1. Sports and Sporting Goods in China
Dynamics behind the new Chinese consumer in the sporting goods industry
By Carolina Coviello
November 17, 2014
I would like to thank the India China Institute for awarding me the fellowship.
I also would like to thank the interviewees:
Ashim Joshi
Charles Mo
Di Yong
Jerome De Goyon
Mai Yue
Mark Bosse
Miia Kauppila
Robert Watchel
Shanghai, Carolina Coviello

2. The Background of My Research
As a Strategic Design and Management major, I am deeply interested in observing the business
dynamics around the world. This is especially true of emerging countries like China, because they
are a fundamental part of the reality that I want to work and live in. This summer, I got awarded a
scholarship from the India China Institute to conduct research in China. I allocated this scholarship to
gaining a better understanding of the dynamics of the Chinese market, focusing on the sporting goods
industry. This paper is the result of my own research in China, conducted over a five-week period. My
primary research tools were interviews with experts in the field, field observations in stores and sport
fields and organizations, and discussions with the customers and workers. This research wasn’t the only
thing I did while in China. I also took Urban Development and Mandarin classes at East China Normal
University, both of which helped me understand the framework of China and how to interpret my
findings according to the culture. This paper is just the start of a research that I hope to continue in the
future, since it’s sparked by a true curiosity in understanding the market aspect of such a fast-growing
and fascinating country as China.

3. Sports and Sporting Goods in China
Dynamics behind the new Chinese consumer in the sporting goods industry
The rapid economic development of China has significantly altered both the landscape and the context
of its cities. Changes in the landscape are largely depended on China’s growing openness to other
countries. Evidence of this process are the multitude of branches and headquarters that international
brands have opened or moved to China in the past few decades.
As China embraces globalization, Chinese people get in touch with other countries and demand for the
emulation of those countries’ contexts and social practices. As people gain better labor laws and higher
pay, they are able to afford goods that they couldn’t afford before and they have more free time to use
those goods. A free time activity that is gaining more and more traction is playing sports. It is estimated
by General Administration of Sport of China that there will be 40% of Chinese population will take
sports regularly in 2020 which means 680 million people1
. Chinese consumers from all regions and
socio-economic backgrounds are demanding access to greater selection in both products and brands,
better value, and choice of domestic and international brands. Sporting goods companies, are now
starting to consider Chinese people as potential consumers of their products rather than simply the
people who make them, but this would not have been possible without better labor conditions,
openness of the workers to the idea of playing sports, and to an increased understanding of the
companies on knowing how to target the new Chinese consumer.
1. Change of Labor Conditions in China
One of the biggest factors in shifting the consumer market in China was
the improvement of Chinese labor conditions, which empowered the
Chinese workers and shifted China away from being the “utopia of
capitalism.” The latter term was introduced to me through an interview
with Charles Mo, founder and CEO of Charles Mo & Company, former
Vice-Chairman for the American Chamber of Commerce in Shanghai,
and former Chief Financial Officer at Nike Inc. “Utopia of capitalism”
refers to the fact that, in the past, China was a perfect place for
companies to outsource. The labor was cheap and the workers were not
only docile, but also literate. As Mr. Mo described, “The population in
China has a 99.5% literacy rate, so everyone can read. If workers can
read they can be taught new tasks. Combine this with the American
companies’ grasp at Standard Operating Procedures, and you get a
powerful market machine.” Mr. Mo also described that, when he first
started doing business in China in 1995, the labor conditions were much
different than what they are now. In his opinion, the biggest turning point
was in 2009. 2009 is the year during which the labor force became more
aware and started demanding more rights, and during which the Chinese
economy got better. The most important outcome this provoked is that, in 2011 alone, the labor rate
went up 30%-40%. In the same year and in his own company, which has only 5 to 6 employees, Mr.
