So says Shanghai-headquartered business consultant Shaun Rein. &a;nbsp;&a;ldquo;Labor markets are bad,&a;rdquo; Rein said in an interview on Thursday. In addition, compared with the past, consumers are more accepting of better-made domestic goods. &q;They&s;re becoming more supportive and more nationalistic when it comes to Chinese brands,&q; he said. Apple, for instance, is running into problems in the country &q;due to the fact that they&s;re being outcompeted by Huawei, Oppo and Vivo at much better price points.&a;rdquo;
Rein is the author of &a;ldquo;The End of Copycat China,&a;rdquo; &a;ldquo;The End of Cheap China,&a;rdquo; and &a;ldquo;The War for China&a;rsquo;s Wallet: Profiting from the New World Order.&a;rdquo;&a;nbsp; Excerpts follow.
Q. What&a;rsquo;s your take on China&a;rsquo;s economy?
A. It&a;rsquo;s much weaker than people realize. Labor markets are bad. Starting in October, it became very difficult for even kids from top universities like Stanford and Columbia to get jobs. &a;nbsp;When we started our business in 2005, they would graduate from the U.S. in June, they looked for a visa in the United States for three or four months, couldn&s;t get one, and then came back to China. It used to take me a week in order for me to hire someone. I&s;d have to decide very quickly. Even in August 2018, we&a;rsquo;d have to decide in a week. Now, people that I interviewed in October are still looking for jobs. The labor markets collapsed in October.
So from a consumer spending standpoint, that&s;s hitting hard. They&s;re starting to trade down. They&s;re skipping the big-ticket items like houses and cars. They&s;re still travelling overseas, but they&s;re going not so much to America or the UK; they&s;re now going more closer -- so Thailand and Japan. We&s;re very bullish on domestic tourism.
The next thing is they&s;re just trading down in general. So instead of buying a Starbucks latte, they&s;re going to Luckin. Instead of going to Imax movie theaters, they&s;re watching on iQiyi and online videos. So in 2019, the premiumization drive that a lot of people said consumers would do is over, and they&s;re now trading down. A big shift.
Q. What does all of this mean for multinationals? To what extent are multinationals caught up in China&s;s mixed relations with the West?
A. You haven&s;t seen anti-American sentiment on the consumer side except for Apple. Because people feel that the United States is going into hostage diplomacy by arresting (Huawei CFO) Meng Wanzhou, people are supporting Huawei. But, in general, people aren&a;rsquo;t buying multinationals&a;rsquo; (goods) not because of the economy and not because they&s;re anti-American. It&a;rsquo;s because they&s;re becoming more supportive and more nationalistic when it comes to Chinese brands.
For instance, in 2011, we interviewed 5,000 consumers in 15 cities, and at the time 85% of consumers surveyed always buy a foreign brand over a local brand. In 2016, we did the same research. This time, 60% of consumers said they would always buy a domestic Chinese brand over foreign brand. I didn&s;t even do the research in 2017 or last year.
So Apple&s;s problems in China are not due to the economy. They&s;re not due to anti-American sentiment. They&s;re due to the fact that they&s;re being out competed by Huawei, Oppo and Vivo at a much better price points.
Q. How are multinationals as a group reacting to all of this?
A. They&s;re getting hit very hard. The only brands that are doing well would be heritage brands that have an incredible brand position &a;ndash; a Nike, Chanel, Estee Lauder. Other brands are in confused mode. They think it&s;s the economy, but it&s;s not. They need to adjust. They need to understand that the day Chinese just desire Western brands is over.
Q. How should they adjust?
A. They either need to buy a Chinese firm. They need to either go even more upmarket, in some cases they have to offer more value products.
Q. Any recent examples of a multinational buying a Chinese firm? Multinational?
A. No.
Q. Moving downmarket?
A. You don&s;t want to go too down. What you want to do is offer more like, &a;ldquo;Buy five, get five.&a;rdquo; It&s;s more of a value play.
Q. &a;nbsp;KFC, who you work with, seems to be trying to move up a little.&a;nbsp; (See related story &l;a href=&q;http://www.forbes.com/sites/russellflannery/2019/02/06/meet-the-force-of-nature-behind-yum-chinas-expansion/&q;&g;here&l;/a&g;.)
A. The food market is a difficult one because companies are getting hit by Ele.me and Meituan. &a;nbsp;Anything that&s;s 30 RMB and less is dead, because people can just buy something at half of the price. So you need to try to go more upmarket, be a little bit of premium, a little bit healthier. And then you&s;re able to win. It&s;s not easy.
Q. That&s;s what Yum is trying to do?
A. That&s;s what they&s;re trying to do. I&s;m very negative on say McDonald&s;s. All these guys earn a lot of trouble. For the first time in about a decade, I&s;m bullish on instant noodles. People are starting to buy the cheap three or four (yuan) noodles again.
Q. &a;nbsp;When is this going to end?
A. This is a long time period. The economy is a lot worse than people realize. None of my clients are making a lot of money. If nobody&s;s making money, how on earth are you getting six percent growth&a;#65311; I just I can&s;t figure it out.
Q. What about the auto industry&a;#65311;
A. There are two things hitting autos. First, prices are so high and people are concerned about their savings, and so they&s;re skipping autos. It&s;s hitting the American brands because of the tariffs. People are buying a Lexus and they&s;re still buying a BMW because China has lowered the tariffs from Germany and Japan, but people are not buying American brands. You saw Ford&a;rsquo;s sales dropped 50% year on year in the fourth quarter. And you also have the issue where people to use shared mobility. That&s;s a big trend in China because it&s;s very difficult to buy a license plate. It&s;s expensive. I&s;ve never been able to get one. My company has had to buy all of my license plates and they cost $30,000 each. So the American auto manufacturers are in a lot of trouble. They&s;re going to continue to double-digit (sales) drops this year.
Now the second thing is people are hoping for an end of the trade war and they&s;re saying if there is an end to the trade war China might lower the tariffs on cars even more. So people are taking a wait and see attitude to see is it going to be cheaper in three months. And that&s;s what&s;s happened with Tesla. They&s;re waiting for when Tesla opens their factory in China in May, or when they lower their prices which they just did last week by $20,000-30,000. So the market for American autos in China is in trouble because people have no money, or if they have money, they have a wait and see attitude.
Q. What does this shared economy mean for foreign businesses? &a;nbsp;It&a;rsquo;s easy to think of Chinese companies like Didi benefitting and maybe a Geely, which seems to be building up a fleet to supply that sector.
A. It&a;rsquo;s too expensive to own a car in China, and a lot of Chinese -- younger Chinese especially -- tell us they don&s;t even want to drive. It&s;s too stressful, too much traffic, too expensive and too much risk of an accident. They&s;d much rather outsource driving either to a driver or autonomous cars.
Q. Where can foreign companies fit into the shared space?
A. What they can do is sell fleets. But if they sell fleets to the taxi companies, that lowers their brand image. Hyundai did that with the taxi companies; now nobody wants to buy a Hyundai. They could invest in some of the Chinese Internet players and do co-partners partnerships with them.
--Follow me @rflannerychina
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