China’s ‘Lifestyle Services’ Boom
Exploiting the Desire for a Better Life
China’s startup scene is no longer just about the Internet but also about a trend toward premium products. As China’s growing middle class cares less about a product's price-performance ratio, a new group of service providers has emerged to tap the premium product market.
Exploiting the Desire for a Better LifeBy Fuyuan Hsiao
From CommonWealth Magazine (vol. 621 )
We are driving along the western coast of Jiaozhou Bay in Qingdao, China. According to the car’s GPS, we are riding right across the sea. In reality, we are crossing a vast expanse of reclaimed land with a seemingly endless horizon. High-rise cranes tower over construction sites where trucks are raising huge dust clouds.
“Look there on your right; that’s where they shot The Great Wall. When the shooting was over the set was immediately dismantled,” notes the man at the wheel, Zhang Wen (not his real name), referring to the 2016 film by Chinese director Zhang Yimou. Zhang Wen, who until recently worked for the entertainment and real estate giant Dalian Wanda Group, knows this place so well he would be able to find his way with eyes closed.
This is fortunate, because the face of the city is changing so rapidly that GPS map updates cannot keep pace.
China’s richest man, Wanda Group founder Wang Jianlin, has invested more than NT$200 billion here in the construction of Wanda Studios, the world’s largest film-making facility.
Trial operations at the Qingdao Oriental Movie Metropolis with Wanda Studios as their core will start this July. As an event to solicit foreign investors was held on soundstage 1, the final scenes for the Hollywood science fiction monster film Pacific Rim 2 were being filmed next door.
The megastudio in Qingdao is Wang’s dream of a Chinese Hollywood come true. The Oriental Movie Metropolis, which covers an area 14 times as large as Taipei’s Da-an Forest Park, constitutes a mixed-use entertainment complex combining Hollywood-style film production with a Disney-style theme park. It comprises 30 soundstages, Asia’s largest movie theater, which holds 5,300 seats, restaurants, condos, a hospital, an international school, an ice-skating rink, a theme park and a yacht harbor. Last year, Wanda signed contracts with nine production companies for the shooting of 100 Chinese films and 30 international movies here in Qingdao.
“We shoot Chinese movies to tell stories from China. The Oriental Movie Metropolis demonstrates China’s cultural self-awareness and self-confidence. What foreign countries achieve we can now also achieve. What foreigners can’t accomplish, we can accomplish now and do it well,” says China’s former Vice Education Minister Pan Zhenzhou proudly as blindingly bright stage lights move overhead.
Now that China’s economic growth rate has slowed to around 6 percent, the United States has reclaimed its crown as the world’s largest trading nation, relegating China to second place. During this phase of economic overhaul, the engine behind China’s continued growth comes from man-made waves of consumption.
Vantone Real Estate Chairman Feng Lun once used the term “barbaric growth” to describe the power behind the waves the private sector creates. The Wanda Group alone is developing some 12 projects, each in the order of more than NT$200 billion, across China.
“China’s renewed growth will definitely come from consumption,” asserts Christina Liu, managing director of Hong Kong-based Bellwether International Group, which specializes in research on the Chinese economy.
Once the Chinese people become affluent, they also want to “live the good life.” As the government and the private sector in China are joining hands to turn the nation into a "good life superpower” in Asia, any solutions for reducing customers’ “pain points” - making urban life more convenient, less stressful and more enjoyable - have the potential to create big waves.
Amid this industrial paradigm shift, large manufacturers, the longtime star performers, are handing the baton to the new rising stars-- smaller companies that provide lifestyle services.
Bike-sharing platforms, popular in big cities around the world, are a case in point.
While riding a bike through the old narrow alleys in Beijing or slowly crossing a major avenue, one is tempted to drift off into the China of yesteryear, when bicycles were still the dominant means of transport. However, times have changed. While people back then rode their own bicycles, using locks and keys to secure them against theft, they now scan a bar code with their mobile phones to rent a bike to get around, parking it wherever they like. The bike can be then picked up by another rider at any time.
Bike sharing is China’s hottest wave-making industry, giving rise to a new generation of lifestyle service providers. Bikes can be rented by scanning a QR Code and left at the rider’s final destination for pickup by the operator.
Last March, Taiwanese bicycle manufacturer Giant established YouBike in Fujian Province’s Quanzhou. The company was planning to replicate the Quanzhou pilot project in other Chinese cities.
