As China slowly transforms its economy from dependence on exports to one driven by consumers, the emphasis will shift to retail sales. Indeed, with nearly $9 trillion lost in Western stock and housing markets since 2008, the world urgently needs a new consumer. Marketers–will the Chinese middle class be the next battle ground for your products or services?
There are poor in China–and lots of them–as peasants from the countryside struggle with daily hardships and most live “hand to mouth”. And for a country that once frowned on the accumulation of wealth, there are also individuals who are very well off. But a segment of consumers exists in China, just above the hefty niche of factory workers–a middle class–growing in sophistication and disposable income.
To be sure, this middle class is just a segment of Chinese consumers–estimated to be anywhere from 150-300 million, of a total 1.3 billion people. But these individuals are spending and could potentially be the growth engine that delivers the world from its economic doldrums.
To keep their economy humming at a 6-8% growth rate, China has unleashed a $586B stimulus package. A recent Wall Street Journal article cites the implications of this stimulus on China’s economy:
“A torrent of bank lending, spurred by the government, is increasing investment in China. Consumers are out shopping in response to incentives such as lower mortgage rates and tax cuts on car purchases. Auto makers in particular are benefiting. Vehicle sales in China climbed 5% to a record 1.11 million units in March–a tentative turnaround from last autumn, when car sales slowed significantly.”
It’s important to realize that not all of the $586B will be put back into the hands of consumers. In fact, most of the monies will go towards needed infrastructure improvements and healthcare. But a significant portion of the stimulus is helping China’s middle class spend more aggressively. “In China, people still have the money to buy a Mercedes”, said Ulrich Walker, chairman and CEO of Daimler’s northeast Asia operations. We expect a continued positive growth trend.”
To be sure, China’s definition of middle class isn’t the same as in most Western societies. Affluent workers in China’s middle class only earn up to $12,500 (USD) per year. Moreover, many middle class workers are still salting away a significant portion of their salary for housing, healthcare, and schooling–not exactly spending wildly on international brands.
However, as global marketers desperately seek buyers for their products and services, it might be worth a look at the rising incomes and spending power of China’s emerging middle class.
Questions
1. The Chinese head of Nissan Motors says that China’s market is currently the only growing market. Proctor and Gamble says sales in China have slowed, but not as much as other countries. Can affluent and middle class Chinese “save” the global economy?
2. Many multi-national retailers have made significant strides in the Chinese market. Are they placing safe or smart bets (both?) on a growing middle class?
3. Have you identified your growth engine for the next 5-7 years? What/where/who is it? Does China factor in your plans?
Related posts:
- Going For Growth–In China
- Retail in China: Traditional Marketing 4Ps Still Relevant
- Going For Growth?In China
- Going For Growth?In China
- New Markets: Too Late For Green Technology?
Tags: blue ocean strategy, China, Chinese middle class, growth, new markets, Retail, Segmentation and Targeting
Paul,
I think you’re asking the right questions. While so much attention is being paid to our immediate economic crisis, the true, historic issue of our times is the rise of a Chinese and Indian middle class.
I really don’t know what the impact will be, but I suspect it’ll be HUGE.
Paul,
I agree with Jonathan that the emerging middle class in both India and China hold great promise. Having said that, Western companies wanting to do business in these countries had better do their homework before rushing in. What appears to be lucrative opportunity will turn sour quickly without cultural understanding. There have already been failures by pushing the wrong products or the right products in the wrong packaging. Some things just don’t translate well from English or another Western language into Chinese, for example. Doing this right takes time–and it also takes making the right connections in these countries who can facilitate cultural understanding, valuable insights and assistance in placing the right products in the proper manner. When doing business in Asia, forming the right connections are an absolute “must”.
Questions
1. The Chinese head of Nissan Motors says that China’s market is currently the only growing market. Proctor and Gamble says sales in China have slowed, but not as much as other countries. Can affluent and middle class Chinese “save” the global economy?
Well, insofar as the Chinese continue to manipulate their currency to encourage exports and discourage imports, no, they are not going to save the global economy. If, however, the Chinese move toward more balance between production/savings toward more consumption and imports then, yes, they could be a substantial engine of growth.
