Infrastructure plays a pivotal role in driving economic development.
In recent years, China's economy has experienced rapid and healthy growth, primarily driven by its transportation, communication, internet, and energy infrastructureIt is difficult to envision the current economic landscape without advanced railway networks represented by high-speed trains, or without the robust communication infrastructure symbolized by the rollout of 5GMoreover, the extensive energy infrastructure initiatives, such as the West-to-East Gas Transmission and West-to-East Electricity Transmission projects, have been fundamental to enabling China's remarkable development trajectory.
These infrastructures not only serve essential functions but also embody the principles of inclusivity, acting as a significant force behind the ongoing health and prosperity of the Chinese economy.
As the consumption market in China swiftly expands, a stark contrast arises when comparing it to thirty years ago—it has transformed into a massive and complex systemFor instance, within the food industry alone, the number of large-scale enterprises reached 42,000 in 2023, with the industry surpassing a staggering 9 trillion yuanWith this scale comes the urgent necessity for robust infrastructure capable of elevating the sector towards healthy, sustainable growth, addressing existing distribution challenges, and fostering high-quality development.
The perspective of political economics highlights that distribution—part of the larger economic framework consisting of production, distribution, exchange, and consumption—plays an indispensable roleDistribution serves as a catalyst for both production and consumption, while simultaneously exerting constraints and balancing effects on their respective growth.
Thus, it becomes crucial that the distribution systems and models align with the exigencies of production and consumptionAdequate distribution frameworks can catalyze growth in these domains; conversely, deficient systems can impose limitations that hinder development.
China’s consumer goods distribution model has undergone two significant phases:
The first phase pertains to the distribution model prevalent during the planned economy
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In the early years following the establishment of the People’s Republic, the country faced acute shortages in the market, necessitating a distribution system dominated by state-owned wholesale enterprises to guarantee supply.
During this period, the market was characterized by supply leadership.
The second phase emerged with the transition to a market economy, beginning with urban economic reforms in 1983. These reforms gradually dismantled the traditional state-controlled wholesale distribution system, evolving into the current consumer goods distribution framework.
This era is defined by a production enterprise-led market.
At that time, the market environment was filled with rapid growth in supply due to the opening of the production market, juxtaposed against a backdrop of scarce distribution resources, particularly concerning logistics and capitalCompounded by significant internal issues within traditional state-owned distribution companies and the government's standardized reform measures, state-owned enterprises eventually retreated from the market, leading to the emergence of a distribution landscape primarily dominated by dealers.
This dealer-led distribution model, characterized by its high flexibility, has indeed played a positive role in propelling the development of China’s consumer goods marketWith distribution in the hands of production enterprises, market strategies became more adaptable, stimulating rapid production growth.
However, every economic model and distribution system carries inherent constraints linked to the era in which it operates.
Today, the Chinese consumer goods market has experienced momentous changes compared to three decades ago:
The market has transitioned from shortages to a state of ample supply, often described as relatively surplus.
The consumer goods industry has burgeoned into an immensely prosperous and scaled sector.
The overall industry environment has undergone significant metamorphoses
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Notably, substantial improvements in logistics and financial markets have surfaced, particularly aided by advancements in internet technology, which pave the way for the reconfiguration of contemporary distribution models.
In light of the industry's rapid growth and the significant transformations within market elements, several issues have become increasingly pronounced, particularly the escalating “high distribution costs, low efficiency” dilemma.
Industry analysis indicates that distribution costs currently represent over 70% of the total product price structure in China.
These concerns manifest in various ways:
- A plethora of distribution channels;
- High logistics touchpoints and transfer occurrences;
- Significant capital lockup within distribution processes.
Such exorbitant distribution costs do not correlate with increased efficiencies; quite the opposite, they contribute to a considerably low efficiency landscape.
Furthermore, under the prevailing production enterprise-dominated model, the shortages of essential resources such as logistics and capital have persisted over the years, coupled with a dearth of necessary social services, perpetuating an ecosystem where brands construct their separate “relatively independent” dealer networksEach brand operates its distinct distribution framework, prompting individual dealers to develop their logistics, operational teams, and financial management systemsThis has led to a fragmented market characterized by small, scattered entities operating independentlyThis fragmented structure inevitably results in high distribution costs and abysmal efficiency.
Currently, it is apparent that the existing distribution model is at a critical juncture requiring comprehensive reform.
Observing recent developments, retail enterprises—particularly supermarkets—find themselves trapped in a “high price, low margin, low efficiency” scenario, which has propelled the entire industry towards the brink of widespread losses.