Less than a year later, however, numerous other bike-sharing companies had sprung up across China, creating stiff competition for Giant.
Hugely popular bike-sharing startups such as bluegogo, ofo and Mobike represent a new trend of founding private-sector "lifestyle services providers.”
Mobike, founded by Hu Weiwei, a 35-year-old former business reporter, received investment from electronics assembler Foxconn and Chinese internet provider Tencent. Apple Inc. CEO Tim Cook made headlines when mounting a yellow ofo bike during a visit to the ofo headquarters in Zhongguan Village. Ofo founder Dai Wei, a Peking University graduate, is only 25 years old.
These newly created consumer waves depend on technology for their success. “China’s service industry has fallen behind…there is demand everywhere, there are pain points everywhere. Our market is large. You only need to hook up to the Internet and satisfy the needs of a certain target group, and you will easily get several million or tens of millions of users,” explains Lin Chufang, former vice president of the Chinese personalized news app Toutiao (“headlines”), as he taps his mobile phone to show off a host of transportation-related apps – taxi caller, car rental or bike sharing – on the display. Lin frankly admits that he relies entirely on mobile apps to organize his life. Thanks to these mobile services, he no longer needs to carry cash, make phone calls or send SMS messages (his mobile phone displays 1,466 unread SMS).
Before the advent of the mobile phone, the Chinese market was fragmented based on provincial or city boundaries, which made it difficult for companies to expand their reach. Once the mobile phone arrived, Chinese market segments became demarcated by demand.
“If you can solve the Chinese people’s daily life problems, you have a market with great depth,” says Lin.
Tu Tze-chen, former general director of ITRI’s Center of Knowledge-based Economy and Competitiveness Study, concluded in his research that "BATH” (composed from the initials of Baidu, Alibaba, Tencent and Huawei) fuel the fire that will make the Chinese economy regain steam. The four companies effectively hold a monopoly on China’s emerging consumer market. Due to their large customer base, they can create whatever wave they want to create, and even turn it into a powerful tsunami.
Thanks to technology adding fuel to the fire, a completely new industry has emerged in the Chinese-speaking world – knowledge monetization or making money by sharing knowledge and expertise. Several columnists have founded new media startups and knowledge-sharing platforms with paid content. There is Luo Zhenyu with his Luogic Talkshow, finance writer Wu Xiaobo’s startup Shanghai Bajiulin, Ji Xiaohua’s Zai Hang, which provides business consulting sessions, as well as Zhang Yiming’s Toutiao with nearly 500 million users.
As we push open the door to a Starbucks coffee shop, we spot business reporter Li Xiang. Li used to be an editorial writer for eeo.com.cn (The Economic Observer) and deputy editor-in-chief for Bloomberg Business. Last year, he left his full-time job and began to sell his Li Xiang Business Internal Reference column via the paid content app Dedao. Within less than two weeks, almost 60,000 people had signed up for an annual subscription fee of 199 renminbi.
Li is not alone; other popular experts are also turning their insights into cash cows, such as Peking University economist Xue Zhaofeng, Xu Lai, editor in chief of the science and technology news website Guokr. com, and classical music critic Liu Xuefeng.
Rita Gunther McGrath, professor of management at the Columbia Business School, wrote in her book The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business that companies need to “move from wave to wave of competitive advantages, trying not to stay with one too long because it will become exhausted…” Learning to ride these waves is crucial for a company’s survival. China has evolved from being the world’s factory to being the world’s market. The scope of its market and its speed of replication will become a global wave-making machine, unleashing a consumption wave that will shock the world.
“China doesn’t have a population dividend, but it has two other dividends no one pays attention to – the urbanization dividend and the market dividend. These two dividends are closely related to consumption,” notes an investigative finance and business reporter who formerly worked as a commentator for state-run China Central Television (CCTV). It will take another twenty years for China to become fully urbanized, says the reporter. In the future, 940 million people will live in 3,000 cities nationwide.
“The urban economy is China’s most overlooked endogenic growth engine,” the reporter adds. He believes that everyone underestimates the pressures and opportunities that urbanization holds for China.
Urbanization requires basic infrastructure such as high-speed railways, subways and airports. SSubway networks are currently being built in 28 cities across China. The country’s existing 22,000 kilometers of high-speed railway routes are longer than all the high-speed railway lines in the rest of the world combined. By 2020, the high-speed railway network is supposed to cover 113 cities, including the major metropolises.
