A Country of Diverse Consumers

Earlier this year, a McKinsey report predicted that China will have 290 million middle class households by 2011 with annual income ranging approximately from $3000 to $5000. By all accounts, this prediction seems too conservative. A recent report by Boston Consulting Group and experts at Wharton says that China has already 25 to 30 million middle class households with annual income of $4300 to $8700.

While this causes much excitement in the business community, many difficulties remain for western companies that want to sell in China. On one hand, Chinese consumers are embracing new economic ideas and lifestyles, buying goods that have long been unavailable to them; on the other hand, they are part of a consumer culture and economic system that are very different from the West. Here are the key points from the BCG report and my comments:

Although China has 1.3 billion people, only 400 million are in urban areas. Coming from a culture that is extremely frugal, the middle class Chinese are both savers and spenders. There are people who are looking for value and a bargain price, and there are others who are seeking a premium branded product.

Some of the most popular products among the middle class are color televisions, mobile phones and personal computers. Interestingly enough, in big cities like Shanghai, diamond engagement rings are big sellers, even though the concept of Western-style engagement prior to marriage does not exist in China.

Chinese value education tremendously. Families with kids spend a disproportional part of their incomes on their children’s education. Chinese are also very status conscious. They are willing to spend much of their discretionary income on items that will help them rise in status, but won’t spend on anything their friends and neighbors cannot see. There is so called “consumptive anxiety” – the need for people to buy products so as “not to be left behind.”

Perhaps the biggest challenge for companies selling in China is navigating through its fragmented sales and distribution channels. Many distributors are state-owned. Local government officials, often on the boards of local companies, make it very difficult for companies from other provinces to do business in order to favor the products of home-grown companies. As one senior executive said, doing business in China is half business and half politics.

China is so big, with many diverse cultures and traditions. It’s almost impossible to generalize the market. For the next five years, most of the growth will be in smaller cities. The needs of these consumers are very different from those from big cities. It’s critical for companies to have a localized mindset and develop products that factor in the local tastes and appeal to the consumers in smaller cities.

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8 thoughts on “A Country of Diverse Consumers

  1. I just wish someone would find a way to market cheese in China. Maybe then the price would come down to something relatively cheap… ok, so it is cheap by western standards, but it’s quite expensive by Chinese standards.

  2. Now that MNCs are looking toward China not just as a production house but as a new market, points 4 and 5 are especially important. The NYTimes had an interesting article yesterday about the “palace aesthetic” popular in modest Russian households. In my experience, Chinese people have the same taste.

    A friend once said to me that “Chinese people work hard their whole lives to buy a Mercedes, a big TV, and European furniture so they can cover it all in plastic!”

    It’s a funny statement that I think is absolutely true! Chinese culture loves to showcase glitz. Smaller city consumers may be less concerned with luxury travel and fancy dinners, placing higher value on durable goods to showcase.

    Matthew – Chinese people of an older generation typically aren’t used to the taste of cheese, and I find that they also generally don’t like any uncooked foods (ex. salads, sushi.) My parents and many of their friends weren’t exposed to these “foreign” foods until later in life. That may be part of the reason why cheese is not heavily marketed in China.

  3. I think China has a very big potential, and companies who do not think to localize will lose out.

  4. Matthew, as Liz said, Chinese don’t usually eat cheese at all. Before I came to the US, I never had cheese in my life. Even today, I still don’t eat cheese that much. It’s probably healthy :-).

    Liz, I found your friend’s remark very amuzing. I do see people buy those expensive things and cover them up in plastic! Are your parents from Asia / China?

  5. It’s interesting to read this information about the “up-and-coming economic threat from China”. Thanks for this great article, Helen.

    How significant is the fact that Chinese parents spend a disproportional amount of their income on their children’s education? In my opinion, this is an area where the U.S. would be wise to try and stay in the game.

    Great comments, Liz.

  6. HOW funny!!!

    I’m so surprised that this article is written at the end of October in the year 2006,DOES THE AUTHOR REALLY KNOW ABOUT CHINA? how long haven’t you gone back to China??

    what you said in the article “Some of the most popular products among the middle class are color televisions, mobile phones and personal computers.”

    here are some numbers I would like to show everyone here…

    1. In the year 2005, About 29% of the Chinese population have mobile phones, the number will rised to 50% in the year 2010. and the total mobile users in 2005 is 376 million, this number made China the biggest mobile market in the world.

    2. About 70% of the households in rural areas and 100% of the households in urban cities have color televisions in China.

    Chinese economy is booming, and let me tell you what are popular among middle class Chinese:

    1. outbound travelling, in the year 2005, 310.3 million Chinese travelled outside of China.

    2. at the end of May 2006, the internet users in China break though 1,000 million.

    That’s it, I don’t think I need to explain more about this issue, those numbers here can explain explicitly…

  7. Lianna,

    I appreciate your comment.

    I believe the numbers quoted here are for the “emerging” middle class, which includes some currently rural or semi-rural population. Although 400 million Chinese have mobile phones, please don’t forget Chinese update their mobile phones every 7-8 months. I found your number of outbound Chinese travelers are interesting. I would be very interested in knowing where you get the statistics. At least I know your number of Chinese Internet users are FAR off. According to CNNIC, Chinese Internet users reached 123 million by June 2006, not 1,000 million!

    But thanks again for visiting my blog and hope to see you in the future!