While I doubt they would flat-out allow the yuan to float against the dollar, watch the yuan and how they handle it. As it stands now, company trying to import to China is at a significant disadvantage because of the currency exchange rates.
2. Many multi-national retailers have made significant strides in the Chinese market. Are they placing safe or smart bets (both?) on a growing middle class?
Smart yes. Safe, the political winds will tell…
Jonathan, thank you for commenting on this post. Sometimes in the craziness of life and trying to keep our heads above water, we forget to watch for the oncoming tidal wave. For marketers, China and India are not only economic giants now, but they are projected to be top 2-3 economies within next couple of decades. From a blue ocean strategy perspective, just think of the possibilities!
Ted, as one who lived in Taiwan for some time, I appreciate your insights in the need for marketers to understand the nuances of their market and the importance of creating the right partnerships/connections to succeed.
While the Chinese government has in the past “strongly encouraged” joint ventures as a way to break into the Chinese market (and realizing there is positives/negatives to that strategy) having a local partner to help navigate the political and socio-economic processes is a must. There are some terrific case studies of Western companies that decided to do things in China according to their pre-defined processes (it worked in other countries, it will work in China…). I’m sure you can guess the outcome.
Neil, as you know the topic of the Yuan pegged to the dollar and ramifications therein could be an entire post. Your point regarding the restraint of domestic consumption of imports as a result of that unofficial policy is well taken.
To tackle this challenge, many Western companies set up shop in China either thru JV (strongly encouraged) or outright ownership of factories, stores etc (now starting to take place). Philips is a great example of a company that is not only exporting but also meeting the needs of Chinese consumers–and doing quite well with this strategy. I believe there is an opportunity to meet the needs of the Chinese middle class while deftly navigating bureaucratic red tape. Better to be on the inside, than on the outside looking in?
Hi Paul,
Excellent post, as always. All of this leads to a major question in my mind: since middle class Chinese consumers have less purchasing power than their Western counterparts, and an increasing hunger for “luxury” items, how will the Chinese banks and government respond? Will they learn a lesson from the West and tightly control the amount of credit they extend to consumers in China? I think it will be interesting to see how this develops, as well.
Yes, Paul, I see your point and that will certainly help substantially but I do not to see how such de facto protectionism will “save” the global economy.
They want others to come in an hire Chinese workers to make products for Chinese consumers. That is good but I think if the Chinese want to be the engine of growth they might consider opening trade up more. The yuan is key to this.
I think they *could* “save” the global economy but I hope they take a hard look at their practices and consider some changes that would benefit both China and their trading partners. If they did this, they could well be celebrated and toasted the world over as the economic engine that drove the global economic recovery.
Neil, if you listen to Bernanke, Geithner et al, I think they’d argue that the global economy doesn’t need saving at all, and that we’re well on track for recovery–green shoots everywhere. For me, that’s questionable analysis at best.
We’re going to need a primary growth driver to get us out of this funk. Will it be technology (biotech, green, nano etc) or demand consumption led (as I posit above). Time will tell.
Claire, you bring up a terrific point that I have not covered in this post. Easy money and poor risk management processes are two big culprits in the financial crisis of 2008. Right now there are a lot of sick companies (public and private) in China propped up by govt loans. In fact, one counterpoints of the recent surge in Chinese auto sales is that they are made possible by generous loan terms. Could this be the making of a new bubble?
Exactly, Paul. And even before the current global economic crisis, the Chinese government and banks were quietly writing off a lot of debt. Even with China’s huge building boom of the last few years, some ill-advised loans and expenditures were made. Since China is still a secretive, somewhat closed society as a Communist country, it’s hard for us in the West to know exactly how many toxic assets the banks are carrying there already. My guess is that consumers will be given much less credit as a result. That, in turn, will impact consumer purchases, especially for big ticket items.
I don’t know whether spending in China will “save” the global economy. However, the middle class in China and India is already having a transformative impact as more companies design and create products for this market first. Middle class Indian and Chinese consumers are not the same. However, there are enough of each to make it a profitable venture to design products for each of these markets and then determine whether a version of those products can be rolled out worldwide.
