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Understanding the Chinese Consumer

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.

24 comments on “Understanding the Chinese Consumer

  1. syedzunair
    March 23, 2012

    @Barbara: 

    China is emerging to be the biggest consumer market for electronics. What concerns me is that how will marketers build their brand image in China? Predominantly, the market in China is not focused on brand loyalty apart from a few niche items. One can find numerous local brands for say single item like a smartphone, all with more or less the same features the only difference being the price tag. Since, majority of Chinese consumers consider cost over brands it will be interesting to see how enterprises place themselves in China to reach out to the mainstream and the low level consumer segments. 

  2. Himanshugupta
    March 23, 2012

    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…” 

    Well India is no different in that sense. But you already know that and we are reading the McKinsey report from different perspective i.e. possibility of local market. Western consumers and Asian consumers think quite differently as far as the spending is concerned. Even though the per capita income and the middle class will grow in India and China, we should not expect much increase in spending per person. But surely the sheer number (of people) will help the demand. As the saying go, you will not buy a Ferrari until you do not have a road to drive on, the local government have huge responsibility to both attract manufacturing by building infrastructure and give incentive for people to spend.

  3. FLYINGSCOT
    March 23, 2012

    Great article Barb.  From my travels in China and talking to many folks I heartily agree that branding is the key.  I was amazed how drawn to Western brands the Chinese people are.  They told me they would rather pay 3x for a Western brand as they see Chinese products as very poor quality, carrying little kudos.  I watch eagerly for the first major Chinese brand to be truly competitive in the eyes of the Chinese consumer.

  4. Wale Bakare
    March 23, 2012

    Do you still carry the mindset of China being low-cost labour place? I think, that stereotypical attribute for cheap labour is being fading off gradually.

  5. syedzunair
    March 23, 2012

    Wale, 

    I think China still has low cost labour as compared to other regions.

    On the other hand, China still has the ability to produce different qualities of products depending upon the price consumers are willing to offer. So during my visit there I found different qualities A,B,C etc of the same product each fetching different price tag. 

  6. Mr. Roques
    March 23, 2012

    Do you think Apple will continue their high-end device only approach? What about the low-end iPhone I heard about a few months ago? I know 200US$ is not much, but maybe they could create really inexpensive smartphone that can compete with the other brands. 

    I also think the iPad will have a smaller brother, at least eventually. A smaller screen tablet.

    What do you think?

  7. ahdand
    March 24, 2012

    It was before but I dont see it ight now becasue China is much more developed and financially stonger than before.

  8. syedzunair
    March 24, 2012

    “Even though the per capita income and the middle class will grow in India and China, we should not expect much increase in spending per person”

    I agree with you Himanshugupta, even if the income increases the buying pattern of the people in India and China is different from that of the West. I don't see middle class people in India buying expensive cellphones especially with a high rate of mugging. Instead, I believe that the low cost smartphones will prove to be a success.

  9. ITempire
    March 24, 2012

    To add on to your blog's idea Barb, I think as the incomes of the Chinese people will increase, not only the demand for consumer electronics will increase but also the wage demands, which will in the long run, wipe out the low-cost labour advantages the Chinese economy benefits from. Also I have read on many places the ongoing debate about who will take the lead after Chinese and Indian markets saturate. The far-sighted manufacturers are already trying to explore opportunities in Africa so that they become the pioneers of the revolution.

  10. Taimoor Zubar
    March 24, 2012

    The cost advantage from China will decline (if not disappear completely) in the coming years because of the growing wages. However, the increased income levels in the economy, as Barbara pointed out, will be a key attraction for companies to launch their new products in China and tailor them to suit the Chinese consumers.

  11. Taimoor Zubar
    March 24, 2012

    They told me they would rather pay 3x for a Western brand as they see Chinese products as very poor quality, carrying little kudos”

    I've seen this happening as well. Even if the product of the Western brand was also manufactured in China, people would still prefer the Western brand and pay the high price. I think the Chinese brands really have to establish quality standards to build up an image and gain recognition. A part of it would also be to change consumer perception through marketing.

  12. stochastic excursion
    March 24, 2012

    I wonder how much of the rise in discretionary spending is a result, not of improved conditions for the rank-and-file laborer, but of the cash flow from all the incoming investment dollars and bureaucratic fee structure.  Also, China's managerial class is known to be of a caliber that rivals the West, so no doubt they know how to work the organization for wage incentives.

  13. Ariella
    March 24, 2012

    @TaimoorZ Yes, Chinese good are considered to be of inferior quality, but I'm not certain people would pay as much as 3x for a Western brand, though they may be willing to pay some premium. 

  14. Taimoor Zubar
    March 25, 2012

    @Ariella: You'd be surprised to see that there are actually brand-loyal consumers who are willing to spend twice or thrice the amount just because of the brand even when the features are same. Compare how Apple's products cost way more than other brands even when the hardware specifications are not much different. It's all about the brand name that gets them to pay more.

  15. Taimoor Zubar
    March 25, 2012

    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.

  16. Himanshugupta
    March 25, 2012

    @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.

  17. ahdand
    March 25, 2012

    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.

  18. Ariella
    March 25, 2012

    @himanshugupata as in the adage, “If it ain't broke, don't fix it.” 

  19. Wale Bakare
    March 26, 2012

    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.

     

  20. Daniel
    March 26, 2012

    “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.

  21. Eldredge
    March 26, 2012

    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.

  22. Barbara Jorgensen
    March 26, 2012

    @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.

  23. ITempire
    March 26, 2012

    @ TaimoorZ

    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. 

  24. Mr. Roques
    June 22, 2012

    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.

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