Challenges Faced by Global Brands in China's Evolving Market
Once lucrative ventures for McDonald’s, Apple, and Tesla in China face uncertainty amidst an economic downturn and fierce competition from local players. The once-promising landscape now sees price wars and shifting dynamics impacting Western companies' fortunes.
Sign up for CNN’s Meanwhile in China newsletter to stay informed about the country’s growth and its global impact.
Western companies have long profited from the increasing spending power of Chinese consumers. However, with a recent economic downturn and the rise of strong local competitors, these bets may now seem riskier as price battles intensify.
Discounts and special deals are available in a wide range of consumer brands, including food, clothing, consumer electronics, and cars. This reflects a significant change in the way people are spending money in the world's second largest economy.
The electric vehicle (EV) industry is currently experiencing a fierce price war, with manufacturers fighting for survival in what is being described as a "life and death" race.
Tesla's market share in China decreased to 4% in April, dropping significantly from 7.7% in March as per data from the China Passenger Car Association. Deliveries from its Shanghai factory, the largest worldwide, also saw an 18% decline compared to the previous year.
In contrast, BYD, Tesla's main competitor in China, experienced a 29% increase in sales of pure electric vehicles.
"China has really changed people's perceptions," according to Anne Stevenson-Yang, co-founder of J Capital Research. She mentioned that the business environment in the country has transformed significantly.
Recently, Tesla (TSLA) made significant price cuts in China, following similar reductions in the United States and Germany. These price adjustments are part of a series of reductions that Tesla has implemented in its largest international market since late 2022.
Last year, the Chinese economy saw a growth of 5.2%. This was the slowest rate of expansion in a year, excluding the pandemic years, since 1990. Back in 1990, the GDP only increased by 3.9% due to international sanctions following the Tiananmen Square massacre.
Consumers have been cutting back on their spending as their job and income situations have worsened. The ongoing crisis in the real estate sector, which makes up 70% of household wealth, along with a stock market downturn, have only added to their difficulties.
Tesla CEO Elon Musk makes a surprise visit to China, it coincides with Beijing's auto show where reports suggest he is trying to export his company's self-driving technology. CNN's Marc Stewart has more.
Elon Musk, the CEO of Tesla, recently made an unexpected trip to China. His visit aligns with the timing of the Beijing auto show, where there are reports indicating that he is working on exporting Tesla's self-driving technology. CNN's Marc Stewart provides further details on this development.
Clipped From Video
video
Related video
Elon Musk makes surprise visit to China, meets senior trade officials
In the 1990s, many companies in the West were eager to expand their operations in China. Consultants were hired, and boardroom meetings were held to discuss strategies for tapping into the country's rapid growth. However, things have changed since then.
According to Stevenson-Yang, the focus has shifted. Instead of trying to do more in China, C-suite discussions now revolve around the challenges of either exiting the market, protecting current operations, or diversifying supply chains across multiple countries. In her words, China has transitioned to a status similar to that of Brazil - still significant, but presenting its own set of difficulties.
The economic challenges in the country are not just affecting Tesla and the electric vehicle sector. Other major American companies such as Apple, Starbucks, and McDonald's are also feeling the impact as they work to adapt their business plans to keep up with the fast-evolving market.
Apple has been offering discounted prices on iPhones.
Worries about the future have led Chinese consumers to become more mindful of their budgets, according to Yang Wang, a senior analyst at Counterpoint Research. This shift in mindset has caused purchases related to premium or luxury items to decrease in priority.
People browsing Apple products at a Beijing flagship store on September 22, 2023.
People browsing Apple products at a Beijing flagship store on September 22, 2023.
Kevin Frayer/Getty Images/File
"Chinese consumers are indeed cutting back on their spending," he mentioned.
In the fiscal quarter ending March 30, Apple's total revenue in Greater China, which includes mainland China, Taiwan, Hong Kong, and Macao, dropped by 8% to $16.4 billion.
Huawei, a Chinese tech company that faced challenges from the West in the past, has been making significant progress. According to Counterpoint Research, their smartphone sales increased by 70% in the first quarter of 2024. This growth was driven by the successful release of their Mate 60 series.
Customers look at new Huawei Pura 70 series smartphones, as the series models go on sale at a Huawei's flagship store in Beijing, China April 18, 2024. REUTERS/Tingshu Wang
Customers look at new Huawei Pura 70 series smartphones, as the series models go on sale at a Huawei's flagship store in Beijing, China April 18, 2024. REUTERS/Tingshu Wang
Tingshu Wang/Reuters
Related article
Huawei sales are soaring in China as Apple sinks
At an earnings call with analysts, Apple CEO Tim Cook stated that China is the most competitive market in the world. He also expressed his long-term optimism about the Chinese market.
Data from the China Academy of Information and Communications Technology, a government-backed research firm, revealed that Apple's decision to lower iPhone prices in China led to a significant increase in shipments in March. This positive development came after a challenging period in the first two months of 2024, during which Apple experienced a sharp decline in iPhone sales.
The price reductions were led by Apple and third-party retailing platforms, with some iPhone 15 models offered at discounts of as much as 20%.