Mo had to increase the workers’ salary by 23%. Another observation on this topic comes from Jerome
De Goyon, Business Director of S2M, a China focused sports and lifestyle marketing company. I
interviewed him and he shared me a multitude of observation stemming from S2M’s own market
research on the sporting goods industry in China, which I will introduce across the paper. Mr. De
Goyon pointed out that employers have to increase the yearly wages by 10-15% percent just to retain
the workers. Because workers become more skilled and conscious of the market outside of China, they
have the potential to be scouted to work abroad or to look for jobs abroad themselves. Therefore,
1
"Sporting Goods Market in China." Marketing To China. www.marketingtochina.com, (August 10, 2012).
Charles Mo

4. employers need to invest in increasingly better labor conditions and increasingly higher salaries to keep
their workers.
Charles Mo shared that, in 1995, he used to pay his cashier 800 CNY
a month. In 2014, that same cashier earns 6200 CNY a month, eight
times more than before. Of course the value of 6200 CNY
corresponds to only a bit over $1000, but the cost of life is much
lower in China. This cost change depends on social welfare, which, as
Mr. Mo added, constitutes 42% of the base wage of his employees.
What was this situation like before?
Robert Watchel, VP of Sales at Dynasty Footwear explained to me
that, before the Labor Reform, employers were not compulsory to
buy insurance and house benefits for employees. After the Reform, it
became something they couldn’t avoid. He added that these benefits
consist of endowment insurance (company pays 21%), medical
insurance(company pays 2%), unemployment insurance (company
pays 2%), employment injury insurance(company pays 0.5%-2%),
maternity insurance(company pays 1%), and house benefits
(company pays 12%). Also, the payments for insurance and benefits
are not same every year, it is based on the radix that government sets
for every province and city, and the radix keeps on growing. People working in Shanghai earn much
more than those in privinces. For example, in Putian, the radix for the insurances grew from RMB 1100
in 2012 to RMB1170 in 2013.8, a 6% increase. Mr. Watchel also shared that the general salary for
workers in one of the shoe factories in Putian grew from 1700 CNY in 2007 to 3000 CNY in 2014.
Although the increase mainly results from the increasing living expenses and taxes, according to
Wetchel, the cost for insurances definatelly has an impact on the increase in salary.
2. How Sports are Viewed in China
The fact that the new Chinese customers, meaning those rising from poverty to a middle-class, now
have a bigger buying power, doesn’t necessarily mean that they will allocate all of their expenses in the
sporting goods industry. As General Manager of Active Kidz Shanghai (AKS), Miia Kauppila,
explained to me, the concept of using free time for recreational purposes is rather new in China.
Indeed, Active Kidz Shanghai was created by International families
who wanted to allow their kids to practice sports in a place like
Shanghai. At that time, services of such kind were not offered in
Shanghai.
AKS is now a very successful company. However, it is important
to note that most of the kids that take classes through the
association are international. As both Ms. Kauppila and Mr. De
Goyon pointed out, Chinese families still believe that the kids’ free
time needs to be used efficiently through doing homework and
taking part only to cultural extra-curricular activities that would
prepare the children to have access to the best schools and get the
best jobs in the future. Nonetheless, Ms. Kauppila is witnessing a
shift in this perception as more and more Chinese parents sign up
their children to AKS’s programs. She further explained that
“Chinese families are more interested in sports, they have now learned that sport is good for the child’s
development. Through playing sports, the child grows up as a well-rounded, heather, and thus more
efficient human being.” Families are getting most of their knowledge on the subject through the
programs that schools across China have been promoting. Stress over schoolwork and limited
Active Kidz Shanghai’s Logo
Jerome De Goyon

5. resources to solve mental problems in China have driven up the youth suicide rate, with suicide being
the top cause of death among Chinese youth2
. Because of this, the education system is trying to change.
An example of change in the education system is what Ms. Kauppila described as “experimental
schools.” The programs offered at experimental schools emphasize the importance of allowing
youngsters for more free time to spend on leisure activities, with sports being one of them. A largely
established institution of this sort is Shanghai Experimental School. This school makes up a ten-year
program from elementary to secondary education with flexible grade categories and a focus on reform3
.
