Bill Zhang

Friday, December 23, 2005

A Buying Spree in the Middle Kingdom?

Just as retailers in the West wrap up their busiest selling season, China is gearing up for its version of Christmas. The period when Chinese shopkeepers rake in their biggest sales comes over the Lunar New Year, which this year falls in late January. Advertisement

The good news is that a swelling consumer class is poised to spend plenty of hard-earned yuan on electronics and cars in the upcoming holiday season and on into the new year. The bad news is that the country's consumers can be a tight-fisted, fickle lot.

Everything from mobile phones and flat screen televisions to new homes and automobiles are on the extensive shopping lists of China's consumers for 2006, says a new McKinsey & Co. report. The survey of 6,000 households from 30 cities representing 60% of China's population shows just how quickly the mainland has moved from a production-driven command economy to one increasingly driven by a swelling consumer class.

Indeed, China's recent revision of its gross domestic product shows that 37.8% of China's economy now derives from consumption (see BW Online, 12/16/05, "China's Even Heftier Economy" and BW Online, 12/20/05, "A New Window on China's Growth"). "What we are witnessing in China is the fastest and largest creation of a new consumer class in the history of the world," writes Kevin Lane, a partner in McKinsey's Shanghai office, in a summary of the survey.

There's a lot of good news for the likes of Motorola (MOT ), Lenovo, and Samsung in the findings. For example, 15% of respondents say they intend to buy a mobile phone over the next 12 months, while 10% plan to buy a desktop PC. More than one-half "believe that home ownership is critical to financial security," and 8.5% plan to buy a new home. Eager multinationals, take note: That big-ticket purchase is usually accompanied by a flurry of expenditures on household electronic appliances.

Indeed, the survey shows that 10% are planning to buy a new TV over the next year, with 8.1% going for a flat-screen version. Some 9% will buy a new microwave, while 8% report that they'll splurge on a new washing machines, air conditioners, refrigerators, and even digital cameras. All told, 71% of respondents say they're likely to upgrade furniture and appliances after buying themselves a new home.

GEOGRAPHICAL FACTORS. The spending spree isn't confined to the home, however. Close to half, or 43%, say that "owning a private car is their biggest dream." That's a dream 2.4% of Chinese who responded hope to realize in 2006. It's not surprising that they plan to buy new cars over the next year, given that China's auto penetration is only eight vehicles per 1,000 people, vs. an average of 104 cars in the rest of the world. While that's hard to believe when traveling the clogged and smoggy roads in Beijing and Shanghai, it's welcome news for the likes of General Motors (GM ) and Toyota (TM ).

"For the Chinese, like people all around the world, the auto represents both prestige and personal freedom," says Tim Dunne, a partner at Automotive Resources Asia, a Beijing- and Bangkok-based auto-industry consultancy. "Privacy is also a big factor -- you can talk on your phone, play music, do whatever you want in your own space, when you own a vehicle."

Interestingly, McKinsey's survey shows that the real buying action will happen outside China's already-saturated coastal cities, in the smaller cities of the interior. "Some products are actually on more shopping lists in rural areas and midsize cities than in the largest cities, where the market is becoming saturated," the report says.

FUTURE CONCERNS. So while 10% of consumers in China's biggest cities plan to buy mobile phones in 2006, twice as many in smaller towns say they intend to get a Nokia (NOK ), TCL, or other brand cell next year. And while only 5% in cities like Beijing and Shanghai want new washing machines, 12% of respondents in small towns have the same intention. Similarly, while only 8% in first-tier cities intend to purchase TVs, 15% in China's rural county seats plan to purchase sets.

Another intriguing finding: Your average Chinese is certainly brand-conscious, but not particularly brand-loyal. While 55% of those surveyed say they would prefer having a famous brand when choosing consumer electronics, and 44% and 36% feel that way about food and beverages, respectively, two-thirds of consumers report that they end up leaving the store with a different brand than intended. McKinsey's survey showed an average brand loyalty of only 5% over the 82 brands measured.

