What Will Be China's Next Booming Consumer Industry?

WHAT WILL BE CHINA’S NEXT BOOMING CONSUMER INDUSTRY?

Chen W. Ferguson

Department of Business Technology

Miami University

Hamilton, OH 45011

Phone: (513) 785-7703

Fax: (513) 785-7766

ABSTRACT

After China’s hyper-growth in the housing and automobile industries, recreational boating will be the next burgeoning consumer industry in China. This paper introduces a development model, which includes necessary conditions for the recreational boating industry to take-off. The paper applies the model to China’s recreational boating industry and discusses specific market conditions in China. As China maintains natural water resources, economic prosperity, national culture, quality labor, sufficient capital and administrative incentives, the recreational boating industry is going to experience a rapid growth during the next decade.

Keywords: China, consumer industry, luxurious boats, recreational boating industry

INTRODUCTION

The People’s Republic of China has experienced economic growth at an unprecedented rate. China’s economy grew at an average rate of 10% per year during the period from 1990-2004. Chinese GDP reached $1.65 trillion in 2004 with a real GDP growth rate of 9.5% (U.S. Department of Commerce, 2005). Some big-ticket consumer industries have experienced exponential growth. Among them, housing and automobile industries have led the way. From 1998 to 2004, China’s house sales were quadrupled from 251 billion Yuan to 1,037 billion Yuan (Yu, 2005). During the first couple years of the 21st century, Chinese automobile demand increased by over 1 million per year. By 2008, China will consume 15 million cars – China will consume one out of every four cars made in the world (Ouyang, 2005). Following the housing and automobile industry trends, what will be China’s next booming consumer industry?

A GROWTH MODEL FOR THE RECREATIONAL BOATING INDUSTRY

The recreational boating industry belongs to a big-ticket consumer industry, which is closely related to economic development. Thus, in order for the industry to take off, certain conditions must be present. The Exhibit I displays these conditions.

Exhibit 1 – Necessary Conditions for Recreational Boating Industry to Grow

In order for a country’s recreational boating industry to experience high growth, factors in the model have to be present. First, the country’s economy has to reach a certain level before its recreational boating industry starts to take off. For example, according to the world’s recreational boat development experience, if a country’s per capita GDP is around $3,000, the demand starts to grow (Zhang, 2004). Second, the country has to maintain a certain level of natural water conditions in order to build necessary infrastructure, such as wharf and marinas for recreational boats to be serviced and docked. Third, the national culture of boat loving is essential to stimulate demand. Fourth, because the boating industry is very labor intensive, the country needs to be able to provide mass labors at low cost so as to compete efficiently. Fifth, the recreational boating industry is not only labor intensive, but also capital intensive – the country has to have sufficient capital reserves to invest on huge inventories in boat production process. Six, in order for the recreational boating industry to take off, the country has to implement favorable policies to attract investment and stimulate demand.

APPLICATION OF THE GROWTH MODEL TO THE CHINESE BOATING INDUSTRY

Currently, one of every 171 persons in the world owns a boat. In the U.S., one in every 14 people owns a boat (Zhang, 2004). China and the U.S. share similar water resources. As China’s economy further develops, China’s 1.3 billion populations would have a demand of 182 million boats in 2031 based on the U.S. boat per person ratio. According to Mr. Yang Xinfa, Deputy Secretary-General of the Chinese Ship Industry, “Considering the economic development potential and disposable income increases, China's boat industry has the capability to take off in private boat ownership sector. After housing and automobile, the recreational boating industry will be the next booming Chinese consumer industry. ”(Zhang, 2004). The section below applies the model of Necessary Conditions for Recreational Boating Industry to Grow to current market conditions in China (See Exhibit 1) and substantiates the prediction that the recreational boating industry will be the next booming consumer industry in China for the next decade.

China’s Affluence Level

In China, although half of the population still lives in rural areas, most coastal cities have reached a certain affluence level. For example, in Shanghai, per capita GDP has reached $4,800. Furthermore, there are about other 20 coastal cities, which have also experienced rapid economic development. Currently, it is estimated that there are about 440 million Chinese (Electronics Supply Chain Association, 2003) who are at or above the per capita GDP $3000. This per capita GDP level is the starting point where the recreational boat demand starts to grow (Zhang, 2004).