I conducted a personal research on the popularity of sports among ECNU students (Figure 1, next
page). The research is based on a sample of 100 ECNU students, age 17 to 24. The most popular sport
on campus is basketball, followed by badminton, table tennis, soccer, and working out. The least
popular sport is Gymnastics, which is also the only sport that is practiced exclusively by girls. The other
sport with the biggest gender disparity is soccer, with 94% of the players being male and 6% being
female. Out of the 100 people surveyed, 4 in 10 said they exercise at least 3 times a week, every week.
When asked whether this research meant that Chinese people practice these sports competitively,
Jerome De Goyon, said that they probably don’t. Through the extensive studies he has been
conducting with S2M, he discovered that most Chinese people view sports as more of a leisure activity.
Their main motivation to approaching a sport is relaxation, health and gaining some sense of freedom
from the burden of everyday life. In addition to this, Ms. Kauppila observed that Chinese kids are
better at individual sports than they are at group sports. According to her, it may very well be that the
parents install in their kids’ sport attitude the same efficiency-driven and competitive mindset they
install in their schoolwork attitude. However, when the latter individualistic mindset is applied to group
sports such as soccer and basketball, Chinese kids fall behind their international counterparts because
they do not understand how to efficiently work as a team.
2
Susan Caskie. "The Rise of Youth Suicide in China." The Week. www.theweek.com, (November 1, 2013)
3 “Shanghai Experimental School.” www.ses.pudong-edu.sh.cn.

6. (Figure 1) My own infograph showing the study I did at ECNU July-August 2014

7. Being physically involved in sports is not the only way that the new Chinese consumer can use to
approach sports. Jerome De Goyon believes that, although the Beijing Olympics did not have an
impact at the grassroots level in making people physically practice sports, the event definitely increased
the reputation and following of elite sports among the Chinese population. The population of China
started to believe in China’s possibility to have the power to compete at the elite level with other
countries. Consequently, and, Chinese people’s attendance rate to sport events is increasing. When
International sport competitions are not taking place in China, they are regularly transmitted on TV.
For example, in the last 30 years, the National Basketball Association (NBA) has engaged in extensive
efforts to bring the sport of basketball to the Chinese people. The results have been largely successful:
today, over 300 million Chinese citizens play basketball and the NBA is coming off of its most-viewed
season in China4
.
3. How do Sporting Goods Companies Target the new Chinese Consumer
Sporting goods companies, especially the international
ones, have always present in China. Shanghai Daily
journalist, Di Yong shared her personal experience on
this topic with me. She said that, from elementary school
all through high school she had to wear a uniform. The
only thing that the uniform did not include were shoes,
and, since girls were not allowed to wear boots or other
pairs of heeled shoes, their only option was sneakers. As
it frequently happens, it was among peers that the first
style preferences started to arise. “If you could afford it,”
she revealed, “you would ask your parents for a pair of
Nike or Adidas. The swoosh and the trefoil were a
symbol of style. Celebrities wore them; people of higher social status wore them. If you wore them, you
felt closer to them. But now, when almost everyone can afford to buy a pair of such shoes, it’s not
about the social status as much, it’s more about celebrity.” She continued on saying that Chinese people
have a big tendency to follow trends, especially those coming from celebrities. Such is the case of the
actors in Korean TV series.
A whole generation of young adults has been looking at actors in Korean
TV series to establish their own lifestyle and consumption choices5
. These choices extend to sneaker
companies such as New Balance, which is extremely popular among Korean celebrities and which
develops sneaker lines, such as the “Cherry Blossom” 999, which are exclusive to the Korean Market6
.
