Chinese Consumers Like Safety, Too

It's a fine time for multinationals to deepen their stakes in China, as faith in the quality of foreign products has never been higher

by Shaun Rein

This has been the year of product recalls—highlighting quality control and safety concerns with exports from China. No sector has been left untarnished. From tainted ginger to carcinogenic toothpaste to GHB in toys, the issue of substandard quality control in China's production process and supply chains has become a constant dinnertime topic as Americans gear up for the holiday season.

However, Americans are not the only consumers increasingly concerned about the "Made in China" label. Chinese consumers also worry that poor quality products and inferior or toxic materials will harm themselves and their families.

A recent report by McKinsey & Co. postulates that Chinese consumers trust and prefer local brands over foreign ones in the face of growing fears over product safety. McKinsey qualifies this by saying that Chinese view the 50 largest multinational corporations (MNCs) operating in China as local.

My firm, the China Market Research Group, has conducted more than 1,500 in-depth interviews with consumers in first- and second-tier cities over the past four months. Our findings run counter to McKinsey's. We have found that in light of the quality-control problems in China, the trust that Chinese consumers place in foreign brands is at an all-time high and increasing. Nearly 75% of consumers said they would prefer a multinational's product if they could afford it and if the product directly affected their health.

As one 26-year-old man in Chengdu told us: "A foreign company is not going to use cheap ingredients to cheat us; a domestic company might, which is a concern if we ingest or smell the product." Moreover, Chinese consumers are rabidly brand conscious and want to know the provenance of a brand. They do not mistake Procter & Gamble (PG) or Unilever for a local brand, even if these companies have done a great job at localizing their operations and tapping into the minds of Chinese consumers.

The concern that Chinese have over the safety of what they buy combined with increasing trust in foreign brands and rising disposable incomes has created a huge opportunity that multinationals can leverage. The market is clearly shifting toward the premium segment. By emphasizing that their products are safer and premium, foreign companies will continue to tap into China's emerging 250-million-strong middle class.

A Premium History

Traditionally, MNCs have occupied the premium segment of the market in China. For most sectors aside from luxury, this was largely a function of having higher fixed costs than domestic counterparts.

As a result, sales of most products offered by MNCs sputtered until just the past few years as price-sensitive Chinese consumers did not splurge. China's emerging middle class, however, has fueled a shift in fortunes for MNCs as disposable income has skyrocketed along with China's booming stock and real estate markets. Now more than 50% of MNCs are making money in China by selling into the local market rather than relying on the country primarily as a base for production from which to export. Foreign businesses can no longer regard China as just a place to find cheap labor. Rather, China now needs to become a strategic market to sell into for most companies. Many MNCs have realized how to do this.

Case in point is DuPont (DD), which provides a comprehensive set of products and services used for construction and home decoration, including ingredients used in coating and countertop materials. DuPont did a good job forecasting the trend by Chinese consumers to seek better guarantees of health and safety from the products they were purchasing for home decoration.

Unlike in the U.S., where the developer oversees the construction and renovation of homes, most homes in China are sold unfinished, as empty concrete shells.