Despite Chinese consumers' ambitious plans to buy more goods, multinationals shouldn't get their hopes up too high, at least in the near term. That's because Chinese are still deeply concerned about their health and economic futures -- not surprising, given how the mainland's social safety net has frayed in recent years.

CONTRADICTORY CURRENTS. China still is a nation of savers, with most respondents setting aside one-quarter of their income. Less than one in five report that they're spending more in 2005 than last year. The country's annual per-capita income is only $1,490.

The survey reports that the primary reason Chinese are holding on to their money is to prepare for possible health costs, with some 50% citing this concern, and 43% are saving for retirement. Just 37% of those surveyed feel confident about their financial future. "For most consumers, creating a cash cushion is clearly the number-one priority," the survey says.

So Chinese consumers have big plans to buy everything from spanking new autos to flat-screen TVs, but they're still clearly worried about parting with their money. It may sound contradictory, but it's just another example of the crosscurrents defining the fast-changing behemoth that is China today.

Tuesday, December 20, 2005

China ranks 6th in world economy

China on Tuesday revised its GDP (gross domestic product) for 2004 to 15.9878 trillion yuan (about 2 trillion U.S. dollars), up 2.3 trillion yuan, or 16.8 percent from the preliminary figures.

The country's top statistician Li Deshui made the announcement at a press conference of the Information Office of the State Council, citing the result of a national economic survey.

The country has overtaken Italy as the world's 6th biggest economy.

The value-added of the tertiary industry was 6.5018 trillion yuan, 2.1297 trillion more than the annual preliminary estimation announced earlier this year. And the industry's share in the GDP rose from the earlier estimated 31.9 percent to 40.7 percent, an increase of 8.8 percentage points.

The increase of service sector output accounted for the largest part, or 93 percent, of that of the GDP.

Li said China had long been using the Material Product System (MPS) which was developed under the centrally-planned economic system in its national account statistics until the 1980s, resulting in "very weak" statistics for the service sector.

The scope of tertiary industry is turning wide and complex with a large number of units, which have no good means for accounting and statistics, he said.

Meanwhile, along with the economic reform, China has seen a diversified economic development in terms of ownership, and in particular, a dynamic development of private and individual-run service activities.

"It is very difficult to conduct statistical surveys as they are very scattered with frequent changes, resulting in a certain degree of under-coverage," said Li.

While many new services are mushrooming, data on their activities are often underestimated, he acknowledged.

Li added that some of the services affiliated to manufacturing or construction enterprises are estimated but classified into the secondary industry, while more others are neglected.

The value-added of the secondary industry was 7.3904 trillion yuan in 2004, 151.7 billion more than the original data, while the industry's share in the GDP shrank from the preliminarily estimated 52.9 percent to 46.2 percent, a drop of 6.7 percentage points.

"Through the survey, we are able to remove the 'water' from the statistics of the manufacturing sector, in particular, from small-sized enterprises," Li said.

Analysts say some small firms, including township enterprises in the rural areas, have been exaggerating their output figures to help local governments and officials showcase their "political achievements" and seek promotion.

Li said the share of the primary industry was still based on the figure from the annual preliminary estimation, as the industry was not covered in the survey.

The value-added of the primary industry was 2.0956 trillion yuan, and the industry's share in the GDP was 13.1 percent, 2.1 percentage points lower than the preliminary figures.

Result from the latest survey will not affect the nation's macro-economic policy, Li said. "The changes in the figures do notmean the traditional statistics have misled China's policy-making."

The survey's leading group was set up under the State Council, China's cabinet, and headed by Vice Premier Zeng Peiyan, with governments at all levels and concerned departments participating in the event.

More than 3 million enumerators and supervisors were recruited,and another 10 million statistician and accountants from government agencies, enterprises and institutions were mobilized to participate in the survey, according to Li.

More than 30 million questionnaires were collected in the survey with more than 1.06 billion records of firsthand raw data, Li said, adding that a sample survey showed that the comprehensive reporting error was only 4.9 per thousand, within the 1-percent target.