There are a lot of different companies that are trying to gain primacy in the Chinese sporting goods
market, but the only ones that will be successful are the ones that will be able to read into the Chinese
consumers’ attitude towards sports and target it. Di Yong’s colleague and sport journalist at Shanghai
Daily, Ms. Mai Yue, shared an insight on her mother’s life with me: “Lots of women are in charge of
house work, but if they have time, they will engage in sport activities. If they are younger, like me, they
will go to the gym. If they are older, like my mother, they will take part to after-work group dancing
sessions.” Group dancing is a private gathering of the neighborhood, a ritual that has been around for
many years. I took part to several group dancing sessions, mainly by simply joining in as I saw a group
of people starting to dance in the street. Usually, there is one leader who is also the person who brings
the stereo. He or she knows the choreography to all the songs and lets everyone follow. Group dancing
is a leisure activity, which is regarded and practiced with the same frequency as a sport, twice or even
4 Alicia Jessop, “The NBA’s Unprecedented Growth in China Fueled by Jeremy Lin and Media Platforms.” Forbes.
www.forbes.com, (July 27, 2012).
5 Andrea Fenn, "Korean TV Idols Set Tone among Chinese Fashion Consumers." Korea Times. www.koreatimes.co.kr,
(May 25, 2011).
6 Pete. Forester, "These Women's New Balances Will Make Guys Try to Squeeze a Pair On." Complex. www.complex.com,
(March 23, 2014).
“Cherry Blossom” 999

8. more times per week. However, people do not wear sporting
gear during group dancing. Same thing goes for Tai Chi. A lot of
people practice it, but they don’t do so in their sport gear.
When I asked Mr. De Goyon, why it is that sporting goods
companies this a potential sector of the market through creating
group dancing or Tai Chi apparel, he answered that such
marketing strategy will not be effective; the product simply
would not sell. He said that traditional Chinese sports like Tai
Chi are quite small in China, and people don’t really need any
specific clothes or any specific facility to practice them. It also
depends on the age group. Being a traditional sport, Tai Chi is
practiced more by the elderly, and this kind of consumer group
is not as prawn as other groups to change their habits, especially
when there is no real need to do so. A study conducted by Mr.
De Goyon also revealed that the top three sports practiced by
the elderly in the last 12 months are, from most practiced to
least practiced, walking, running, and badminton. Tai Chi
doesn’t even make the top 10 in this list. In this regard, I have
found some discrepancy with my research at ECNU. One in
three students I surveyed said that they practice Tai Chi every
week (Figure 1). However, further investigation revealed that ECNU offers free Tai Chi classes to its
students, which I also had to take when I was there. Thus, my results may have been altered by the fact
that the school gives the possibility to practice some sports more than others.
Another sporting goods market sector that is getting traction especially among the middle-aged group,
is outdoor sports, meaning mountain climbing or skiing. Jerome De Goyon’s study on this topic
revealed the increasing popularity of outdoor sports in China depends upon two main factors:
international outdoor sports events and the consumers’ desire of gaining reputation through appearing
knowledgeable of the world outside of China. How do you look against other people and what do you
know is very important in China, and De Goyon believes that this behavior is true for sports as well. If
you know about Cristiano Ronaldo, Le Bron James, or a new outdoor extreme sport coming from
another country, just like the kid wearing Nike sneakers in elementary school, you are looked at with
admiration. It is estimated that there were 823 outdoor product brands in China in 2012, with more
than 418 of them being foreign companies, 12 percent more than the year before7
. But when it comes
to fashion, traditional sports brands are still expected to do better than the bigger international ones.
Faced with overcapacity and the shop closures, many of these companies now regard outdoor products
as a lifeline. German athletic footwear and apparel brand Adidas has taken aim at the outdoor
marketplace, through opening 30 stores in the Adidas outdoor category in China in 2012 alone 8
.
According to estimates from Shanghai-based market research firm, China Markets Research Group,
Nike has the largest share of the sportswear market in China with 16 percent, Adidas comes in second
with 13 percent, while local brands Li-Ning and Anta have around 10 percent and 8 percent,
respectively9
. This shows that people in China prefer international brands to local ones. According to
De Goyon, the quality of local the goods from local sporting goods companies such is not as good as
that of international brands. The Chinese consumers are increasingly more aware of this, their pushing
away from the local market and, despite all the efforts that the government has made to promote
Chinese brands, they still opt for their international counterparts. According to BusinessWeek, the
7
Yao Jing, Lv Chang. "Springboard to Success." China Daily. www. usa.chinadaily.com.cn, (March 29, 2013).
