November 18, 2016

The Coming of Age of the Chinese Consumer

"The Chinese consumer has finally come of age. The traditional drivers of China's economy, investment and exports, are struggling, but the country's consumers keep spending." The preceding sentences are the beginning of a whitepaper, The Chinese Consumer in 2030, published by The Economist Intelligence Unit (The EIU) in English and 简体中文. The introductory paragraph continues to explain that "private consumption is now the main driver of economic growth in China, and The EIU expects it will grow in real terms by 5.5% a year on average in 2016-30 – boosting its share of the overall economy to nearly 50%. The incremental growth we expect in private consumption in China over the next 15 years is more than current level of consumer expenditure in the EU."

The report's Executive Summary presents the following key takeaways:
  • Nearly 35% of the population, or around 480m consumers, will meet EIU's "definitions of upper middle-income and high-income by 2030. That represents a sharp increase on the 10% (132m) at present. The emergence of this large population, with a personal disposable income of at least US$10,000, will alter the consumer landscape in China;
  • Income will become more dispersed, rather than concentrated in first-tier cities on the eastern coast. Major interior cities, such as Changsha, Chengdu, Chongqing and Wuhan are set to see sizable leaps, with each having at least 2m high-income consumers by 2030. Nevertheless, smaller cities and those undergoing industrial restructuring risk being left behind, suggesting that high levels of income inequality will persist; and
  • Rising discretionary income will drive changes in consumer tastes and preferences. Around 30% of the spending by the average Chinese consumer is still allocated to food, compared with only 15% in South Korea. As income levels rise, consumers will look to upgrade consumption habits and switch to more expensive and premium brands. We pinpoint how this will play out in the automotive, tourism and financial services sectors."
The authors of the report are correct to note that "understanding these trends and the scope for regional divergence in China will be critical for consumer goods firms. Access to robust data and local knowledge will be essential. There are also challenges to navigate. China's economic trajectory has become more uncertain, and firms will need to monitor risks accordingly in order to stay ahead of the curve."

Regarding the segmentation of the middle class, the report says: "Individuals moving into the lower middle-income bracket will have greater room for discretionary spending on goods and services. Those entering the upper middle-income segment will be looking to upgrade their spending towards branded and premium products."

Doing business in China over the past few years, I have witnessed the tremendous rise, both in population and purchasing power, of the Chinese middle class. And I can attest to The EIU's report that the middle class are purchasing more vehicles (low, booking more vacations abroad (i.e., destinations outside of mainland China), and financial services including insurance and wealth management.

While the topic of information and communication technology is not covered in The EIU report, I am confident that a growing middle class in China will continue the drive to purchase technology products and services. Despite the deceleration to China's economy during the past few years, spending on mobile technology hardware and services remain strong. Lower middle-income consumers are replacing their feature phones with basic smartphones and upgrading their service plans with mobile network operators to access high speed mobile broadband. Those individuals in upper middle-income bracket are upgrading to high-end smartphones. The growing adoption of smartphones in China presents an opportunity to develop value-added services and content optimized for mobile devices.

The report's final sentence says: "In the future ... meeting the needs of a booming and more demanding middle-class group of consumers will be fundamental to [China's] economic sustainability." Do you agree? What are your thoughts about The EIU report?

UPDATE: The EIU held a webinar on Nov. 30, 2016 discussing its whitepaper in greater detail. You can watch a recording of the webinar through this link and download the slides here.

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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