Bad omens have long played a part in China’s history. In 2134 BC, two astrologists were executed for failing to predict a solar eclipse.
This month in Tianjin a deadly blast at a chemical storage facility occurred less than two weeks before China’s Black Monday - when stocks fell 8.5% in a day – the sharpest decline in eight years and one which has continued subsequently.
Local fallout from the Tianjin blast directly affected the lubes and automotive industries, while financial market after-shocks continue to be felt around the world. The problem is that immature financial markets can over-react even more than mature ones and the Chinese Government’s desire to control the information flow does lend itself to normal market trading. While other financial markets around the world are sliding in response, will this affect the global economy?
The story behind the story is about competitiveness: China’s manufacturing base is being eroded by local inflation, the slower demand from Europe, and the emerging commodity-backed economies like Brazil and South Africa which are also feeling the after-shocks of commodities price collapse.
None of these signs auger well for the global economy, but are we seeing the start of the next global economic crisis? And what effect would this have in key lubricants growth markets?
A crisis seems unlikely for a number of reasons. Growth is indeed decelerating in China and may continue to slow at a sharper rate than expected as the economy shifts from being investment-led to consumption-led.
While other commentators are questioning whether a centrally controlled economy can make this transition to one driven by consumers, Martin Sorrell (the head of the world's leading advertising agency WPP) remains bullish about China. According to the Harvard Business Review an annualized growth rate of 5% over the next decade would increase consumer spending in China by 60%, which would surely help manufacturers, retailers and energy companies alike.
That increase will be backed by a wave of increasingly affluent consumers. In 2013, there were 2.9m US Dollar millionaires in China. No less than twelve months later there were more than four million.
According to ANZ economists’ estimates, by 2030 some 326m people will join the ranks of China’s middle class, bringing the number up to over 850m in the nation’s urban areas. This will, in turn, increase their consumption share of GDP from 36% today to around 50%.
Plenty of international companies share this optimism. Carlyle Group has just staked a huge bet in China’s growing passenger vehicle market by acquiring a 75% stake in Tongyi Lubricants from Shell and Huo’s Group. The private equity firm is counting on an increase in passenger car adoption to recoup its investment.
Daimler, buoyant on strong sales of its Mercedes-Benz brand units, is also continuing to invest heavily in production alongside its German rival VW, which has just opened its 20th plant in Changsha.
If growth is coming from smart, affluent, tech-savvy middle classes, then lubes marketers will need to be responsive. A report from Kline showed that even if Chinese consumers didn’t actually purchase lubricants online, they would be more than likely to read reviews and compare prices online before buying product.
Fortunately, OATS’ innovative new solutions are fully optimized for delivering data to mobile devices, providing accurate, timely recommendations to consumers on the go.
To find out more about OATS' products and services, or to comment on anything you have read in this month's OATS China Bulletin, simply contact Diana Shen. We welcome your thoughts in this time of change and look forward to hearing from you.
Sebastian Crawshaw
Chairman