8
Ibid.
9 Deepanshu Bagchee. "China’s Consumers Upgrade to Nike and Adidas." CNBC. www.cnbc.com, ( September 11, 2011).
Group Dancing Class in Beijing

9. government has an explicitly stated goal to help domestic companies emerge as first national and then
global champions. Foreign companies face a tough challenge from state-owned or state-supported
Chinese players. Often the best option for multinationals in these industries is to partner with Chinese
players while lobbying (through their governments) for open markets10
.
The Chinese market is divided in tier cities. Tiers of cities depend on the key characteristics of a city,
from provincial GDP to transportation system, infrastructure, and historical significance. First-tier
cities are Guangzhou, Beijing, Shanghai, and Shenzhen, the so called “Big 4.” Second-tier cities
encompass Wuhan, Tianjin, Chongqing, Chengdu, Xiamen. Third-tier cities are Chongqing, and
Hangzhou. As explained in Bill Fisher’s book “Reinventing Giants,” each tire, starting from the lowest
one, supports the one that sits above it. Thus, the first tier is the one that is the closest to consumers,
and the last one is the one that is the furthest away, but which will creates opportunities for
development and strategic planning11
It is because of the latter reason that Adidas has been pushing its market strategy in tier 3 and tier 4
cities People want variety and different products, especially in tier 1 cities. This gives opportunities to
smaller brands like Uniqlo, CNA, and Gap to come and grab quite a big market share from big sporting
goods brands like Nike and Adidas. Thus, instead of buying sport-specific gear, consumers buy lifestyle
products that they can use to do sport and to go about their daily activities. Additionally, Chinese
people living in tier-1 cities have higher income than those in lower-tier cities. This makes it possible
for people living in tier 1 cities to go abroad and buy the products from the international lifestyle
brands at a lower price than what they would get them for in China. This is even more of an obstacle to
the success of local brands such as Li Ning and Anta. Indeed, these companies are more successful in
tier-3, tier-4, and tier-5 cities because their goods are cheaper than Adidas or Nike’s, the people who
live in lower-tier cities don’t care about the design, nor do they pay much attention to the technical
performance of the products when they are actually used to practice sports. According to De Goyon,
Li Ning will not be able to succeed in tier- 1 and tier-2 cities. Because of taxes, rent, and other factors
typical of tier-1 and tier-2 cities, Li Ning would have to raise its price. However, without the costumer
base necessary to buy the least-preferred local products, Li Ning will not sell as much as Adidas and
10
Anil K. Gupta, Haiyan Wang. "Lessons From Li Ning's China Stumble." Bloomberg Business Week.
www.businessweek.com, (October 13, 2011).
11
Bill Fischer,, and Umberto Lago. Reinventing Giants How Chinese Global Competitor Haier Has Changed the Way Big Companies
Transform. (San Francisco, Calif.: Jossey-Bass, 2013), 89.
Figure 2: Organization of Tier Cities

10. Nike. Most people in China live in tier 4, tier 5 and tier 6 cities at the moment, and that’s what Nike
and Adidas are trying to do, go to the cities belonging to the latter tiers and develop those markets for
them.
Nike and Adidas
One of the biggest objects of discussion
when it comes to the sporting goods
industry is the competition between
Nike and Adidas. Both companies are
really successful and over the last seven
years, the market has grown at a
compounded annual rate of nearly
30%. Yet, as reported by Forbes
magazine in the article “Nike’s China
problem,” Nike’s sales in Greater China
(i.e., including Hong Kong, Macau and
Taiwan) fell for five consecutive
quarters, before recording a paltry
growth of 4% in the second quarter of
Fiscal 2014, while apparel sales for
Adidas are growing in specific sectors.
