Does China have a demand or supply problem in services?
Many observers moan about how Chinese consumers need to pull out their wallets and spend more, but little thought seems to be given to offering services that they would actually want to spend money on.
JP Morgan recently calculated that Chinese consumers have US$9.2 trillion on deposit with banks, and most of it is staying put in the banks. Given this visible reluctance to spend, there is an argument that we need demand stimulants. Could the government stimulate spending, for example, through a tax credit on a wellness check? On a wealth management check up? On a home air quality check?
Maybe, but if the service on offer is low quality or untrusted, it will probably make no difference over the medium term. What is needed is a higher quality of services.
Cinema offers a great example of how, when offered a quality service, Chinese consumers embrace it. China has many world-class cinemas (including as many modern IMAX screens as anywhere in the world), that show the latest Hollywood and domestically produced movies (creating the second largest box office revenues in the world, behind only the US), and for which patrons pay global prices of up to US$20 for a seat. And they pay that price frequently.
Contrast that with an example from sport – Chinese soccer. The quality of the product is poor, the quality of the stadiums is mediocre, and a season ticket price of not much more than US$100 still doesn’t get fans in to fill the stadiums. A better quality of game in a higher quality of stadium would, I believe, lead to a virtuous cycle of more money coming into the industry, funding further improvements that attract more fans.
Similarly, if airlines flew on time more frequently, more people would fly on them. Airlines would perform better as a result, as would hotels and ground transportation.
I am hopeful that the opening of Disney in Shanghai in the near future can create a role model for delivering a quality service experience, and being able to charge well for it as a result.
The reason so many services remain cheap in China is because providers have not moved beyond “the cheaper the better” mindset that is so prevalent in the manufacturing sector. As a result, services are of terrible quality. It is not surprising that consumers won’t spend more. They are increasingly discerning and won’t pay for rubbish.
Internet based innovators are a major driver of change by not only providing services at lower cost, but also often with lower investment of time from the consumer and delivering a higher quality service. But not all services will be delivered by Internet.
We need a broad push to make higher quality services available. If they were, consumers would buy more services and spend more on them as well.
Image credit: Flickr/Toby Simkin