Business confidentiality

"In the publication, utilization and analysis of the survey results, departments and local governments concerned should continue to abide by the Statistics Law and the Regulations on National Economic Survey, to protect business confidentiality and privacy of the respondents, and to honor earnestly the commitmentsof not levying any penalties on the respondents on the basis of survey information," Li Deshui said at the press conference.

The NBS is working on the revision of data back to 1993 on the basis of the revised GDP figures in the survey year, using the trend deviation method which is widely adopted by the Organizationfor Economic Cooperation and Development, Li said.

"Results of the revision will be released on another occasion,"he said.

According to the State Council's decision, the survey results will be used as a basis for the central government and for local governments in compiling 2005 national account statistics, in highlighting economic and social development for the 10th Five-year Plan period (2001-2005), and in preparing the 11th Five-year Development Program and the 2006 annual development plan, he said.

Tertiary industry

The share of China's tertiary industry in the country's 2004 GDP (gross domestic product) has risen from the earlier estimated 31.9 percent to 40.7 percent, up 8.8 percentage points, shows the first-ever national economic survey.

The results from the national economic survey indicate there was an underestimation of the tertiary industry's contribution to China's GDP in 2004, Li said.

According to the survey, the value-added of the tertiary industry was 6.5018 trillion yuan, or 2.1297 trillion more than the annual preliminary estimation.

Of the total increase of 2.3 trillion yuan in the GDP, the increase of the value-added of the tertiary industry accounted for 2.13 trillion, or 93 percent, said Li.

Li said it is the under-coverage of the tertiary industry in the regular statistics that has led to the above situation.

China had long been using the Material Product System (MPS) which was developed under the centrally-planned economic system inits national account statistics until the 1980s, resulting in very weak statistics for the service sector, said Li.

As the scope of the tertiary industry is turning wide and complex with a large number of units, and many new and dynamic services are mushrooming in China along with the rapid economic growth, it is very difficult to conduct statistics surveys, resulting in a certain degree of under-coverage, Li added.

Li mentioned the three sectors where private and individual ownership has taken a large share, including transport, storage, post and telecom; wholesale and retail trade, catering trade; and the real estate. The value-added in the three sectors was about 1.5 trillion yuan larger than the regular preliminary estimation, accounting for 70 percent of the total increase of the tertiary industry.

In addition, some of the services affiliated to manufacturing or construction enterprises are estimated but classified into the second industry, while more others are neglected, said Li.

Currently, the local governments in China are using a unified way to revalue their regional GDP according to the statistics of the national economic survey, said Li.

Li said the new statistics from the national economic survey indicate the structure of the three industries is more consistent with the actual situation in China and more in line with the general level of developing countries.

But he noted that although the revision leads to some increase in the total size of the GDP, the ranking of China's per capita GDP is still below 100th in the world.

Exchange rate reform  

While answering a question on whether China should step up the reform of its exchange regime, Li said China's exchange rate reform which began on July 21 is "successful," noting "This policy should not be changed so frequently."

"The reform of the exchange rate has been proved a successful one," he said.

The floating exchange rate based on market supply and demand and pegged to a basket of currencies instead of a single currency in the past is a major progress of the reform in this regard, the Chinese official noted.

China allowed its currency, the yuan, to appreciate by a modest 2 percent on July 21.

The aim of the exchange rate reform is to build a managed, floating exchange rate mechanism based on market supply and demandand to maintain the yuan's basic stability at a reasonable equilibrium, said the People's Bank of China (PBoC), or the central bank.

  Survey result and macro-economic policy

Li told the press conference results from the national economic survey will not affect the nation's macro-economic policy.

The changes in the figures do not mean the traditional statistics have misled China's policy-making, he said, noting that the former figures did reflect the general level and development trend of China's economy, though they might have slightly undervalued the economic volume.

In addition, Li said, the major problems of China's economy, including high energy consumption, low economic efficiency and the extensive mode of economic growth, did not change with the adjustment of statistical figures.

