Understanding the Chinese Consumer

by William McEwen, Xiaoguang Fang, Chuanping Zhang, Richard Burkholder

We learned a decade ago that only 6 percent of Chinese households owned a vacuum cleaner and 25 percent owned a refrigerator. Given those numbers, it would seem logical that, with their rising incomes, more Chinese consumers would want these items. Certainly, the average Chinese household is now much more likely to have a TV set, a phone, a refrigerator, a vacuum cleaner, and a washing machine than it was a decade ago. But the rate at which these products are now purchased pales compared with that of higher-technology products—products that may not save labor but rather enhance enjoyment and entertainment that satisfies individual tastes. Within a decade, ownership of color TVs increased by almost half. The percentage of households reporting they have DVD players jumped from 7 percent in 1997 to 52 percent in 2004. The number of households with computers grew from 2 percent in 1994 to 13 percent in 2004, and the number of those with mobile phones jumped from 10 percent in 1999 to 48 percent in 2004.

What does all this mean for a company planning to do business in China? First, it's clear that aspirations are growing, that desire is outstripping ability, and that the traditional bellwethers of modernization don't necessarily apply. Chinese consumers want more than just function. This is one reason why Nokia, which has emphasized fashion over function, has seen its cell phone sales in China rocket past those of Motorola and Ericsson. If a company wants to sell vacuums or washing machines in China, it had better pay attention to emotional needs as well as physical ones. And if it's selling microwave ovens, air conditioners, and TVs, it should be sure those products are as fashionable as they are reliable.

The ripe urban market. Some Western managers see the continuing rise in China's average income as an opportunity across an entire nation. Others divide China into two worlds: the cities of Beijing, Guangzhou, and Shanghai; and all other locations. Both perspectives are incomplete. While it's true that average income has increased, some Chinese are benefiting far more than others. And while there are sharp differences between the incomes of urban and rural dwellers (urban Chinese earn almost three times more than rural dwellers do), affluence is growing not just in the big three cities but in what has been termed the "third China"—the midsize cities such as Xi'an, Nanjing, and Wuhan, which may afford some of the largest opportunities for marketers.

Indeed, a relatively well-to-do segment is expanding briskly across the nation. In 1997, about 3.5 percent of Chinese households had annual incomes of 30,000 renminbi (about $3,800). In just five years, that figure skyrocketed to over 12 percent; half of those living in the big three cities have achieved this level of income. These consumers can afford the products that other Chinese may only dream about.

In some product categories, where consumers live appears to be a more important predictor of spending than affluence. This may reflect the needs of urban dwellers for products such as air conditioners or the availability of technology support for items such as computers. In other categories, like automobiles, affluence is the largest predictor of ownership.

By and large, affluent urban dwellers already own a fair amount of what they want: Televisions and mobile phones are ubiquitous. Accordingly, opportunities in this market spring more from upgrades than from first-time product sales. The product-marketing game in the affluent world is now about brand share. Though marketers will still use the first-time-sale approach in rural areas, many affluent city dwellers will now be drawing on their direct experiences and will be persuaded not only by company-managed communications but, more powerfully, by word of mouth.

The survey data also reveal important differences among products segments. Not all are growing equally; some appear to be quickly gaining appeal, while others are merely edging forward—or even backsliding. Overall, the Chinese appetite continues to be strong for certain must-have items, including TVs and mobile phones, hard goods such as refrigerators and air conditioners, and "fun" products such as stereos and digital cameras (computers and video cameras are just heating up).

Importantly, the speed of development in China is such that new technologies may well replace old ones before the older ones even have a chance to get established. For example, we're seeing the digital camera rocket past the film camera, the VCD zoom past the VCR, and the mobile phone bypass the landline. In fact, more than 80 percent of all city dwellers own a mobile phone, and 33 percent of these people say they're planning to buy another one.

The automobile is an exception—it is still poised for first purchases. As of 2004, only 10 percent of those in the highest income bracket owned a car. Though intense competition is forcing prices to drop, cars still cost two to three times most people's annual income. Even so, appreciable numbers of consumers are actively planning to acquire one. It's small wonder that companies like GM, Volkswagen, and DaimlerChrysler continue to have strong interest in China. With an estimated upside of 100 million to 130 million potential buyers, even a small market share translates to an impressively large number of units sold. If only 2 percent of this total estimated market were to buy cars in the next two years, that would still be an increase of about 39 percent over the current level of car sales there. What's more, this 2 percent would represent a whopping 22 percent of GM's total worldwide sales in 2004. (See "What Urban and Affluent Chinese Consumers Want (2004).")

For the time being, marketers in China will find their biggest consumers among the urban and the affluent. And "affluent" no longer means just the top 3 percent to 5 percent of Chinese consumers; the wealthy class is growing, so creative-financing options may be the way to attract this group. Conspicuous consumption is as apparent in the Middle Kingdom as it is in the West, and lots of attention is being paid to staying current.

Excerpted with permission from "Inside the Mind of the Chinese Consumer," Harvard Business Review, Vol. 84, No.3, March 2006.

William McEwen is a global practice leader in brand management for the Gallup Organization. Xiaoguang Fang is the vice chairman of Gallup China. Chuanping Zhang is a managing partner and Richard Burkholder is the international bureau chief for the Gallup Poll. They are based, respectively, in Sydney, Australia; Beijing and Shanghai, China; and Princeton, New Jersey.