remaining economic driver, which contribute 66.4% of the economy. As China has cut import tariffs on 1,449 categories of consumer products starting from 1 Jul 2018 and the minimum income-tax threshold is expected to be elevated by October this year. Increasing competition between homemade and imported products becomes foreseeable, especially China’s industrial upgrading has been already well underway. This article combines China’s quality legislative program on consumer products, plus the expert analysis and comment on these latest economic policies, as well as a statistical analysis on distributor/purchaser preferences on different product sectors.
Quality Improvement Plan
On 19 May 2015, China presented the national strategy on “Made in China 2025” to move up its position in the global value chain and the importance of consumer product quality standardization and improvement was then proposed by Premier Li Keqiang during the Congress meeting. China believes quality legislation and monitoring mechanism can expand more demand/ availability to domestic producers and force the technological upgrading of producers and upstream equipment manufacturer/raw material suppliers in all dimension. On 6 Sep. 2016, the State Council promulgated the “Improvement Plan for the Standardization and Quality of Consumer Products”, which outlines the key objectives and implementing strategies and priority on different product sectors.
China will continue the perfecting of standard system by developing and refining of new/existing quality standard, as well as branding of homemade products and higher premiums from global market can be expected. In some priority product sectors, 95% of the quality indicators will keep in line with that of international standards and 90% qualification rate in the domestic market will be guaranteed.
These objectives will be fulfilled by segmented legislation projects and major quantitative index and timeframe are summarized as follows:
Alignment with International standard. China will accelerate data gathering and comparison between national and international standards in priority consumer goods and bulk import/export products. After the validation of key quality indicators and methods, an international standard will be transformed into a national one. Furthermore, some of these quality standards will be provided with official English translation to broaden global recognition. By the end of 2020, China will finish the comparison on 1000 quality standards and 95% of the quality indicators will be equivalent to international standards.
Self-declared system for enterprise standard. Enterprise standard is a critical market-entry process: prior to the placing on the market, producers are usually required to submit the paper and/or electronic copy to quality supervision department or other departments at different level. Human factors/disturbances (corruptions) were often involved during such filling process and the qualification status of these enterprise-standardized products was often non-disclosed to the public. A public information platform that enables remote submission and public query on enterprise standard will be developed for all producers in key product sectors. Leading producers in new product sector will be encouraged to develop enterprise standard, which will then be transformed into an industrial/national standard and universally adopted in the industry.
Other Accomplishments by 2020. All resident communities, townships schools and 100 hospitals will be established with risk monitoring point to facilitate consumer warning and product recall system. 10 industrial parks and 400 exporting enterprises will be nominated as quality safety demonstration zone and enterprises. 30% of the overseas countries/regions will be monitored under Chinese anti-counterfeit system and a white paper on quality safety of imported consumer goods will be updated annually.
The improvement plan also designated 9 groups of consumer products as prior products and future lawmaking will emphasize on different aspects ranging from product category, resource efficiency, environmental friendliness, raw material, usability, product design, processing control, limits of chemical and risk monitoring/assessment, etc.
