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.
China's mass transit is also an opportunity for electronics companies. Not only are railways expanding geographically, but trains and control systems are being equipped with state-of-the-art technology.
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.
The full McKinsey report is available here.