Over this period, revenues for Nike
brand products rose everywhere except
China and Japan 12
.
Nike is still the first sporting goods
company in China. Simple proof of this
is given by financial data (Figure 3, data
originating from NYSE). The
comparison on the left shows that,
between 2012 and 2013, Nike lost
shared value while Adidas gained it.
However, the value of Nike’s shares
value has always been constantly
growing and, at $95.50 is now much
higher than Adidas’, which instead
amounts to amounts to $63.10.
Additionally, Nike’s P/E ratio has been
higher than Adidas’ across the board.
This means that investors consider
Nike’s shares as a more valuable future
investment than Adidas’. The value of
Nike’s stock mirrors the pattern of
Nike’s sales, which plummeted between
2012 and 2013 and are now going up
again. Indeed, in 2012 Nike encountered
inventory issues and is not recovering from the loss, it being such an established company. As Forbes
12
Trefis Team. "Nike's China Problem." Forbes. www.forbes.com, (March 21, 2014).
Figure 3: My Own Comparison of Nike and Adidas stock

11. Magazine’s article “Great Speculations” further explains, in 2012 Nike’s inventory levels at stores were
well beyond the demand for its products. This necessitated heavy discounts in order to clear the
inventory, which affected the company’s top line. Even post-discounting, the clear out process was
slow13
.
In order to increase their sales, Adidas is adopting a new strategy, which targets lower-tier cities in
hopes to profit from them once their inhabitants become richer. According to De Goyon, Adidas has
understood that China is so big, and his cities are so densely populated, that each city should be
considered as a different nation and tackled as such. Not all of Adidas’ advertising in China is the same.
The company customizes advertising depending on the city it is placed in. Since more people in Beijing
practice running than in Shanghai and since more people in Shanghai practice basketball than in
Beijing, Adidas focuses on running advertisement in Bejing and basketball advertisement in Shanghai.
Same strategy applies to the range of products offered. Additionally, 19-year-old soccer and basketball
player Ashim Joshi, who has lived in Shanghai for 15 years, told me that an element of advertising
people in China really look at is brand ambassadors, an observation that goes hand in hand with Di
Young analysis of Chinese following the trends showcased in Korean TV series. In this regard, De
Goyon stated that Adidas’ marketing efforts to diversify advertisement in China extend to their brand
ambassadors as well: “ Look at Dalian, a city in the North of China which revolves very much around
soccer. There, Adidas has placed more advertisement which portrays famous soccer player David
Beckham than it has in a city like Shanghai, where soccer is not as prominent.” Jerome De Goyon
concluded his analysis by saying that, although its true that Nike is still the number one company in
China, because of its innovative strategy, Adidas’ has the potential to take over at least in the lower-tier
cities.
Differently, Charles Mo believes that Nike’s supremacy in the sporting goods industry in China will not
be endangered. He believes that Nike will always stay true to its original mission statement, and this will
guarantee Nike’s success. Mo thinks that Adidas’ multi-brand strategy will make the company loose its
core branding strategy. When such thing happens, a company becomes a general loose brand with no
specific product to gain sales on. Differently, to Charles Mo Nike has not lost sight of its top product,
sneakers and of its brand identity and the fact
that this shows in Nike’s well-crafted
advertising to him is a sign that Nike will
succeed in the long run.
Success isn’t only measured by sales, but also
by how brands are able to create emotional
attachment in their customers. In Charles Mo
opinion, Nike’s area of expertise is exactly
that of creating emotional attachment through
advertising. Nike does so through pushing
feelings rather than products. “Nike never
promote the act of running,” said Mr. Mo,
“they promote the spirit of running. Have you
ever seen a Nike shoes on advertising? The
answer is probably no. Adidas seems to be
more technical in its advertising, it’s all about skills. When you look at a famous Nike television
advertisement, you can see Michael Jordan flying into the air, and at the same time they will show a
little kid on a bike. You become the little kid in that advertisement, and are emotionally connected to
the brand.” A sportsmen himself, Charles Mo also pointed out that the reason why he thinks Nike will
thrive more than Adidas in the long run is its commitment to the critical mass. It is true that there is
smaller social groups that are arising as consumers of their own in China, such as women a
