With each provocative tweet aimed at China from the president-elect, David Vered worries about a trade war that would hurt profits at his Los Angeles jeans company.

All the denim Vered buys for his brand, YMI Jeans, comes from Chinese factories, which have come to dominate the industry because of China’s abundance of affordable labor, capital and lax environmental laws. Those same conditions help make China the world’s top producer of all manner of manufactured goods such as cellphones, furniture, rubber boots and even Christmas lights. It’s difficult for foreign companies to source supplies from anywhere else and stay competitive.

“It would be disastrous,” Vered, who remains a Donald Trump supporter, said of a trade war. “China is the whole production line. It would be very, very difficult for us.”

Across California, companies reliant on Chinese factories and suppliers are mulling over what it means if the incoming Trump administration makes good on threats to slap new tariffs on Chinese goods. The president-elect and his surrogates have floated the idea of import taxes as high as 45% and as low as 5% to punish China for undervaluing its currency — a charge many economists say is outdated.

Should the trade relationship with China sour, no state would feel the disruption more than California.

About $143.6 billion in goods from China were shipped to the Golden State in 2015, according to the latest full-year census data. That’s three-and-half times more than second-place Texas.

Meanwhile, the threat of retaliation from China looms large for state exporters. California sold about $14.3 billion in goods to China in 2015 — second only to Washington state’s $19.4 billion.

The high trade volume helps keep more than 30,000 workers employed at the Port of Los Angeles, where 6 of every 10 containers arrive from China. And the raw materials and finished products that pour in ensure California companies such as Apple and Intel remain among the most profitable brands in the world.

“California has more to lose because we are the gateway to the U.S.” for Asian exporters, said Sung Won Sohn, an economist at Cal State Channel Islands. “This is where the infrastructure, connections and merchants are.”

The state also boasts the nation’s largest manufacturing base, employing about 10% of all U.S. factory workers, according to the U.S. Department of Labor. Most of those jobs are in high-value sectors like computers, chemicals and aerospace — industries that can more easily absorb California’s higher wages, expensive real estate and stricter regulations than producers of, say, garments or toys. Still, many companies that choose to manufacture in California rely on components and raw materials from China.

All signs point to a more adversarial relationship between Beijing and Washington once Trump assumes the White House. Trump, who nearly threw the “one China” policy into disarray last month, during the presidential campaign ran as a champion of displaced working-class Americans who believe they’ve been marginalized by globalization and Chinese mercantilist policies.

Trump has promised to bring jobs back to the U.S. and slash America’s trade deficit with China, which hit a record $367 billion in 2015.

One of Trump’s long-stated solutions for lost jobs and China has been to impose tariffs, much like President Reagan did with Japanese cars (a move that helped U.S. automakers but raised prices for American consumers).

“I’m totally open to a tariff if they don’t treat us fairly,” Trump said during a GOP primary debate last year. “Their whole trade thing is tariff. You can’t deal in China without tariff. They do it to us, we don’t do it. It’s not fair trade.”

Trump has kept the pressure on since being elected, mostly over Twitter, where he’s fired hundreds of barbs at China over the years.

“China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade, but won’t help with North Korea. Nice!” Trump tweeted Monday.

On Tuesday, Trump picked Robert Lighthizer to be his U.S. trade representative. The lawyer and former trade official during the Reagan presidency has spent years arguing for tariffs on foreign goods. He joins a host of aides and appointees to the incoming administration, such as UC Irvine economist Peter Navarro, who favor a decidedly confrontational approach to Beijing.

California “gets an advantage by simply facilitating the flow of illegally subsidized goods into the country,” Navarro, who was tapped to head the newly created National Trade Council and wrote a book called “Death By China,” told The Times last year. “We are unique in that we are the gateway for the disease, and people make money off of that.”

It remains unclear how much blame to assign China for the loss of American factory jobs, which peaked at 19 million in 1979 before falling to about 12 million today. A study by Ball State University’s Center for Business and Economic Research in 2015 found that 88% of lost manufacturing jobs were due to efficiencies such as automation and robots.

