Monday 15 October 2007

Economics in China: a story about "Beer"

Here at chinaconomicsblog "beer" is never too far away from our minds. So imagine our delight in finding a "economics and beer" post on a law blog (Chinalawyerblog).

On a serious note, this small anecdote tells us a considerable amount about doing business in China and more specifically how tight the margins are in what amounts to probably the most capitalistic market in the world and fits the economists standard assumption of "perfect competition" the most economics models are based on.

Such thin margins are also a deterrent to multinationals wanting to supply the home market. As an export platform China remains a good place to do business. When one thinks of some of the problems with "quality" it is clear to see that this overriding pressure on margins forces some companies to cut corners.

Tight Profits, How Can A Foreign Company Survive?

I went biking into the hills nearby Beijing last weekend, and returned with a story about beer and profit margins, and learned more about why it is so difficult for some foreign companies to compete here. Somewhere in the hills a few kilomters off the main road, I ran out of water and found a small, very simple store that sold water, soap, snacks and beer. Here is a photo of the beer stacked outside the store.

The bottle of water cost 1.2 Chinese yuan (RMB), about US$0.17, and to my surprise the shopowner told me the 500ml bottle of beer was the same price. I was startled, since beer in Beijing costs a minimum US$0.26, twice that price, and I couldn’t see how anybody could profit on such cheap beer, especially since it needs to be transported so far to this store.

The shopowner told me that his cost for a bottle of beer is 1 Chinese yuan, about US$0.13, and therefore his profit on the sale of an entire crate of 24 bottles is about 24 x US$0.04 per bottle, or about US$1.

So, what I am wondering here is how do foreign brands compete? I think they answer is that at least in the beer industry they really can’t. There’s no way Chinese consumers are going to pay four times more for a bottle of Budweiser than the local beer.

Incidentally, if you have not read Chinalawyerblog before I can wholeheartedly recommend it. Although there is an element of car crash blogging jjb gives insights into life living and working in China not found elsewhere. It is a soap opera in blog form. Will he ever get his money? Will he be bumped off before he gets paid? Tune in to find out.

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