Brands should brace themselves for the end of 'cheap China'

The study, by Roland Berger Strategy Consultants, shows higher manufacturing costs, shifting government policies and social issues are compounding the complexity of doing business in China.

"Right now, the value proposition for many firms in China is disappearing and eroding China's competitive low-cost advantage relative to other countries," Tom Wendt, author of the study, says.

Production prices in China are increasing faster than neighbouring Vietnam, according to IHS Global Insight and the OECD. The 2010-2015 period is expected to experience a 75 per cent hike in prices; and unlike every other country, China's prices did not decrease during the 2008 crisis.

Roland Berger research finds the growth of foreign tech firms may soon pass their tipping points in China as Wendt anticipates a decline in market share by 2023 for specific industries like computers, semiconductors, circuit boards, and LCD televisions.

Particularly, China will eclipse the US as the largest market for Intel in 2012, says Shaun Rein, author of his new book The End of Cheap China and founder cum managing director of the China Market Research Group. In fact, the mercury is also rising for Chinese tech brands. "Cisco is being killed by Huawei, Dell by Lenovo," Rein remarks.  

Rein points out that China’s manufacturing cycle actually beats that of the US because of "superior infrastructure and efficient labour pools".

The state's redevelopment plan for the Pearl River Delta (to be completed by 2020) includes phasing out non-core industries and bringing in promising sectors like advanced manufacturing (such as power equipment), hi-tech R&D, and modern service industries (such as financial services, information services, logistics, tourism).

The consultancy singles out Hewlett Packard, Cisco, Dell, Mattel, Esprit, Nike and Foxconn as the first major companies likely to be impacted by the changes, as they are focused on low value-add manufacturing and exporting.

China is no longer a cheap place to do business, and its shift away from being an export-oriented economy to one that is consumption-led causes tension for brands like Gap and Ralph Lauren, Rein says, noting that neither are handling their branding well in the region.

Ralph Lauren, for example, has not been catering to the taste of Chinese consumers with their "blue-eyed models" and not crafting its brand image to suit the local culture.

Not all firms are affected to the same extent though, as ballooning local demand can drive expansion for the automotive industry, Wendt concurs.

"The smart brands will be the ones who look at China as a market to sell into rather than a market to buy from," Rein adds, with Chinese consumers no longer viewed as price-sensitive as before.

Wendt also stresses that the window to react to the fundamentally changing Chinese business environment is closing quickly.