Beijing Capital International Airport, expanded in 2008, was running near its maximum design capacity only six years later. The planned new international airport in the Daxing District covers an area half as large as the city of Taipei. Upon its completion, scheduled for September 2019, it will be the largest airport in the world.
China’s rapidly growing cities are home to the nation’s emerging middle class. Anyone who finds way to reduce their pain points, making their lives more convenient and livable, will be able to create new markets. The city of Nanjing, which was largely bypassed by investors when China served as “the world’s factory,” is a typical example.
The capital of Jiangsu Province boasts wide tree-lined boulevards, clusters of office and residential high-rise buildings as well as luxury residential compounds where proud owners parade their red poodles in the park. Six years ago, the site of Walsin Centro, a high-end urban development project in the Central Business District of Nanjing Hexi New Town, was still a poor backwater on the banks of the Yangtze River. When the Nanjing City Government published plans to develop a new district here, Taiwan’s Walsin Lihwa Corp. was the first to seize the real estate development opportunity.
Walsin Lihwa, which started out as a power cable and wire manufacturer, moved production to China in the 1990s, making Nanjing its manufacturing base. As Walsin Lihwa Chairman Chiao Yu-lon explains, Nanjing is not as suitable as a manufacturing location as the coastal cities. But now that the Chinese economy is shifting from manufacturing to consumer services, Nanjing’s urban strengths are coming to the fore.
As many as 60 million people, more than the population of South Korea, live within a three-hour drive from Nanjing. “The daily needs service industry and the urban economy are closely related. Cities are the most important engine for the consumer economy,” says Chiao. Consequently, Walsin Lihwa wants to cross over from manufacturing into consumer services.
Cities like Nanjing are mushrooming in China. The nation currently boasts 30 cities with at least 8 million inhabitants, which is the population of New York City. As of the end of last year, twelve Chinese cities generated a GDP of more than 1 trillion renminbi. Over the past decade, Chinese consumption grew at an annual rate of 15 percent, compared to just 2.5 percent in the United States.
The middle class in these dozen cities are the consumers who are driving the transformation of China’s industrial structure.
As a result, sectors and trades that were not profitable for many years in the past are now suddenly turning a profit.
Wu Xiaobo, the celebrity finance journalist, has termed 2016 “Year One of Chinese middle class consumption” as the new normal is higher-end consumption. It is the young urbanites in their twenties and thirties who are leading consumer trends with their preferences and values. They are eager to move up the social ladder and crave “instant success”. They want a good quality of life and value good taste and stylish design. They are not hunting for the best price but rather seek after the best performance. Education, healthcare, entertainment, culture and creativity are the new star industries of the urban economy.
Upscale Pirated Products
Li Xiang notes that the economy needs to undergo frequent revisions, just like a printed magazine. When the Chinese economy reached the time for revision, [Chinese President] Xi Jinping wrote a supply-side prescription for its restructuring. This is effectively consumption upgrading or premiumization. Li observes that inelastic demand in the Chinese market collapsed last year as sales of instant noodles and beer declined for the first time ever.
Discerning young city dwellers also like to frequent restaurants with a nice atmosphere and trendy interior decoration. Restaurant chains that provide a distinctive dining experience, such as the Xibei Mongolian restaurant, Grandma’s Home and HaiDiLao hot pot, keep opening new outlets. Miniso, a household and consumer goods retailer modeled after Japan’s lifestyle brand Muji, has become a favorite among shoppers from the new middle class. “Even copycat products need to move toward the premium segment,” remarks Li with a smile.
Marketing research firm McKinsey found in a Chinese consumer survey last year that the Chinese are becoming more selective but keep consuming. They are most willing to spend on healthy living and travel.
As Chinese consumption patterns change and people aspire to a better quality of life, Taiwanese-invested companies in China are jumping on the bandwagon by branching out into the new lucrative lifestyle services segment.
Urban Transformation Opportunities
In late March, crowds of elementary and junior high school students were frolicking on the lawn of the Ginko Lake Eco-Tourism Area in Nanjing’s Jiangning District, about one hour by car from the city center. The squealing and screaming of excited children could be heard across the theme park, the largest in Jiangsu Province, as they watched the alpacas, rode thrilling rides, or toured the dinosaur area.