Table 1-China’s Lawmaking Preference on Different Categories of Consumer Products
- Mandatory standard to be increasingly and universally formulated/adopted: product rating and evaluation, safety, energy& water efficiency, durability, installation and maintenance, etc.;
- Performance and user experience improvement: electronic toilet, air purifier, cleaning robot;
- Comfort and intellective level perfection: air conditioner, refrigerator and laundry machine, etc.;
- Exterior and functional design optimizing: kitchen and personal care electronics such as electric cooker, electric shaver, etc.;
- Commercialization, standardization and property promotion on innovated products including Artificial Intelligence, Intelligent hardware, intelligent home, virtual reality, and IoT(Internet of Things);
- Elevated requirements on Information safety and privacy protection, usability and comfort assessment, crowd-funding and O2O( online to offline) market standardization on intelligent terminal device such as smartphone, wearable device and novel audio-visual product;
Household & Home Decoration Products
- Mandatory limits of VOCs and toxic substances in furniture, Lighting appliance, kitchen/bathroom hardware, coating, sanitary ceramic, wallpaper and carpet, etc.;
Garments& Fashion Products
- Maintaining China’s ascendancy in textile, apparel, shoes, hat, leather and luggage sectors;
- Elevated criteria for raw materials such as new fabric, top quality cotton, fiber and wool, cashmere, silk and leather;
- Standardization on function index: water tightness, windproof, thermal insulation and anti-microbial property, etc.;
Maternal, Children, Older and Handicapped Supplies
- Further standardization on safety and labeling for specific groups:
- Children’s toys, school supplies, baby diaper, pacifying products, kids furniture, children’s wear;
- Feeding supplies, feminine sanitary products, hair & beauty products;
- Cultural, recreational, fitness and leisure products targeting old people;
- Assistive and rehabilitative aids for disabled;
Cosmetics and Household Chemicals
- Comprehensive system including universal/basic indicators, specific indicators for important products, allowable limits and testing method will be established for massive products: common cosmetics, oral care products, detergents, waxworks and household insecticide;
- Standardization will be prioritized for children cosmetic and oral care products;
- Expedite the method development for the testing of restricted ingredients in Chinese herbal toothpaste and special-use cosmetics;
- R&D on analytical reference for household chemical products;
Education, Sports and Leisure Goods
Stringent limitation standard on harmful substances in cultural and sports goods such as stationery, pens, musical instruments, fitness apparatus, winter, outdoor, water and traditional sports apparatus;
Traditional Cultural Artifacts
Elevated safety and environmental requirements: four stationery treasures, fireworks and firecracker, bamboo and rattan wares, silk articles, chinaware and lacquerware
Food and Food Related Products
Continuous refinement/establishment of MRL and testing method of pesticide residues, veterinary drug residues, heavy metals and other harmful substances;
Further strengthen the development of mandatory standard of infant food, food additives and food enrichment,
as well as in-processing hygienic requirements for food producers;
Legislative priority will be granted to traditional food and novel food such as fast food, frozen food, backed food and fermented food, etc.;
Intensifying monitoring of food-related risk and injury incident: risk assessment will be carried out depending on the raw material and inventory/pre-approval management would be adopted/adjusted accordingly.
Behind Import Tariff Reduction
On 30 May 2018, Chinese State Council announced to reduce import tariff on 1,449 categories of consumer products. Average rate from most favored nations will be reduced from 15.7% to 6.9%, down by over 50%. This move apparently represents China’s pledge to global trade partners including the United States, but its impetus to economic restructuring is far more reaching.
China has offered 4 tariff reductions since 2015 and the latest adjustment primarily involved labor-intensive sectors such as textile & garments and food processing, etc., which are largely imported from Southeast Asia, Africa and Latin America. Backed by China’s ever-increasing market, growing employment and tax revenue in these economies would enable these trade partners to source more industrial products from China in turn.
In terms of domestic economy, average importing prices of textile and sporting goods, home electronics, proceed food and cosmetics (part of medicines) will be reduced by 8.8%, 12.8%, 8.3% and 5.5% accordingly. In consideration of the absorption within the distribution channel, the tariff reduction might not necessarily cause massive price cut in the terminal market. But the diminishing price gap between imported and homemade products is bound to fuel the competition in the domestic market, especially the textile & garments and home electronic sectors, which seem to have already saturated. Company merger& acquisition, relocation and overseas investment are very likely to feature China’s production upgrading. China is happy to see that a number of producers have already increased their inputs on R&D and automatic and intellectual manufacturing equipment and thus transformed from labor-intensive enterprises to technology/capital-intensive ones.
Preference & Intention
China’s middle-income group is approaching 400 million and predicted to reach 600 million by 2020 and over 1 billion by 2030 and is increasingly demanding from "quantity" to "quality". Earlier this year, China's Ministry of Commerce has initiated a national survey on 10 major categories of consumer goods among domestic distributors/retailers and consumers, results indicated that imported products have become an important complement to China’s consumer goods market.
