Environmentally Friendly Consumers Emerge

PRC government policies and consumer preferences are going green, presenting new opportunities for US companies to sell sustainable products in China.by Julia KanThe economic downturn has affected business operations and consumer preferences significantly. Many companies are looking for ways to cut costs and maintain profitability, while most consumers are choosing lower-cost items over luxury goods. Because environmentally friendly products tend to cost more to produce, businesses and consumers often forego making or buying green products, especially during tough economic times. Despite the higher initial costs, however, China—its government and people—is beginning to embrace a more sustainable development model.

The new “buy green” trend

Recent research and studies show that Chinese consumers are becoming more interested in environmentally friendly practices and products. The Greendex Survey, sponsored by the National Geographic Society and Globescan Inc., measures green consumer behavior by scoring people’s responses about their consumption of housing, transportation, food, and goods. The 2009 results showed an increase in green consumer behavior in 13 of the 17 countries surveyed. China ranked third on the list with a Greendex score of 56.7, up 1.5 points from the previous year. According to the survey, Chinese consumers are among the most concerned about the environment. Eighty-one percent of respondents are willing to pay more for energy-saving products, and 69 percent say they try to reduce their environmental impact. Compared to 2008, more Chinese are repairing rather than replacing broken items, using their own shopping bags, avoiding excess packaging, buying green products, and recycling.

Also in 2009, L.E.K. Consulting LLC surveyed industry leaders and more than 600 consumers throughout China to examine the change in consumer attitudes toward environmentally friendly products. More than 80 percent of respondents said that they would be willing to purchase energy-saving products, and two-thirds of those who were unwilling to pay more for green products said that they would be willing when economic conditions improve. The survey also showed that price is still the deciding factor when it comes to buying green. Seventy-five percent of Chinese respondents would pay no more than a 10 percent premium for green products now and no more than a 15 percent premium if economic conditions improve. Consumers in third-tier cities showed less interest in buying green products than those in wealthier cities, perhaps indicating that as incomes rise, so will the demand for green products.

Roland Berger Strategy Consultants GmbH had a slightly different take on consumer preferences. The firm’s 2009 report surveyed Chinese consumers across the country— from “megacities” down to third-tier cities—and found that roughly 85 percent of respondents in all locations said they try to avoid buying products made by companies that they know harm the environment. The report also showed a high level of willingness to choose green products across different age groups (ranging from 91 percent to 93 percent of respondents from ages 18 to 64). The report concluded that concern for the environment is equally widespread across all demographics of Chinese consumers.

Drivers of China’s green movement

The new attitude toward environmental sustainability springs from the actions of the PRC government, nongovernmental organizations (NGOs), and the country’s growing middle class.

Government policies strive for sustainability

Though China recognized the importance of protecting the environment as early as 1973, when it held its first national environmental protection conference in Beijing, the government did not implement strong environmental policies until recently. At the 2007 Chinese Communist Party Congress, PRC President Hu Jintao called on all actors in Chinese society to change their behavior to benefit the environment—the first time a major policy speech in China emphasized the quality over the quantity of growth. To give its environmental protection agency more power, China elevated it to full ministry status in 2008. In recent years, China has issued a slew of environmental measures, including laws on renewable energy and water pollution, regulations on chemical substances and electronic waste, and new emissions and pollution standards.

The PRC government provides various subsidies and preferential tax policies for consumers who trade in old products for new, energy-efficient models. The State Council announced last December that it would continue to offer subsidies it had introduced in early 2009 to encourage purchases of new home appliances such as air conditioners, computers, refrigerators, televisions, and washing machines. (The subsidy amount depends on the product’s energy-efficiency level.) China will expand the number of cities that participate in the subsidy programs in 2010. In particular, the government is focusing on boosting sales in rural areas. The “home appliances to the countryside” program gives farmers a 13 percent subsidy on purchases of certain home appliances and has recently expanded to include items such as DVD players, electric bikes, and electric cookers.

The central government also promotes energy-saving technologies in the mining and construction industries and subsidizes energy-saving lighting products and vehicles. As China tightens emissions standards and offers consumers incentives to buy energy-efficient vehicles, the auto industry is offering various green opportunities. In 2010, the government raised subsidies for consumers who trade in old autos that do not meet the country’s emissions standards for new ones. The subsidy amount increased from ¥3,000-¥6,000 ($440-$878) to ¥5,000-¥18,000 ($732-$2,637) per vehicle, depending on the vehicle’s model. The government also offers a 7.5 percent preferential tax rate for purchases of vehicles with engines smaller than 1.6L. According to Xinhua News Agency, China is expected to release a new green auto stimulus plan in the next few months. The plan would reportedly encourage the production of fuel-efficient cars by giving consumers in five cities subsidies of up to ¥60,000 ($8,789) on purchases of qualified electric cars.

These government measures appear to have increased sales of green products. (The programs also serve a second policy goal of boosting domestic demand.) According to a statement from the PRC Ministry of Commerce (MOFCOM), rural sales of subsidized household appliances in the first quarter of 2010 jumped 690 percent year on year to ¥31.7 billion ($4.6 billion). In addition, new-auto sales in the first quarter of 2010 reached nearly $5 million—up 2.67 percent from the first quarter of 2009. A separate MOFCOM statement said that the number of auto subsidy applications and approvals has more than doubled since the incentive programs began.

