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CHINA: "China Automotive Monthly: Executive Summary" Feb. 2011

CHINA: "China Automotive Monthly: Executive Summary" Feb. 2011. 8-page Exec Summary by J.D. Power and Associates Asia Pacific.

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backCHINAtalk March, 2012

Meet the Chinese Consumer of 2020

Evolving economic profiles will continue to be the most important trend shaping the market.

Most large consumer-facing companies realize that they will need China to power their growth in the next decade. But to keep pace, these companies will also need to understand the economic, societal, and demographic changes shaping the profiles of consumers and the way they spend. This is no easy task not only because of the fast pace of growth and subsequent changes in the Chinese way of life but also because of the vast economic and demographic differences across the country.

These differences are set to become more marked, with significant implications for companies that fail to grasp them. Since 2005, McKinsey has conducted annual consumer surveys in China, interviewing a total of more than 60,000 people in upward of 60 cities.

Our surveys have tracked the growth of incomes, shifting patterns of expenditure, rising expectations — sometimes in line with those of the respondents’ Western counterparts and sometimes not — and the development of many different consumer segments.

Those surveys now provide insights to help us focus on the future. We cannot, of course, predict it with certainty, and external shocks might confound any forecast. But our understanding of consumer trends to date, coupled with an analysis of the economic and demographic factors that will further shape them in the next decade, serve as a useful lens for contemplating the profile of the Chinese consumer in 2020.

Changing Demographics
Many of the changes taking place in China are common features of rapid industrialization: rising incomes, urban living, better education, postponed life stages, and greater mobility. Japan saw similar changes in the 1950s and 1960s, as did South Korea and Taiwan in the 1980s.

But some unique factors are also at work, such as the government’s one-child policy and the marked economic imbalances among regions. Our analysis reveals important insights into the likely demographic and socio-demographic profiles of Chinese consumers at the end of this decade.

Changes in economic profiles have been and will continue to be the most important trend shaping the consumer landscape. The Chinese are certainly getting richer fast: the per-household disposable income of urban consumers will double between 2010 and 2020, from about $4,000 to about $8,000. That will be close to South Korea’s current standard of living but still a long way from its level in some developed countries, such as the United States (about $35,000) and Japan (about $26,000).

The current vast differences in income levels will persist, however, although the numbers at each level will shift dramatically. At present, the great majority of the population consists of “value” consumers — those living in households with annual disposable incomes between $6,000 and $16,000 (equivalent to 37,000 to 106,000 renminbi), just enough to cover basic needs. “Mainstream” consumers, relatively well-to-do households with annual disposable income of between $16,000 and $34,000 (equivalent to 106,000 to 229,000 renminbi), form a very small group by comparison. China has fewer than 14 million such households, representing only 6% of the urban population. A tiny group of “affluent” consumers, whose household income exceeds $34,000, accounts for only 2% of the urban population, or 4.26 million households.

Until now, these divergences have presented multinational companies operating in China with a choice: to target only mainstream and affluent consumers or to stretch the brand to serve the value segment. Those that took the first course could more or less maintain the same business model they applied in other parts of the world, without needing to de-engineer their products. But in taking that approach, they limited themselves to a target market of 18 million households. Companies that chose to serve the value category benefitted from a much bigger market to play in — 184 million households — but their products had to be cheaper, they were forced to adapt their business models, and profitability was lower.

This situation is changing. Because the wealth of so many consumers is rising so rapidly, many people in the value category will have joined the mainstream one by 2020. Indeed, mainstream consumers will then account for 51% of the urban population. Their absolute level of wealth will remain quite low compared with that of consumers in developed countries. Yet this group, comprising 167 million households (close to 400 million people), will become the standard setters for consumption, capable of affording family cars and small luxury items.

To read entire article, please click here.

Source: CFO magazine - GAI

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