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It is not often that Goldman Sachs refers to the capricious, cleanliness-obsessed Japanese kawayakami toilet gods in its equity research. It is rarer still that it cites the propitiation of these deities while making the investment case for a Chinese bathroom fittings company.
But when it comes to pitching Shenzhen-listed stocks to nervous, anywhere-but-China global investors, these are undeniably tough times: tough enough, clearly, to justify the construction of an elaborate chart comparing “toilet culture and key penetration drivers in China vs Japan and US”.
For proponents of the idea that various parts of the world are ripe for various types of Japanification, this is appealing stuff. The short version of the note is that Goldman believes smart toilets — the sort of seat-heating, rear-washing, fundament-drying marvels pioneered in Japan as a supposed extension of its kawayakami worship — are poised for embrace by a toilet-friendly Chinese culture. Toilets, the note asserts, are viewed in China as a “safe and comfortable space for me-time”.
While smart-toilet adoption in China has, for the past decade, been led by middle-aged, middle-class women, the next phase is expected to draw in younger buyers. The beneficiaries, argue the Goldman analysts, will be cheaper, less sophisticated domestic offerings from the likes of local sanitaryware giant Arrow Home rather than pricey foreign ones from the likes of Japan’s Toto — an echo of the trend in numerous Chinese sectors.
China’s smart-toilet adoption levels, predicts Goldman, should rise from 4 per cent in 2022 to 11 per cent in 2026, by which time the revenues of the wider Chinese sanitaryware industry will be worth $21bn a year. In Japan, it adds, smart toilets enjoy an 80 per cent adoption rate, while in the US, which Goldman declares an “unfriendly toilet culture”, the rate is below 1 per cent. Adoption rates in China will ultimately be capped somewhere around 30 per cent, the note cautions, given the age of China’s housing stock and the requirement of decent water pressure.
Goldman’s analysis reverberates beyond its focus on smart-toilet growth in the world’s second-biggest economy. Given the fears swirling around the risks of extended stagnation and balance-sheet recession, it may seem an odd time to be making a bull case for fancy toilets. But the product, in all its intimate cultural and technological complexity, stands as a proxy for a type of middle-class, property-linked consumer spending whose relevance to the wider questions around the Chinese economy has never felt stronger. China needs the smart-toilet story to come true, but it needs it to happen in the right way: the good bits of Japanification, without the bad ones.
China’s current economic woes have afforded space for the theory that the problems of early 1990s Japan may be repeated on a grander scale in China. The combination of a crisis in China’s property sector, a distinct dampening of entrepreneurial animal spirits and a demand shortfall that has taken the consumer price index to the brink of deflation lend a certain solidity to this line of thinking.
Zombie companies, lacklustre corporate spending and a chronic decline in pricing power weighed on Japan for decades. It is a spectre that China should legitimately dread. Yet many dismiss the comparison and the idea that China’s problems are inescapable in the relatively short term. Andy Rothman, an investment strategist at Matthews Asia, regards it as a mistake to underestimate the resilience of Chinese consumers and entrepreneurs and the pragmatism of policymakers.
Such optimism underpins the case for smart-toilet adoption: urbanisation in China is unfinished, furnishing expenditure as a percentage of disposable income is still lower than in Japan, the US and India, and the more desperate property developers are to sell apartments, the more they may try to entice buyers by installing fancy toilets. Consumer demand may be low, but middle-class demand for a relatively inexpensive “quality lifestyle” upgrade may defy that. Japanese consumers bought ever flashier toilets through 30 years of stagnation. That’s a good Japanification.
The problem, though, is inherent in Goldman’s case for Arrow Home: China’s younger generation and average-income families will buy domestically produced smart toilets precisely because they are not only cheap now but will probably be cheaper still in the future as the market expands. The price of a lower-end smart toilet, according to Goldman’s estimates, will drop 20 per cent between now and 2026. Embed those kind of deflating numbers in consumer heads, and you have the wrong kind of Japanification.