Book excerpt: The End of Copycat China

Her face had the excited flush of imminent motherhood as she opened the door. “Welcome to my home,” the 27-year-old Vanessa Zhu beamed. She handed us disposable slippers saved from some hotel trip. The lingering scent of spicy Sichuan food from last night’s dinner hung in the air.

Accompanying me was Maureen, the chief operating officer of one of the world’s largest consumer goods companies. We were in the middle of a six-month project translating insights from home visits and in-depth interviews into new products and packaging designs.

The first home we visited was Vanessa’s in a newer section of Chengdu, the capital of Sichuan province, famed for its fashionable women and a laid-back tea culture. Vanessa’s husband, Xiao Wen, was off at his $800-a-month job as a sales executive in a multinational firm, so Vanessa was showing us through their home.

A sheen of sweat beaded up on Vanessa’s forehead as she waddled through her two-bedroom, 70-square-meter (approximately 700-square-foot) home. Although she had a Haier air conditioner unit installed, it was turned off. She told us she usually had it switched off and other electric appliances unplugged “to save on electricity costs.”

Vanessa spent most of her time preparing for her baby’s arrival. Family and friends had bought gender-neutral items for the baby, because nobody knew whether it would be a boy or a girl. The government prohibited doctors from telling expectant parents the gender of their baby before birth because of fears that families limited to only one child will favor boys and seek abortions if they know they are going to have a girl. China has a skewed sex ratio, with 118 boys born per 100 girls, according to the 2010 census. The typical biological rate should be 103 to 107, according to the National Bureau of Statistics.

Vanessa explained she and Xiao Wen worried about the toxicity in paint and furniture, so they had already painted the walls with Nippon Paint, a trusted Japanese brand, and bought the crib from Goodbaby, a Chinese maker of baby products with a good reputation for safety. They had also bought wooden dressers far in advance so that all the furniture, paint, and curtains could air out formaldehyde and other toxic smells.

Most Chinese home buyers buy everything new when they move into a new home, from curtains to dressers made from compounded wood to tables. There are few hand-me-downs and most consider older furniture garbage rather than antiques. The mix of smells from all the new items can get overpowering.

Foreign-branded diapers and cans of baby formula stacked nearly to the ceiling crowded a corner of the baby’s room. Storage space presented a problem for Vanessa, as it poses for most middleclass Chinese, who live in cramped homes by Western standards.

Maureen was confused. “Why foreign brands?” she inquired. She did not understand why Vanessa spent on brands that did not bring prestige. Maureen had read work by Tom Doctoroff, the author of What Chinese Want: Culture, Communism, and China’s Modern Consumer, on Chinese consumer habits. Doctoroff, who is the Asia-Pacific chief executive officer (CEO) for advertising giant JWT, argues Chinese consumers tend to pay premiums only on items they use outside the home to project status but economize on items that remain inside the home, such as home decoration.

Vanessa responded, “I just don’t trust dairy products made in China, domestic Chinese or foreign brands. The supply chain is a mess. I will spend more if I trust the brand and quality.” Fears over another melamine scandal, or a botulism scandal, which struck New Zealand dairy company Fonterra in 2013, linger for years, and parents do not want to take any risks.

Her answer mirrored respondents on social media China Market Research Group (CMR) tracked and explained why foreign brands with cheap dairy products lost market share. For instance, in a project CMR did for a hedge fund analyzing baby formula, we found mothers correlated high price with safer products.

Many mothers responded they did not trust Nestlé baby formula, for instance. Nestlé located its dairy farmland in northeast China, a region known as China’s rust belt. From Nestlé’s perspective, establishing operations there introduced international farming and quality standards and helped local farmers and the local community. Nestlé instituted a cheaper price position than other international players.

But Nestlé’s strategy backfired. Chinese mothers feared that unsafe chemicals from decades of industrial runoff contaminated the soil, poisoning the grass, the cows, and finally the baby formula.