Of the 1,018 distributor respondents to the survey, 95% of them are bricks-and-mortar shops including supermarkets, retail stores, department stores and hypermarkets, etc. and over 85% of them have the yearly sales over 1000 million. Nearly one in four distributors achieved over half of their total sales through imported goods and the top 5 contributed product sectors (respondent percentage) are: passenger vehicles (51%), household & home decoration products (34.6%), watches & glassware (31.0%),electrical &electronic products(25.9%) and food(25.4%). 39.2% of the distributors voted brand image as the top determinants for imported products, followed by safety(14.6%), price(12.9%), design(11.7%) and raw material(11.6%). 85% of the distributors plan to maintain their sourcing percentages of imported products and the rest distributor respondents were roughly and equally split between reducing and increasing. The willingness varied wide among product categories and most favored product sectors are food, maternal and child supplies, cosmetics, watches & glassware and passenger vehicles. 34 of 92 of the surveyed products represented rising expectation of imports, rang from 8 categories:
- Food: wines, fresh fruits, beer, fresh milk, edible oils, and health food;
- Clothing & shoes: sports shoes, sportswear, outdoor clothes, casual clothes, leather shoes/boots, and suit;
- Maternal &child supplies: infant food, infant clothes, diapers, child safety seat;
- Cosmetics: perfume: skin care product, make-up product, oral care products and hair clean product;
- Education, sports and leisure goods: outdoor equipment, fitness equipment, sports balls, swimming appliance and musical instrument;
- Watches& glassware: wristwatch, glasses and sunglasses
- Gems & Jewels: diamond and gold jewelry
- Passenger vehicles: SUV, new energy vehicles and passenger cars;
80% of the 1,397 consumers are aged over 30 and most of them are from threesome families. 36.7% of the families earn more than 20,000 RMB per month and all of these families have ever purchased imported products. One in five of the consumers expend 30% of their budget on imported products and the top 5 most purchased goods (respondent percentage) are: cosmetics (36.1%), maternal and child supplies (33.4%), watches & glassware(28.9%), passenger vehicles(27.3%) and gems & jewels(22.7%). 90% of the consumers identify product safety as the top determinant for imported food and maternal and child supplies while 70% of them voted quality as a key determinant of durable products such as education, sports and leisure goods, cosmetics and household & home decoration products. 86% of the consumers have purchased/planned to purchase imported consumer products in the past/next year, mainly focused on cosmetics, maternal and child supplies and watches & glassware, while food, clothing& shoes, and cosmetics are most concerned. 31% consumers plan to increase their household budget on imported products and safety, price and quality factors will be the main considerations.
Table 2- Distributor/Consumer Status, Willingness and Preference on Different Categories of Imported Consumer Products
Imported food accounted for over 50% of the total revenue for25.4% of the distributors and value percentage of imported food can be as high as 90% in some food categories (percentage of distributors): seafood (21.3%), health food (19.6%), beef (19.5%) and wines (18.3%);
Brand, raw material and safety are the top 3 determinants of imported food, identified by 31.9%, 20.2% and 20.2% of the distributors.Brandis prior concerned when importing wines, health food, beer, edible oilsandfresh milk while raw material and safety are also little more concerned when sourcing beef, seafood, fresh fruit, milk and dried fruit;
82.5% of the distributors plan to maintain their sourcing percentage of imported food and 9.9% of the distributors plan to increase food importation in next year. Over 10% of the distributors representedrisingdemandforimported foodincludingwine, fresh fruit, beerandhealth food;
Fresh milk, health food, seafoodandfresh fruits are regarded as the most insufficiently supplied indomesticmarket by 37.1%, 36.8%, 36.4% and 33.5% of the consumers respectively;
92% of the consumers regarded safety as the top purchasing determinant, followed by price (70.4%) and raw material (67.5%);
Imported food accounted for 10% of the total budget in 42.4% of the consumers and thepercentageof consumer whospendsover 30% of the budget on imported food was 15.8%;
51.4% of the consumers plan to maintain their budget on imported food and 29.7% of the consumers plan to increase the budget on imported food in the next 6 months;
Clothing & Shoes
