Chinese Companies Aren’t Winning Just by Being Cheaper: Goldman Sachs

Chinese companies aren’t winning overseas just because they’re cheaper, according to Goldman Sachs, challenging one of the biggest assumptions behind China’s export boom.

“Intuitively, I think we would all associate with the Chinese product, with price deflation, price cuts,” Trina Chen, co-head of Greater China equity research at Goldman Sachs, said on the bank’s “Exchanges” podcast published Tuesday.

But Goldman found Chinese products often become more expensive after entering foreign markets, partly as their quality improves, while price cuts tend to come later as established rivals fight to defend market share.

The finding challenges the view that Chinese firms win foreign markets by relentlessly undercutting rivals on price.

It comes as policymakers from Washington to Brussels grapple with a surge in Chinese exports, part of what someeconomists have dubbed “China shock 2.0.”

China’s weak domestic demand and years of deflationary pressure have also fueled concerns that its exporters could push down prices overseas.

More than a race to the bottom

Goldman analyzed 11 sectors and 40 Chinese and global companies to study where Chinese firms are gaining market share.

Chinese products typically enter new markets at about a 30% discount to incumbent rivals, but prices often rise in subsequent years.

Chen said higher prices could reflect factors including inflation, economic cycles, and improvements in product quality.

Chinese companies often raise prices as their products improve without losing their price advantage over competitors. Chen said the discount versus competitors generally remained stable.

Chinese electric vehicles are one example. They sell at roughly a 20% discount to comparable global models, a gap Chen said has remained stable over the past three to four years.

Robot vacuum cleaners show an even more dramatic shift. Chen said Chinese products in the category entered the US market at around a 40% discount but now command a roughly 60% premium as manufacturers continue innovating and adding new functions.

“I think it’s fair to say the entry of the Chinese product does not necessarily create additional pricing pressure for many years post the initial entry,” Chen said.

Instead, price cuts often come later, when established competitors struggle to defend their positions.

“These price cuts typically are initiated by companies who have been losing market share and 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-facing, high-growth products.

Progress has been slower in mature, interconnected business-to-business markets, where customer trust, servicing networks, local distribution channels, and long operating track records make it harder for Chinese companies to gain market share.