It’s also debatable what, exactly, a trade deficit says about a nation’s economy. Some economists note that the U.S. economy thrives when it runs a trade imbalance.

“The challenge isn’t about how to get jobs back, but how to prepare jobs for the future,” said Patrick Chovanec, chief strategist for Silvercrest Asset Management.

“The story of the U.S. economy has always been about creative destruction,” he said, referring to the capitalistic theory that new production methods always replace old ones. “The question is how to facilitate that in a way that’s humane and productive.”

Moreover, many economists say the merits of using tariffs are overstated. They say a tax on imports could blunt some Chinese exports, but would also make consumer goods in the U.S. more expensive — a shift that would disproportionately hurt the working class.

In 2009, President Obama slapped a 35% tariff on Chinese tires. The move saved up to 1,200 U.S. jobs, but it also resulted in Americans paying an additional $1.1 billion on more expensive tires, according to a study by the Peterson Institute for International Economics.

It’s also no guarantee that tariffs on Chinese goods would result in more U.S. manufacturing activity — not when developing nations such as Vietnam, Cambodia and Mexico have spent years building a case as viable alternatives to China for production.

“Tariffs on imports from China will not serve as a magic wand that brings back lost jobs,” said Eswar Prasad, an economist at Cornell University who formerly headed the International Monetary Fund’s China division. “Rather, such tariffs could end up inflicting collateral damage on U.S. businesses and hurting job growth in companies that have built international supply chains.”

Among the biggest sectors to have done this is the tech industry, which relies on countries across Asia to build its hardware. Apple can afford to build its high-end desktop computers in the U.S. because they are an expensive, niche product. But the equation changes when it comes to the iPhone, which accounts for about 60% of the company’s sales. Making the device in the U.S. requires access to tens of thousands of vocation school-trained workers at a single plant. In addition to higher labor expenses, Apple would have to pay for the added costs of importing parts across the Pacific such as processors from South Korea, cameras from Japan and rare-earth minerals from China. Building that supply chain from scratch could take years.

The same problem applies to smaller companies and products that aren’t as high-tech. Bruce Gifford, chief executive of the Santa Monica- and New York-based 360 Sweater, said it would be impossible to produce in the U.S. the sweaters he sells at stores including Nordstrom and Bloomingdales.

“We don’t have the knitting equipment here,” said Gifford, who employs about 40 people. “For the most part, there’s no sweater production left in the U.S. anymore because there’s no sweater machines or ancillary products like the right washing machines, driers, presses or yarn suppliers.”

The company would have little recourse other than to pass the higher costs onto consumers if Chinese imports were slapped with a new tariff. Almost all the world’s cashmere comes from China’s arid northern and western frontier provinces where cashmere wool goats thrive. Ultimately, Gifford hopes Trump’s tough talk on China is nothing more than residual campaign rhetoric.

“I just can’t imagine the tariffs are anything more than a threat,” he said. “It’s to put China on notice.”

david.pierson@latimes.com

Follow me @dhpierson on Twitter

MORE BUSINESS NEWS

Stocks open mostly lower on Wall Street

U.S. economy creates a modest 156,000 jobs in December

Some Obamacare advice for Republicans: First do no harm

Nissan plans to make robot cars; human ‘mobility managers’ will intervene when needed

Around the Web

The Pandemic Highlights the Top U.S. Pot Producers

• Order Reprints
• Print Article

Illustration by Elias Stein

As Covid-19 hit the U.S., sales of medical marijuana jumped at Florida-based Trulieve Cannabis, surging 50% in February’s third week over those in the corresponding week in January, then another 50% in March. “We are very accustomed to hurricanes,” says CEO Kim Rivers. “There was a rush of activity prior to any potential stay-in-place order.”

The pandemic highlights an overlooked reality: U.S. pot is hot. “Contrary to popular belief,” wrote Stifel/GMP analyst Rob Fagan, 2019 was a great year for U.S. sales. Legal sales in...