Users commented that Nestlé’s price level, often 50 percent cheaper or less than competitor products, such as domestic player Biostime, slumped so low that they worried about quality control. Nestlé’s problems in infant formula show the dangers of competing on price in China as a foreign brand—consumers perceive that foreign brands fromWestern developedmarkets, such as Switzerland, should be more expensive than local ones, or ones from developing regions, such as Thailand or eastern Europe.

Once explained, Vanessa’s willingness to pay more for infant formula, despite her relatively low income, made sense to Maureen—she had heard of the melamine scandal in 2008, when hundreds of infants developed kidney stones and five died, and knew safety issues continued to plague the dairy sector, despite continual nationwide campaigns to crack down on shady farming practices. But she did not get why diapers remained such a concern and asked Vanessa why she purchased Huggies rather than cheaper domestic brands, such as Anerle. Some diapers even had Hong Kong labeling.

“I worry about the quality of diapers made in China,” Vanessa said. “Anything that touches my baby’s private parts and skin has to be the best.” She explained she bought domestic sanitary napkins for herself to save costs but “spares no expense” for her baby. She requests that friends traveling to Hong Kong buy diapers to bring back because they are “better quality.”

When buying for children, especially during toddler years, mothers spend above levels they would otherwise spend for themselves—for safety—and they view those years as crucial for development. The one-child policy and competition with other children for too few good spaces in schools plays into the mentality and will continue even as the one-child policy gets relaxed because many are used to this mode of thinking and because high costs limit parents from having more than one child.

The state media has singled out many foreign brands, such as Johnson & Johnson’s baby shampoos made in country, for selling products with inferior ingredients. Asking friends traveling overseas to stock up on infant formula, diapers, and cosmetics to bring back is common.

Consumers perceive foreign-brand products made in China versus overseas differently with a hierarchy true across all product categories. Traditionally foreign brands made outside of China gain the most trust and prestige, followed by foreign brands made in China, national domestic brands, and then regional ones. This hierarchy is becoming upended, however, as national domestic brands, such as Biostime in baby formula, start to source from overseas and position themselves over foreign brands made in China. These premium domestic brands are gaining fast favor and trust with consumers.

Fears of the made-in-China label are so acute that Vanessa bought Japanese shampoo brand Pigeon for her baby, despite holding negative feelings toward the country for the atrocities it committed during World War II, because she trusted Japanese quality control. She stayed clear of Japanese food, including sushi, because she worried it may be irradiated by Fukushima, but felt baby shampoo was safe because factories were based away from Fukushima and it was not ingested.

As Maureen saw Vanessa’s spending habits, clearly Doctoroff’s argument that Chinese won’t spend money on the inside of the home is no longer true. Consumers evolve, no longer spending just to display social status. Alarm about food and product safety, as well as self-expression and individualism, are trumping ambition as the main drivers for spending.

Despite being six months pregnant, Vanessa refused to sacrifice on style. She wore shoes with inch-thick heels that cost $10. She wore a stylish red shirt, albeit from a no-name brand she paid 40 yuan (about $7) for. On top she wore a dark blue antiradiation bib Chinese pregnant women wear to block harmful radiation from computers, TV screens, and mobile phones.

Vanessa sacrificed makeup because she feared the impact of chemicals on her baby, but a quick look in her bathroom showed she spent a lot on face moisturizers and eye creams. L’Oréal bottles were strewn around the sink. She bought some herself; others were gifts from friends.

She kept a running shopping list, including nail polish and mascara to give her girlfriends and even their husbands, whenever they visited Hong Kong. “I ask friends to buy products at Sa Sa in Hong Kong because prices there are 20 to 30 percent cheaper than in Chengdu. There is also better variety.”

Her desire to buy cosmetics overseas explains the daigou craze, where people buy products via third parties who make frequent trips over the border to Hong Kong. There is a thriving daigou business, with people setting up shop on Taobao and WeChat. Even with commissions, prices are still cheaper than legal outlets because of tariffs.