13 Ibid.
Adidas’ #allinformygirls campaing

12. nd teenagers, but, in his opinion, sports is all
about men and always will be. Mo further
explained that it is hard to connect with
teenagers because teenagers change their mind
often and are easily influenced by their peers. He
added that women are also hard to target because
they are hard to connect with in the sports realm
since sports is not as important for them as it is
for male in general. Interestingly enough,
teenagers and women are the two groups that
Adidas is trying to target with, respectively, its
NEO label and the #allinformygirls campaign.
Even more interesting is the fact that, according
to a recent Bloomberg Business Week interview
to a Shanghaienese teenager, consumers perceive Adidas as the sporting goods brand with the best
value for money when compared to Nike. The interviewee said that, although “there are Nike and
Adidas discount outlets just next to each other outside our school,” “the Adidas outlet is always
packed, and the Nike one is never crowded.14
”
A final note on this matter is given in Forbes’s “Nike’s China problem article.” The author described
additional leverage points on which Nike could act upon to further improve its success in China
without losing its core brand identity.
1) Nike is a running and basketball shoe company from the U.S.. Its expansion into Europe was based
on the strategy of targeting key players for sponsorships and leveraging those sponsorships to forge
relationships with large-scale commercially organized leagues like the Barclays Premier League in
England and La Liga in Spain. A similar strategy isn’t possible in China for two reasons: no
opportunities similar in scale to those in Europe exist and the more popular sports in China, i.e.
Football and baseball, have limited appeal in urban areas.
2) Nike’s training and running categories haven’t received much traction in China because health clubs
are traditionally seen as activities for rich people in the region. On the other hand, a culture of biking to
work exists in China but people do so mostly in street clothes, instead of spandex.
3) Nike’s branding is based on encouraging strong identification with iconic sports-stars it uses to
endorse its products. In a culture where parents are excessively focused on academic achievement, such
a strategy has limited appeal15
.
5. Innovation in China
On November 13th
, 2014 Mark Bosse, Associate Strategist at Wolff Olins gave a talk titled “Innovation
in China.” The talk was based on a research project he conducted while in China for 1 year through the
Fullbright Research grant. During the talk, he argued that, despite the public’s opinion that China is
nothing but the factory of the world, and that Asians cannot innovate, China has proven to be an
extremely innovative country. He proposed two case studies, one on technology company Xiaomi, and
the other on Haier, which instead specializes in consumer electronics and home appliances. Both
companies are Chinese, they are both start-ups, and they both have witnessed exponential growth in
the past few years. Fast Company has ranked Xiaomi as the Most Innovative Company in China of
2014,16
and second as the World’s Most Innovative Company in the Consumer Electronics industry,
14 "Nike Just Doesn't Do It With Lost Sales Year in China." Bloomber. www.bloomberg.com, (July 17, 2013).
15 Trefis Team. "Nike's China Problem."
16 "The Top 10 Most Innovative Companies in China." Fast Company. www.fastcompany.com, (February 10, 2014)
Adidas NEO label

13. with the rival company Apple placed third17
. As far as Haier goes, the Boston Consulting Group ranked
it 8th
in the 2013 report of Most Innovative Companies of 201318
. Bosse believes that there are three
main characteristics that these companies have in common and which contribute to their success: they
are built to scale, read into consumer needs, and take a different approach to innovation.
First of all, being built to scale means that they are built to target the nearby emerging markets
(Singapore, Taiwan, India among many) so that, as those emerging markets expand, the companies will
sell more of their goods that and see an explosion in sales.
