Recalling Brand China.(Giving Globally)(Commentary)(consumer spending in China)

Byline: William H. Hess; Hess is Global Insight's senior China analyst in Beijing.

To solve its export crisis, China needs its own people to buy at home.

Months before the latest toy recalls, Beijing propagandists were working overtime to convince the world that Chinese products are safe, calling concerns about quality unfair and overhyped by the foreign media. One state-television report recently claimed that defective toys were 90 percent the fault of defective foreign designs and only 10 percent the fault of domestic producers.

Such efforts have aimed to reassure two key constituencies: foreign consumers, and, increasingly, ordinary Chinese buyers themselves. Yet Beijing will need to do a lot more work before it can persuade its increasingly affluent citizenry to buy Chinese. According to a little-noticed report issued last year by China's Ministry of Commerce, the country's domestic markets are dominated by foreign goods. According to the ministry, in the 10 years leading up to 2004, the market share of foreign manufacturers in China quadrupled, to 31 percent. In textiles, clothing and footwear, foreigners control 48 percent of the market; in IT equipment and electronics, 82 percent, and in furniture, 51 percent. This suggests that the real manufacturing crisis facing China today is how to get Chinese consumers to value domestic brands as much as foreign ones (many of which are also made in China).

Foreign dominance even extends to Chinese exports, suggesting that there's something hollow about the much-touted Chinese manufacturing miracle. In numerous coastal regions where China's manufacturing boom is based, 90 percent of exports in some sectors are now produced from mostly imported components or materials. And close to 60 percent of China's total exports come from firms that are either completely or partially controlled by a foreign entity. According to Global Insight's forecasts, China could indeed become the world's largest manufacturer by the end of 2008. But this will be dominance in nominal terms only. The value added to products assembled in China remains low. As a result, so do China's profits; most of the money made from selling such goods goes to the ...