McDonald’s, Apple and Tesla can’t bet on making a fortune in China anymore

McDonald’s, Apple and Tesla can’t bet on making a fortune in China anymore

For decades, Western companies have made profitable bets on the inevitable rise of Chinese consumers. Now the economic downturn and the emergence of fierce local competitors mean those bets look less safe when a price war breaks out.

Discounts and special offers are offered across consumer brands from food and clothing to consumer electronics and cars, reflecting a dramatic shift in consumption patterns in the world’s second-largest economy.

One of the fiercest price wars is taking place in the electric vehicle (EV) industry, where a “life and death” race has manufacturers scrambling for survival.

Tesla’s China market share shrank to 4% in April, nearly half of March’s 7.7%, according to data released by the China Passenger Car Association on Friday. Shipments from its factory in Shanghai, the world’s largest, fell 18% last month from a year earlier.

This sharp decline contrasts with increased sales by its biggest Chinese rival BYD, which reported a 29% jump in pure EV deliveries.

“Everyone has changed the way they think about China,” said Anne Stevenson-Yang, co-founder and managing principal at J Capital Research. “The business climate has completely changed.”

Last month, Tesla ( TSLA ) announced aggressive price cuts in the country, shortly after also cutting prices in the United States and Germany. The move adds to a series of price cuts it has made in its biggest overseas market since late 2022.

Last year, China’s economy grew 5.2%. Outside of the pandemic years, that was the slowest annual rate of expansion since 1990, when gross domestic product rose just 3.9% because of international sanctions following the 1989 Tiananmen Square massacre.

Consumers have cut back on spending as their jobs and income prospects worsen. The prolonged crisis in real estate, which accounts for 70% of household wealth, and the stock market slump have added to their woes.
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In the 1990s, “every company in the West” was hiring consultants and holding boardroom meetings about how to do more in China, according to Stevenson-Yang. But now the consultants are gone and instead of talking about how to capitalize on rapid growth, C-suite discussions are about “exiting, protecting one’s operations or balancing supply among several countries.”
“China is now around the status of Brazil – big, important but difficult,” he added.

Nor is the country’s economic woes limited to Tesla and the EV industry. They beat other American corporate giants such as Apple (AAPL), Starbucks (STUX) and McDonald’s (MCD): all are struggling to adapt their business strategies to a rapidly changing market.

Discounted iPhones
Concerns about the future have forced Chinese consumers to be more budget conscious, said Yang Wang, senior analyst for Counterpoint Research. As a result, purchases associated with premium or luxury have taken a back seat.

“Certainly Chinese consumers are experiencing ‘reduced consumption’ in general,” he said.

Apple’s overall revenue in Greater China – which includes mainland China, Taiwan, Hong Kong and Macau – fell 8% to $16.4 billion in the fiscal quarter ended March 30.

Meanwhile, Huawei, the Chinese technology champion that the West once tried to kill, has grown rapidly. Its smartphone sales jumped 70% in the first quarter of 2024, boosted by the successful launch of its Mate 60 series, according to data compiled by Counterpoint Research.

“[China] is the most competitive market in the world,” said Tim Cook, Apple’s CEO, on an earnings call with analysts earlier this month. He added that he continues to feel optimistic about the Chinese market in the long term.

The US smartphone maker has cut prices for iPhones sold in China, which helped its shipments jump in March, according to data published last week by the Chinese Academy of Information and Communications Technology, a state-backed research firm. It marks a turnaround from the previous two months of 2024, when Apple saw a deep decline in iPhone sales.

The price cuts are led by Apple and third-party retail platforms, with some iPhone 15 models being offered at a 20% discount.

Food fight
Coffee chains have also been vying to undercut each other’s prices. Last February, Cotti Coffee, a startup founded by two former Luckin Coffee executives, began a campaign to reduce the price of a latte to as low as 9.9 yuan ($1.4).

The move prompted Luckin, which is the country’s largest coffee chain, to match the price. Cotti then reduced the price of the latte again to 8.8 yuan ($1.2).

Aggressive discounting has affected global brands. Even Starbucks, which has signaled it is not interested in a price war in China, has begun offering coupons that effectively drop the price of its lattes to under 20 yuan ($2.8). They usually sell for 30 yuan ($4.2).

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The average check paid by Starbucks customers declined 9% in China in the first quarter of the year, mainly due to lower promotions and sales of higher-priced items, the company said.

“Our consumers are now more cautious in their spending,” said Belinda Wong, chairman and co-CEO of Starbucks China, on an earnings call in January. “You’re seeing a massive influx of mass-market competitors focusing on rapid store expansion and low-price tactics to drive trial.”

Fast food chains have also gotten in on the action.

“Poor man’s deal” has been a trending term among Chinese youth since 2022. It initially refers to McDonald’s $1.90 set meal “1+1 = 13.9-yuan as you wish”, which is very popular among customers.

Other Western fast food chains have since followed suit, launching their own low-priced set meals.

An online guide to getting weekly fast food discounts has gone viral on social media.

“Monday at McDonalds for free McNuggets, Tuesday at Tastien for a ‘one-for-one’ offer, Wednesday at Dominos 30% off, Thursday at KFC for a ‘Crazy Thursday’ offer, Friday at Burger King for half price weekday deals , then headed to Wallace for the weekend. Repeat next week,” according to a driver.

Nanchengxiang, a Beijing-based fast food chain, has even launched a super-cheap “3 yuan (41 cents)” breakfast buffet, setting the lowest price for all-you-can-eat meals.

The set, dubbed by many netizens as a “must have for the working poor in Beijing,” has more than doubled sales during breakfast hours, according to canyin168, a data tracking and analytics website in the catering industry.
‘There are no easy solutions’
“Depressed” consumer sentiment is likely to remain for a while, said Yang of Counterpoint Research.

Some Western brands will “inevitably” be forced to reconsider prices to defend market share.

However, that is “not an easy solution,” as foreign brands are at a disadvantage compared to domestic brands due to higher operating costs, he added.
He did not think they might withdraw from the country.

In the medium to long term, China is poised to drive global economic growth and contribute to the largest cohort of growing middle-class consumers.

“With depressed economic prospects in most developed countries, and some still chasing the growth of major emerging markets such as India, China can still offer the most profitable market in the world, even with depressed consumption levels,” he said.

But expectations need to be lowered.

“I think the fundamental mistake that many Western companies make in China is to believe in the myth of a growing middle class,” Stevenson-Yang said.

“In reality, the Chinese have a lot of money from capital gains in real estate and the stock market; They never experienced a big increase in income. The economy is not back to the poverty levels of the 1980s, but there is a lot of recall being done.”

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