• BONDS
• FUNDS QUARTERLY

The Coronavirus Crash Reveals a Big Problem In Bond Fund Pricing

• Order Reprints
• Print Article

Illustration by Jack Richardson

The exchange-traded fund industry just threw the mutual fund industry under the bus. BlackRock, Vanguard, and State Street have all made statements over the past—very volatile—month that bond ETF market prices are a “price discovery” tool, arguing that prices of illiquid individual bonds held in mutual funds and ETFs are “stale,” while ETFs have greater liquidity and therefore more accurately reflect the value of their underlying portfolios. That was their explanation for why so many ETFs traded at discounts to their underlying portfolio values—their net asset values, or NAVs, in Wall Street parlance.

But...

• DIVIDENDS

Here Is a List of Companies That Have Suspended Dividends or Stopped Stock Buybacks in April

• Order Reprints
• Print Article

Photograph by Timothy Fadek/Bloomberg

After dozens of companies suspended or cut their dividends in recent weeks amid the coronavirus-driven business slowdown, some analysts believe dozens more are vulnerable across a variety of sectors.

Take banks: After suspending stock buybacks in mid-March, eight big U.S. financial firms, including Bank of America (ticker: BAC) and JPMorgan Chase (JPM), appeared as though they could emerge from the coronavirus crisis with their dividends intact. After European and U.K. banks suspended their dividends on regulators’ urging,...

• FUNDS
• FUNDS QUARTERLY

How Stock Market Selloffs Can Help You Stress-Test Your Investment Portfolio

• Order Reprints
• Print Article

Illustration by Alex Robbins

There have been few days in Wall Street history to try an investor’s patience like March 16. The S&P 500 index fell 12%, its worst day since 1987, which followed the almost-as-awful 9.5% decline on March 12. The market, of course, has continued to register several jarring one-day drops, including more than 5% on March 18 and 4.3% on March 20. Investors are getting stressed as their portfolios are being put to the test.

There is a valuable lesson here: Now you know how your portfolio holds up during periods of market volatility.

• ECONOMY AND POLICY
• UP AND DOWN WALL STREET

Massive Job Cuts and Falling Tax Receipts Make for Grim Headlines. The Real News Is Even Worse.

• Order Reprints
• Print Article

There’s good news and bad news about the economy as the crisis brought on by the coronavirus pandemic deepens. The bad news is that the substance of the recent economic data is even worse than the headlines. As for the good news, well, maybe it’s that with each passing miserable day, we’re closer to the end of this ordeal, even though a finale is nowhere in sight.

That was exemplified by Friday’s report that 701,000 nonfarm jobs were shed in March, the most since 2009 in the wake of the Great Financial Crisis, while the unemployment...

• TELECOM
• TECH TRADER

Everyone Is Worried About the Internet. So Far, It’s Actually Doing Just Fine.

• Order Reprints
• Print Article

Comcast says video conferencing and voice over IP traffic is up 212% in recent weeks.

Getty Images

The Internet is doing just fine.

With everyone stuck working and studying from home, Americans have become sensitive to any news about internet slowdowns. We’re all using more bandwidth for video conferences and streaming, the only things maintaining any sense of normalcy in our lives. So, internet anxiety is understandable.

Last month, European...

• FUNDS
• FUNDS QUARTERLY

Managing Your Money in The Most Turbulent Times

• Order Reprints
• Print Article

The news is bad. More than one million people worldwide now have Covid-19. The U.S. has more than 250,000 cases, and more than a quarter of those are in New York City (where Barron’s is based). People are worried about the health of family and friends; they’re worried about their jobs; they’re wondering how they’ll home-school their kids another few months. And, of course, most of us are worried about our finances.

The Barron’s team has been working hard to produce the news and analysis that our readers need—on the economy,...

• TRANSPORTATION
• INSIDE SCOOP

Warren Buffett’s Berkshire Hathaway Sells Huge Blocks of Delta, Southwest Stock

• Order Reprints
• Print Article

Warren Buffett’s Berkshire Hathaway disclosed that it sold large blocks of stock in Delta Air Lines and Southwest Airlines.

