China’s economic rebalancing will drive demand for Thai consumer goods

Author: EIC | Economic Intelligence Center
Published in Bangkok Post/Asia In Depth: Asia Focus section, 6 July 2015

China is changing again, with a big nudge from the top. The central government is already in the second year of its latest five-year economic plan, which seeks to “rebalance” the economy so that growth follows a more sustainable path. This calls for relying less on exports and investment and more on domestic consumption driven by expansion of the middle class. The reform is aimed at ensuring economic stability, but one consequence is a slowing of growth. The government’s target for GDP growth in 2015 is 7.0%, down from last year’s 7.4%.

Yet China’s slower growth is not necessarily bad news. In the view of Siam Commercial Bank’s Economic Intelligence Center, companies here can benefit in two major ways. As China puts less emphasis on serving as “factory of the world,” Thai and other ASEAN manufacturers can pick up the slack. Clear evidence shows that the GMS could become Asia's new low-cost production hub replacing China as the world's factory as the region becomes more integrated. Vietnam, for example, has now attracted several investors and is emerging into the new Asian hotspot for hi-tech manufacturers. While Thailand is also ready to be production hub for electrical appliances following the upcoming launch of the AEC. Undoubtedly, Foreign Direct Investments into ASEAN are expected to continue to grow strongly as more companies look to set up production bases in the region and expand global supply chains. And as Chinese consumerism gains momentum, Thai producers are well positioned to profit.

China already accounts for 12% of Thailand’s annual exports. In the past, 70% of these exports have been raw materials, and various primary and intermediate goods destined for further processing by Chinese industry. As China shifts away from export production towards consumption, these Thai industrial exports might lose momentum. But China’s imports of Thai-made consumer goods are destined to climb. Beijing planners target a doubling of per-capita income by 2020. Various measures aim to accelerate urbanization, raise living standards, and increase the size of the middle-class population to 700 million people by 2020, up from 400 million today.

The fast expansion of such a vast consumer market should encourage Thai businesses to develop appropriate new products and add value to existing ones. Chinese consumers enjoy higher purchasing power nowadays, and they have a strong taste for luxury. They love trying new products, especially premium goods with distinctive characteristics. China’s brand preferences are not yet carved in stone, so Thai companies should leap at this chance to win the loyalty of so many open-minded, deep-pocketed customers.

China’s consumption boom will especially benefit producers of food and beverages. Chinese consumers devote 25% of their spending to food, but they have little confidence in the integrity of domestic producers, following years of scandals involving tainted products like pork and powdered milk. Not surprisingly, interest in organic food has soared during the past five years, which has created a significant opportunity for Thailand.

EIC believes that organic and natural products have strong potential, which is evident in the growing interest among grocery stores and supermarkets in major cities. Organic foods command much higher prices than ordinary ones. They cater to the lifestyle of modern Chinese consumers who are highly educated, middle-class and affluent. The many Chinese who return from studying or working abroad tend to adopt Western-style attitudes regarding body image and health, and to develop a taste for international food. As such, Thai businesses should export products like organic sugar and organic tropical fruits and vegetables that are hard to grow in China, i.e., bananas and durians. Unique types of rice, such as organic Riceberry, also have strong potential. 

Chinese, especially in the big cities, are increasingly keen on imported wines and spirits, thanks in part to these beverages’ aura of good taste, wealth and social status. The main target market is successful, middle-aged businessmen. Studies have shown wine to benefit cardiovascular health, so it appeals to senior consumers and the health-conscious.

Thai makers of wines and spirits can introduce their wares in China by promoting them as novel and sophisticated. Wines and spirits made from Thai fruit, such as mangosteen, star fruit or mulberry, can be marketed as healthful and unique. Thai vineyards can capitalize on the global interest in “new latitude” wines, which now include grapes grown in places like India and Japan never before associated with fine vintages.

Other likely winners are cosmetics and spa products, because Chinese urbanites are increasingly beauty conscious. Thai companies should take advantage of local raw materials like aromatic and medicinal herbs. Indeed, many Thai personal care products are already popular in China. The largest Chinese shopping website features several online stores that sell only beauty products from Thailand. The success of these products owes partly to the reputation of Thai goods for high quality, affordability, attractive packaging and natural ingredients.

These are just a few examples of Thai consumer products with excellent prospects in China. Of course, Thai companies need to not only identify the right products to sell there but also to choose the appropriate distribution channel. The online space is attractive. China’s e-commerce has been growing by 30% annually during the past couple of years. Chinese consumers increasingly rely on the internet to find product information, compare prices and make purchases. This opens a new door to Thai companies that want to reach Chinese customers quickly and cost-effectively and to target market niches.

Thai firms that have not yet considered entering China should keep the market’s size in mind. China’s middle class will soon outnumber Thailand’s entire population by a factor of ten. Capturing even a tiny slice of this clientele will enable some Thai businesses to grow more than ever before.