I don’t know whether spending in China will “save” the global economy. However, the middle class in China and India is already having a transformative impact as more companies design and create products for this market first. Middle class Indian and Chinese consumers are not the same. However, there are enough of each to make it a profitable venture to design products for each of these markets and then determine whether a version of those products can be rolled out worldwide.
Camille, thank you for taking time to comment. I remember reading an article (recently) about how showrooms in India are overflowing with people who want to touch/see the new Nano by Tata Motors. The waiting list is also a mile long. So instead of these markets as an “afterthought”, companies are realizing there are other middle classes in emerging markets with disposable income.
I am not a marketer but I think you raised very good questions. In China, the “middle classes” are rising. Many of my classmates are joining that group. They spend on things they like and not worrying too much above saving for the future as their parents did. They were born in the good days and have not much the memory of what it is like being poor. I cannot say that the boom will last forever. But based on my friends current status, I would say the size of the mid class should continue to increase for quite several years.
Well, we are on track for a recovery but it will be weak one. If we have growth of, say, 1% in 2010 it will not feel much like a recovery.
Without drivers we will have an anemic recovery. With significant drivers the recovery can turn into something of a boom.
I still say that in the case of China, it is in everyone’s interest that the yuan be let out of its cage. Yes, it could be a separate post but no discussion of China or its burgeoning middle class can really proceed without consideration of the grossly imbalanced currency exchanges. It is the elephant in the room.
If China is to become a full player in the global market it would be in their best interest to float the yuan. I think that a growing middle class may end up making this an imperative along with concern about environment, food/product safety, education, etc., that normally come with the rise of a middle class.
The Chinese middle class is most certainly seeing many of the fruits of the West just out of their reach mostly because of an artificially depressed currency value that denies them full access to the world market.
It is also in the Chinese’s interest to see the global economy start to grow. They cannot continue to maintain their growth without the global economy starting to grow again. I think that they will come around to this realization.
Hi Ariel, the boom of 6-8% YOY economic growth (either real or manufactured) will probably continue for sometime now, as it has for the past 25 years. As you rightly point out, there are many young people who know nothing but prosperity. That said nothing lasts forever and I have to wonder, is there a Black Swan on the horizon?
Neil, thank you for adding all your valuable input regarding China’s middle class. For China, it’s definitely a balance between meeting the needs of its citizenry, holding down inflation, and of course continuing its export growth. Right now, the Chinese govt is making tradeoffs, doing the best they can to manage constraints (esp political). It will be very interesting to watch and see what happens in the next 5-10 years as sophisticated Chinese consumers start demanding more from the companies they do business with…and eventually their government!
Paul, with the first global contraction in 70-years I do not see how you can have growth in just one country. Yes, they are big but they are highly export dependent.
As it stands, millions of Chinese have already been tossed from their jobs and the Chinese safety net is very weak.
Hi, Paul,
Thank you for your post.
You and your readers might find these resources interesting in terms of taking the subject a bit further and maybe even tracking solutions:
http://tinyurl.com/2lkphj
http://tinyurl.com/ojocd4
Regards,
Laurel
Laurel, I was hoping at some point that you would respond to my recent posts on China. The sites you pointed out are good resources, esp the World Bank url. Thank you for commenting!
All of this discussion makes sense. My prediction is that the rise of the “middle class,” and associated costs of such,in India and China will lead to a resurgence of services back in the low-cost U.S. markets, especially for call center services. There are many low-cost, low-population areas in states, such as Montana, Iowa, Kansas, Arkansas, etc, that would a call welcome facility and the accompanying jobs. I predict:
At some point, India and China will price themselves “equal” to low-cost America. Then, we will see the return of some call center work to the US.
Nancy, thank you for your bold predictions! An interesting byproduct of rising middle classes in India and China is rising customer expectations. These expectations are not only of products purchased, but also of the work people are willing to do, and the lifestyle they’re willing to accept. So rising incomes, rising expectations, increasing levels of education and even inflationary monetary pressures all point towards the possibility that your predictions will come true! Thank you for commenting!
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