Berkshire (ticker: BRKB) subsidiaries sold 13 million Delta (DAL) shares over Wednesday and Thursday for a total of $314.2 million, a per-share average of $24.19 each. Berkshire now has overall ownership of 58.9 million Delta shares, according to a form it filed with the Securities and Exchange Commission.

Buffett’s...

1. How to Select Suppliers When Import Jewelry Accessories from China?

a. Importers Who Do Not Have Specific Styles

Hong Kong Global Sources Fair	Canton Fair

b. Importers Who Have Their Own Designs or Samples

• foreign trading companies, whose customers are mainly famous foreign jewelry companies;
• foreign large-scale chain supermarket, such as Walmart;
• Foreign famous jewelry or fashion brands, such as Forever 21, Topshop;
• Foreign original jewelry shops/craft shops/tourist souvenir shops.

1) Big quantity importers-over 2000 units for each item

Forever 21 jewelry styles

Importers who are from the first three types usually purchase big quantity in every single order, but they have stricter requests for their suppliers as well. Especially like large famous brand Walmart, passing its factory audit is an integrant condition for its suppliers. They will entrust a professional factory-auditing organization to do the audit one or two times every year, so passing just one audit doesn’t mean the factories will be qualified forever.Some other importers require suppliers to sign NDA/NNN agreement (Non-Disclosure Agreement/Non-disclosure, non-use/non-compete, and non-circumvention Agreement) to make sure none of their own designs and products will be sold or recommended to other importers from these suppliers.If you are one of this kind of importers, you can select large/middle jewelry trading companies or factories as your suppliers, I believe that your strict requirements in product quality and test will be achieved by them. Also source them from large fairs will be a wise choice.

2) Small quantity importers-under 2000 units for each item

If you only need hundreds of units for each item for customizing your design, then obviously you cannot reach the MOQ of most large jewelry factories/trading companies. So you need to source small-scale trading companies who can deal with small quantity order flexibly.They will get materials from the market, then entrust the production to cooperated small jewelry workshops. Such as electroplate factory, welding plant if it’s alloy jewelry product; If it’s hand knitting product, they will send materials with samples to some countryside nearby, because there are lots of people who are doing handwork with lower labor charge. That’s why these small trading companies reduce the cost.One of my colleagues had worked in a small jewelry trading company for two years. All of their small orders are produced by very small jewelry workshops. For example, a hand knitted shell necklace, the workshop will send material which gets from Yiwu market to the countryside in Jiangxi Province (not far from Yiwu), then send the finished goods back to Yiwu trading company after 10-15 days of production.

Small electroplate factory	People who are doing handwork in countryside

c. Importers Who Want to Buy Stock Accessories

There are some importers who aim to low-price stock jewelry products, for selling in African or other developing areas. These stock jewelry products are from different sources, such as leftover products, rejected products because of mistakes in producing, customized products abandoned by clients, etc. These products are sold to stock collectors in a tenth of the original price, some are even sold by weight, just like fruits and vegetable.If you want to buy stock accessories, you can visit the stock street in Guangzhou/Yiwu/Qingdao, where you can find lots of stock jewelry shops, such as Wuai stock street and Meihu stock street in Yiwu.I did a research in Yiwu Wuai stock street, and one shop owner told me that most of their stock jewelry are brought from Guangzhou, normally are leftover products. Many different styles of necklaces with colorful stones are all in one price-$0.3/pc. The quality is good as I checked some of them. If you buy from Guangzhou factory in bulk, this necklace at least needs $1.5-$2.0/pc. Major customers of these shops are from Africa.

