Spending from China’s new breed of consumers has got cash registers ringing in some unlikely places. Regular readers of WiC will be familiar with the holiday shopping that has turned Bicester Village, a retail park in central England, into one of the UK’s top tourism destinations. In places like Australia there has been consternation in supermarkets after shelves were emptied of infant milk powder and some of the shopping by Chinese in Japan’s department stores has been so frenzied that the locals have even devised a new term for it: bakugai or “buying explosion”.
For a glimpse of the retail revolution back in China itself look no further than Alibaba’s Singles’ Day, which racked up $30.8 billion in sales in its most recent iteration last November. That extravaganza was gigantic: netting more than double the combined haul of Black Friday and Cyber Monday, two similar shopping festivals in the United States.
Yet the Singles’ Day sales figures hinted at a different story, some analysts thought, because the actual pace of growth had dropped substantially on earlier years.
That was a worrying signal for policymakers, who have been steering China’s economy away from overreliance on manufacturing and investment towards a future in which consumption fuels growth.
Retail sales grew at their slowest pace last year for 16 years in another sign that consumers could be losing their vim, while revenues in the car industry – a bellwether sector – fell for the first time since the early 1990s.
Weakness like this also worries Jim O’Neill, who we interviewed in WiC last year. The star economist, best known for inventing the BRICS acronym as a way of encapsulating the new forces transforming the global economy, says that China’s consumers have been crucial to its fortunes, contributing about a quarter of its growth over the last 10 years. Now there are signs that sentiment is slowing, he has been warning, which is casting a much bigger shadow over China’s prospects than issues such as pollution or political challenges like trade disputes. Of course, the impact will be felt across the global economy too. So what are the major trends to look out for in China’s consumer story?
Make way for the middle-classes
Consumption in China is described in a very different light to 15 years ago when the focus was more on the luxury lifestyles of a much smaller proportion of the population.
Today the spending is getting more egalitarian as greater numbers of shoppers come into the marketplace, with much of the momentum from an emerging ‘middle-class’.
The Chinese government doesn’t like the term because of its ideological roots, preferring ‘middle-income group’. But its statistics agency counts at least 400 million people in middle-income households, earning between Rmb25,000 and Rmb250,000 a year.
This variation in wealth means that the middle-class is broadly defined. But as a basic rule blue-collar workers with lower incomes constitute a bigger share of the group while white-collar staff in better-paid jobs do a disproportionate amount of the spending.
Many of the stories in WiC’s weekly editions have talked about the goods and services they are buying in areas like healthcare, education, entertainment and holidays.
Another way of defining China’s middle-classes is looking at where they live. Homeownership is a major factor in their spending power – with some commentators arguing that middle-class parents should own their own home and have the cash to buy another for their children.
What’s clear is that middle-class consumers are overwhelmingly an urban group, concentrated in China’s first-tier cities and wealthier coastal regions. A key statistic: urban households now earn more than three times as much as their rural equivalents.
Total demand is substantial, dovetailing with China’s efforts to rebrand itself as a market for the world’s goods, and not just as an export giant. This is something that the government was trying to underline at the inaugural China International Import Expo in Shanghai last year. The message was obvious: don’t be distracted by the talk about the trade row with Washington or you might miss out on millions of customers.
Paying a premium
One of the features of China’s consumer class is that shopping habits are constantly evolving, especially among the country’s millennials. Born in the 1980s and 1990s, they grew up with few of the financial hardships of their parents, making them more disposed to spending than saving. These younger adults are driving many of the changes in the retail landscape, supercharging the surge in online shopping and accelerating the acceptance of payment apps like Alipay and WeChat Pay.
Indeed, such is the digital revolution that cash is starting to die out as a means of payment in many cities.
The millennials are also a key player in the ‘premiumisation’ of the marketplace, a trend that has taken hold over the last five years. As a strategy premiumisation is based on charging customers more by upgrading their purchases (a more affluent consumer might switch, for example, between instant coffee and the pricier, capsule-based fresh ground varieties). Different companies attempt this in different ways but the brands that are benefiting most have value propositions that have moved away from pure luxury or connotations of status towards a newer emphasis on considerations such as health, quality and ‘experience’.