Result of the survey also showed some optimistic implications. For example, it showed that the service industry has contributed greatly to China's economic growth, and consumption is also an important propeller of the economy, according to Li.

"The structure of China's economic growth turned out to be morerational and healthy, which can give us confidence in a long-term rapid growth and will also help the nation in mapping out its macro-economic policy," he said.

Monday, December 19, 2005

AOL-Google Deal Set for Vote

The board of Time Warner on Tuesday is expected to add its approval of a deal that would give Google a 5 percent stake in America Online for $1 billion while allowing AOL to sell ads on the search engine’s expansive network of Internet sites.

The agreement leaves Microsoft, which is expected to unveil new search technology next month, without a major ally in its battle with Google for domination of the interactive advertising industry. Microsoft had negotiated with Time Warner most of this year in an attempt to develop a working relationship with AOL, but was upstaged in negotiations that ended on Friday.

Yahoo also talked with Time Warner, but pulled out during November after reports it offered 20 percent of Yahoo’s stock for AOL, a deal that would have valued America Online at about $10.6 billion (see Yahoo Denies It Bid for AOL).

The Google deal values AOL at about $20 billion, excluding the anticipated revenue on both sides from increased ad sales and other non-cash sweeteners in the deal. That’s nearly a quarter of the value of Time Warner, which has a market cap of about $82 billion.

For Time Warner, the agreement offers new life for AOL, which has been a problem child for the media conglomerate since the two agreed to merge in late 1999. It also gives Time Warner stronger footing in the online advertising world to complement its inventory of ads in cable, print, and other media.

Several publications, including The Wall Street Journal and the New York Times, said AOL will sell advertising for Google’s search results on AOL’s sites. In return, Google will promote AOL’s sites in the sponsored links in its search results. Google also will add AOL’s collection of online videos to its search results.

Shares of Time Warner closed up $0.16 to $18.00 on Friday. Google climbed $7.62 to $430.15—a new record high. Shares of Microsoft dipped $0.02 to $26.90.

Established Ties
Google provides AOL with search technology. The relationship is set to end next year, but if the deal goes through, it will continue for another five years. In other words, even as Microsoft launches its biggest assault ever on search, Google will have managed to defend the greenest part of its turf for the next six years.

Google, which brought in revenue of $1.03 billion last year, makes money primarily through online ads. And 12 percent of the revenue that AdSense, Google’s advertising program, generated last year came from AOL.

So it wasn’t a surprise that Microsoft targeted AOL earlier this year, trying to convince it to switch to MSN’s search technology. It was at that point that Yahoo reportedly entered the fray.

“If you’re large and successful, you don’t want to lose your biggest customer to your biggest competitor,” said Scott Kessler, an analyst with Standard & Poor’s. “Next year will be a big year for Microsoft and search. Really, the last thing Google wanted to see was its biggest customer bolting to its biggest competitor’s new offering.”

As an investment, this move might make sense for Google, as it gets a piece of a company that is rapidly growing its revenue from online ads.

What's AOL Worth?
But for Time Warner, it doesn’t make too much sense, points out Tom Forte, equity analyst with Geneva Investment Management of Chicago. He believes a $20-billion valuation for AOL is on the low side.

“The notion of selling a 5 percent stake to Google for $1 billion doesn’t meet my requirements for giving cash back to shareholders, not when you’re talking about a $12.5-billion stock repurchase program,” said Mr. Forte. “The upside is that it meets the requirement of the company at the end of the day as it retains a majority stake in AOL.”

Billionaire financier Carl Icahn has been repeatedly attacking Time Warner on the issue of shareholder value (see Icahn Warns Time Warner).
t doesn’t necessarily make complete sense for Google either. If anything, this highlights the Mountain View, California, search giant’s vulnerability, according to Rick Summer, an analyst with Morningstar. It would take Google four years to recover $1 billion from AOL, he said.

“This highlights a larger issue,” said Mr. Summer. “If they have to take this to the extreme, if they had to buy all their content relationships and wait four years, this business would look substantially different.”