2004: year of the price wars – the WTO column

(Later at Chinabiz)

2004: year of the price wars – the WTO column

Ann Arbor, MI – You might think that China is a bargain? Well, there is still room for improvement and we are going to see some of that during the upcoming year. Foreign companies that thought they had tapped into one of the most profitable markets of the world will have to readjust their estimations.

The first major change in the economies in China’s big cities people noticed halfway through the 1990s was that no longer supply but demand was directing daily life. Gone were the familiar queues and quota systems to organize scarce food and other resources. By freeing up the price controls system China’s consumer market came into existence, at least for a substantial number of consumer goods.
But important parts of the economy were excluded from this road to a market economy up to today, partly because demand was still higher than supply or because the government had good reasons to maintain a price level exceeding greatly the market value of the products and services. Cars in China have been too expensive compared to their production costs, telecommunication fees and airfares have been higher than really needed.
The Chinese consumers always knew they were paying too much for those cars and other products, but since there was a relative shortage with no alternatives in place, they accepted reluctantly the higher prices. In some cases the consumers benefited in the long run, as for example the telecommunication system in China’s larger cities is better, more transparent and certainly more affordable than those in Europe or the United States.

That artificial barrier to reach market prices has benefited some industries’ profitability in a major way: the airline industry bought time-out to reform before they will face global competition in a few years time. The telecommunication giants could show decent balance sheets to the investors that had to be lured into buying their shares at foreign stock exchanges. The poorly developed automotive industry could maintain a globally unmatched profitability, because they were allowed a margin of over 20 percent on top of the real production costs.
Foreign car companies, airliners and their suppliers had a golden decade as they used domestic protection in the slipstream of China’s policies. When I fly to Europe I regularly take a detour to visits friends in the US and still spend less money than on a direct flight from Shanghai to Amsterdam. While visa regulations would make such a detour hard to take for Chinese citizens, it shows how much the European airlines have been profiting.
Key markets will now lose this government-induced protection as competition increases under liberalization. The Ministry of the Information Industry has already announced that this year’s domestic phone fees will be up for review. Both increased capacity and competition will allow consumers to pay less, putting a dent into corporate profits. Car prices are going down ,dramatically, putting an end to the urban myth that Chinese cars are more expensive than Japanese or German cars. They only were because of the high margins of foreign car producers in China.
Reform is entering a new phase and the consumers seem the main beneficiaries; the golden times for some foreign investors might be reduced to … silver.

Fons Tuinstra