The New Consumption Wave
China's Middle-class Catches Spending Fever
The Chinese city with the highest per capita GDP is ... Ordos? CommonWealth Magazine sheds light on the under-the-radar cities fueling China's consumption boom.
China's Middle-class Catches Spending FeverBy Benjamin Chiang, Sherry Lee
From CommonWealth Magazine (vol. 447 )
China's urbanization and the rise of a middle-class have unleashed dramatic changes in its consumer market.
Before Beijing launched economic reforms three decades ago, Chinese society only knew one class – the proletariat. But 30 years of economic liberalization have pulled 600 million people out of poverty and turned them into the world's biggest middle-class consumer group.
Kao Cheng-shu, a professor in Tunghai University's Department of Sociology, says China has entered a completely different stage of consumerism, similar to the experiences of developed countries, because of its rising national income.
Sociology and economics scholars generally believe that annual per capita income of US$3,000 marks an important threshold, signifying the end of a "hand-to-mouth" existence. When this "magic US$3,000" barometer is attained and surpassed, people use their newfound wealth to consume, their needs grow more diversified, and their lives become more modern and sophisticated, Kao explains.
This "magical" force seems to be gaining strength by the day in China. The country's rapid industrialization and urbanization have driven wages and standards of living higher, with per-capita income already exceeding US$4,000 a year and closing in on US$5,000.
Because of the country's huge income gap, China already has roughly 100 million people whose income is on a par with Taiwan's per capita income of nearly US$20,000 per year.
Middle Class Consumption Frenzy
Complementing those wealthiest 100 million are another half billion people who make up China's middle class.
Li Shi, a professor at Beijing Normal University and a long-time observer of income distribution, identifies the annual disposable income of China's middle-income class at between 10,700 renminbi and 32,100 renminbi. Around 30 percent of China's population, or nearly half a billion people, fall within this income category.
At around 30 percent, China's middle class may constitute a small proportion of the population, compared with those of other nations, but the hundreds of millions of people it encompasses dwarf the populations of almost every country in the world.
The demand generated by a wealthy class of 100 million people and a middle class of half a billion has fueled the opening act of China's consumption frenzy, and companies are rushing to supply this consumption feast.
Growing by a New Taiwan Every Year
Over the past 20 years, China has engaged in the biggest mass urbanization campaign known to humankind.
According to Goldman Sachs statistics, China has averaged 20 million new urban dwellers every year for the past 10 years, the equivalent of adding one Taiwan a year.
In 2009, China's urban residents accounted for 47 percent of the country's population, meaning that roughly 630 million Chinese people live in metropolitan areas.
Government campaigns to promote demand for electric appliances, cars and building materials in the countryside have also stimulated consumption in non-urban areas. Massive transportation infrastructure projects to develop high-speed rail, freeways and airports have suddenly transformed rural villages into towns and towns into cities, unleashing pent-up demand in a torrent of consumption.
The consulting firm McKinsey & Company estimates that more than 1 billion people will live in China's cities by 2030, exceeding the population of any country in the world except for India. By 2025, China is projected to have 221 cities with over 1 million people, compared to 35 in all of Europe.
This mass urbanization has also linked together so-called "third-tier" and "fourth-tier" Chinese cities scattered around the country and launched a unified take-off that has rapidly delivered them from poverty.
One example is Shenmu County, in Shaanxi Province along the borders of Shanxi and Inner Mongolia, with a population of 360,000 living in an area one-fifth the size of Taiwan. Much of Shenmu's land is a vast desert, but it is rich in coal, and the black fuel has generated average annual economic growth in the county of 25 percent over the past 15 years. Shenmu residents now boast per capita disposable income of more than 19,000 renminbi a year – more than Wuhan – and medical care is free.
In shopping areas in urban Shenmu, the latest Sony digital cameras and Samsung LCD TVs are on display, ready to be grabbed by farmers driving into town in their BYD cars.
"Things that you can't buy are immediately shipped in from Shanghai the next day. New products are introduced at the same time as in Beijing," says an amazed Sun Yuanxin, the deputy director of the Institute for World Expo Economic Research at Shanghai University of Finance and Economics. He believes that the spending power of the Shenmu area rivals that of Shanghai.
