China 2014: Too Little, Too Late for Newbies

2014 will be the year leaders of consumer goods producers realize that it may be too late to enter China. If you haven't established significant scale already, you probably never will. The PRC will not be an option for turbo-charging future growth plans for current non-players.

2014 will not be easy. Consumer confidence is on tenterhooks. Anxiety abounds as the nation holds its collective breath awaiting signals issued from the upcoming third plenum. At this gathering, slated to begin November 9, a new leadership team will announce its reform agenda. Consumers will be not be reassured if President Xi Jinping does not announce a robust, albeit incremental, program to modernize the economy and limit the role of the Communist Party in key industrial and service sectors. But the smart money suggests that competition between entrenched political interests will dilute aggressive efforts to liberalize policy. Even if the smart money is wrong, most economists believe long-term acceleration can't be accomplished without the short-term pain that comes with rebalancing towards a consumer-led economy. So consumer spending will remain pinched, at best.

A more acute problem for multinational corporations is changes on China's media scene. Due to new and ever stricter government regulations, the range of permissible broadcast television programs is becoming more and more narrow, and less and less interesting to viewers. Officials now allow only one "reality-based" show to air every quarter across 31 provincial stations. (CCTV, the national network, has long been soporifically-inclined.) And only one "imported format" -- for example, China Idol -- is allowed in a calendar year.

The result? Ratings, already low, will further decline.

However, because China's media market is government-controlled -- that is, monopolistic at city and provincial levels -- media prices will remain sky high. So the cost of establishing brand awareness is increasingly prohibitive, a trend that will only accelerate in 2014. Brand building costs, typically 5-7 percent of revenue for corporations operating in the West, were already double or triple of what they are in the United States and Europe.

True, as TV becomes less affordable, alternative digital media grow. But, unfortunately, digital is better for deepening engagement for and optimizing experience with existing brands than forging awareness of new ones.

Large MNCs who have already captured significant market share by, in part, expanding distribution will continue their march towards national dominance. Blessed with on-the-ground scale and healthy cash flows, foreign companies continue to boast active preference amongst consumers vis-à-vis local competitors, will become bigger and bigger. (By the way, government orchestrated propaganda attacks against foreign brands, a characteristic of China's brandscape for many years now, will continue but will not markedly affect consumers' fundamental preference for international brands given their safety and "cool.")

So the pockets of new players must be deep, lest they consign themselves to competing in lower-tier markets at lower prices against very aggressive, operationally-savvy local competition or newbie international also-rans. The result? Low margins which might cause marketers to think twice before fighting for scraps in China's hinterland. The cash rich markets of Shanghai and Beijing would be forfeited from the get go.

Is China going to collapse? No. Are current MNC leaders such as Starbucks, Unilever and Nike going to hit the wall? No.

Will Chinese growth continue? Yes, although at less spectacular rates than previous years, assuming no unforeseen macro-economic disaster.

But the era of China as Great White Hope is probably over.