It’s Christmas for China’s decorations sector
China’s holiday ornament industry is beating the economic chill in Europe and America by boosting sales at home, where Christmas trappings are an increasingly popular marketing tool for local retailers.
While Chinese manufacturing activity is shrinking for the first time in almost three years, the mainland’s Christmas decoration industry is reporting strong sales and a rush by new entrants into the industry.
In Yiwu, a manufacturing centre in eastern Zhejiang province that claims to be the Christmas ornament capital of the world, exports are up about 10 per cent for the industry as a whole and some manufacturers are reporting their best year to date. Over the past three years, the number of Christmas decoration manufacturers in Yiwu has snowballed from 80 to 600.
“Christmas is like Chinese New Year: even poor people have to celebrate it,” said Chen Jinlin, head of the Yiwu Christmas Products Association. “Hotels, kindergartens, schools, supermarkets, they all have Christmas decorations.
“As people born after the 1980s and 1990s grow up, the [Christmas] culture is having a growing influence.”
According to Zhang Lanfang at the Yihang Handicraft Products Factory, this season is so busy that she doesn’t even have time “to drink a cup of tea”.
“The financial crisis has had no impact on my sales,” Ms Zhang said.
But with export margins hit by increased competition and the rising value of the renminbi, businessmen such as Gong Yuequan are emphasising domestic sales and innovation.
Mr Gong, chairman of Zhejiang Youlide Arts and Crafts Company, says domestic buyers want more extravagant – and more expensive – Christmas items than foreigners as they are often used as marketing tools at malls, restaurants, hotels and office buildings.
Due to Yiwu’s labour shortage, Youlide is outsourcing basic manufacturing to small workshops and hiring designers to create more innovative products, many of which fuse east and west. These include a Santa figurine dressed like a Chinese landowner in traditional brocade and embroidered with holly leaves – and a six-metre high tree that can be decorated with baubles and presents for Christmas and then knots and birdcages for Chinese lunar new year.
“The domestic market is more profitable,” adds Mr Gong. “Foreigners know how much these things should cost, but domestic customers have just started celebrating Christmas and they have no idea.”
China’s coupon websites struggle to pay the bills
Growing numbers of Chinese merchants are struggling to collect their money from daily deals websites as some of the smaller companies in the fiercely competitive sector are collapsing.
A coffee shop owner in Chengdu, who gave his surname as Zhang, said he was owed Rmb30,000 ($4,700) by Fantong, a coupon site focused on restaurant deals.
A Beijing-based merchant surnamed Li said Kutuan, another group buying site, was more than two months late paying him Rmb16,000 for clothing and cosmetics sold in coupon deals. “The agreement was that they’d pay 10 working days after the deal. Kutuan’s excuse [for the delay] is that too many buyers returned the goods so they couldn’t collect, but they haven’t returned a single piece to us,” said Mr Li.
The complaints are the latest sign things are starting to fall apart in a sector that has sucked up $700m in venture capital funds since it took off last year.
Driven by the hope for quick returns from a business model that generates cash from the very beginning, Chinese start-ups have created thousands of Groupon clones in the country since early 2010. But the total number of daily deals websites in China has started falling, according to a report published by Tuan800, a website that aggregates coupon sites and collects data about them.
“In October, only 16 new group buying sites opened and 1,017 sites stopped operating; therefore, the total number of group buying sites decreased for the first time, to 4,057,” the report said.
The transaction value has stopped growing after peaking in August at Rmb1.25bn. Combined with investors’ loss of appetite for Chinese technology pickings and a marketing spending spree among the top competitors this year, the slowdown makes it impossible for many smaller sites to survive.
Over the past year, some of the largest coupon sites, including Lashou, Wototuan and Manzuo, have spent big on aggressive outdoor advertising campaigns and continue to expand their sales teams beyond the largest cities. “They are squeezing us out,” says a sales representative at Kutuan, the site with which Mr Li has his payment troubles.
Kutuan is no longer hiring in cities other than the wealthy metropolises of Shanghai, Hangzhou and Guangzhou. 24quan, which ranks among the top 10 sites but has seen its transaction value slide since August, has mostly stopped hiring since last month.
The market is also looking risky for the largest players. Lashou, which ranked second by transaction value in October but has failed to keep the growth momentum it saw this summer, first downsized and then delayed a planned stock market flotation in the US. Gaopeng, the joint venture that runs a local site with Groupon, of the US, laid off a large portion of its staff after an aggressive expansion drive.
“Group buying in China is a game independent companies can’t win,” said Ding Yongxing, who heads the group buying arm of Sohu, one of the country’s largest online portals. “For larger internet groups it’s just part of a broader social media or e-commerce offering, so the cost of customer acquisition is so much lower and it’s not such a drag on margins.”
Pearson bolsters presence in China
Pearson has expanded its reach in China with the $155m purchase of Global Education and Technology Group, a provider of English language test preparation services.
The FTSE 100 education and publishing company, which owns the Financial Times, is aiming to tap further the growing demand for English language education in China through the all-cash deal.
Pearson on Monday said it would pay $294m for US-listed Global Education, which is expected to have $139m in cash on its books when the deal completes at the end of the year.