Urban Demand – Moving Inland
Of nearly 700 Chinese cities, CommonWealth Magazine has identified 47 "super cities" with the greatest potential, including some bright pearls that have yet to be discovered. (See Table)
The big surprise is that the city with the highest per capita GDP and fastest growth over the past three years is not Beijing, Shanghai, Guangzhou or any metropolis along China's prosperous east coast. Instead, the champion is the relatively anonymous Inner Mongolian city of Ordos, which has higher per capita GDP than Taiwan. Other points worthy of note: Guangzhou residents are the biggest spenders in China, and the country's 10 biggest cities have a combined retail market worth NT$13 trillion, more than Taiwan's GDP.
Urbanization has spread spending power from the major coastal cities to medium-sized metropolitan areas inland, where consumption has truly exploded.
Last July, the Hefei store of consumer electronics retail chain Buynow Electronic Information Co. teamed up with China Merchants Bank and China Mobile in a promotional campaign modeled after department store "VIP Night" promotions. More than 10,000 "VIPs" jammed into the store in just under five hours and bought nearly 1,000 notebook computers.
"Hefei people buy notebooks with as much ease as if they were buying groceries – they have no hesitation," recalls Luke Lin, the general manager of Buynow's store in Hefei, capital of Anhui province. Every year for the past three years, rents for retail space in Hefei have risen 20 percent a year, but shop owners have still been quick to renew their leases.
Second- and third-tier cities long ignored by enterprises have suddenly become hotbeds of consumption. Moving to northeast China, 10 malls are opening this year in Shenyang, a city of 7 million people. The city's Louis Vuitton branch alone has annual sales of more than 200 million renminbi.
One of the 10 commercial developments is a 3.7 billion renminbi, 300,000 square-meter super mall. "At the end of the year, you will see a kilometers-long stretch of shopping centers," says a Taiwanese businessman based in China who is helping Shenyang shopping centers build CRM (customer relationship management) systems.
Chinese Consumers Changing Corporate Marketing
China's half-billion-strong middle class is brimming with confidence and assertiveness, which has forced companies to change their marketing strategies.
The first "little emperors" spawned under China's one-child policy are now over 30, and they have incredible spending power. "Even if they are employed, they still use the family's money. Single children are often supported by six adults. They're not afraid to spend money and don't have to support their parents," observes Friendly Business Group president Thomas Liu.
Of all the consumers in the world, Chinese consumers are the most patriotic and have the most confidence in the future.
According to a survey by communications services specialist the WPP Group, more than 50 percent of Chinese consumers have complete confidence in their country and are not worried about the future, well above the global average of 38 percent. "Chinese people's confidence in the future is immediately reflected in their attitude toward consumption, which is very aggressive," says Milan Chiang, director of marketing for B&Q (China) Investment Co., Ltd.
Aside from getting annual raises, members of China's burgeoning middle class have also benefited from the booms in China's property and stock markets over the past 10 years, which have given them the means to pursue their dreams.
Yumi Ding, a 28-year-old woman who has been working for six years and currently is the assistant director for planning at a large cultural development company in Shanghai, has already bought an apartment for over 700,000 renminbi in Chengdu, Sichuan Province. Living in the Pudong district of Shanghai, she could not stand the crowds in the subway during her commutes, and later purchased a big sedan for roughly NT$1 million. "When I drive to work every day, I can enjoy my own space," she says.
Ding was promoted from salesperson to assistant director last year, and she has a clear sense of how to invest in herself. She spent 70,000 renminbi on a management course co-organized by Fudan University's EMBA program and Columbia University, in preparation for going abroad to further her studies.
'Made In Taiwan' Wins the Day
China's consumption fever is fueled in part by the need to keep up with others. Disposable income gets spent first on a car, then on an apartment and then on high-end 3C products.
What most surprises Friendly Business Group's Thomas Liu are sales clerks who make barely over 2,000 renminbi a month but are still willing to spend a quarter of their income on lipstick. "The person in our office who has the cell phone with the worst functions is me," Liu says. "The most expensive mobile phones are owned by 20-somethings."
China's urban middle class has also begun to pay attention to their own health, and Taiwanese companies with sensitive noses have gotten a distinct whiff of an opportunity. "In Shanghai, there's currently a shortage of NT$2,000 bottles of enzyme," Yu Chien-hua, the president of Taichung-based Organic Garden Biological Technology Co., says with a laugh. The company sells at least 600,000 renminbi a month worth of its health products in Shanghai.
