Forget the Budget. Forget the US presidential election. In the end, neither will make much difference to companies or to investors one way or the other. Something far more significant is happening, even if few are paying much attention to it. A new wave of Chinese consumer brands is starting to push out into global markets.
The coffee market might already look hyper-competitive, but it is about to get a lot more crowded. Last week, China’s largest chain, Luckin Coffee, said it was planning to launch in the US market next year. It has already started advertising during sports events and has built up a list of initial locations in cities with lots of Chinese students and expats. It plans to undercut the big US chains by selling coffee in the $2-$3 price range, instead of the $5-plus for the big cups that have become the norm at Starbucks and many of its rivals.
As the younger, more prosperous Chinese switch from tea to coffee, Luckin has steadily turned into a huge business, with more than 20,000 outlets, far more than the 7,000 Starbucks has in China, and closing in on the 38,000 it has globally. It is profitable and growing quickly, while Starbucks has stumbled from crisis to crisis, switching one chief executive for another, and redrafting turnaround plans, even while the share price struggles. Luckin may well be pushing at an open door, with lots of money to spend, and a pitch to customers who are looking for something different.
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Likewise, in the electric-vehicle industry, emerging Chinese colossus BYD last week overtook Tesla, recording higher revenues in the third quarter than the US market leader. The US and the EU may be slapping punitive tariffs on Chinese electric cars, but so far that has not slowed down their rise. With Tesla surpassed, Volkswagen and Ford may well be next in line as customers find the Chinese-made vehicles are often better than Western models, and certainly a lot cheaper. Chinese fast-fashion brand Shein has also expanded globally, and plane manufacturer Comac is ramping up production and could soon be as familiar as Boeing and Airbus. China’s home-grown brands have been building and growing over the last two decades and are now ready to expand into the global market.
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Complacent Western giants are not nearly ready for them. Starbucks, as noted, is in crisis. Our car companies are dependent on subsidies for their electric vehicles and are relying on their governments putting punitive sanctions on their Chinese rivals. Boeing and Airbus have allowed quality issues and delivery delays to undermine their reputations as if the industry was still a cosy duopoly. The list of industries where China poses a real threat is likely to get longer over the next few years.
Why are Chinese consumer brands so popular?
China’s emerging brands have two things on their side. First, a vast domestic market, with more than 1.4 billion people, and 145 cities with more than a million people, mostly speaking the same language, and all using the same currency and the same payment systems. It is a strong base and one that can be used to fund expansion overseas. Next, and perhaps more importantly, many of them have developed their own distinct offering. The coffee chains have far more sophisticated apps than their Western rivals. The car companies have lower costs and often better design and technology. Western multinationals often still think of China as a country where they can offshore manufacturing. They are ignoring that it has grown richer and is bubbling with fresh ideas, some of which will be very successful.
The overall Chinese economy might be slowing down, but that should not fool anyone that the competition from Chinese companies is about to disappear. Even without any further growth, China is still the second-largest economy in the world and it has turned into a thriving laboratory for new entrepreneurial ideas. Investors spend a lot of time fretting about interest rates, tariffs, employment and all the other things that impact corporate profits. They are blind to the challenge to Western consumer brands from Chinese rivals. The fight has only just begun.
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