Stock jewelry style	African customer is placing order in shop

2. Three Main Producing Areas of Jewelry Accessories in China

Guangzhou, Yiwu and Qingdao are the three main producing areas of China’s jewelry accessories. No matter you are purchasing by anyways, the suppliers are all from these three cities. Each of them has its own characteristics.

a. Guangzhou-Best Quality and Most Specialized City of China’s Jewelry Accessories

The jewelry industry in Guangzhou was led up from Hong Kong, as their position is very close. So Guangzhou’s jewelry styles and designs are the most innovative and closest to the international fashion trend. Jewelry businessmen from Yiwu usually visit Guangzhou to buy some new styles, then produce accordingly. The maturity of Guangzhou’s jewelry industry makes its quality higher than in other cities.But the MOQ of Guangzhou’s suppliers is normally higher, which means Guangzhou is not suitable for small-quantity importers (hundreds of units of one item). Except you are their old customer, they may help to do some occasional small orders.

Artificial stone shop in Liwan plaza

You can find lots of jewelry wholesale markets in Guangzhou, such as Xijiao Building, Liwan Plaza, and Market of South-China International Little Commodities.Xijiao Building is located near Guangzhou train station, most of the products inside are with high quality and price. If you are interested in high-level jewelry, you cannot miss this market. The main products in Liwan Plaza are crystal and jade products. The market of South-China International Little Commodities is an omnibus market with abundance suppliers.

b. Yiwu- Low Price, Best Choice for Small Jewelry Accessories Importers

There are three main way to find jewelry suppliers in Yiwu, by my experience:

1. Visit District 1 of Yiwu Wholesale Market, or Xingzhong Area (兴中小区);
2. Search jewelry factories/trading companies from Yiwu, Jinhua on Alibaba;
3. Visit Yiwu Fair which is held at Oct. 21st-25th every year.

Jewelry products booth in Yiwu wholesale market

The advantage of Yiwu’s jewelry products is rich and varied styles and quality, lower price than Guangzhou jewelry. And purchasing from Yiwu market is more convenient. Meanwhile, its disadvantages are: suppliers’ holistic level is lower than Guangzhou, most styles and designs are imitative, products with distressed prices are in bad quality.A lot of people think Yiwu jewelry’s quality is poor, but it’s not true. Here you can buy the jewelry product with world’s lowest price, but you can still find factories and trading companies who are doing OEM/ODM orders for large European and US fashion brands.

c. Qingdao-Major Production Place of Korean Style Jewelry

Sino-Korea International Commodities market

Qingdao is situated in the northeast of China, which means it’s very close to Korea. Lots of Korean jewelry companies were attracted to establish factories there, hence the major product is Korean style jewelry, and the quality is normally high.Jewelry wholesale market also can be found in Qingdao, the most popular two among them are Sino-Korea International Commodities market and Jimo Small Commodities market.

3. How Chinese Jewelry Suppliers Get Their Product Design?

As I mentioned above that lots of importers like suppliers to recommend new styles, also selecting new styles is their main purpose when attending jewelry fairs. But how Chinese jewelry suppliers get their product designs?Most large-scale factories have their own designers, they take some top international fashion brand’s new styles as a reference, then add their own idea and revise, to create a new own style then recommend to customers. They also select beautiful styles from big customer’s finished orders to take as reference, introduce to other importers with/without own revise.Middle and small suppliers who cannot afford to have own designers, usually go to Guangzhou and Qingdao to buy new style samples, then copy to own designs to show to customers.There are many booths in Yiwu jewelry market who are specialized in “hot cake” jewelry styles. E.g. hot cake in 2014: flower headband; hot cake in 2015: choker. These suppliers will change their products according to the hotcakes trend at a different time.

Flower headband	Choker sets

4. What Kind of Compliance Is Needed for Importing Jewelry from China?

The compliance test is very important when importing jewelry accessories from China as most countries and areas have their own regulates for imported jewelry. So the test report is necessary for them.High-end customers from Europe and the US normally have cooperated Chinese testing company (such as SGS branch company in China), their suppliers need to send samples and materials to the testing company before shipping. The test report is sent to the customer directly by the testing company, in case any fake reports made by suppliers.Most jewelry products are touching the skin, and its test can be divided into two parts: physical test and chemical test. Physical test includes colorfastness, tensile test, sharp point, and edges, etc. Chemical test are mainly check the content and thickness of hazardous chemical substances such as lead, cadmium, nickel. The right picture shows the content standards of hazardous chemical substances in major countries.

test requirements

5.How to Ship Your Jewelry Products When Import from China?

