SEPT. 30, 2013 • China’s CPC Central Committee, State Council has formalized a new and experimental free trade zone in Shanghai. As a result, Western video game consoles can now be officially marketed and sold within the zone as long as hardware and software are approved by the Ministry of Culture first. The move is the first lifting of the nationwide ban on console sales instituted in 2000. The change is a by-product of larger goals of the free trade zone to reform and open up government functions, actively explore management model innovation, and promote trade and investment facilitation. The Shanghai Municipal People’s Government will implement the zone, under which consoles have been classified: Wholesale and Retail – 5179 Wholesale of other machinery and electronic goods. The State Council order instructs government agencies to being facilitating the implementation of the zone as of October 1.
Impact: China may have 1.3 billion people but it is still a niche market when it comes to high-end Western video games. In many ways Hong Kong has served as a free trade zone since coming back under mainland control. Many well-to-do Chinese have gone to Hong Kong to purchase items that may not be available in the PRC. One category of those items has been game consoles. The Chinese government often takes a slow and steady approach to social and trade liberalization – often to maintain levels of control, yet also to learn how to strategic models work before embracing them. Hong Kong has been invaluable in this regard, now the government is ready to try trade liberalization closer to home in Shanghai. The choice is perfect as the city is the country’s traditional international business hub. That has resulted in a strong middle class and wealthy elite with substantial yuan to spend on material goods. We gather there are plenty of these consumers who will be happy to shed the gray market to acquire their PlayStations, Xbox Ones and Wii Us.
There are many questions regarding how successful video game systems can be in China, however. Tensions with Japan are high at the moment, which has had a negative impact on imports such as automobiles. With all of the public vitriol being expressed, Japanese consoles might not be received well with the masses. Then there is the matter of piracy. With the latest generation of systems, digital distribution is now robust enough to make the elimination of retail discs a comfortable choice for Microsoft, Sony and Nintendo. One of the best early moves might be to bring Korean market titles to China with the necessary localization. Chinese gamers are already fond of Korean games, cultural norms popular in each country are similar, and there is no stigma attached to playing them. There is a demand for specific world-class Western games, but the actual number of titles that fit that description is smaller than needed to sustain consoles in China. We are sure though that digital console offerings need to be free-to-play as subscription games are not overly popular, and neither is pay to own.
The biggest impact is likely to be on Hong Kong. With the further opening up of China, it is inevitable that the former British colony will begin to lose its special niche as more and more business transactions move to Shanghai. Console makers have so far concentrated much of their regional efforts through Hong Kong knowing that much of their wares are moving far beyond the city. Protracted approvals through the Chinese Ministry of Culture may yet put the kibosh on using Shanghai as a video game bridgehead. However, if the reception turns out to be friendly, there will be a need to focus marketing efforts on Shanghai as opposed to Hong Kong.