Second of all, both these companies value their customers through creating differentiated products to
reflect customer tastes, which is similar to what Adidas does with its multiple fashion lines. The process
of creating a new products is more complex than creating a new fashion line. It involves creating an
object and testing if it works, and how it interacts with the consumer. For this reason, the process must
encompass creating focus groups. Both Xiaomi and Haier establish focus groups either through online
forums or through physical research and development activities. Inded, the Chinese government and
companies themselves have been opening a huge number of R&D facilities across China. An example
is Daimler’s Beijing R&D center, created to tune Mercedes-Benz to Chinese tastes19
”.
Finally, the concept of learning from the strategy means learning from the mistakes in strategies done
by established companies in the sector. According to Bosse, this allows companies like Xiaomi and
Haier to avoid the mistakes they would make if they started from scratch. This system of learning is
coherent with Chinese culture in general. Chinese culture revolves around the concept of the master as
a person you will learn a certain technique, which you will apply to your own art in order to pay
homage to him.
Yet I believe that Chinese innovation wouldn't have been there if it weren’t for China’s established
manufacturing system and proximity of natural resources for raw materials. Charles Mo explained that
the outcome of outsourcing to China has created a supply chain there that is extremely efficient and,
almost irreplaceable for any big company that wants to make a profit. When comparing the two of the
biggest manufacturing countries in the world, China and India, Mo noted how much bigger has foreign
investment been as compared to India’s. In last year alone, foreign investment in China amounted to
$64.1 billion US dollars, whereas India’s only reached $10.4 billion US dollars20
. When I asked him,
whether he would suggest a company to outsource to China or not, he said : “Absolutely, you are stuck.
I’m not saying you don’t have a choice, but you really may be stuck.” The supply chain of China is
incomparable to any other supply chain in the world for two reasons: proximity of raw material and
labor force. Charles Mo exemplified the concept by saying, “let’s say you want to make a phone in
India. Where are you going to get your display screen? Japan. How about the audio components?
China. How about other the front-facing FaceTime camera chip? Taiwan. This mans that, if you want
to make your phone in India, you will have to pay import taxes on these goods that you will be much
more expensive than the ones you will have to pay in China. On top of that, even though Indian labor
force is efficient in terms of IT and Call Centers because most people in India speak English, they are
not as keen to learn factory skills as Chinese workers, and they are also more expensive.” He concluded
by saying, “Although the labor force in China is not very obedient anymore, its execution skills are still
exceptional and the manufacturing base that supports them is not present in any other country in the
world other than China. So yes, you are stuck.” Additionally, when asked whether or not he thinks
China will reach full industry independency in the sporting goods industry and in other industries, Mo
answered that it will eventually happen, but not right away. The reason behind this is that China is
depends too much on export and too little on retail consumption. According to Mo, export in China
accounts for 39% of the GDP, and retail consumption accounts for 27% of the GDP. This means that,
17 "The World's Top 10 Most Innovative Companies in Consumer Electronics." Fast Company. www.fastcompany.com,
(February 10, 2014)
18 The Boston Consulting Group. Changing the Game.
19 Norihiko Shirouzu. "Daimler Opens Beijing R&D Centre to Tune Mercedes-Benz to Chinese Tastes." Reuters.
www.reuters.com, (November 3, 2014).
20 "Foreign Direct Investment." Wikipedia.. www.wikipedia.com.

14. as of right now, the only way for China to grow is to export. As a comparison, in the US the only way
to grow GDP is by spending more, because 72% of GDP is retail consumption. In the US, GDP will
not grow unless consumers spend more, and if the economy only depends on spending, it cannot
sustain itself.
Conclusion
The Change in labor conditions in China has influenced and empowered the Chinese consumer. More
international goods are increasingly more available to the consumer, and this is also true of
opportunities to explore the world outside of China. However, the raise in cost of the workers does not
mean that, at least as of right now, international companies should or will outsource out of China,
because China’s proximity to raw materials and workers’ skillfulness are simply too efficient of a
resource to give up on.
Notes
While I was in China, I posted a picture every day for a month describing my experience with the
culture. All the pictures can be found on my blog at http://nxtplorer.com/chinexplorer .

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The inspiration for this research and main reference throughout this paper is:
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