Most widely-used shipping way of jewelry accessories is international express, because jewelry’s characteristics of rapid updating, small volume, and high requirement in timeliness. But there still are some large-quantity importers prefer using LCL sea shipping, as their total volume of one order is biggish. In order to catch the jewelry seasonal fashion, they will place the order few months earlier to offset the long-time in sea shipping.

Necklace for Valentine’s Day

33

Leave a Reply

This report was originally published by Michael Snyder at The Economic Collapse

Can the global financial system handle a full-blown trade war between the two largest economies on the entire planet? We have never seen anything like this happen in the modern age, and this is creating a tremendous amount of uncertainty for the financial markets. Yes, something had to be done, and I have been writing about this for years. China has been stealing our intellectual property, manipulating currency rates and slapping high tariffs on American goods. We simply could not allow China to continue to take advantage of us, but now we are so dependent on the Chinese that a trade war with them is going to inevitably produce a great deal of pain. We are all going to wish that another way could have been found to resolve this crisis, because in the short-term this is definitely going to hurt the U.S. economy. And if President Trump chooses to press forward with trade wars against Europe, Canada and Mexico at the same time as well, the pain for our economy is going to be off the charts.

Most Americans didn’t even notice, but Donald Trump fired a shot that was very clearly heard all the way over in China on Friday when he slapped a tariff of 25 percent on 50 billion dollars worth of Chinese products…

China accused the United States of firing the first shot on Friday when the White House said that it would impose tariffs of 25% on $50 billion worth of Chinese goods.

The announcement confirms a threat first made by President Donald Trump in March and follows months of trade talks between the two sides. A truce was announced in May, but it proved short-lived.

“The United States has kept changing its mind and now launched a trade war,” China’s Commerce Ministry said in a statement.

The Chinese retaliated almost immediately by slapping a 25 percent tariff on 50 billion dollars worth of our goods…

China will slap hefty tariffs on U.S. goods in retaliation for President Trump’s decision to levy duties on $50 billion worth of Chinese imports.

Beijing will impose an additional 25 percent tariff on a total of 659 U.S. imports worth about $50 billion, according to a statement on the country’s Ministry of Finance website.

The first batch of tariffs will hit 545 U.S. products worth about $34 billion, including agricultural products, such as soybeans, corn and wheat, automobiles, beef, pork and seafood, and will start July 6.

President Trump took the weekend to think about it, and on Monday he decided to raised the stakes much higher.

If the Chinese really do go ahead with their tariffs, the Trump administration is going to hit them with a 10 percent tariff on another 200 billion dollars worth of their goods. The following is from Trump’s official statement…

This latest action by China clearly indicates its determination to keep the United States at a permanent and unfair disadvantage, which is reflected in our massive $376 billion trade imbalance in goods. This is unacceptable. Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship with the United States.

Therefore, today, I directed the United States Trade Representative to identify $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent. After the legal process is complete, these tariffs will go into effect if China refuses to change its practices, and also if it insists on going forward with the new tariffs that it has recently announced. If China increases its tariffs yet again, we will meet that action by pursuing additional tariffs on another $200 billion of goods. The trade relationship between the United States and China must be much more equitable.

If China does not match each round of tariffs they will look weak, and if Trump does not keep raising the ante every time China matches him then he will look weak.

So where will this end?

Ultimately the goal is more balanced trade with China, which would mean more jobs and more factories here in the United States.

But in the short-term we won’t see any of that.

Instead, all we are going to see is tremendous pain.

First of all, you should expect to see higher prices on any products that are made in China. This is going to hit consumers that shop at Wal-Mart and the dollar stores particularly hard.