A projection of the Chinese “middle class” population is even more promising. By 2010, China is expected to have 490 million “middle class”, which is defined as having an annual income of at least $10,000, being able to purchase an apartment, and taking leisure vacations annually (Electronics Supply Chain Association, 2003).

Based on current Chinese living expenses, “If you earn 20,000 Chinese Yuan per month, you will be able to rent a boat; if you earn 500,000 - 1 million Chinese Yuan per year, you will be able to buy a boat.” (Zhang, 2004). Accordingly, 80% of double income families in affluent coastal cities such as Shanghai will be able to rent a boat. Quite a number of successful Chinese entrepreneurs and businessmen can afford to buy personal boats. This will create a sizable domestic customer base for the Chinese recreational boating industry.

China’s Natural Water Resources and Historical Heritage

China has over 90,000 lakes, 6,500 islands, and about 20,000 kilometers of waterfront coastline. China’s rich natural resources and long history have contributed to early exploration of the seas. Approximately 600 years ago, Chinese navigator Zheng He (1371-1435) led an expedition, which visited more than 30 kingdoms. His travels dated 87 years earlier than Columbus and the founding of America in 1492 (Liu Hanjun, 2005).

Although modern cruising is very different from ancient nautical exploration, the passion of exploring the water resources is deeply rooted among Chinese. In the summer of 2005, China had a large-scale celebration across the country honoring Zheng He’s achievements, marking Zheng He’s anniversary as National Navigation Day. From the national campaigns, China delineated an overall plan to tap China’s potential water resources and leverage its rich historical heritage to catch up with more developed nations.

Cultural Influence

After decades of isolation from the rest of the world, contemporary Chinese culture exemplifies the rich. “To be rich is glorious” was Deng Xiaoping’s edict in 1997 and ignited an economic boom. In China, owning a boat is much more a proclamation of wealth, success and capability rather than a life style, which is witnessed in other nations like Australia and New Zealand. In those countries, a majority of people buys boats because they want to enjoy nature more thoroughly. In comparison, a majority of the Chinese boat consumers have the deeper psychological need of claiming their success, which can be satisfied by owning a boat. This early adopters will not only create a demand for recreational boats in China, but also influence the middle class’ consumption pursuit for the status symbol created by recreational boats.

In addition to wealthy Chinese boat consumers, China also maintains a sizeable number of expatriate boat owners. In China, there are altogether 520,000 foreign-owned enterprises (U.S. Department of Commerce, 2004). That foreign investment has created an expatriate population including foreign executives who are potential recreational boat consumers and buyers.

Personal leisure and business boats are especially popular (Zhang, 2004). “There are no better places to close business deals than on the boat,” commented by a manager from Mercury Marina in Suzhou, China (Cai, 2005). Boats become the trendy venue for multinational companies when they select places for parties, team building events and meetings. Led by multinational companies, some profitable domestic companies will also choose boats to conduct their business functions. Multinational companies in China favor corporate boats, with facilities for meetings or get-togethers. In addition, private boats are also very popular. In a high-end marina like Mercury Marina, 80% of boats are for leisure and 20% are business boats. Although the annual membership for Mercury Marina is as high as $20,000, it currently has about 600 members. Among them 70% of the memberships are from local domestic customer bases (Cai, 2005). Private boats and business function boats are both expected to grow rapidly within the next decade in China.

Sustained Quality Labor

The boat industry, by nature, has a very labor-intensive production process and China maintains a very strong competitive advantage. China has 200 universities (in comparison India has 80 universities). Among them, 60% of those universities train engineers. In addition, China has 1 million rural citizens, who could be moved to cities every year to keep the general labor cost at a fraction of the U.S. labor cost. For example, the standard Chinese labor rate is $0.70 per hour, which is about 1/16th that of the American labor rate. China’s qualified engineers and sustainable low cost labor will provide a competitive advantage for the boat manufacturing industry in China.

