Goldman Sachs says Chinese companies are winning overseas not just because prices are cheaper, challenging one of the biggest assumptions behind China’s export boom.
“Intuitively, I think we all associate Chinese products with deflation and price cuts,” Trina Chen, Goldman Sachs’ co-head of equity research in China, said on the bank’s “The Exchange” podcast released on Tuesday.
But Goldman Sachs found that Chinese products tend to become more expensive when they enter foreign markets, in part because of improved quality, and price cuts tend to come later as established rivals compete for market share.
This finding challenges the view that Chinese companies win foreign markets by constantly undercutting competitors on price.
It comes as policymakers from Washington to Brussels grapple with a surge in Chinese exports, part of what some economists call “China shock 2.0.”
China’s weak domestic demand and years of deflationary pressures have also raised concerns that its exporters could drive down overseas prices.
Not just a race to the bottom
Goldman Sachs analyzed 11 industries and 40 Chinese and global companies to examine where Chinese companies are gaining market share.
Chinese products often enter new markets at about 30% discounts to existing competitors, but prices tend to rise in subsequent years.
Chen said the price increase may reflect factors such as inflation, economic cycles and improved product quality.
Chinese companies often raise prices as their products improve without losing their price advantage over competitors. Discounts relative to competitors have remained stable overall, Chen said.
China’s electric vehicles are an example. They are priced at about a 20% discount compared to similar models globally, a gap that Chen said has remained stable over the past three to four years.
Robot vacuum cleaners take an even more dramatic turn. Chen said Chinese products in this category entered the U.S. market at about a 40% discount, but now command a premium of about 60% as manufacturers continue to innovate and add new features.
“I think it’s fair to say that the entry of Chinese products will not necessarily cause additional pricing pressure for many years after the initial entry,” Chen said.
Conversely, price cuts tend to happen later as established competitors struggle to defend their position.
“These price cuts are usually initiated by companies that have been losing market share and are trying to defend their market share in a very challenging situation and competition,” Chen said.
Chen said Chinese companies tend to gain market share fastest in modular, consumer-oriented, high-growth product areas.
Progress has been slower in mature, interconnected business-to-business markets, where customer trust, service networks, local distribution channels and long operating records make it harder for Chinese companies to gain market share.