Most manufacturers and retailers continue to see enormous potential for growth in China. To become the pot of gold that manufacturers and retail hope for, Douglas Alexander, Principal Consultant at Component Engineering Consultants, believes "China needs to make greater efforts to lower its savings rate, extricate itself from the investment and export-driven growth model, and develop into a consumption-led economy." ["Where Are the Chinese Buyers?" EBN, 6 December 2012] He goes on to note that China's "middle class is growing with the promise and expectation that goods will be available for this enhanced level of lifestyle." The new lifestyle that confronts most Chinese middle class consumers is one associated with cities. Urbanization is taking place in China at an incredibly rapid pace. Ian Johnson reports, "China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a transformative event that could set off a new wave of growth or saddle the country with problems for generations to come." ["China’s Great Uprooting: Moving 250 Million Into Cities," New York Times, 15 June 2013] He continues:
"The broad trend began decades ago. In the early 1980s, about 80 percent of Chinese lived in the countryside versus 47 percent today, plus an additional 17 percent that works in cities but is classified as rural. The idea is to speed up this process and achieve an urbanized China much faster than would occur organically. The primary motivation for the urbanization push is to change China’s economic structure, with growth based on domestic demand for products instead of relying so much on export. In theory, new urbanites mean vast new opportunities for construction companies, public transportation, utilities and appliance makers, and a break from the cycle of farmers consuming only what they produce. 'If half of China’s population starts consuming, growth is inevitable,” said Li Xiangyang, vice director of the Institute of World Economics and Politics, part of a government research institute. “Right now they are living in rural areas where they do not consume.'”
With wages in China on the rise, most analysts expect that the Chinese (especially younger generations) will become bigger consumers of goods and services. The consulting firm McKinsey & Company has put a lot effort into understanding Chinese consumers. That understanding begins by studying the impact of urbanization. A year ago, the McKinsey Global Institute released a report entitled Urban World: Cities and the Rise of the Consuming Class. It concluded that the 600 cities making the largest contribution to a higher global GDP will generate nearly 65 percent of world economic growth by 2025. Many of those cities will be located in China. McKinsey analysts note, "Since the mid-1980s, the pace of that shift — from the United States and Europe toward Asia — has been increasing dramatically. We expect this trend to continue, so executives and policy makers must be prepared to respond. ... To capture the opportunities that arise from urbanization, businesses will need extensive market intelligence."
In past posts, I've emphasized the fact that cities are not homogeneous entities; rather, they are patchwork quilt of neighborhoods, ethnicities, tastes, and lifestyles. That is why market intelligence is so important if businesses want to reach individual consumers. McKinsey partner Yougang Chen believes that "rising middle-class wealth and a new generation of sophisticated young consumers are changing the rules for China's consumer market and the companies that serve it." ["China’s next chapter: The rise of the Generation-2 consumer," McKinsey & Company, June 2013] He explains:
"The image of China as a place to sell only low-cost, unsophisticated mass-market products is changing as dramatically as its demographics. Lifted by a wave of growing middle-class wealth, the country's economy is undergoing significant shifts in consumption dynamics as a new generation of young, prosperous, and individualistic shoppers moves to the fore. Our latest research suggests that within the burgeoning middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade. As that happens, a new, more globally minded generation, born after the mid-1980s, will exercise disproportionate influence in the market."
In a video accompanying the article, Gordon Orr, a Director at McKinsey & Company, explains that many of China's new consumers are purchasing goods and services online. This has resulted in many companies wondering exactly what kind of presence they need in Chinese cities (i.e., virtual presence only, virtual presence and a flagship store, or multi-channel presence). In another McKinsey & Company article, Chen, along with his colleagues Dominic Barton and Amy Jin, discuss how "generational change and the rising prosperity of inland cities will power consumption for years to come." ["Mapping China’s middle class," June 2013] They write:
"The explosive growth of China's emerging middle class has brought sweeping economic change and social transformation—and it's not over yet. By 2022, our research suggests, more than 75 percent of China's urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year. In purchasing-power-parity terms, that range is between the average income of Brazil and Italy. Just 4 percent of urban Chinese households were within it in 2000—but 68 percent were in 2012. In the decade ahead, the middle class's continued expansion will be powered by labor-market and policy initiatives that push wages up, financial reforms that stimulate employment and income growth, and the rising role of private enterprise, which should encourage productivity and help more income accrue to households. Should all this play out as expected, urban-household income will at least double by 2022."
Douglas Alexander asks, "How would you feel if your boss promised you a 13 to 15 percent raise, per year, for the next 7 years? Stimulated?" Probably, but rising wages, are only part of the emerging picture. The McKinsey analysts note, "Beneath the topline figures are significant shifts in consumption dynamics." As noted previously, the biggest shift is that upper middle class Chinese consumers are going to be driving the Chinese economy and those are the consumers that most companies should target first. They believe, "By 2015, barring unforeseen events, more than one-third of the money spent around the world on high-end bags, shoes, watches, jewelry, and ready-to-wear clothing will come from Chinese consumers in the domestic market or outside the mainland." The McKinsey analysts also note that companies need to look beyond China's coastal cities. They explain:
"Middle-class growth will be stronger in smaller, inland cities than in the urban strongholds of the eastern seaboard. And the Internet's consumer impact will continue to expand. Already, 68 percent of the middle class has access to it, compared with 57 percent of the total urban population."
In China, as elsewhere, there are also generational differences when it comes to what consumers buy. McKinsey analysts label the most significant generation of Chinese consumers "Generation 2" or G2. They write:
"China's new middle class also divides into different generations, the most striking of which we call Generation 2 (G2). It comprised nearly 200 million consumers in 2012 and accounted for 15 percent of urban consumption. In ten years' time, their share of urban consumer demand should more than double, to 35 percent. By then, G2 consumers will be almost three times as numerous as the baby-boomer population that has been shaping US consumption for years. These G2 consumers today are typically teenagers and people in their early 20s, born after the mid-1980s and raised in a period of relative abundance. Their parents, who lived through years of shortage, focused primarily on building economic security. But many G2 consumers were born after Deng Xiaoping's visit to the southern region — the beginning of a new era of economic reform and of China's opening up to the world. They are confident, independent minded, and determined to display that independence through their consumption. Most of them are the only children in their families because when they were born, the government was starting to enforce its one-child policy quite strictly."
This generation is not IT-savvy, McKinsey analysts report it "is the most Westernized to date." They describe G2 consumers a bit more:
"Prone to regard expensive products as intrinsically better than less expensive ones, they are happy to try new things, such as personal digital gadgetry. They are also more likely than previous generations to check the Internet for other people's usage experiences or comments. These consumers seek emotional satisfaction through better taste or higher status, are loyal to the brands they trust, and prefer niche over mass brands. Teenage members of this cohort already have a big influence on decisions about family purchases, according to our research."
The article goes on to discuss more about the location and character of growing Chinese cities. The analysts then conclude:
"Armed with better information, companies can begin tailoring their product portfolios to the needs of increasingly sophisticated consumers and revising brand architectures to differentiate offerings and attract younger consumers eager for fresh buying experiences. There will be not only challenges but also plenty of opportunities for companies whose strategies reflect China’s new constellation of rising incomes, shifting urban landscapes, and generational change."
The "better information" with which companies must be armed will come from big data analytics. I agree with analysts who predict that, in order to grow, most companies are going to have to conquer the emerging market landscape. There is no more important emerging market than China.