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For decades, Western companies have made fortunes betting on the inexorable rise of Chinese consumers. Now, with the economic downturn and the emergence of fierce local competitors, a price war has erupted that makes those bets look less safe.
Discounts and special deals are being offered across consumer brands, from food and clothing to appliances and cars, reflecting dramatic changes in consumption patterns in the world’s second-largest economy.
The most intense price competition is taking place in the electric vehicle (EV) industry, creating a “life-or-death” competition. Manufacturers are struggling to survive.
Tesla’s market share in China shrank to 4% in April, nearly halved from 7.7% in March, according to data released Friday by the China Passenger Vehicle Association. Delivery from Shanghai factory, The world’s largest Last month, it was down 18% compared to the same month last year.
This steep drop is in contrast to sales growth at China’s biggest rival BYD, which reported a 29% increase in pure EV shipments.
“Everyone has changed the way they think about China,” said Anne Stevenson Yang, co-founder and managing principal of J Capital Research. “The business environment has completely changed.”
Last month, Tesla (TSLA) announced aggressive price cuts in Japan, followed soon after by price cuts in the U.S. and Germany. The move added to a series of price cuts the company has carried out in its largest overseas market since the end of 2022.
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Last year, China’s economy grew by 5.2%. Excluding the year affected by the pandemic, this is the slowest annual pace of expansion since 1990, when international sanctions following the 1989 Tiananmen Square protests resulted in gross domestic product (GDP) growth of 3.9%. I stayed.
Consumers are cutting back on spending as job and income prospects worsen. The prolonged real estate crisis, which accounts for 70% of household assets, and the stock market crash are exacerbating the predicament.
In the 1990s, “every company in the West” hired consultants and held board meetings to discuss how to further expand their operations in China, Stevenson-Yang said. But now that consultants are gone, executives are debating less about how to unlock rapid growth and more about whether to protect their business by exiting or balancing supply across multiple countries. It’s all about talk.
“China is now in almost the same position as Brazil: big and important, but difficult,” she added.
The country’s economic woes are not limited to Tesla and the EV industry. They’ve hurt other American giants like Apple (AAPL), Starbucks (STUX), and McDonald’s (MCD), all of which have struggled to adjust their business strategies to rapidly changing markets. ing.
Yang Wang, senior analyst at Counterpoint Research, said Chinese consumers are becoming more budget-conscious due to worries about the future. As a result, purchases related to luxury and luxury goods have been put on the back burner.
Kevin Frayer/Getty Images/File
People browse Apple products at the flagship store in Beijing, September 22, 2023.
“Certainly Chinese consumers in general are experiencing a ‘consumption downgrade,'” he said.
Apple’s total sales in Greater China, which includes mainland China, Taiwan, Hong Kong and Macau, fell 8% to $16.4 billion in the fiscal quarter ended March 30.
Meanwhile, Huawei, the Chinese tech champion that the West once tried to crush, is rapidly advancing. The company’s smartphone sales surged 70% in the first quarter of 2024, driven by the successful launch of the Mate 60 series, according to data compiled by Counterpoint Research.
“[China] is the most competitive market in the world,” Apple CEO Tim Cook said during an earnings call with analysts earlier this month. He added that he remains optimistic about the Chinese market in the long term.
U.S. smartphone makers lowered the price of iPhones sold in China, leading to a sharp increase in shipments in March, according to data released last week by the China Institute of Information and Communication Technology, a government-backed research firm. This marked a turnaround from two months ago, when Apple experienced a sharp decline in iPhone sales.
The price cuts were led by Apple and third-party retail platforms, with some iPhone 15 models being offered at discounts of up to 20%.
Coffee chains are also competing with each other to lower prices. Last February, Kotti Coffee, a startup founded by two former Luckin Coffee executives, launched a campaign to cut the price of its latte to 9.9 yuan ($1.40).
The move prompted Luckin, the country’s largest coffee chain, to match its prices. Cotty has since lowered the price of its latte again to 8.8 yuan ($1.20).
For aggressive discounts, Influenced by global brands. Even Starbucks has indicated it is not interested in the project. In a price war in China, the company has started offering coupons that effectively reduce the price of a latte to less than 20 yuan ($2.8). It usually sells for 30 yuan ($4.2).
The average check paid by Starbucks customers fell 9% in China in the first quarter of this year, mainly due to promotions and lower sales of big-ticket items, the company said.
“Consumers are now more cautious with their spending,” Belinda Wong, chairman and co-chief executive officer of Starbucks China, said during an earnings call in January. She says, “We’re seeing a huge influx of mass-market competitors and a focus on rapid store expansion and low-price strategies to drive trial.”
Fast food chains are also getting in on the act.
“Trade of the poor” has become a buzzword among young people in China since 2022. Initially, it referred to McDonald’s “1+1=13.9 yuan all-you-can-eat pair” set menu for $1.90, which was extremely popular among customers.
Other Western fast food chains have since followed suit and launched their own low-priced set menus.
Online guide to get weekly fast food discounts has been discontinued Popular on social media.
“Free McNuggets at McDonald’s on Monday, ‘1 for 1’ offer at Tastian on Tuesday, 30% off at Domino’s on Wednesday, ‘Crazy Thursday’ sale at KFC on Thursday, 50% off at Burger King on Friday, set deal on weekdays So, I’m heading to Wallace for the weekend. We will repeat it next week,” said one guide.
Beijing-based fast food chain Nancheng Xiang also launched an ultra-cheap “3 yuan (41 cents) breakfast buffet,” setting a record low price for an all-you-can-eat option.
According to canyin168, a data tracking and analysis website for the catering industry, sales of the set, which many netizens have dubbed “an essential item for Beijing’s working poor,” more than doubled during breakfast hours.
Counterpoint Research’s Yang said the “slump” in consumer sentiment is likely to continue for some time.
Some Western brands will “inevitably” be forced to reassess their pricing to protect market share.
However, he added that it is “not an easy solution” as foreign brands are at a disadvantage compared to domestic brands due to higher operating costs.
But he believes they are unlikely to leave the country.
In the medium to long term, China will continue to drive global economic growth and contribute to the largest and growing middle-class consumer group.
“Even with weaker consumption levels, China remains vulnerable, as the economic outlook remains weak in most developed countries and there is still room for recovery in key emerging growth markets such as India,” he said. “It has the potential to provide the most lucrative market in the world.”
But you’ll need to lower your expectations.
“I think the fundamental mistake that many Western companies made in China was believing in the myth of a rising middle class,” Stevenson-Yang said.
“In reality, the Chinese had a huge amount of money in real estate and stock market capital gains. They never saw their incomes increase significantly. The economy has not returned to the poverty levels of the 1980s. However, many conditions are improving.”
