4 Strategies for Reaching the Chinese Consumer6 August, 2015 / Articles
Slowing Chinese economic growth coupled with confidence-sapping tumult on the stock market have set alarm bells ringing at companies about their future growth prospects in China. But they should not simply sit back and wait to see what happens next. Consumer-facing businesses have an important role to play as the Chinese government nudges its economy from an investment-led to a consumption-led model. China has many eager, experienced consumers – but companies need to remember that there are many more cautious ones waiting in the wings who will need to be coaxed into joining the consumer economy.
Government policy will, of course, be an important factor in releasing this latent demand. But while the power to initiate a transition to a consumption-led economy lies in government hands, what the government unleashes, companies can nurture.
Our research on China’s prospects, in comparison to the development trends of 167 countries over 60 years, highlights the magnitude of the opportunity. Economic growth of just under 5% a year would see consumer spending rise by 60% over the course of the next decade, even if consumption’s share of GDP doesn’t budge. But with the right mix of government policy and business action, consumer spending could rise by as much as 126%, the equivalent of an additional $15 trillion.
So what exactly can companies do to help push toward the higher number? There are four things.
First, as consumerism becomes more deeply entrenched, companies will need to segment more and more precisely, acting on the different needs and tastes of different income, regional, and age groups. Take transport. Audi has focused on the luxury car market, offering an extended-wheelbase version of its sedans to allow room for a chauffeur and back passenger, as many rich Chinese prefer to be driven rather than drive. Audi now sells more luxury cars than any other manufacturer in China. Meanwhile, agile Chinese manufacturers such as Geoby have taken the market for cheap transport by storm. A decade ago, there was no market at all for low-cost electric bikes. Today, an estimated 200 million Chinese people use them and the number is rising – and Geoby is heading to other markets with its products.
Second, they will need to extend modern trade channels and distribution networks to make sure it is not only consumers in today’s biggest cities that get access to new products, but those in more rural locations as well. E-commerce is helping to overcome this barrier. But China presents a unique set of challenges. How, for example, do you reach the millions of workers who, under China’s Hukou system, are still registered as living in villages but who have migrated to live and work in cities and so have no registered address there? In Brazil, Microsoft and Google helped overcome a similar problem in city slums, home to some 11 million people, many of whom own smart phones. With no official addresses, delivery of online purchases or local retail distribution near these people was almost impossible until the two companies entered into partnerships with local community groups to map these areas. This opened up the potential for delivery. The companies took the initiative to help find this solution.
Third, companies will need to communicate the benefits of unfamiliar products to Chinese consumers in order to build demand and loyalty. Property insurance is a good example. Despite growing personal wealth and a taste among the rich for expensive cars, jewelery and art, the penetration of property insurance in China remains very low. Between 2004 and 2011, only 1.4% of property losses due to natural catastrophe were insured, according to Lloyds. People are either unfamiliar with property insurance, or not convinced of its value.
Finally, companies will need to develop the financial services and products that typically underpin increases in consumer spending, and which remain relatively scarce in China. Innovative business models may be required. Take consumer credit. The absence of credit histories in a newly-consuming society stifles borrowing – a barrier that Sesame Credit Management Group, started by Alibaba founder Jack Ma, is overcoming by examining consumers’ online purchasing activity, including their record of paying utility and cell phone bills, in order to assess their creditworthiness.
All four actions, pursued energetically, will help determine the size of the Chinese consumer market in 2025. Company CEOs should take note that an economy, like nature, abhors a vacuum. Somebody will step in to fill the need. Those consumer-facing businesses that move quickly, but wisely, will enjoy an outsize share of what continues to be one of the greatest consumer spending expansions in history.