“As well as continuing the process of earnings per share upgrades from deploying cash, we see this deal as strategically positive – it helps bulk up Pearson’s presence in China and provides a footprint for future expansion into other subjects outside of English language,” analysts at UBS said.
Global Education provides test preparation services in China for students who are studying for English language qualifications. The group offers online courses, as well as classroom training to prepare students for national qualification exams, such as the International English Language Testing System.
The company, which was founded in 2001, operates a network of 450 test preparation and training centres in 60 locations around China. About 115 of the centres are owned by the company, the rest are franchised.
The acquisition bolsters Pearson’s presence in China. It follows its 2009 purchase of the Wall Street English education business for $145m and complements its existing Longman English division, which provides language education for children.
Last year the group launched an expansion plan to open 50 new English language centres in China, creating 2,000 jobs.
Pearson has estimated that 500,000 Chinese students sit the internationally recognised English language assessments each year – a fourfold increase over the past five years.
“This acquisition gives us the opportunity to help high school graduates gain the English qualifications they need,” said John Fallon, chief executive of Pearson’s international education business division.
“Through organic investment and complementary acquisitions, we’re learning a lot about the significant growth opportunities we see in China.
“[The acquisition] also significantly extends our scale, geographic breadth and range of education in the fastest-growing English language teaching market in the world.”
Global Education is expected to generate revenues of $65m in 2011. Pearson said it expected the acquisition to be “broadly earnings neutral in 2012”, including integration costs.
CCB aims to secure Brazil foothold
China Construction Bank is in talks to buy a bank in Brazil amid plans to open a subsidiary in Latin America’s biggest economy, according to officials and people familiar with the matter.
The move comes as the leading Chinese banks are moving into Latin America to service rising trade with the region and to encourage South American exporters to begin trading in China’s currency, the renminbi, rather than the dollar.
John Weinshank, senior vice-president at CCB’s New York branch, told a banking conference in Miami that the executive board of the world’s second-largest lender by market value had approved a proposal to open a subsidiary in Brazil.
“We are following our customers,” Mr Weinshank told the annual conference of Felaban, the Latin American banking federation, adding that the proposal still needed the approval of regulators in both countries.
Separately, a person in São Paulo familiar with the matter said CCB had opened talks with the owners of a small Brazilian bank over a potential acquisition of the institution.
The person declined to name the target, but said entry into Brazil through an acquisition would provide CCB with the necessary licences and permits more easily than starting from scratch.
China overtook the US to become Brazil’s largest trading partner in 2009 and its biggest foreign investor last year as companies ranging from car manufacturers to engineering firms are looking to set up in the Latin American economy.
Chen Jin, head of international financial institutions for Industrial and Commercial Bank of China in Beijing, told the Felaban conference that the group is establishing branches in Brazil and Peru as it seeks to help its clients with their businesses in Latin America.
ICBC has also bought 80 per cent of Standard Bank in Argentina, a deal that is awaiting shareholder approval, she said.
China bans TV ads during dramas and films
China has banned advertisements during dramas and movies on television in the Communist party’s latest move to assert control over the country’s increasingly commercial media industry.
The rules, which come into effect in January, ban TV stations from running ads during films and drama episodes that run for 45 minutes or more.
Analysts said they could slow the world’s fastest-growing big advertising market next year, as the party’s media campaign starts to have a commercial impact, or divert TV ad budgets to other media.
The State Administration of Radio, Film and Television, an arm of the propaganda department, has over the past two years stepped up its meddling in TV networks’ operations.
In 2010, it cut the amount of ads stations could broadcast during prime time by a quarter. This year, it pushed networks to cut entertainment programming in favour of morally edifying shows. Earlier this year the regulator forced Hunan TV, China’s most commercially successful provincial broadcaster, to take Supergirl, the nation’s first and most successful talent show, off air. Officials told the broadcaster that entertainment should take a back seat to “values, responsibility and quality”.
Analysts said the new rules could throw the industry into disarray. Zhao Yihe, head of research at Charm Communications, one of China’s leading advertising agencies, said they were “not going to be a lethal blow” to TV stations, but that they would hurt their ability to make money.
“I expect this to shave one or two percentage points off the growth rate of TV advertising next year, which we originally forecast to be about 15 per cent,” said Mr Zhao.
GroupM, the world’s largest media investment management group, predicts that China’s television ad spending will hit Rmb201bn ($31.4bn) this year, up 13 per cent from last year.
However, Seth Grossman, managing director of Carat China, said the Aegis-owned media agency had not changed its 11.8 per cent growth forecast for the whole Chinese ad market in 2012 because advertisers were likely to move money to other Chinese media.
“The first impact will be on [TV ad] pricing. China is still a very high demand environment, and that’s a classic inflationary pressure. This doesn’t take money out of the Chinese advertising market. It will go elsewhere,” he said, predicting benefits for local television channels, online video outlets and outdoor advertising companies.
Domestic companies are the biggest spenders on Chinese TV ads, but some foreign brands like Nike, Toyota, Coca-Cola, Procter & Gamble and Sony are also present.
Mr Zhao said the new regulations would create short term chaos as TV networks renegotiate advertising slots that were auctioned off as recently as this month.