Accumulation of Financial Capital

For the recreational boat production, initial financial backing is a major obstacle since it is not unusual to have over $1 million tied up with the inventory of one luxurious boat. Thus, the boat industry is not only labor intensive, but also requires strong financial resources. According to the U.S. Boat Building and Repairing Industry, “The barriers to entry are largely financial in nature—capital requirements are high to establish a viably sized facility and skilled labor is very expensive.”

After decades of an open-door policy, starting in 2004 China became the number one recipient of foreign direct investment. China received $64 billion in 2004 for a cumulative total of $563.8 billion. China has attracted large investment inflows and foreign exchange reserves totaled $610 billion in 2004 (U.S. Department of Commerce, 2005). A series of incentive policies on insurance, finance and foreign investment will attract more international boat companies to enter the Chinese market. Abundant capital reserves provide necessary financial resources for China’s recreational boating industry.

Administrative Policies

Almost all of the coastal cities in China have recently promulgated several policies to attract investment to develop boat industries. Amoy (Xiamen), the biggest port in China, is going to build a wharf, which will be able to hold 900 boats ranging in size from 10 to 30 meters. Qingdao has become the aquatic sport center of China. At present, 154 Olympic construction projects with a total investment of $9.1 billion are under construction. A boat dock covering a land area of 0.5 hectare is under construction.

In 2000, Zhuhai (a Special Economic Zone in South China) established the Pingsha Industrial Zone. Starting in 2003, the city government started to promulgate a series of policies and specified Pingsha Industrial Zone to become the largest boat and boat-related product-manufacturing center in China. So far, 15 boat and related manufacturers have already invested in the special industrial zone where manufacturers can handle the customs and clearance within the zone (Jin Lin, 2005). In addition, they also enjoy tax advantages, such as no tax for the first 2 profitable years. So far, several wholly foreign owned enterprises and joint ventures have established marinas and luxurious boat manufacture facilities in Zhuhai.

BARRIERS TO DEVELOPING CHINA’S RECREATIONAL BOATING INDUSTRY

Currently, Chinese recreational boat buyers are divided into three categories:

Powerful, large-scale traveling and shipping companies. They purchase boats and use them for tourism and other high-end commercial activities, such as cruising, weddings and sightseeing.
Business Boats. Companies purchase boats and rent them out for official business occasions, such as conferences, parties and team building activities.
Private boats. These individual sales comprise 20%-30% of the total sales volume.

In order for the above customer segments to grow rapidly, it has some major barriers, which need to be addressed. In addition to some micro issues of boat production and sales issues pertinent to boat companies. At the macro level, there are three major issues that need to be addressed at the national level.

Regulations and Policies

In China, personal recreational boats can only navigate in limited areas, mainly in certain lakes. Even if the necessary permission has been obtained, the maritime affair and some other government offices have to be notified in advance to coordinate the service and administrative procedures. China does not have specific stipulations, which govern the purchase and registration procedures of personal recreational boats, although the Chinese government and especially some city governments have started to address such issues very diligently.

Infrastructure

Chinese marinas and marina-provided services are limited. Even though some people have the disposable income to purchase boats, they will wait until the market becomes more mature. In China, the anchoring fees and other overhead charges can be around $15,000 per year. Currently, China has only 20 marinas. More marinas, which can handle large sized (about 100 feet) leisure boats, will be essential to grow China’s recreational boating industry.

Finance-Related Issues

First, Chinese banks generally are not willing to provide a loan for personal boat purchase, because of the risks involved. Second, because of limited insurance development and availability in China, boat insurance is still at an embryonic stage. Third, the second-hand boat market in China is almost non-existent. Nobody knows by how much and how quickly a boat will depreciate in China. Actively maintaining the value of a boat is very important to sustain the continuous demand of the market. As boat owners tend to upgrade their personal recreational boats over time, this provides more new boat demand.

The promising news is that all of the above issues have started to be addressed. Some coastal cities are working hard to promulgate regulations, especially in the special economic zones, which have more freedom as granted by the central government. All of the above issues have drawn attention and will gradually be solved as China pledged to develop the recreational boating industry.

