How expats are now making money doing business in China.
“We always knew that what we were doing was unsustainable,” Gus spoke while sitting on a stool in his new French-style creperie. The former New York day trader moved to Shanghai in the early 2000s to take up a post with a major financial newspaper and eventually set up his first import/ export company in 2005. Functioning as the China-based eyes and ears of American and European companies, he sourced high ticket items like outdoor furniture, garden supplies, and metal fencing from factories and coordinated their shipments overseas. Profits were initially good, but over the intervening decade he saw his orders dwindle from 20 to 25 containers per month to a mere half a container a few times per year. Fearing that he would soon go under, he began looking for a new engine of financial growth: he turned around and looked square at China.
The 2008 global economic crisis clearly demonstrated the instability of China’s export based economy, and the country has been very actively cultivating its domestic service sector ever since. The transition has happened with incredible haste, as consumer driven industries now generate more GDP than the manufacturing sector. Stimulating this transition, the average wage in China has increased more than four fold and per capita disposable income had risen three times over in the past decade. This newfound wealth is not something that the population of China is squeamish about spending, as household consumption has grown between 11 and 15 percent per year from 2008 to 2013.
While higher wages fueled the consumer economy, the flip side was that they inhibited growth in the manufacturing sector.
“It’s becoming just as expensive to manufacture a product in China as it is for companies to do it at home,” Gus explained.
Faced with shrinking profit margins, many foreign manufacturers and buyers began abandoning China altogether, opting for the cheaper frontiers of Bangladesh, Vietnam, and Myanmar. Those who stuck it out began looking for ways to cut costs.
“Alibaba became very difficult for us because they became so good at what they were doing and the factories were getting English speakers, so buyers in the US and Europe could deal directly with the factory in many cases. So it became very difficult [to continue earning a profit in export], the margin was shrinking,” Gus explained.
To counteract the losses and the lack of security that he was enduring in exports, Gus reversed his position almost entirely. He began importing ingredients from France and began making authentic French pastries in his apartment with his wife and kids. He began selling them to the health foods stores around the city, and a few months later opened a small cafe in a busy shopping area.
From the beginning, his creperie was well received by both expats and Chinese customers, the types of sweet and savory snacks he offered hit both palates potently and the branding (i.e. old France) was particularly appealing to young locals enamored with Occidentalist imagery and customs.
“It’s been paying for itself since the first day,” Gus explained.
He plans on opening more branches in shopping malls around the city throughout the coming year.
Alex Papp moved from Hungary to Xiamen in 2005, and soon after started an international trade company. Mostly manufacturing and shipping high-tech medical equipment to Australia and Europe he hasn’t yet seen a decrease in earnings like some other exporters, but he decided to tap into China’s booming service sector anyway. In 2008, he opened the first Pappy’s Restaurant location. Serving a mix of specialized Western and Chinese cuisine along with difficult to find health food products for fair prices, the restaurant became an immediate success. He eventually expanded to four locations around Xiamen, and plans to have 10 in the city within a couple of years. The long term goal is to spread franchises to other cities around China.
In the past decade Shanghai’s Yongkang Road has transitioned from a traditional wet market to a high-fashion street to its current incarnation as a strip of over 20 foreign themed and mostly foreign owned bars and restaurants. There is an Australian bar, an Irish pub, a Mexican restaurant, a wine bar, an Italian pizza joint, a shop that specializes in micro brews from around the world, a French bar — a particular commercial niche for most of the dominant expat demographics in the city. In the middle of it all is the Rooster Bar, created and run by the Taiwanese/ American John Cox.
“It’s like any hole in the wall that you might find back in, I’d say, Brooklyn. But I’d say that almost anywhere in the world you can find a bar like this,” the Cox said.
Combining cheap prices, specialty American beer, and classic rock, John established one of the landmark bars in Shanghai.
“I opened it because I saw an opportunity. The risk and the investment were tolerable in my mind. I never expected it to really do well, but I thought it would be fun to try out.”
