Times Have Changed: No More “China Produces and America Consumes”

Forbes: Helen H. Wang

When I started to write my book The Chinese Dream three years ago, people in the United States did not even believe there was a middle class in China. Today, China’s middle class is already larger than the entire population of the United States and is expected to reach 800 million in fifteen years.

If this prediction sounds too bullish, chances are it is not. In 2006, McKinsey predicted that the by 2025, the Chinese middle class would reach 612 million and China would become the third largest consumer market in the world after the U.S. and Japan.

These numbers are already outdated.  A recent Credit Suisse report predicts China’s consumer market will reach $16 trillion by 2020, overtaking the United States as the world’s largest consumer market in the world.

2020 is less than ten years from now. Whether or not China will become the world’s largest consumer economy remains to be seen. However, this much is clear: the Chinese middle class has already changed the dynamics of the world we live in. The world is no longer “China produces and the United States consumes.” U.S. exports to China are growing almost two times as fast as overall U.S. exports, supporting half a million jobs.

The Credit Suisse report reveals that the average household income of the Chinese middle class increased 98 percent between 2004 and 2009. While Western economies were struggling with recovery, China’s retail sales rose solidly 18.4 percent in 2010. The Chinese are also saving less. The household saving rate dropped from 26 percent to 12 percent over the last five years.

The $45 billion export deal signed during President Hu Jintao’s state visit is just the beginning of these changing dynamics. The Chinese middle class is creating enormous opportunities for American companies selling into China. General Motors plans to export $900 million in vehicles and parts to China in the next two years. Recently, Texas businesses signed six agreements worth of half a billion dollars in exports to China, including cotton, crystalline silicon solar cells, and photovoltaic generation systems.

The Chinese middle class has proved to be an alternative growth engine for Western companies, especially when their home markets stagnate during the recession. The Credit Suisse report indicates that wages in urban China will increase 19 percent annually from 2011 through 2015, and private consumption may climb to 42 percent of GDP in 2015, up from the current 36 percent.

For companies that want to sell into China, now the timing is right and momentum is strong. In China, Western companies have advantages in big-ticket items such as automobiles, luxury goods, and technology products because of their quality and reputation. However, they will face more competition from Chinese domestic firms in consumer goods sectors such as food and beverages, household appliances, and personal care products.

Here are some time-proven tips for Western companies to succeed in China:

  • It may be a good idea to reposition your products or services when entering China. For example, Pizza Hut positioned itself as a high-end trendy restaurant chain and is doing extremely well in China.
  • Consider promoting your flagship brands but tailor them to Chinese consumers’ tastes. Many younger Chinese consumers favor Western brands because they believe that Western products elevate their social status.
  • Align your business with the government’s priorities, and you will stand the best possible chance of success. For example, green tech is a strategic priority at all levels of the Chinese government. This opens up tremendous opportunities for Western companies.
  • Choose partners that can make substantial business contributions– pair with local companies that explicitly share your strategic goals. Don’t limit your choices only to large, well-established Chinese companies.
  • As Chinese strategist Sun Tzu said, “Know yourself and know your enemy, you will win every war.” It is very important to know who you are dealing with and what they really want and need. The ability to learn faster than your competitors may be the only sustainable competitive advantage.

As the Chinese middle class continues to grow, China will import more goods and services from abroad. U.S. trade deficits with China will narrow. As the U. S. exports more to China, the U.S. and Chinese economies will be more interdependent and interconnected. This will produce more jobs and more balanced growth in both countries, driven in good measure by the growth of the Chinese middle class.

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