Has China Sucessfully Cultivated its Domestic Consumer Market?

by morganschapiro

I’ve often said here that I don’t believe China is in the stable position that the world believes it to be because it has failed to capture its own domestic market. Many Chinese are not able to afford the products produced in its country and China relies on cheap exports for a large part of its growth.  The problem with cheap labor exports, is that they don’t produce a lot of revenue compared to other stages of manufacturing. I recall reading a report that claimed that China received only 6c per dollar spent on the manufacturing of the iPad compared to the 20-30c received by Japan, South Korea and Taiwan who fabricated pieces and participated in high tech manufacturing.

Am I correct? That, for now, is impossible to tell as the numbers coming out of China are often unreliable or coerced by the politburo’s long reach. McKinsey, however, just came out with a survey based study that I recommend reading and discuss below.

http://csi.mckinsey.com/Home/Knowledge_by_region/Asia/China/2011_Annual_Chinese_Consumer_Survey.aspx

Full Disclose: My experience with China comes from a few sources. I work for a company called China Programs that promotes summer study programs in China, I spent a little over a month in Shanghai at East China Normal University during the Olympics where I conducted studies of the local population  and have read many journals and taken classes on the subject.

 

Quotes and Analysis/Opinion:

“McKinsey’s 2011 Consumer Report, like those of previous years, is a snapshot of the buying behavior of China’s urban consumers.“

This is an important fact to remember while reading this report. China has millions of migrant workers and a large part of its rural lands are in poverty compared to its cities. Success of its cities does not mean that China has captured its entire consumer base, although cities alone may be enough to move them to the next stage of growth. This disparity may also cause political instability in China.

After being present for a small seminar (Boston University allows it undergraduate students to cross register for graduate classes) and asking questions of Dr. Ho Szu-yin, Taiwan’s former deputy National Security head under Ma Ying-jeou, Taiwan is acutely aware of this fact. The previous administration’s plan (and what it looks like will continue, blue or green) is to preserve the status-quo while civil unrest grows in China between rural and urban in hopes that fundamental change in China will neutralize the threat of reunification before demographic changes in Taiwan render it unable to defend itself due to social obligations maturing

“First-time buyers have been a major driver of category growth in China.
This year, however, among the urban population, only 5 percent of
consumers who spent more did so because they were first-time buyers,
down from 20 percent in 2010.”

This is the slowing growth that I am somewhat concerned about. If it is slowing this dramatically in urban centers, rural sectors will be considerably worse.

“Chinese consumers can be quick to adopt what were once unfamiliar
products, opening up whole new areas of growth. For example, 66 percent
of consumers in the survey said they bought chocolate this year, compared
with 46 percent just two years earlier. Similarly, fabric conditioner and pure
fruit juice were once unfamiliar to the Chinese, but penetration rates are
now as high as 42 and 60 percent respectively.

Although brand awareness is rising, there is little sign that brand loyalty is
following suit. In fact, an increasing number of consumers choose between
a growing number of their favorite brands.”

What I see here is massive opportunity for Western Company growth, but also a potential for them to fail. If they are unable to capture brand loyalty they will spawn domestic competition. When these companies end up inevitably making products that are as high in quality as their western counterparts these companies will face increased competition. These companies also do not have the disadvantage of paying off R&D costs since they can simply copy the current formulas of competitors, although they will have to overcome brand stigma.

“Although almost 60 percent of the population now has Internet access, as
a medium for obtaining product information, its reach remains relatively
limited—only 28 percent of those surveyed said they had recently received
product information from Internet advertising and other forms of online
communication for consumer electronic products, for example. In short,
the Internet has by no means replaced other media channels as an
important source of product information.”

Why? In my opinion this is because in China they have not yet managed to make consumer websites as friendly as western counterparts like amazon, they are not protected by the same laws as western countries so they worry they may never receive their products or they may be counterfeit, there is not a rigid price structure and you cannot bargain online, fears of identity theft, lack of unified shipping services (USPS priority mail helps online businesses in America more then the government realizes) and finally lack of cheaper prices online then in stores.

It could also be partly cultural as the Chinese culture values relationships highly, but I doubt that this is a strong factor.

“Emotional considerations, barely apparent two years ago, are playing a
more important role in consumers’ choice of brand, particularly among
wealthier people.”

Welcome to modern high end branding. Why wealthier Chinese? Most likely it is because it represents a significant status symbol, especially in a place where fake goods are so prevalent. From my anecdotal experience I saw people go to great lengths to prove that goods were genuine and not counterfeit while in Hangzhou and Suzhou.

“The Chinese have taken to consumerism with ease, embracing thousands
of new products, services, and brands. By 2020 and within the course of
one decade, real consumption will have doubled to $4.8 trillion and China
will then be the world’s second-biggest consumer market after the United
States.”

“The government, keen to rebalance the economy, has responded by flagging
domestic consumption as a top priority in its latest five-year economic
plan, which includes a range of consumption-boosting measures such as
subsidies on energy-efficient cars, rebates to rural consumers on purchases
of electronic goods, and an increase in the minimum wage.”

From here I’ll refrain posting and analyzing the rest of the 50 page report. I highly recommend reading it, especially for people who plan to enter the Chinese market.
I do offer some advise to those who plan to try to enter enter the Chinese market (any more then this and you’ll have to hire me):
The Chinese attitude is very different then that found in the western world. They perceive value very different and have a different chain of logic to the point that some unfamiliar with the culture would consider it circular (and even some experts). Traditional tactics will not yet work in the market. If you plan on targeting the rapidly growing middle class you have to take this into account. While the upper class (not including party and politburo members who intentionally avoid this image) has grown to favor high-end western products and product values, the middle class will likely demand a much more sino-centered product line and values. It will be nearly impossible to train sufficient amounts of current western talent to manage a market of over 100 million consumers (what I predict to be at least the middle classes market size in the coming five or so years), so any branch extended to China will need significant amount of domestic talent to be hired but also must be under close supervision to maintain quality and brand assurances as well as prevent ethical misinterpretations of a western logic centered policies.