A growing number of dealerships face severe challenges due to inventory pressure and rising operational costs, leading to the collapse of several dealer firms
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Meanwhile, many production enterprises encounter significant market contractions, struggling to push through declining sales amid growing inventory pressure.
Multiple factors contribute to these issues; however, the deficiencies within the current distribution model stand as one of the principal culpritsAddressing these shortcomings should be one of the focal points in discussions about future transformations in the consumer goods sector.
The complexity of initiating changes in distribution modes within China's extensive and multi-tiered market necessitates a systematic approachHowever, it is vital for discussions to center around constructing new infrastructure for consumer goods distribution that aligns with the industry’s realities and addresses the integral role this sector plays in both current and future economic development.
The consumer goods industry has secured its status as a fundamental part of China’s national economy, significantly contributing to economic growth, improving living standards, and bolstering consumptionNotably, the food industry plays a crucial role in driving agricultural value and impactThe growth of the consumer goods sector will be instrumental in invigorating all layers of industries—primary, secondary, and tertiary.
When assessing the current state of the consumer goods sector across production, distribution, and consumption, one finds abundant supply on the production side, yet considerable potential for boosting consumption demand remainsThe industry's bottleneck is evident within the distribution stage, primarily characterized by “high distribution costs” coupled with “low efficiency.”
Addressing the existing distribution model's shortcomings necessitates cooperative efforts from both governmental and enterprise levelsCompanies within the consumer goods sector must tailor their strategies according to their operational realities to reduce distribution costs and improve efficiency
Concurrently, the government should take a holistic approach to advance the consumer goods industry while fostering economic growth, which may entail building infrastructure that promotes lower distribution costs and enhances overall efficiency.
In recent years, the government has already begun developing infrastructure supporting businesses in international trade logistics—such as overseas warehouses and the China-Europe Freight Train initiativeThese infrastructures have been invaluable in facilitating the growth of China's foreign trade.
As observed, the government needs to advocate the establishment of two key infrastructures:
- Transactional infrastructure;
- Logistic infrastructure.
This would aim to address the urgent issues of high distribution costs and low efficiency currently plaguing China's consumer goods sector.
The first step is to develop transactional infrastructure:
The consumer goods sector is characterized by a plethora of small-scale, decentralized enterprisesDue to the mismatch of information along supply chains, high transaction costs are a pressing concernMany excellent products face challenges locating markets and customers.
In light of these realities, it is vital for the government to promote the establishment of an infrastructure platform capable of serving numerous small to medium-sized enterprises, thereby transforming the consumer goods distribution model and lowering transaction costs.
In recent years, the e-commerce sector has established stable and mature platform-based transactional modelsHowever, the current dominance of major e-commerce platforms hinders equitable access, leading to exaggerated monopoly profits that inflate businesses’ distribution costsConsequently, overall social distribution expenses are not diminished but rather exacerbated through these platforms.
The industry urgently requires transaction platforms designed to offer extensive coverage and inclusivity, ultimately facilitating lower industry transaction costs.
The second step involves creating a unified logistics infrastructure.
Logistics is a critical component of consumer goods distribution, representing a significant part of total distribution expenses
It serves as a fundamental building block for enhancing distribution efficiency.
In consumer goods distribution, the flow of commerce is contingent upon effective logistics.
At present, the existing logistics model within the consumer goods sector exhibits fragmentation characterized by small scale, frequent transfers, and high inventory levels, which has become increasingly incompatible with current industry dynamics and has contributed to a significant waste of social resources and capital, also hindering environmental goals.
Significant changes have occurred in the overall logistics landscape, resulting in a relatively abundant supply of resources and enhanced levels of socialized logistics management.
Facing this reality, there is an urgent need for a new logistics model that is centralized, large-scale, minimizes handling, and embraces “just-in-time” inventory principles, ultimately transforming the existing logistics distribution paradigm within the consumer goods sector.
Transforming the logistics distribution model holds immense potential for reducing the distribution costs of the consumer goods sector and boosting overall efficiency.
Centralized, large-scale logistics systems not only significantly curtail costs but also mitigate the waste and pollution associated with the prevailing fragmented models.
With modern digital logistics management frameworks, we can enhance overall distribution efficiency and drive the digital transformation of the consumer goods sector.
Establishing a unified logistics infrastructure needs government guidance, policy support, and the cultivation of large logistics enterprises to undertake this missionLogistics service companies like Midea’s Ande Intelligent Logistics already possess robust capabilities in serving the consumer goods sectorGovernment support and guidance would be instrumental in facilitating their growth.
To summarize, the development of the consumer goods industry is paramount for promoting economic growth in China
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