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Goldman Sachs, known for its equity research, has taken an unusual approach by invoking the capricious and cleanliness-obsessed Japanese toilet gods, known as kawayakami, to make a case for investing in a Chinese bathroom fittings company.
During uncertain times like these, when global investors are cautious about investing in China, Goldman Sachs believes it is essential to present compelling arguments. One such argument is a detailed chart comparing “toilet culture and key penetration drivers in China vs Japan and US”.
This concept appeals to those who believe in the Japanification of different parts of the world. According to Goldman Sachs, smart toilets – the luxurious toilets that have seat-heating, rear-washing, and fundament-drying features, originally introduced in Japan as an extension of their kawayakami worship – are poised to gain popularity in China, thanks to its toilet-friendly culture. Chinese people see toilets as a “safe and comfortable space for me-time”.
While middle-aged, middle-class women have been the primary adopters of smart toilets in China over the past decade, Goldman analysts predict that younger buyers will drive the next phase of adoption. According to Goldman, affordable and less sophisticated domestic offerings from companies like Arrow Home, a local sanitaryware giant, will benefit from this trend, rather than expensive foreign brands like Japan’s Toto – a pattern seen in various sectors in China.
Goldman Sachs predicts that China’s smart toilet adoption rates will increase from 4% in 2022 to 11% in 2026. By then, the revenue generated by the broader Chinese sanitaryware industry will reach $21 billion per year. Comparatively, smart toilets have an adoption rate of 80% in Japan, but less than 1% in the US, which Goldman Sachs describes as having an “unfriendly toilet culture”. The note cautions that adoption rates in China will likely cap at around 30%, considering the age of China’s housing stock and the need for decent water pressure.
Goldman Sachs’ analysis extends beyond the growth potential of smart toilets in China. Despite concerns about extended stagnation and balance-sheet recession, there is a strong case to be made for middle-class consumer spending, particularly in relation to property. The success of smart toilets serves as a representation of this type of spending. China needs smart toilets to become popular, but in a way that avoids the negative aspects of Japanification.
China’s current economic challenges have led to theories suggesting that China may experience a larger-scale version of Japan’s problems in the early 1990s. The combination of a property sector crisis, a decrease in entrepreneurial spirit, and a demand shortfall pushing the consumer price index towards deflation make this comparison seem plausible.
However, many experts dismiss this comparison and believe that China’s problems are not unavoidable in the short term. Andy Rothman, an investment strategist at Matthews Asia, cautions against underestimating the resilience of Chinese consumers and entrepreneurs, as well as the pragmatism of policymakers.
This optimism supports the case for adopting smart toilets in China. Urbanization in China is not yet complete, and expenditure on furnishings as a percentage of disposable income is lower than in Japan, the US, and India. Additionally, property developers trying to sell apartments may install fancy toilets to attract buyers. While consumer demand may be low, the middle class’s demand for a relatively affordable upgrade in their quality of life may defy expectations, as they did in Japan during decades of stagnation.
However, there is a challenge inherent in Goldman Sachs’ case for Arrow Home. Younger generations and average-income families in China may buy domestically produced smart toilets because they are currently affordable and are likely to become even cheaper as the market expands. Goldman Sachs estimates that the price of lower-end smart toilets will decrease by 20% between now and 2026. If consumers are aware of these deflating numbers, it could lead to unintended consequences similar to Japanification.
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