Homemade products accounted for over 50% of the total revenue for 81.1% of the distributors and 45% of the distributor’s achieved their sales totally through homemade products. Outdoor clothes, sportswearandsportsshoes contributed a little more value percentage than other product categories;
Brand, designandprice are the top 3 determinants of imported products for 42.6%, 21.8% and 13.4% of the distributors.Rawmaterial was alittlemore concerned when importing silk products, suitandshirt;
89.4% of the distributors plan to maintain their sourcing percentage of imported goods and 6.1% of the distributors plan to increase importation in next year. Products that represented rising demandaresportsshoes, sportswear, outdoor clothing, casual clothesandleather shoes/boots;
Sportsshoes, casual clothesandleather shoes/bootsare regarded as the most insufficiently supplied indomesticmarket by 41.6%, 36.9% and 34.3% of the consumers respectively;
Fashion design, priceandcomfort are the top 3 determinants for 68.3%, 68.3% and 57.4% of the consumers;
Importedclothing & shoesaccounted for 10% of the total budget in 41.5% of the consumers and thepercentageof consumer whospendsover 30% of the budget on imported products was 15.3%;
54.6% of the consumer plans to maintain their budget on imported products and 26.3% of the consumer plans to increase the budget on imported products in the next 6 months;
Maternal & Child Supplies
Homemade maternal & child supplies accounted for over 50% of the total revenue for 76.4% of the distributors and 30% of the distributors achieved their sales totally through homemade products. Imported infant food, assisted-food processer andchild safety seatcontributed higher value percentages than other products and these products accounted for more than half of the total sales for 26.1%, 25.6% and 25.5% of the distributors.
Brand, safety and raw material are the top 3 determinants of imported products for 35%, 23.8% and 13.5% of the distributors. Safety was far more concerned than any other product and raw material was especially considered when importing infant food, diaperandinfant clothes;
85.8% of the distributors plan to maintain their sourcing scale of imported products and 7.3% of the distributors plan to increase importation in next year. Product categories and percentages of consumers that represented rising demand of imports are:infant food (12.4%), diaper (9.1%), infant clothes (8.5%) andchild safety seat (7.2%);
78.8%, 49.9% and 46.2% of the consumers believed infant formula, assisted-food and diaper as the top 3 insufficiently suppliedmaternal& child supplies indomesticmarket;
91% of the consumers regarded safety as the prior concerned factor and 63.96% of the consumers voted raw material as the top determinant;
58.6% of the consumers spend over 10% of the budget on imported products and 33.4% of the consumers expend over 30% of the budget on imported products.
44% of the consumers plan to maintain their budget on imported products and 36.9 % of the consumers plan to increase the purchasing of imported product in the next 6 months;
Household & Home Decoration Products
Homemade products accounted for over 50% of the total sales for 76.4% of the distributors and 30% of the distributors derived their revenue totally from homemade products. Imported wallpapers, ceramic tileandtimber floorcontributed a little higher than other products and these products accounted for over 50% of the sales for 55% of the distributors;
Brand, designandsafety are the top 3 factors for imported products for 35%, 23.8% and 13.5% of the distributors.Designwas far more concerned than other products when importing kitchen rang, lamps and lantern, pot, tableware, sanitary wareandknife tools. Paint coating, kitchen/bathroom hardware draw exceptional safety concern;
80.1% of the distributors plan to maintain their sourcing scales of imported products and 16.9% of the distributors plan to reduce their importation in next year. Products that represented decreasing import demand are:ceramic tile, sanitary ware, timber floor, paint coatingandlamps and lantern;
35.7% and 32.7% of the consumers regarded cooking pot/pan and luggage are the most insufficiently supplied products indomesticmarket;
70.2% of the consumers regarded quality as the prior concerned factor and 56.7% of the consumers voted safety as the top determinant;
Market percentage of imported household & home decoration products are moderate as only 31.2% consumers spend 10% of the budget on imported products and 22.6% consumers have never purchase imported products;
51% consumers plan to maintain their budget on imported products and 25.5% of the consumers plan to increase the budget in the next 6 months;