We tracked the trend in our Focus Issue on tourism, where millennials are at the forefront in changing how the Chinese choose their holidays. In the past it was all about whistle-stop bus tours of the world’s best-known landmarks, with plenty of time for shopping for luxury goods in between. The newer desire for travel is about exploring a broader range of destinations, more often as individuals or in small groups. Shopping is still relevant but it’s not the main event. More important are some of the experiences along the way: increasingly these include the likes of hiking and other outdoor activities. In another example of becoming more adventurous, more of the tourists are eating the local cuisine rather than searching for Chinese food.
There are glimpses of how consumers are changing in the wine trade too, something we have looked at in more depth in our Little Red Book series on China’s significance to the world of wine.
Wine sales in China started to get headlines on the back of demand for top-end vintages from a tiny number of elite collectors about 10 years ago. There was a short period when prices went haywire as speculators exploited the boom but the bubble soon burst and the industry pressed the reset button, shifting towards a business in which regular drinkers foot more of the bill.
These changes have been profound in how the Chinese choose their wine (not just according to price or the status of the brand, but with more thought on varietals that they enjoy or want to explore), where they buy it (online and supermarkets) and where they drink it (no longer just at business banquets, but often out with friends and even at home).
China now has about 70 million drinkers of imported wine, compared to about 30 million five years ago, and while France is still the most respected producer, other countries have prospered by encouraging consumers to try a wider range of choices. Australia is a key beneficiary: China now accounts for well over a third of its wine sales by value or more than A$1 billion last year, up from just A$10 million in 2000.
Is foreign still favourite?
In the wine trade local brands have been losing share to foreign imports. But the story is different in other industries as domestic firms bite into businesses previously dominated by global companies.
One factor is that foreign brands are losing their must-have status in sectors where local companies have caught up in product quality. There are still categories where international brands stand out, especially where quality or safety is a key determinant in consumer choice. Infant milk formula is one of the best examples. But in other industries the foreign brands are no longer the favourites. Ten years ago few Chinese wanted a domestic smartphone but local firms like Huawei, Oppo, Vivo and Xiaomi have transformed perceptions in their home market, accounting for nearly four fifths of sales for much of last year.
Initially they competed more on price but Chinese smartphone makers now deliver top-notch hardware, with functionality that appeals directly to local consumers. Camera quality on Huawei’s phones is widely regarded as superior to Apple’s and the Chinese giant released another model recently with an additional lens with enhanced zoom, which has been a hit with selfie-takers. That has helped Huawei’s share of phones priced in the key $500-$800 segment to surge to almost 27% last year from 9%, research firm Counterpoint reports. Apple’s share in the same segment plummeted, however, dropping to 55% from 81% the year before.
Cars are another sector where the context is changing. Robert Bao, the head of strategy for electric carmaker XPENG Motors, told WiC in March that his firm would beat Tesla in China because it better understood local consumers – he noted it had around 2,000 R&D staff focused on improving the Chinese driving experience. “Our customer base is quite different from that of Tesla’s. Our target customers are the young tech-savvy generation in China who are keen to try new things. They care more about the smart features, less about the raw acceleration of the vehicle, or the prestige of a brand,” he said.
Bao also explained that younger buyers (in the 20-35 age group) are more concerned about what happens inside their cars, specifically the way they are connected to online services as well as their innovative features (for instance, a rotating roof camera is offered by XPENG to take group selfies).
Autonomous parking is another area where Bao claims an edge for XPENG, particularly because Chinese car parks tend to have less uniform layouts than US ones. “We’ve also gone down a different route to Tesla, which is using ultrasonic radar for autonomous parking. That’s great for spotting obstacles such as walls, but it’s not so good at working out where the empty spaces are. By contrast, we’re combining inputs from ultrasonic radars and cameras in what we call ‘sensor-fusion’ technology that dramatically improves the efficacy and accuracy of the application. When we recently tested about 260 parking scenarios, we discovered that our technology worked 70% of the time, three times more accurately than the most advanced brand available in the market.”
Freeman Shen, founder of WM Motor, another electric vehicle start-up, also talks about a fast-changing future in which local brands are well positioned to profit. He told WiC: “Millennials, unlike their parents, are less focused on the status connotations of a brand. They prioritise functionality.” This is a decisive shift: the first generation of car buyers largely made up their minds based on the prestige and social status their vehicle conferred – a decision-making process that helped elite foreign firms like BMW to prosper.
