China Trends: Go West!

Westerners of a certain age who follow economic trends in China these days could be forgiven if they’ve had 80s synth-pop tunes stuck in their heads of late. While the Chinese government has been promoting the movement of people towards growing cities in the interior instead of the already bulging megalopolises on the east coast, the explicit economic shift in terms of development dollars and infrastructure projects only started to ramp up last year. As a result, this is a region that is just now taking off.

Western brands are taking note. As The Economist pointed out recently, luxury brands, long the canaries in the coal mine when it comes to economic trends, are finding that they may be hitting their peaks in the developed eastern cities.

It seems that China remains the biggest prize in the luxury industry, but the low-hanging fruit is gone. Luxury firms must now venture beyond the coastal cities where they have made easy fortunes, cultivate new types of customers and market niches, and experiment with new business models.

As the big costal – and very international – cities, such as Beijing, Shanghai and Shenzhen, have gotten saturated with Western brands, the room for growth in those places is shrinking. Out west, however, things are quite different. Chongqing, for example, is the biggest megacity in China’s west, and the numbers coming out if its Liangjiang New Area development zone of late are indicative of the kind of potential that the interior markets have for growth. The 20.4% jump in annual GDP that they reported for 2012 was staggering in its success.

Housing is more affordable in Tier-2 and Tier-3 cities, while wages have been rising, meaning that consumers there tend to have a little more disposable income to spend than many of their eastern compatriots. The government is shifting more and more development dollars to the region; they’re expanding highways and high speed rail lines to accommodate the burgeoning populations there.

Consulting firms are getting into the game, as well. Groups like Sichuan Delegations & Internships have started popping up all over the region in an effort to cash in on the need that Western companies have as they explore entering the area.

Firms need to think about more than just Beijing and Shanghai when they look at entering the China market. Those may be the easiest cities to land in but they’re not where the most growth is going to be over the next few years. While economic expansion slows in the most developed places, it’s in China’s vast interior, where there is still a growing need for more schools hospitals and all other kinds of urban infrastructure, where growth is going to be the most robust.

In their recent broad analysis paper, “China’s Great Rebalancing Act”, The Eurasia Group lays our several areas where the government will have to make adjustments in the economy in order to maintain growth. One of these is shifting development attention from the east to the west.

Beijing will have little trouble pushing economic activity from the coast to central and western China. That initiative should gain support from local and provincial officials since it will mean additional investments in infrastructure, expanding regional development plans, and adopting investor-friendly regulations.

China still has incredible potential no matter where you go, but for those willing to take a chance in western China, there are more opportunities to be had than there are in the east.