Imported cosmetics accounted for over 50% of the total sales for 23.7% of the distributors and 31.5% of the distributors generated 50% of their sales through imported perfume. The value percentages varied little among other product categories;
Brand, safetyandprice are the top 3 determinants for imported cosmetics and the variation was also very mild among different product categories;
83.6% of the distributors plan to maintain their importation scales and 9.2% of the distributors plan to increase their importation on cosmetics in next year. 10% of thedistributorsrepresented rising importing demand on perfume, skin careandmake-up products;
75% of the consumers believed that skin care product is the most insufficiently supplied cosmetic indomesticmarket;
70.2% of the consumers regarded quality as the prior concerned factor and 69.7% of the consumers voted safety as the top determinant;
64% ofconsumers spend over 10% of their budget on imported cosmetics and the budget percentage was 30% for 36.1% of the consumers;
49.3% consumers plan to maintain their budget on imported products and 38% of the consumers plan to increase the budget in the next 6 months;
Education, Sports and Leisure Goods
Homemade products accounted for over 50% of the total sales for 81.4% of the distributors and 48.9% of the distributors derived their revenue totally from homemade products. Value percentage of import and homemade products varied little among different categories. Brand image is the main determinant of imported products. Imported musical instruments, pen,sportsballsreflected a little more price sensitivity than other products while swimming appliance and outdoor equipment raised more safety concern. Product design is also an important factor for all product categories;
88.2% of the distributors plan to maintain their import scale and 7% distributor plan to increase the importation in next year.Penis only product category that represented decreasing import expectation;
56.9% and 41.3% of the consumers recognized outdoor equipment and fitness equipmentas the top insufficiently supplied product categories indomesticmarket;
Product quality and safety are concernedby74.1% and 56.3% of the consumers;
Only 29.2% consumers spend over 10% of their budget on imported products and 23.5% of the consumers have never purchased imported products;
53.9% consumer plan to maintain their budget on imported products and 26.8% of the consumers plan to increase the budget in the next 6 months;
Electrical & electronic products
Homebred electrical & electronic products accounted for over 50% of the total sales for 74.1% of the distributors and 34.6% of the distributors derived their revenue totally from homebred products;
Imported photographic equipment, cleaning robot, electric toothbrush and hearing aidsrepresented higher sales percentage 20% of the distributors generated 90% of their total sales through imported products;
Brand, safetyanddesign have been designated as the top 3 factors for imported electrical & electronics by 35%, 23.8% and 13.5% of the distributors. Chinese distributors displayed brand awareness on refrigerator and washing machine while representing safety concern on water purifier, dishwasherandlaundry dryer. Product design was also concerned when importing electric toothbrush, photographic equipment, cleaning robotandvacuum cleaner.
In addition, energy efficiency and environmental friendliness are also important factors forairpurifier, TV, laundry dryer, water purifierandair conditioner;
85.8% of the distributors plan to maintain their import scale and 10.3 % distributor plan to decrease the importation in next year. All product categories represented decreasing import expectation.
Photographic equipment, water purifier, air purifier, electric toothbrushandcleaning robot are the top insufficiently supplied electrical & electronics domestically, recognized by 32.8%, 30.3%, 29.7%, 26.3% and 23% of the consumers.
Product function is the most important determinant for electrical & electronics (66.4%), followed by safety (53.8%) and price (48.5%).
44.4% of the consumers expend over 10% of the budget on imported electrical & electronics and 21.2% of the consumers spend 30% of the budget on imported products;
50.9% of the consumers plan to maintain their budget on imported products and 28.5% of the consumers have increased the budget for the next 6 months;
Imported products accounted for over 50% of the total sales for 31% of the distributors and 16.3% of the distributors generate over 90% of sales through imported products; 35.2% of the distributors generated 50% of their total sales through importedwristwatch.
