A Buying Spree in the Middle Kingdom?
By Dexter Roberts
Just as retailers in the West wrap up their busiest selling season, China is gearing up for its version of Christmas. The period when Chinese shopkeepers rake in their biggest sales comes over the Lunar New Year, which this year falls in late January.
The good news is that a swelling consumer class is poised to spend plenty of hard-earned yuan on electronics and cars in the upcoming holiday season and on into the new year. The bad news is that the country's consumers can be a tight-fisted, fickle lot.
Everything from mobile phones and flat screen televisions to new homes and automobiles are on the extensive shopping lists of China's consumers for 2006, says a new McKinsey & Co. report. The survey of 6,000 households from 30 cities representing 60% of China's population shows just how quickly the mainland has moved from a production-driven command economy to one increasingly driven by a swelling consumer class.
Indeed, China's recent revision of its gross domestic product shows that 37.8% of China's economy now derives from consumption (see BW Online, 12/16/05, "China's Even Heftier Economy" and BW Online, 12/20/05, "A New Window on China's Growth"). "What we are witnessing in China is the fastest and largest creation of a new consumer class in the history of the world," writes Kevin Lane, a partner in McKinsey's Shanghai office, in a summary of the survey.
There's a lot of good news for the likes of Motorola (MOT ), Lenovo, and Samsung in the findings. For example, 15% of respondents say they intend to buy a mobile phone over the next 12 months, while 10% plan to buy a desktop PC. More than one-half "believe that home ownership is critical to financial security," and 8.5% plan to buy a new home. Eager multinationals, take note: That big-ticket purchase is usually accompanied by a flurry of expenditures on household electronic appliances.
Indeed, the survey shows that 10% are planning to buy a new TV over the next year, with 8.1% going for a flat-screen version. Some 9% will buy a new microwave, while 8% report that they'll splurge on a new washing machines, air conditioners, refrigerators, and even digital cameras. All told, 71% of respondents say they're likely to upgrade furniture and appliances after buying themselves a new home.
The spending spree isn't confined to the home, however. Close to half, or 43%, say that "owning a private car is their biggest dream." That's a dream 2.4% of Chinese who responded hope to realize in 2006. It's not surprising that they plan to buy new cars over the next year, given that China's auto penetration is only eight vehicles per 1,000 people, vs. an average of 104 cars in the rest of the world. While that's hard to believe when traveling the clogged and smoggy roads in Beijing and Shanghai, it's welcome news for the likes of General Motors (GM ) and Toyota (TM ).
"For the Chinese, like people all around the world, the auto represents both prestige and personal freedom," says Tim Dunne, a partner at Automotive Resources Asia, a Beijing- and Bangkok-based auto-industry consultancy. "Privacy is also a big factor -- you can talk on your phone, play music, do whatever you want in your own space, when you own a vehicle."
Interestingly, McKinsey's survey shows that the real buying action will happen outside China's already-saturated coastal cities, in the smaller cities of the interior. "Some products are actually on more shopping lists in rural areas and midsize cities than in the largest cities, where the market is becoming saturated," the report says.
So while 10% of consumers in China's biggest cities plan to buy mobile phones in 2006, twice as many in smaller towns say they intend to get a Nokia (NOK ), TCL, or other brand cell next year. And while only 5% in cities like Beijing and Shanghai want new washing machines, 12% of respondents in small towns have the same intention. Similarly, while only 8% in first-tier cities intend to purchase TVs, 15% in China's rural county seats plan to purchase sets.
Another intriguing finding: Your average Chinese is certainly brand-conscious, but not particularly brand-loyal. While 55% of those surveyed say they would prefer having a famous brand when choosing consumer electronics, and 44% and 36% feel that way about food and beverages, respectively, two-thirds of consumers report that they end up leaving the store with a different brand than intended. McKinsey's survey showed an average brand loyalty of only 5% over the 82 brands measured.
Despite Chinese consumers' ambitious plans to buy more goods, multinationals shouldn't get their hopes up too high, at least in the near term. That's because Chinese are still deeply concerned about their health and economic futures -- not surprising, given how the mainland's social safety net has frayed in recent years.
China still is a nation of savers, with most respondents setting aside one-quarter of their income. Less than one in five report that they're spending more in 2005 than last year. The country's annual per-capita income is only $1,490.
The survey reports that the primary reason Chinese are holding on to their money is to prepare for possible health costs, with some 50% citing this concern, and 43% are saving for retirement. Just 37% of those surveyed feel confident about their financial future. "For most consumers, creating a cash cushion is clearly the number-one priority," the survey says.
So Chinese consumers have big plans to buy everything from spanking new autos to flat-screen TVs, but they're still clearly worried about parting with their money. It may sound contradictory, but it's just another example of the crosscurrents defining the fast-changing behemoth that is China today.
Roberts is BusinessWeek's Beijing bureau chief