As China continues transitioning from an export to domestic consumption based economy many types of imported goods have gone from being rare and expensive luxury items to becoming readily available. Once the reserve of famous international cities like Shanghai and Beijing, it is now common to find imported food shops, foreign food sections in supermarkets, and authentic international restaurants in almost every sizable city across the country. Items like French milk, Swiss chocolate, New Zealand cheese, and German beer can now be obtained easily, and this explosion of availability of foreign products has not only been a boon for the Chinese consumer but also for foreign themed food and beverage operations.
“There were two problems about trying to do something authentic,” Gus, the owner of the French bakery, told me. “One was you couldn’t get the ingredients you needed through customs, and [the other was] freshness. So you had to use local ingredients and you just couldn’t reproduce the cuisine. Now you can do authentic stuff because the importers are bringing in really good ingredients. So it is easier for foreigners to do foreign based and foreign style products.”
“It’s nice for us because we have more selection,” John Cox explained. “They are trying to bring in [more new products] to compete with other more readily available products. So from a purveyor’s standpoint it’s great to be able to offer our patrons microbrews from the U.S. or microbrews out of Australia, things you wouldn’t have gotten in China five or six years ago.”
The new diversity of imported goods and ingredients that the food and beverage industry in China can now access has further pushed the boundaries of what they can offer. It’s a cyclic scenario where a more worldly and adventurous Chinese consumer demands new types of foreign products which leads to an increase in their supply, which then allows foreign themed restaurants and bars to offer more authentic products, which further fuels the demand.
“People see the opportunity, they see the demand, so they are trying to satisfy the supply,” Cox added.
“The high and middle class is able to spend money for new foreign luxury goods and are very curios to try new things from abroad. It also got pushed by many very active retailers who promote new products with amazing passion and speed,” said Oliver Schirmer, the general manager of ACA Import & Export in Xiamen.
Although the increasing diversity of foreign products in China isn’t something that was facilitated by any trade liberalization efforts by the Chinese government. “The import beer faction has increased a lot, but the government has not made it easier. Not at all,” said Mr. Kou, a Malaysian who imports beer to Shanghai.
Mr. Kou went on to explain that the rise in imported consumer goods in China is due purely to consumer demand. The diversity and sophistication of the products that importers are now bringing in is a direct result of the fact that many of these products perform well in the Chinese market. This has prompted importers to test out an increasing variety of foreign products, which is resulting in a broader spectrum of brands from more diverse corners of the world appearing on shelves and on tables throughout the country.
While the explosion in import diversity has primarily been driven by changing patterns of consumption, another factor is at work as well. The big importers often have advantages when dealing with major foreign brands, so for the multitudes of smaller scale importers to get in on the market they need to focus on the longtail: specialty items for niche or budding consumer bases that are simply too small for the big importers to bother with. For example, a big Chinese company already holds the import rights to Heineken beer, but it’s an open market for companies who want to bring in that tasty Portland craft brew. This means a diversity of options for the consumer that were unfathomable just five years ago.
“The high volume spirits, you can buy those from any supplier in town, but the nice thing is that the selection is improving, and the people who are driving that — whether it’s microbrewed beer or a smaller distillery out of the U.S. or someplace else in the world — are guys coming from a small business perspective,” Cox explained.
The demand for higher end, foreign products combined with the new availability of imported ingredients has created a climate where foreign themed food and beverage operators in China can offer authentic products they never could before. This has lead to many foreigners finding fertile ground in China for the foods, deserts, and drinks that are typical of their home countries. Germans are now selling doner kebabs, French expats are finding success with bakeries and creperies, the Japanese are opening Sake bars, Italians are opening pasta restaurants, Americans are starting microbreweries, while the Irish and British are opening their particular flavor of pubs all over the country.
The fundamentals for expats looking to start businesses in China have done a complete 180. Where the question was once, “What can China make that people in my country want to buy?,” it is now, “What does my country have that I can make and sell here in China?”
“That’s the story of modern China,” John Cox explained. “It’s more about consumption, it’s a consumer based economy now.”
Segments of this article were originally published in the South China Morning Post at How China’s expat business owners have diversified to survive and Chinese demanding new tastes are driving increased food and drink imports.