Brand, designandprice are the top 3 determinants of imported products for 47.9%, 21.7% and 10.6 % of the distributors and preferences varied little among different product categories;
87.1% of the distributors plan to maintain their import scale and 5.4% distributor plan to increase the importation in next year.wrist watch represented distinctly high rising import expectation than other product categories;
Wristwatch,sunglassandglass are the top insufficiently supplied products indomesticmarket, recognized by 78.9%, 45.9% and 39.2% of the consumers;
Product design was most concerned (75.8% consumers), followed by price (59.3%), material (58.8%) and brand culture (55.2%);
50.1% of the consumers expend over 10% of the budget on imported products and 28.9% of the consumers spend 30% of the budget on imported products;
46.9% of the consumers plan to maintain their budget on imported products and 37.1% of the consumers have increased budget for the next 6 months;
Gems & Jewels
Homebred products accounted for over 50% of the total sales for 82.7% of the distributors and 54% of the distributors derived their revenue totally from homebred products;
Brand, designandprice are the top 3 determinants of imported products for 41.5%, 25% and 13.8 % of the distributors;
90.2% of the distributors planned to maintain their import scale and 5.4% distributor plan to increase the importation in next year.7.2% distributorsintended toincrease the import of diamond products;
Diamond, pearl and gold jewelryare the top insufficiently supplied products indomesticmarket, identified by 63.9% and 47.4% of the consumer respectively;
Product design was most concerned (83% consumers), followed by price (71.7%), material (53.1%) and brand culture (35.1%);
59.8% consumers spend over 10% of their budget on imported products and 23.2% of the consumers have never purchased imported products;
46.4% of the consumers plan to maintain their budget on imported products and 32.5% of the consumers have increased budget for the next 6 months;
Homemade vehicles accounted for over 50% of the total sales for 48.9% of the distributors and 28% of the distributors derived their revenue totally from homebred products. Homemade cars contributed over 50% of the revenues for 69.8% of the distributors while percentages of homemade new energy vehicles and MPV are lower.
Brand, priceanddesign are the top 3 determinants of imported vehicles for 36.8%, 15.8% and 11.8 % of the distributors. Chinese distributors displayed comparatively price sensitivity to new energy vehicles and cars represented higher design concern;
77.6% of the distributors planned to maintain their import scale and 11.6% distributor plan to increase the importation in next year. Imports of new energy vehicles SUV and cars are increasingly demanded by 17.3%, 15.9% and 13.1% of the distributors and MPV became the only decreasing category;
47.9% and 40% of the consumers believed SUV and new energy vehicles are most insufficiently supplied indomesticmarket;
69.3% and 69% of the consumers regarded safety and performance are the most important purchasing determinants;
42.5% of the consumers expend over 10% of the budget on imported vehicles and 27.3% of the consumers spend 30% of the budget on imported vehicles;
45.6% of the consumers plan to maintain their budget and 37.1% of the consumers have increased budget plan on imported vehicles for the next 6 months;
Since the reform and opening up, China has maintained a sustained current-account surplus at the expense of imbalanced industrial structure and low-end position in global value Chain. A concrete example might be computer/mobile industry, whose final products run a trade surplus but intermediates products are in deficit and left more added value abroad. Awakened by the latest ZTE sanction, China realized is unbalanced industrial structure not only constraints its GDP growth but threatens its industrial security. But there exist some actual challenges:
Income Pyramid. Consumption upgrading has indeed played a positive role for China to upgrade its manufacturing and service sectors. But the effect is still very subtle at present due to its large percentage of the low-income group (excluding the tendentious statistical approach on the middle-income group), which is quality/safety insensitive and brings less upgrading incentive for domestic producers. In one way Chinese consumers headed overseas in record numbers on shopping sprees, but in another way China can produce a manned space flight other than the most common items such as electric rice cooker and electronic toilet.
Technology Vacancy. China obtained parts of high-end technology during globalization and developed series of leading applicative technology such as mobile payment, big data, artificial intelligence and new energy resource, etc., which fueled China’s consumption and industrial upgrading to some extent. If China failed to overtake its vulnerability in core technology, whole economic momentum would be slowed substantially;
During the first half of this year, there appeared signs of slowdown in terms of retail sales of consumer goods, fixed asset investment, PMI indicators. As China will continue deleveraging measures and anticipated 2 rate rises by Fed (Federal Reserve) in the second half of this year, housing-related/downstream sectors (household appliances) would probably suffer. Moreover, indecisive Sino - US trade friction could create even more uncertainty to China’s consumer product sectors.