China’s Consumer Revolution is Underway

“A new chapter is opening in China’s development. The country is starting to turn the corner to becoming an economy where private consumption will replace investment as the major driver of GDP growth and eventually constitute the largest share of GDP.” By 2025 private consumption could overtake investment as the largest component of China’s GDP – these are among dramatic forecasts from leading international consulting firm McKinsey & Co.

This represents a groundbreaking shift in China’s growth trajectory. For the past two decades government and the corporate sector (primarily SOEs) have been the predominant drivers of growth.

The Chinese consumer revolution is underway – and anyone doing business in China will need to respond.

“China is forecast by many analysts to become the largest or second-largest consumer market in the world by 2015, with enough purchasing power to buy 14 percent of the world’s products, up from five percent today. In short, the consumer environment in China five years from now – or even next year – will by all measures be markedly different than today.”  (AmCham Shanghai, Report by Booz & Co, 2011)

By 2025 McKinsey projects that household consumption in China will rise faster than household income, with household savings predicted to decline from the current level of 42 percent of income to 36 percent in 2020 and even lower to 29 percent in 2030 – following a similar pattern to that seen in the economic development of other Asian economies.

By 2020 the McKinsey research predicts a massive expansion in GDP, from the current level of USD$6 trillion to USD$11 trillion – or nearly the equivalent of an additional two Germanys being pumped into China’s economy.

Higher income, lower savings, and broader prosperity add up to more purchasing power –  more Chinese consumers are going to spend more and buy a bigger range of products.

For the Chinese government the shift to consumer driven growth is good news. China wants to see the current reliance on exports and investment shift to a more sustainable growth pattern driven by domestic consumer spending.

Although domestic consumption is rising, it currently makes up just over one-third of China’s total economy – by comparison American consumer spending makes up more than more than two-thirds of the U.S. economy. (Source CNN-On China, 15 Nov 2012)

The Mega Rich – Only the Tip of the Consumer Iceberg

The emergence of a super wealthy class in China has captured global headlines. China may have more than one million people with a net worth of $1 million or more, and that is expected to grow rapidly. (Source CNN-On China, 15 Nov 2012)

While China’s super rich might grab the headlines, the biggest trend is the rapid expansion of China’s middle class – whose increased spending power will have the broadest and deepest impact on the market place.

McKinsey segments Chinese consumers into the following three major groups, “Value Consumers”,  whose annual  household  incomes are between USD$6,000 and $16,000; “Mainstream Consumers” whose annual household disposable incomes are between USD$16,000 and $34,000; and “Affluent Consumers”,  with annual incomes exceeding $USD34,000. McKinsey finds that the great majority of the Chinese population are currently in the “Value Consumer” group, with the other two segments still relatively small. “Affluent Consumers” account for only 2% of the population – or around 4 million households

By 2020, however, the pattern of household income will change dramatically. McKinsey forecasts the “Affluent” group will triple to 6% of the population, while those in the Mainstream group will jump to 51% – an astonishing increase of over 900%. The size of the lowest income group – the “Value” consumers will also shrink dramatically. McKinsey argues these dramatic changes will oblige anyone doing business in China to re-think their approach.

Until now, most firms had been pitching their products and services to the dominant “Value Group” – the largest and lowest earning consumer segment. By 2020 China’s  “Mainstream” consumer group will comprise 167 million households – or close to 400 million people and “will become the standard setters for consumption, capable of affording family cars and small luxury items. Companies will be able to respond by introducing better products to a vast group of new consumers, thus differentiating themselves from competitors and earning higher profits.”

And while the proportion in the “Value” group will fall from 82% to 36% of households by 2010 they “will still represent an enormous market for cheaper products: 116 million households, or 307 million consumers.”

(Source: Meet the Chinese Consumer of 2020, McKinsey Quarterly March 2012)