China has also tried to reduce wasteful packaging. In 2008, the PRC Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) introduced a draft law to limit the number of permitted packaging layers and require the cost of packaging to be no more than 15 percent of the price of the product. The proposed requirements aim to reduce the amount of waste generated by forcing manufacturers to cut down on packaging materials—punishing noncompliance with fines of up to ¥50,000 ($7,323). Though industry and consumers supported the idea of curbing excessive packaging, industry representatives denounced the draft law as “impractical,” and the law stalled as AQSIQ became embroiled in the melamine milk scandal. In 2009, the State Council reiterated its commitment to reducing excessive packaging and tasked the PRC National Development and Reform Commission (NDRC), a more powerful agency than AQSIQ, with finding a solution.

China banned the use of thin plastic bags in all retail outlets in June 2008, encouraging consumers to switch to reusable shopping bags. According to June 2009 NDRC estimates, the ban had reduced the use of plastic bags by two-thirds and could save 2.4 million tons of petroleum each year.

NGOs raise awareness

Environmental NGOs have been a driving force behind China’s green consumerism. China’s leaders recognize that NGOs can help raise public awareness of environmental issues. To some extent, the government has allowed them to act as watchdogs that alert the public about environmental transgressions. For example, the Institute of Public and Environmental Affairs, a Beijing-based NGO run by journalist and environmentalist Ma Jun, keeps a public, online database on air and water pollution levels across China. The organization also uses information from government websites to compile “blacklists” of the country’s top air and water polluters—a tactic that increases public awareness of environmental issues and raises the stakes for companies that violate environmental regulations. To remove their names from the lists, many companies have cleaned up their operations to comply with PRC rules, and their factories have undergone third-party audits.

Friends of Nature, China’s oldest environmental NGO, is another example of nongovernmental actors that promote green initiatives. In 2006, Friends of Nature was one of three organizations to help create the Green Choice Project in Beijing. The project aims to raise public awareness of environmental issues and teach shoppers to become more environmentally conscious. For example, it urges consumers to purchase products with less packaging and to avoid buying disposable products.

The growing middle class

The rise of green consumer behavior appears to be related to the growth of China’s middle class, itself boosted by rapid urbanization and rising incomes. The Chinese Academy of Social Sciences recently reported that China’s middle class makes up 23 percent of the country’s urban population. (Though definitions of “middle class” vary, most are based on income, occupation, and education level.) The majority of China’s middle class falls between the ages of 25 and 44, is better educated than the rest of the population, and spends a higher percentage of its income on nonessentials. As consumers, they are willing to pay more for higher-quality goods and more inclined to try new, trendy products. As China—and the rest of the world—puts greater emphasis on sustainable living, the country’s middle class is the largest consumer base for green products.

A chance for US companies

The green consumption trend in China appears in the increasing popularity of healthy, ecological, and sustainable lifestyles, which has significantly boosted sales of eco-friendly products. The new wave of environmental understanding, in conjunction with government regulations and incentives, has created market opportunities for various industries in China. For instance, food products that meet sustainability standards receive the “Green Food” logo—a quality trademark registered by the PRC Ministry of Agriculture Green Food Development Center, which supervises the production, packaging, storage, and transportation operations of food manufacturers. Chinese consumers can find products with this logo alongside other similar but less green items in grocery stores, allowing them to make decisions about their environmental impact.

US companies are well-positioned to benefit from the surge of interest in more sustainable products in China. Since the United States has been regulating behavior that affects the environment for decades, US businesses have already created greener alternatives for many products. In addition, US companies tend to use innovative packaging that can be recycled and reused. China’s growing number of eco-conscious consumers presents significant market opportunities for manufacturers of environmentally friendly products.

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Industry Snapshot: Cosmetics Go Green

In recent years, new regulations intended to encourage safer products have changed China’s cosmetics industry. In October 2003, the PRC government issued Provisions on the Environmental Administration of New Chemical Substances. Similar to Europe’s regulation on the Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH), the provisions call for all manufacturers and importers to register chemicals used in their products with the PRC Ministry of Environmental Protection’s Chemical Registration Center (CRC). Products that contain unapproved chemicals are listed in one of three categories: prohibited commodities that may not be imported into China, prohibited commodities that may not be exported from China, and toxic chemicals with severe import and export restrictions.

China’s version of REACH has forced cosmetics companies to reevaluate the types of chemicals they use in their products. CRC currently lists 145 harmful chemicals that may not be imported to and exported from China—of which 30 percent are frequently used in cosmetics. CRC’s list grows each year and may eventually match EU standards. (The European Union bans cosmetics manufacturers from using more than 1,100 harmful chemicals in their products.) Under China’s provisions, cosmetics that contain harmful chemicals must be reformulated.

Unlike the European Union and the United States, China does not accept data and research conducted by international sources in its product registration process. Instead, China requires all newly registered chemicals to be retested domestically. This means that foreign products that have already met international standards must undergo duplicative testing to be imported and sold in China.

Make up by the numbers

China’s urban population (roughly 575 million) is considered one of the largest groups of potential cosmetics consumers in the world. These consumers have more disposable income and tend to devote more time and money to hygiene and personal appearances—fueling the growth of China’s cosmetics market.

China’s cosmetics sales reached ¥120 billion ($17.6 billion) in 2008, according to the China Association of Fragrance Flavor and Cosmetic Industry, and are estimated to increase to ¥140 billion ($20.5 billion) in 2010, according to Euromonitor International. US Department of Commerce data shows that the value of US cosmetics exports to China hit $145 million in 2008 and $147 million in 2009. In 2008, more than 3,000 registered cosmetics enterprises marketed more than 20,000 brands in China. The 500 foreign brands, which dominate the high-end market, made up 50 percent of China’s total 2008 cosmetics sales.

—Julia Kan[/box]

[author]Julia Kan is a business development associate at the Australian Trade Commission in San Francisco, California.[/author]