American firms are entranced by China’s potential market size. In fact, its size is generally one of two main criteria considered when American firms make the decision to sell there. The other is the burgeoning disposable income of the middle class. Unfortunately, only focusing on the size and disposable income of the Chinese middle class—while ignoring cultural aspects—can lead to a suboptimal outcome.
Many assumptions regarding the Chinese middle class market are untrue. For one, it’s not as large as many think. And its disposable income is not a sound guide to estimating sales. Instead, the focus should include culture: the key to understanding the Chinese consumer. In China, culture has a tremendous impact on decision making patterns, buying habits and value perceptions of products.
According to the World Bank and the National Bureau of Statistics of China (NBSC), in 2006 China’s population slightly exceeded 1.3 billion people. Generally, this population can be divided into three consumer categories:
The first category, subsistence shoppers, includes those who live in poverty or at the level of subsistence. This group is interested in the cheapest possible necessities—nothing else. NBSC statistics for the year 2006 indicate there are just under one billion rurally-registered Chinese with an annual average income of approximately $500.
The second category, rich and affluent shoppers, includes the wealthiest category, plus those who can spend without consideration of cost. These shoppers, numbering approximately 20 million, typically buy high priced, high quality brand named items. According to McKinsey and Company, in 2007 this truly rich group comprised 1.5 million people.
The third category, the Chinese middle class, is thought to number approximately 300 million people. In reality, however, the number is much smaller. In the Business Week article, entitled “China’s Illusory Middle Class,” UBS, Goldman Sachs and McKinsey and Company defined the Chinese middle class differently. However, all three agreed that the minimum number of Chinese middle class consumers is no less than 100 million. Thus, from a conservative perspective, American firms interested in selling to China can comfortably estimate 100 million potential customers for their products.
This is exactly the point where selling in China gets tricky. A potential market of 100 million consumers is nothing to ignore or disdain. However, just considering size or disposable income does not reflect true market conditions.
The Chinese middle class consumer is complex. Surprising to many, three specific cultural areas, unrelated to disposable income, directly impact buying decisions. First, the Chinese middle class is very brand conscious. And it’s also “face” sensitive, indicating a purchase can validate or reinforce status and project an image or level of success necessary to impress family, friends, acquaintances and coworkers.
Second, and seemingly contradictory, the Chinese middle class typically looks for bargains. Third, purchases Chinese consumers view as necessities or “face” related are entirely different from those of American consumers.
Shoes and mobile phones are sound examples of purchases that are brand or “face” sensitive. Many American firms assume Chinese middle class consumers will buy more of a high quality brand named product if it is discounted. In most cases, the opposite is true.
If available, Chinese consumers are likely to buy gray market unlocked iPhones even though the cost exceeds $800, and is a large percentage of annual income. If they can’t obtain the cash or do not have the necessary connections to obtain an iPhone, middle class Chinese consumers typically will purchase the best Motorola or Samsung mobile phone for $500 or at a higher price point.
When shoe shopping, this consumer group may not be able to obtain a $1,000 pair. Instead, they may prefer to purchase a $110 shoe over a $70 pair of seemingly equal popularity or similar status.
Unfortunately, this type of shopping pattern—where consumers prefer to pay high-end prices for status symbols—is not consistent across the board. If it were, American companies would be thrilled.
The reason: many products have no discernible brand or “face” value. These include toiletries and toothpaste, home phones and furniture, where style may be more important.
Chinese consumers have a seemingly undeniable quest for bargains. In fact, they often spend hours searching for one or two items. Does this behavior contradict “face” sensitive purchase patterns?
Surprisingly, bargain shopping actually complements “face” sensitive purchases. The middle class consumer is typically looking for two types of bargains: products that are not brand or “face” sensitive (where many products may meet the consumer’s threshold), and the occasional bargain on brand named goods with “face” value.
The Chinese market offers a wide variety of opportunities to American firms considering expanding there. It is critical, however, for these firms to understand that while the Chinese market is large, it has a limited number of potential customers, and it is not a market for all products.
Firms considering entering the Chinese market must perform due diligence and sound market research. And most importantly, this research must be culturally nuanced and consider more than disposable income. Focusing on and understanding which categories of products are brand and “face” sensitive—then learning how to establish your brand in the Chinese marketplace—is the key to successful selling in China.
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