SUMMARY

The Chinese boat market maintains the necessary conditions for high growth: natural resources, economic prosperity, national culture, quality labor and administrative incentives will attract more international and domestic boat companies to compete in the China recreational boating industry. As China continues to attract more investments, expatriate consumers as well as domestic early adopters of recreational boats will generate a sizable market segment along China’s affluent coastal cities. After the housing and automobile industries, the Chinese recreational boating industry will be the next booming consumer industry to take off in the next decade.

REFERENCES

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Anonymous, (2005) ‘Country Commercial Guide’, [www document] U.S. Department of Commerce, (accessed 12 Feb. 2005).

Anonymous, (2000) ‘THE U.S. Boat Building and Repairing Industry: National Trends and Characteristics - An Initial Report of the Center for Competitive Analysis, [www document] (accessed 8 Aug. 2005).

Anonymous, (2003) ‘Doing Business in China’, [www document] Electronics Supply Chain Association (accessed 8 Aug. 2004).

Anonymous, (2003), Electronics Supply Chain Association (ESCA) July Discussion Group, [www document] July 17, 2003, Accessed through the web site: (accessed 8 Aug. 2004).

Cai, M. D and Yang, S. J. (2005) ‘Big Ticket Item, Where to Dock Chinese Private Leisure Boat?’ [www document] Waitan Pictorial, (accessed 12 May. 2005).

Liu H. J (2005) ‘A Nation’s Sailing – Memorize Zheng He for his Cruise Excursion on the 600 Year Anniversary’, originally published in the People’s Daily web site: (accessed 15, July 2005).

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Jin, L (2005) ‘Zhuhai has Built the First Recreational boat Industrial Zone’, [www document] Industry Zone Proposal, Pingsha Industrial zone Administrative Committee in Zhuhai city, (accessed 12 May. 2005).

Pu, J.P. (2005) ‘Interview with Mr. Yang Xin Fa, Deputy Secretary-General of Chinese Ships Industry’, Wenhui Daily, May 23.

Ouyang, M. (2005) ‘China has Stepped in to the Automobile society’, [www document] People’s Daily, (accessed 12 May. 2005).

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Table 1 – Necessary environments for the recreational boating industry to develop and market conditions in China

Necessary Environments / Chinese Market Conditions

Economic development level - If a country’s per capita GDP is around $3,000, the demand starts to grow.

There are about 440 million Chinese who are at or above the per capita GDP $3000 level, which makes the recreational boat demand start to grow in China.
By 2010, China is expected to have 490 million “middle class”, broadly define as having an annual income of at least $10,000, being able to purchase an apartment, and taking leisure vacations annually

Water resources and historical heritage are necessary stimulate consumption

China has over 90,000 lakes, 6,500 islands, and about 20,000 kilometers of waterfront coastline.
Approximately 600 years ago, Chinese navigator Zheng He (1371-1435) led an expedition, which visited more than 30 kingdoms. His travels dated 87 years earlier than Columbus

Culture influence will impact the recreational boat demand.

“To be rich is glorious” - Chinese early adopters of recreational boats have the deeper psychological need to claim their success which can be satisfied by owning a boat.

Sustained quality labor - The boat industry has a very labor intensive production process

China has 200 universities and 60% of them train engineers
The standard Chinese labor rate is $0.70 per hour, which is about 1/16th that of the American labor rate.
China has 1 million rural citizens who could be moved to cities every year to keep the general labor cost at a fraction of the U.S. labor cost.

Financial capital accumulation- the boat industry requires strong financial resources.

Starting in 2004 China became the number one recipient of foreign direct investment.
China received $64 billion in 2004 for a cumulative total of $563.8 billion.

Administrative support – favorable government policies will attract investment and encourage consumption

Most coastal cities in China have recently promulgated several policies to attract investment to develop boat industries.
Zhuhai (a Special Economic Zone in South China) specified Pingsha Industrial Zone as the largest boat and boat related -product manufacturing center in China.
In Shanghai, the government has decided to build marina facilities along the downtown Huangpu River as part of its transformation into an international tourism metropolis. The 2010 World Expo in Shanghai will also provide momentum to further enhance the marina related infrastructure in Shanghai and its neighboring coastal cities.