For clothing purchases, Vanessa’s husband, Xiao Wen, stayed price sensitive. Stylish but no-name clothing brands took up his side of the closet. He did have a $600 jacket from Jeep, the licensed clothing brand from the automobile company that has caught on with well-heeled Chinese looking to show a rugged, outdoorsy image. He also had Nike shoes in his closet, which cost $250, because he wanted “the best athletic shoes.” But no-name or cheap-branded clothing filled up most of the closet.

He had cases of domestic Snow Beer made by China Resources stacked up in the corner of the combination dining room and living room most Chinese apartments have. Sometimes he even bought regional beers—to save money for the baby, he did not think it necessary to buy expensive beer, such as Budweiser or even domestic Chinese brand Tsingtao.

Later we observed Vanessa washing clothes and cooking lunch. Storage space and packaging played critical roles in product selection.

She had poured 8 cups of powdered laundry detergent into a resealable old infant formula tin. When we asked why, she said most powdered detergents came in “horrible” and “inconvenient” plastic bags that were a “nightmare” to seal and store. Her favorite brand, a foreign player, sold products only in plastic bags and nonreusable cardboard boxes, so she took an old baby formula tin from a friend.

Until that point most detergent brands assumed Chinese shoppers were so price sensitive that they would shave costs by offering the simplest, cheapest packaging format—hence flimsy bags crowding shelves. But based on this insight, Maureen’s company rolled out resealable plastic tubs for it powdered detergent. Within weeks, it emerged as one of its best-selling products.

The success of the better-quality packaging did not surprise me. Lack of quality packaging is an issue that comes up regularly in consumer feedback. One time we did a project on the bottled water sector, where we found the sturdiness of packaging was critical during the consumer buying process.

To be environmentally friendly, for instance, Nestlé’s Pure Life water brand used plastic bottles with thinner plastic and shallower bottle caps. These ecofriendly bottles were popular in Europe, but consumer response in China diverged from the European continent. Consumers told us they felt Nestlé was “trying to cut costs by having flimsier packaging,” and were concerned about the quality of the water. If the packaging felt so cheap, many respondents told us, they were worried Nestlé went cheap too during processing.

Consumers reported liking the harder plastic in bottles from domestic brands, such as Nongfu Spring. As one 31-year-old woman from Hangzhou told me, “I prefer the more solid feeling packaging from Nongfu than Nestlé. It just feels safer.” This was even after Nongfu had faced quality control scandals but Nestlé has not.

Nestlé’s problems also indicate a slight paradox—consumers worry about pollution but distrust ecofriendly and green initiatives. Most green initiatives might help the environment overall, consumers tell us, but pose risks to their personal well-being in the short term because the products might not be safe or are overpriced.

Vanessa began making lunch. She stir-fried chicken and drizzled on spices liberally. The scent made me hungry. We saw storage presented a problem for Vanessa. Her refrigerator squatted short and narrow—most refrigerators in China are about half to two-thirds the typical size of fridges in American kitchens. The few cupboards she had were so shallow that she bought compact and easily stackable products. Space limitations were a real eye-opener for Maureen, who was used to bigger American kitchens with ample pantry space. She realized her company would have to redo packaging across product lines.

As Maureen and I debriefed later that night over a bowl of spicy Sichuan fish, Vanessa and her husband’s spending patterns brought to mind an hourglass shape—top and bottom heavy and narrow in the middle. For categories they prioritized as essential—L’Oréal face creams for Vanessa, Nike sneakers for Xiao Wen, and anything for their baby to come, they traded up and went for the top brands they knew of and could afford. For most other items—T-shirts, nail polish, and beer, they skipped midpriced products altogether. Even though Vanessa and Xiao Wen were middle-class consumers, they did not shop like they were, buying midpriced brands targeting middle-class consumers—they went premium or cheap.

Excerpted with permission of the publisher, Wiley, from The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia by Shaun Rein. Copyright (c) 2014 by Shaun Rein. All rights reserved. This book is available at all bookstores and online booksellers.