Setting aside competitive issues for a moment, companies that have located manufacturing in China have done so for two main reasons: first, low-cost labor; and second, to reach China's vast consumer market. As wages begin to rise in the region, companies will have to increasingly shift their focus toward selling to China's consumers in addition to employing them.
According to research firm McKinsey & Co., a number of trends will change China's consumer profile within the next 10 years. First, China's population is becoming wealthier. In 2000, there was no "mainstream" market in China -- what the rest of the world would refer to as "middle class." By 2020, 51 percent of China's consumers will be considered mainstream. More than half the market will have an income between $16,000 and $34,000, McKinsey reports.
Increased income will change how consumers spend their money. Discretionary spending will increase. According to McKinsey:
Bigger incomes and government efforts to increase consumption will benefit all consumer-facing companies, though to varying degrees, depending on their product portfolios. Discretionary categories will show the strongest overall growth—13.4 percent—between 2010 and 2020, as these goods become affordable to growing numbers of consumers. Next come semi-necessities (10.9 percent growth) followed by necessities (7.2 percent). These average figures will of course vary significantly by region and city.
For electronics companies, it's important to note that a growing chunk of discretionary spending will go toward transportation and communications. Chinese consumption of devices such as smartphones and tablets is increasing, as EBN Editor-in-Chief Bolaji Ojo reports in Apple May Launch the Next iPhone in China. The amount of electronics in automobiles is growing in China as well. In fact, McKinsey believes more Chinese consumers will buy luxury vehicles such as SUVs, which increasingly are packed with electronics.
What is going to make a big difference for OEMs, McKinsey says, is branding. Instead of offering only low-end items, for example, manufacturers should expand their product offerings to encompass both economy and luxury spending. This may require the development of what McKinsey calls "sub-brands," such as Toyota manufacturing both the Corolla and Lexus:
Companies will need the crispest value propositions to connect with each group and to stand out from competitors. By 2020, they will have to position brands (or sub-brands) to target narrower consumer segments and offer more tailored value propositions. Brands extended across too many consumer segments and price points may struggle to defend their market position. Hard though the transition could be, at some point companies that have focused on maximizing their brands’ scale will have to adopt a model based on a portfolio of more targeted brands or sub-brands to connect with different consumer segments.
Well, thats true. But they have handled the iPhone and iPad market differently (from their traditional computer market). So I think there's room for a lower cost iPad.
I think your point regarding perceptions of the consumers really needs to be changed is valid. China needs to realize and advertise the efforts it makes towards quality improvements as the main hurdle in Chinese exports making their mark in the local and foreign markets is that the buyers are always unsure about problems they may face and are also disappointed about resale value. The first problem is severe and long lasting therefore image building is the only way out if China needs to survive in the competitive industry.
@Jacob--a great point that I missed entirely. China is all about promoting China. There are probably some western products that will be consumed no matter what, but as long as there is an alternative Chinese product, I think you are correct.
Good point - this will be a beneficial trend only to the extent that the Chinese government is willing to let foreign products compete in the marketplace. They have spent tha last couple of decades growing their production and manufacturing capabilities, and I am sure they will view it in their own best intesest to encourage and reward internal comsumption.
"As wages begin to rise in the region, companies will have to increasingly shift their focus toward selling to China's consumers in addition to employing them"
Barbara, I don't know how much this is feasible because Chinese governments are interested only in attracting FDI. They are not that much keen in promoting foreign goods or goods manufactured through any MNC in China. Instead of that they are promoting locally manufacturing goods, inorder to boost the internal market and Small/Medium Scale Manufactures.
Taimoorz, we could factor in so many reasons why made in China western products are of high premium:
1 - High Wages
2 - Must Pay Tax
3 - Quality control
4 - Consumer's orientation
In China, and other developing countries all those above are hard for government to implement and enforce. In short, all become possible primarily due to effective and efficient government policies.
I think China is the best place to launch a new product especially electronical items. Im saying this not considering only the population but they are very much risk takers who love to try out the things quickly than the others.
@Mr. Roques, i highly doubt that Apple will comeup with cheaper iPhone or Tablet just to grab more market. I have heard a lot about Apple coming up with cheaper Mac about 5 years ago but that has not happened. Apple's strategy to keep the price up and deliver class product has been going well so why try experimenting in a different direction.
I think China's population will ultimately match up with the Japanese population not just in terms of their living standards and lifestyles, but also on how they upgraded themselves and reached to this point.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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