Theme park founder Lin Ming-tien, an entrepreneur from Taiwan, frequently takes up his megaphone to instruct the park’s staff: “Why has the trash on the lawn here not yet been picked up?” ”The bronze statue at the fountain is rusty, hurry up and remove the rust,” are typical commands. As Lin is bending down to collect the garbage, he also greets a passing elementary student with a bright smile, asking “Are you having fun?” Then he checks his mobile phone to monitor the park’s hourly visitor numbers. By 1:30 p.m., a total of 9,903 people have already entered the park.
Taiwanese entrepreneur Lin Ming-tien’s Gingko Lake Eco-Tourism Area is the largest theme park in Jiangsu Province. Amid the park’s greenery, artificial fog machines create a mysterious, dreamlike atmosphere.
“During the holidays around Labor Day or the Oct. 1 national day, we had so many visitors that we couldn’t squeeze them in anymore,” recalls Lin.
Twenty-eight years ago, Lin founded Jonsa Technologies Co. Ltd. in Nantou, manufacturing satellite antennas. Lin is proud to say that his antennas can be found anywhere on Earth where there is land. Fifteen years ago, he handed the management of Jonsa to his wife, spent NT$15 billion to buy the property in Jiangning District, and went on to develop Nanjing Gingko Lake amusement park, excavating an artificial lake, planting trees and laying sod.
Lin correctly foresaw that leisure and healthy lifestyle would become China’s new massive consumption tsunami. Instead of constructing real estate, Lin built a golf course, a seven-hectare garden, seven hectares of forest, the equally large Gingko Lake and an eco tourism area of seven hectares with tea plantations. The park, which covers a surface area bigger than Taipei’s entire Zhongshan District, opened in October 2015 and began to break even this year.
Another venture that turned profitable thanks to the new interest in a healthy lifestyle and private healthcare is the BenQ Medical Center in Nanjing, a Sino-Taiwanese private hospital controlled by Taiwan’s BenQ Group.
The BenQ Medical Center is located in Nanjing’s Jianye District, about 40 minutes by car from Gingko Lake. Having operated in the red for nine years, the hospital eventually broke even last year and is expected to turn a profit this year. After the State Council announced its Healthy China 2030 blueprint last year, healthcare is forecast to grow into a US$2.3 trillion market within the coming 15 years.
Emerging from a meeting clad in a white lab coat, BenQ Medical Center President Hong Ying can takes us on a tour of the hospital. The premises, which are flanked by upscale office and residential high-rise complexes, are bathed in a sea of pink cherry blossoms.
BenQ Medical Center President Hong Yingcan worked in Nanjing for nine years before his hospital began to gain a firm foothold in the Chinese healthcare market thanks to the consumer trend toward premium products and services.
Hong sighs as he recalls the hospital’s arduous beginnings. When the hospital had just opened in 2008, there were only open fields in the area. Now housing in the area sells for the highest prices in Nanjing, an average of more than NT$600,000 per ping (about US$7,000 per square meter). The hospital has also begun to turn a profit. “In the blink of an eye everything has changed,” remarks Hong.
Aside from seeing patients and managing the hospital, Hong also works on improving his business acumen. He has enrolled in an executive MBA program in healthcare management at Nanjing University, attending classes while continuing to work full time. Hong believes that healthcare and triple premium medical care (premium technology, premium service, premium price) will become the fastest growing, most lucrative sectors in China in the coming two decades.
Since the Chinese government phased out the one-child policy in 2015, allowing couples to have two children, the hospital’s obstetrics department has seen brisk business from the ensuing baby boom. The hospital counted more than 600 deliveries in one year, the fourth-highest number of births at a Nanjing hospital. In the future, BenQ Medical Center will also manage the Qiaolin New Town International Hospital to be built on the site of the new 12-inch wafer fab of Taiwan Semiconductor Manufacturing Company (TSMC) in the Pukou Economic Development Zone.
What does this new China look like? Let’s hear what one of China’s “wave makers”, Luogic Talkshow host Luo Zhenyu has to say: “This is a completely new reality no one has encountered before. It keeps evolving; what we see today is already a new species. The Chinese people all want to make money; they all want to move up the ladder. Any minute you can spot people rise like Ma Huateng (CEO of Tencent) or Ma Yun (CEO of Alibaba). All this is unique to China. And although we pay a price for such impetuousness, it’s truly spectacular!”
Translated from the Chinese by Susanne Ganz