Secondly, any companies that sell products in China are going to be hurting. It is inevitable that some will start laying off workers, and that means that there will be job losses here in the United States.

And even the expectation of lower profits will send stock prices tumbling. In fact, we already started to see this happen on Monday…

Major American companies that generate a significant chunk of their sales from China, such as Boeing (BA), Caterpillar (CAT), Intel (INTC) and 3M (MMM), were among the losers on the Dow on Monday.

The Dow has fallen nearly 1.5% in the past week and is close to erasing its gains for the year. If a global trade war breaks out and slows economies around the world, it could bring an end to the bull market that has raged for more than nine years.

In the short-term, nothing good is going to come out of this trade war.

And even in the mid-term, the pain is going to far, far outweigh any benefits.

This is why a trade war should always be a last resort. As much as possible should be accomplished through negotiations, and it is unclear if negotiations were utilized as extensively as they could have in this case.

If China wants to play hardball, they could start dumping U.S. Treasuries or cut off our access to rare earth elements. If they pulled either trigger, our level of pain would instantly be multiplied.

We can definitely hurt China too, but we do not have any magic bullets that will force them to yield.

Once a trade war begins, it can potentially last for many years, and let us not forget that history has shown us that trade wars can often lead to shooting wars.

I believe that a tragic strategic mistake has been made, and this is not going to end well.

***

Michael Snyder is a nationally syndicated writer, media personality and political activist. He is the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream.

If you want to know what is coming and what you can do to prepare, read his latest book Get Prepared Now!: Why A Great Crisis Is Coming.

Golden Nugget to Chinese Success: Why Best Buy Failed

Best Buy is shuttering up its windows and moving out, a defeat on the heels of Home Depot’s similar move out. Home Depot’s model was to have expert salestaff who could show their target demographic, couples with time on their hands, how to cheaply do remodels using Home Depot supplies. This model failed because in China it is much cheaper to buy supplies wholesale and use the vast migrant labor force for any building projects.

Where Home Depot failed was in thinking they could compete on price in labor. In the US labor is expensive so do-it-yourself is cheaper, even when the supplies aren’t. Best Buy was competing on price within consumer goods though. So why did Best Buy fail? The reason is closely related to the challenges my good friend faces in wine imports. He imports South American wines, which are considerably cheaper than continental, and highly regarded in the US. In China however, Napa won’t sell before Naples, and Buenos Aries bows to Bordeaux. Just as the wealthy have built gated condo communities outside of major cities, China is eager to import the cache of true European luxury. “Taste” is only relevant to label choice.

It would seem Best Buy targeted the same demographic, middle to slightly affluent Chinese consumers. So what is China’s middle class? According to Key Indicators for Asia and the Pacific 2010, “middle class” in China is defined as a daily consumption of $2-20. A latte in China is comparable to the US, even at Starbucks ripoffs. Clothing is considerable cheaper, although the middle class prefer foreign brands which on nearly on par in price with brands targeting middle class consumers here. Foreign brand electronics in China are also similarly priced to discourage black market selling.

Now ask yourself, if you could only spend $600 a month, minus utilities and phone bills, would you spend $200 on a DVD player? Or a $700 tablet? And if you were going to buy a tablet, would you buy the Korean rip-off (Samsung), or would you go over to the Apple store to get the considerably cheaper $500 iPad, which has far more cache? Or, given the option and loose IP protection, would you buy a $250 black market iPad? When Best Buy first opened they had inhouse Apple stores. Apple soon opened their own stores. This erased Best Buy’s main offering: Access to the same luxury goods as foreigners coveted.

A Chinese citizen equivalent in age to American Baby Boomers, grew up during Mao’s “5 year plan” fiascos. They entered the job market only as Deng Xiaoping was just opening up the country to foreign businesses interested primarily in the Chinese labor force. They were exposed to foreign technology and design as a superior model, and with Gen X, began the transition away from the old propaganda claiming China was superior economically and developmentally. Chinese consumers themselves absorbed the negative stereotype of “Made in China” products. Just as we once equated French imports as “luxury goods”, China has equated Western imports with luxury.

