And how American companies can seize the opportunities…
The Chinese middle class is expanding rapidly, reaching 474 million this year, according to my latest calculation.
Many people may challenge this number. But it’s just arithmetic. In a recent report “Consuming China,” McKinsey indicates that 83 % of households in China’s mega cities (cities with population of over 10 million: Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen, and Tianjin) and 66 % in the rest of the cities are middle class families.
By the end of 2011, China’s urban population reached 691 million. Do the simple math, and you will get the same number I got: the population of the Chinese middle class was 474 million, with 88 million living in mega cities, and 386 million in smaller cities.
This means the Chinese middle class accounts for 68 percent of urban population, which is believable to me. Assuming two percent are super rich, still about 30 percent of the people in urban areas are poor.
Some would argue that there are different criteria to measure the size of the Chinese middle class. A simple and important rule of thumb, as stated in my book The Chinese Dream, is that of a household with a third of its income for discretionary spending. These people have passed the threshold of survival and have disposable income to spend on leisure items. As I travel around China, it’s very clear to me that the majority of people in urban areas have reached this stage.
Chinese Consumers Love “Made in USA” Products
The rising Chinese middle class is the biggest story of our time. However, many US companies are missing the opportunity. US exports to China account for only 6 percent of China’s total imports. The major categories of US exports to are in industrial sectors such as power generation equipment, aircraft, and medical equipment.
The biggest opportunity, however, is in the consumer sector. On November 11, China’s “Single Day” shopping festival, online retailers Tmall (B2C) and Taobao Marketplace (C2C) generated a record revenue of $3.1 billion, more than the total sales in the U. S. on Black Friday and Cyber Monday combined. Before long, China will become the world’s largest consumer market, and its consumption could reach $13 to $16 trillion by 2020.
Better yet, Chinese consumers love American goods and are willing to pay more for them. A recent study by Boston Consulting Group indicates that more than half of Chinese consumers prefer American products to Chinese products. Over 60 percent of them are willing to pay more for products that are “Made in USA.” That’s why Foxconn, a Taiwanese manufacturer that produce electronic parts for companies like Apple and Dell, is looking to the U.S. to open manufacturing plants.
Research also shows that the premium that Chinese consumers are willing to pay ranges from 10 percent to 80 percent or more. For example, Chinese consumers pay a 30 % higher premium price for iPhones despite their relatively lower incomes compared to American consumers. Colgate Total Oral Care premium toothpaste costs approximately 200 percent more than local brands.
Leverage Ecommerce Portals such as Tmall and Alibaba
While multinationals have made inroads into China, small and medium sized companies face challenges in accessing the China market. The good news is that the Internet has helped reduce entry barriers and allowed companies to sell into China without a significant upfront investment. Here are a few tips for companies to export to China by leveraging ecommerce sites:
- To sell to Chinese consumers, you can open a shop on Tmall.com, China’s most popular B2C shopping destination, owned by Alibaba Group. Businesses have the option to either opt to handle their own e-commerce operations, or partner with third-party companies like Export Now to help them set up a storefront on Tmall.com and handle all the back-end logistics during the exporting process.
- To sell worldwide, you can register as a “supplier” on Alibaba.com, a B2B online marketplace that has 29.4 million registered users in more than 240 countries and regions. Recently, Alibaba.com has introduced a free Verified Membership in the U.S.. Verified members enjoy the benefit of premium programs, which allow them to gain higher rankings for product listings and have greater visibility than regular members.
The Little Yoga Mat’s Success
An example is The Little Yoga Mat, a small start-up based in New York. It plans to sell children’s yoga mats to China at a 60 % higher premium price. How does it do it? Through Alibaba.com and Tmall, and with the help of Export Now.
Jensen Wheeler Wolfe, founder of The Little Yoga Mat, is a former researcher at Glamour Magazine. She stumbled into this business two years ago while teaching her 5-year-old daughter’s yoga class in her preschool. Realizing small children didn’t have mats that fit their size, Jensen cut her own yoga mat into four pieces to give to the kids. The children were thrilled.
That simple solution became a business idea. Jensen soon discovered an unmet market need. With encouragement from her husband, Jensen quit her job at Glamour and started The Little Yoga Mat. First, she brought in an artist friend to help her design the mats. Then, she used Alibaba.com to find manufacturers that could produce quality mats with eco-friendly materials. One year later, Jensen’s little yoga mats found their way into toy stores, eco-friendly shops, spas, and even pediatrician’s offices. This year, the company’s profits tripled.
Jensen’s next goal is to sell her little yoga mats to China. She is working with Export Now to set up a shop on Tmall. The retail price for her yoga mat is $25 in the U.S. But in China, the same mat can sell for $40. Jensen is excited about the opportunity of reaching out to a new market. She has started to develop new product lines such as children’s backpacks and a book to illustrate basic postures for children. She is getting very busy because inquiries from Sweden, Denmark, England and France have begun to pour in.
The Little Yoga Mat is an excellent example of how small businesses can leverage ecommerce portals to sell into China. The rising Chinese middle class, now approaching half a billion, has created enormous opportunities for U.S. companies. American companies must seize these opportunities and be more proactive in exporting to China. This will help create jobs, improve trade relationships, and perhaps even help with our fiscal cliff.
(A version of this article was originally published on Forbes.com)