Company Level Strategy To Deal with the Yuan Appreciation-Part Two: Sellers' Perspectives

The appreciation of the Chinese currency in general should be viewed as positive news to companies selling (or planning to sell) products/services to China .

Undoubtedly, the PRC government, by revaluing the yuan, intends to accelerate the growth of Chinese domestic consumption so that the country can gradually move away from its over-dependence on the export sector for economic growth. Already, some gurus are enthusiastically talking about the big cost savings foreign car manufacturers in China , for example, can now achieve by spending less yuan on the expensive imported components. We at JJ Wellesley Group, however, believe that two important economic dynamics need to be re-examined before a company attempts to predict any "lift" the yuan revaluation can potentially create.

First, the labor cost difference between China and western countries has been so significant that almost any products/services wholly or partially made outside China will have an unfavorable cost structure when compared with their 100% locally produced cousins. Unless a company only sells to highly price inelastic customer segments (e.g. luxury goods and some highly specialized industrial products), it needs to continue to localize its production processes. The success of Procter & Gamble (which has largely localized their production processes in China ) vividly proves the point. Obviously, raw material business is an exception here. As illustrated in Fig 1, companies need to migrate to the "desirable position" quadrant if they are not already there. For the majority of the companies JJ Wellesley Group has worked with, this migration needs to continue even the yuan continues to appreciate by another 20%-30%.

Second, as for the companies (such as foreign car manufacturers mentioned above) to whom an appreciated yuan has already provided tangible cost savings, they need to first understand the price elasticity of their target customers before deciding on any short- term measures they can take to boost their sales. For years, Volkswagen enjoyed leading market position in China ; and their main customers were government entities and SOE's (state-owned enterprises), who did not care too much about prices. During recent years, however, as the Chinese car market rapidly shifted toward individual buyers, VW reportedly lost a significant part of its market share to Korean and Chinese car manufacturers. With or without any further yuan appreciation, foreign companies should continue to focus their efforts on developing a value proposition that appeals to their target customers.

Read Part One-Buyers' Perspecitives

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