Today’s Chinese Millennials have a lot more pride in their country and its potential. They emerged from universities during and in the wake of September 11th and Wall Street’s fall. They saw the US, and the West, as debt ridden, overweight and academically lazy countries whose time had come. The economic crisis however has hit China too. These same bright Millennials, often already sporting Masters, have had difficulty finding work in China’s urban centers. They’ve been nicknamed the “Ant” tribe, for the way they live in dilapidated apartment buildings, feasting on ramen and the dreams they were once spoonfed of a better China.

Unlike the US Millennials who have “returned to the nest” in droves, many of the Ant tribe do not have wealthy parents to live off. At least not “wealthy” by American standards. They also wrangle more with the Asian values of saving face and have taken up jobs as waitresses, cleaning people, delivery boys in order to continue to live in the urban centers they’ve grown accustomed too. Bottom line: GenY Chinese don’t have disposable income for fancy imported electronics.

For those who do have money, the prestige of having foreign goods is much more blunt than in America. A “preppy” revolution in the eighties in America separated the emerging middle class with the older affluent families. Taste was defined by subtle branding, classic looks and higher quality goods. The nouveau riche were more likely to be “blinged” out, favoring prominent logos, flashy cars and large homes. This trend continued as a widening middle class attempted to “keep up” adding on more debt and leading to the economic crisis. In China there were few “old families” besides those associated with the government. The majority of Chinese middle class and affluents are nouveau riche. The result is a culture where having an “LV” bag is every girl’s dream.

Now a winning example, because I wouldn’t be worth my stuff without giving some positive advice for success in China. KFC was one of the first movers into China. They came in with a cheap, but yummy product, and a business model which competed predominantly on price. Unlike Home Depot or Best Buy, KFC was quick to recognize they were dealing with an entirely different demographic, and needed to change their business model. Marketing and business are inextricably tied, and one of the best value adds your marketing teams can give you is feedback on your brand and the product itself from consumers.

What KFC discovered was Chinese consumers coming out of the bad years considered meat a luxury. They saw KFC, a foreign brand, as a luxury product. At $2 for one serving, equal to the total daily expenditure of the lower middle class today and of much of the upper class when KFC first entered China, KFC was a splurge. So KFC completely changed their store model, creating a middle class dining experience. They altered some of the menu to cater to Chinese tastes, (they put corn in everything, even pastries and yogurt, totally gross), and kept their prices comparable with the US so they weren’t competing there. In effect KFC sold an aspirational lifestyle which had no relation to their American consumers. They paved the way for other US fastfood chains, and to this day foreigners are more likely to be invited to a KFC at least once during their stay in China, over McDonald’s, Subway or any other foreign brand.

So my advice to companies trying to follow in the wasteland of failed foreign brands: Throw out what you know. Do your homework, focus on the goal, making money, and reconsider what your selling. Looking at what you’re selling from the Chinese consumer’s perspective is all the difference. For Home Depot they were selling expensive materials. For Best Buy they were selling marked up, mostly Asian-made electronics you couldn’t haggle for. For KFC they were selling the experience of an American lifestyle and with foods catering to local tastes. And remember: China doesn’t want cheap America. China made cheap America.

——————————————————————

For companies not interested in entering China: Same rules. If you’re sitting in your Mad Ave office ruminating on how to reach Midwestern Moms, and considering staging an “event” in Times Square, because there will probably be some tourists there: STOP NOW. Go back to your product. Go back to your market research (assuming you did your homework), and look at your product from those consumers’ perspective. Will this make my life easier? Will this impress the neighbors? (Who live on Park Street not Park Ave.) Can I, the Midwestern supermom see myself in this scenario? Is there an alternative currently in my life which makes your product or brand seem redundant? My mom bought an iPhone because she saw me finding directions to a restaurant on it.

When selling local, think like a local.

Post navigation

Add new comment