Spooked by a scandal in which milk powder was found tainted with melamine and other stories of unsafe food products, China's middle class believes products made in Taiwan are "golden brands," and that "Made in Taiwan" beats "Made by Taiwanese in China." Yu says his Chinese distributors have asked him to keep the original labeling and packaging for products imported from Taiwan and avoid using simplified characters (Taiwan uses the traditional complex character set), even if that means risking running into problems at Chinese customs.
"They absolutely want the genuine Made in Taiwan product," Yu says.
Meat in the Countryside, Bones in the City
No longer is prosperity limited to major coastal cities, provincial capitals, or 13 specially designated cities. Some 284 low-tier cities and top-level counties and towns and even some rural villages all have potential as consumption centers.
Tze-Chen Tu, the vice president of Taiwan's Commerce Development Research Institute, observes that Beijing, Shanghai, and Guangzhou have already graduated from low-price markets and moved toward high-quality lifestyles.
"But what is rising sharply in China is demand for quality, low-price markets among the country's third-tier cities and below," Tu says.
The Economist Intelligence Unit, McKinsey & Company, Ogilvy and Mather and other international research specialists have all begun to explore the consumer market in those less heralded cities and towns.
Personalized Spending – The New Brand Challenge
Ogilvy and Mather discovered that the younger generation is far more "personalized" – open-minded and easily accepting of alternative cultures – than their parents, leading to a consumer base that is becoming more personalized as well.
This consumption style has spawned a new threshold in the battle to reach consumers. Whoever can teach China's middle class how to enjoy life's pleasures will be the one to emerge victorious in the fight for consumers' hearts.
The relatively upscale men's wear brand Tony Wear, created by Taiwan-based apparel exporter Tainan Enterprise Co., has begun to educate Chinese middle-class consumers regarding their taste in apparel, instilling in them the concepts of matching colors and selecting the right fabrics and patterns, and teaching them how to clean and care for clothes.
Aside from displaying the brand's fashions and accessories, Tony Store's 800 square-meter outlet also features an upscale coffee shop and top-of-the-line cleaning equipment from Japan.
"We don't just sell clothing. We sell a complete middle-class lifestyle," stresses Jack Chen, the general manager of Tony Wear (Shanghai) Apparel Co.
Tony Wear aspires to having a presence in all aspects of the clothing experience, from pre-sale to after-sales service. Chen is currently training apparel consultants to help customers plan their clothing purchases while also offering free cleaning services and educating consumers on how to avoid damaging their clothes during the cleaning process.
Most importantly, by offering to clean customers' clothes, Tony Wear gains a wealth of information on customers' dress habits.
The world's 500 biggest companies have all established presences in China, and in becoming knowledgeable about international brands, the country's middle class has grown more fickle, and partial to anything new, putting considerable pressure on enterprises that manage brands.
"In the future, whoever can command the most information about end consumers will be the winner," Chen stresses. Tony Wear conducts a market survey meeting twice a year, where 10,000 photos of every kind of clothing being worn on the street, taken by salespeople and distributors, are displayed on the meeting room's wall and then studied to discern consumer color, material and style preferences.
The Middle-class Dream: A Gold Mine in the Hinterland
The lifestyle of China's major coastal cities is being replicated in inland urban areas.
The main impetus behind the trend are the many people from inland areas who work in top-tier coastal cities. Once they have saved up enough money, "they end their nomadic lives in big cities and return to their hometowns to build a big 200-square-meter home," says B&Q's Jiang. These migrant workers quickly copy what they perceive as the lifestyles of Beijing and Shanghai, shifting spending power to the second- and third-tier cities they call home.
The Commerce Development Research Institute's Tu observes that China's true gold mine is now the group of third-tier cities, suggesting that the more backward the area, the faster the growth in wealth. Growth in third-tier cities is outpacing that in second-tier cities, and second-tier cities are outpacing first-tier cities.
Although major brands can sell nearly as much at one department counter in Shanghai as they can in an entire third-tier city, it is worth remembering that China has 660 third-tier cities, all of them untrammeled wildernesses awaiting exploration by enterprises.
"Profit margins in second- and third-tier cities are incredible. Distribution and retailing costs are far lower than in the big cities," Friendly Business Group's Liu says.
Companies rushing into retail markets must clearly understand, however, that, "profits come from second- and third-tier cities, but brand building comes from first-tier cities," Liu stresses. How effectively enterprises strike a balance between profits and branding will ultimately determine their success in this new China.
Translated from the Chinese by Luke Sabatier