Now local firms are disrupting the internal combustion engine technology that the established marques have relied on for a century. And as Bao also points out, they are rethinking the entire business model of how a carmaker makes money. With 5G-connected vehicles, where information becomes a key commodity, the start-ups see a future where services fees drive more of their revenues than the initial car sale. An example: new carmakers with data on how good a driver you are, putting them in a sweet spot to get involved in car insurance.
Cases like these suggest that being seen to be a foreign brand isn’t always the advantage that it was in the past. But international firms are still counting on Chinese consumers for much of the increase in their sales forecasts, which could be problematic for a smartphone market that is starting to look saturated or in a car industry that has reported a slump in sales as the authorities phase out subsidies.
Even shipments of Australian wine have been levelling off, increasing at their slowest pace in four years in 2018, after a stellar period of successful growth.
Over the longer term, one of the fears is that the Chinese economy could get caught in the ‘middle-income trap’, setting the scene for stagnation in spending. But a more immediate threat is protectionist sentiment, especially if the tariff row between Beijing and Washington rumbles on for a longer period. Beijing has already shown its willingness to deploy its consumers as political weapons too. Life was miserable for South Korea’s Lotte during a disagreement over the deployment of a controversial missile system two years ago and Japan’s carmakers took a beating after a diplomatic dispute over islands in the East China Sea five years before that. American companies are yet to suffer anything similar but they will know that patriotic shoppers could freeze their spending, punishing firms from a country their government is at odds with.
Another concern for future consumption is that household debt has been reaching record levels, which may provide a natural brake on spending, or that the skyrocketing cost of housing in many cities is leaving people with less in their wallets.
Since the middle of last year there have been questions about whether these kinds of pressures will send retail sentiment into reverse, amid fears that the ‘upgrading’ in spending is going to be fleeting. Naysayers have been talking about how many shoppers are newly determined to search for cheaper goods, for instance, citing the popularity of e-commerce platforms like Pinduoduo, which pitches choices at discounted prices (we first wrote about the online discussion of ‘consumption downgrades’ in WiC425 last September). A survey from HSBC of more than 2,000 wealthier consumers earlier this year painted a different picture on the ‘downgrading’ story, with 80% of respondents expecting to spend the same amounts as last year. But the authorities have still seemed unusually sensitive to the speculation, with reports that the Chinese press has been warned not to highlight the trend.
More room for migrants
One of the counterarguments to the concerns about the robustness of China’s retail market is that there is scope for more spending as residents of lesser-developed cities close the income gap on the coastal provinces.
More than 250 million migrant workers living in the cities have less spending power than they might because of their lack of a hukou, or residency permit, which bars them from access to local services in health and education, and prevents them getting onto the property ladder.
The hukou system was set up in the 1950s as a way of stopping mass migration and preventing the spread of urban slums. Today it is seen as more pernicious in treating migrants as second-class citizens in the cities where they work, but another consequence is that it erodes their buying potential. Lacking the same sense of economic security as their urban neighbours, the migrants spend less and save more for a rainy day (an unforeseen medical operation, for instance).
The costs of replacing the hukou are significant – the Chinese Academy of Social Sciences, a state think tank, says that Rmb100 billion ($14.5 billion) in public funding is required for every million migrants that are granted urban status – but the potential payoff could be vast if it unleashes a new generation of consumer spending.
In the meantime some of the richer cities seem more focused on trying to evict their migrant populations, including Beijing, where as much as half the population lacks a hukou. The capital closed hundreds of businesses run by migrants last year and evicted tens of thousands of people from unlicenced housing, although other cities have taken a more welcoming approach, recognising the economic rewards.
One of the pioneers is Xiamen in Fujian, which started to relax restrictions on outsiders almost a decade ago and which now offers healthcare and pension rights to migrants with stable jobs. As a result its resident population has grown by more than half to two million people, buoying the local economy.
Supporters of similar policies say that reforms like these are required at a national level if more of China’s prosperity is going to filter through to the wider population. In this approach, the migrants are the central characters in the next chapter of economic growth: the unsung heroes of China’s manufacturing miracle, they could turn out to be the next force in its consumer revolution as well.
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