Food fights
Coffee chains are constantly trying to outdo each other by offering lower prices. In February, Cotti Coffee, started by ex-Luckin Coffee executives, lowered their latte prices to 9.9 yuan ($1.4).
As a response, Luckin, the biggest coffee chain in the country, matched this price. In turn, Cotti further reduced their latte prices to 8.8 yuan ($1.2).
The aggressive discounts have impacted global brands. Even Starbucks, who previously indicated they were not interested in a price war in China, began providing coupons that reduced the price of their lattes to less than 20 yuan ($2.8). Typically, they are priced at 30 yuan ($4.2).
YICHANG, CHINA - SEPTEMBER 23, 2021 - Customers are seen at luckin Coffee in Yichang, Hubei Province, China, Sept 23, 2021. Luckin coffee to settle with US investors. (Photo credit should read Liu Junfeng / Costfoto/Future Publishing via Getty Images)
Customers enjoying their time at Luckin Coffee in Yichang, Hubei Province, China on September 23, 2021. The popular coffee chain is in the process of settling with US investors. (Photo credit: Liu Junfeng / Costfoto / Future Publishing via Getty Images)
Related article
In China’s battle of the lattes, Luckin Coffee keeps beating Starbucks
The average amount spent by customers at Starbucks in China decreased by 9% in the first quarter of the year. This was primarily due to promotions and reduced sales of higher-priced items, according to the company.
Belinda Wong, chairwoman and co-CEO of Starbucks China, mentioned during an earnings call in January that consumers are now more cautious with their spending. She noted the increasing competition from mass market competitors who are rapidly expanding their stores and using low prices to attract customers.
Fast food chains have joined in on the trend.
Chinese youth have been using the term "poor man's deal" since 2022. Initially, it was coined for McDonald's $1.90 set meal, known as "1+1 = 13.9-yuan pair as you wish," which was a big hit among customers.
Other Western fast food chains have also joined in by introducing their own affordable set meals.
Tips on how to score weekly discounts on fast food have become a hit on social media platforms.
One guide suggests a weekly fast food schedule: free McNuggets at McDonald's on Mondays, 'one-for-one' offer at Tastien on Tuesdays, 30% off at Dominos on Wednesdays, 'crazy Thursday' deal at KFC on Thursdays, half-priced weekday set deal at Burger King on Fridays, and weekends at Wallace. Repeat each week.
In Beijing, Nanchengxiang, a fast food chain, offers an ultra-cheap "3 yuan (41 cents) breakfast buffet," setting a new record for the lowest price for all-you-can-eat meals.
The set, known as a necessity for low-income workers in Beijing, has seen a sales increase of over 100% during breakfast hours, as reported by canyin168, a website that tracks data and provides analysis for the restaurant industry.
"There is no quick solution."
Yang from Counterpoint Research predicts that the "depressed" consumer sentiment will persist for some time. As a result, some Western brands may need to rethink their pricing strategies in order to protect their market share.
However, that will be “no easy fix,” as foreign brands are at a disadvantage vis-a-vis domestic brands due to higher operating costs, he added.
Pan Gongsheng, governor at the People's Bank of China (PBOC), speaks at the HKMA-BIS High-Level Conference in Hong Kong, China, on Tuesday, November 28, 2023.
Pan Gongsheng, governor at the People's Bank of China (PBOC), speaks at the HKMA-BIS High-Level Conference in Hong Kong, China, on Tuesday, November 28, 2023.
Anthony Kwan/Bloomberg/Getty Images
Related article
China will focus on ‘high-quality, sustainable growth,’ central bank chief says
He believes that they will not likely withdraw from the country.
China is expected to continue fueling global economic growth and adding to the increasing number of middle-class consumers in the years to come.
He said that despite the economic challenges in developed countries and the need for growth in emerging markets like India, China remains a highly profitable global market, even though consumption levels are low. However, it is important to adjust expectations.
Many Western companies in China made a common mistake, according to Stevenson-Yang. They believed in the idea of a growing middle class. However, the reality is different. Chinese people actually accumulated a lot of wealth from real estate and the stock market, rather than from higher salaries. The economy is not going back to the poverty levels of the 1980s, but there are definitely some adjustments happening.
Editor's P/S:
The article presents a nuanced perspective on the challenges faced by Western companies in China's evolving economic landscape. While the country's rapidly growing middle class had once been a lucrative target market, the recent downturn and the rise of strong local competitors have made it increasingly difficult for foreign brands to maintain their foothold. The article highlights the aggressive price wars and discounts offered by both domestic and international companies, indicating a shift in consumer behavior towards budget-consciousness.
Furthermore, the article emphasizes the need for Western companies to re-evaluate their strategies and adapt to the changing market dynamics. It suggests that foreign brands may need to reconsider their pricing strategies, diversify their supply chains, and potentially even consider exiting the market to protect their operations. The article also underscores the importance of understanding the complexities of China's economy and adjusting expectations accordingly, as the country's growth trajectory and consumer spending patterns continue to evolve.
