Comments on: China: Implications of an Emerging Middle Class

By: Deng Xiaoping’s 20/20 Vision « iLook China

Deng Xiaoping’s 20/20 Vision « iLook China — Fri, 05 Feb 2010 20:02:50 +0000

[...] the last decade, something happened in China that Mao thought he had destroyed. China grew a middle class. During a trip to China in 2008, we saw the Chinese middle class everywhere we went. Instead of [...]

By: Paul Barsch

Paul Barsch — Mon, 11 May 2009 14:19:21 +0000

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!

By: Nancy Voith

Nancy Voith — Sun, 10 May 2009 23:58:56 +0000

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.

By: Paul Barsch

Paul Barsch — Sat, 09 May 2009 21:21:35 +0000

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!

By: Laurel Delaney

Laurel Delaney — Fri, 08 May 2009 21:10:17 +0000

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

By: Neil Anuskiewicz

Neil Anuskiewicz — Thu, 07 May 2009 16:11:39 +0000

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.

By: Paul Barsch

Paul Barsch — Thu, 07 May 2009 14:46:38 +0000

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!

By: Paul Barsch

Paul Barsch — Thu, 07 May 2009 14:02:00 +0000

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?

By: Neil Anuskiewicz

Neil Anuskiewicz — Thu, 07 May 2009 06:58:57 +0000

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.

By: Ariel Fang Fang

Ariel Fang Fang — Thu, 07 May 2009 04:57:58 +0000

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.

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 19:47:39 +0000

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.

By: Camille Schuster

Camille Schuster — Wed, 06 May 2009 18:04:38 +0000

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.

By: Camille Schuster

Camille Schuster — Wed, 06 May 2009 18:04:25 +0000

By: Claire Ratushny

Claire Ratushny — Wed, 06 May 2009 16:30:45 +0000

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.

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 16:24:53 +0000

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?

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 16:17:46 +0000

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.

By: Neil Anuskiewicz

Neil Anuskiewicz — Wed, 06 May 2009 16:11:07 +0000

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.

By: Claire Ratushny

Claire Ratushny — Wed, 06 May 2009 16:04:05 +0000

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.

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 15:56:07 +0000

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?

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 15:32:07 +0000

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.

By: Paul Barsch

Paul Barsch — Wed, 06 May 2009 15:21:10 +0000

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!

By: Neil Anuskiewicz

Neil Anuskiewicz — Wed, 06 May 2009 15:19:44 +0000

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…

By: Ted Mininni

Ted Mininni — Wed, 06 May 2009 14:59:11 +0000

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”.

By: Jonathan Kranz

Jonathan Kranz — Wed, 06 May 2009 14:12:06 +0000

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.