Chinas Middle-Class Consumers for Foreign Investment - Case Study Example

Analysis and Profiling of China’s Middle Class Consumers for Foreign Investment by Australian Companies in the Telecommunications Market Name: Course: Institution: Tutor: Analysis and Profiling of China’s Middle Class Consumers for Foreign Investment by Australian Companies in the Telecommunications Market Executive Summary This research paper analyses the nature, size, structure and attractiveness of China’s middle class consumer group. The paper tries to show whether the middle class in China is powerful enough to drive global consumption and hence to be an important market segment for Australian investors. The report finds that China has a huge and growing middle class population that can provide a ready market for foreign products. Much of China’s economic growth and the stability of the domestic market are attributed to a rising middle income population. Most of China’s middle class consumers prefer high quality and expensive products, which can reflect their status and wealth. This consumer group picks out products which reflect personal tastes and pays considerable attention to powerful brand names. As such, the Chinese middle class is a lucrative market for foreign investors. Table of Contents Analysis and Profiling of China’s Middle Class Consumers for Foreign Investment by Australian Companies in the Telecommunications Market 1 Name: 1 Course: 1 Institution: 1 Tutor: 1 Analysis and Profiling of China’s Middle Class Consumers for Foreign Investment by Australian Companies in the Telecommunications Market 2 Executive Summary 2 Table of Contents 3 Introduction 4 References 13 Appendix 15 Introduction In the last few decades, the middle class has emerged as an important social group that drives the global economy. This group is essentially an ambiguous social classification, reflecting the determination to lead a comfortable life (Li, 2008). In both the developed and the developing countries, the middle class enjoys reasonable job security and retirement, stable housing, education and healthcare opportunities and discretionary income that can be spent on leisure and vacation. According to Dickson (2007), middle class consumers have been crucial in the economic thought for a long time. The middle class group emerged out of the bourgeoisie, a group that was derided because of its economic materialism but provided the impetus for expanding the capitalist market economy, as well, as trade between nations. With time, the middle class has been viewed as a source of innovation and entrepreneurship - the small business ventures which aid the economy to thrive (Goldman Sachs, 2009). In today’s economy, middle class values emphasize hard work, thrift and education. As such, the middle class is an important source of the inputs needed for sound economic development, that is, physical capital, new ideas and human capital. In the recent past, the market roles of the middle class have been a subject of intense research studies. Li and Ji (2008) have argued that these roles are a new consumerism, which present the middle class as an up scaling of lifestyles and the ever increasing disconnection between income and consumer desires. In an even more economic vein, the McKinsey Quarterly (2006) has emphasized on the willingness of the middle class group to spend extra wealth for quality as a force that drives product differentiation. Therefore, the middle class is playing a critical role in feeding investment in development and marketing of new products. It is this new market role of the middle class which has become more pronounced with the globalization of trade. Currently, international business efforts are focused to Asia, particularly on China’s emerging middle class which is becoming the next global consumer group. The Middle Class In China: A Macro-Economic Analysis Of China’s Middle Class Consumer Group And Its Attractiveness For Foreign Investment China is geographically a vast country and the world’s most populated nation. With a population exceeding 1.3 billion people and a rapidly growing economy, China presents numerous investment opportunities for foreign markets. According to Zhang and Peng (2008) China’s domestic market has soared dramatically in the last few years such that it is now at par with most Western countries which industrialized a long time ago. In certain industries, China is quickly rising to overtake the United Sates as the number 1 market. As an example, the United States accounted for 37% of global car sales in 2000 while China accounted for only 1%. Today, China is accounts for about 15% of global car sales. Similarly, the People’s Republic of China has emerged as the world’s largest market for cell phones, thanks to a burgeoning middle class population. Much of China’s economic growth and the stability of the domestic market are attributed to a rising middle income population. China’s middle class is defined as the proportion of households with annual incomes of between $6000 and $25000 (Li, 2008). The size of this group has grown rapidly in the last two decades as has China’s economic development. The middle class population in China is large- about 200 million people. For this reason, many businesses are eager to establish positions in the Chinese market. A research study by Li and Ji (2008) predicts that if China sustains its current economic growth rate, the country’s middle class will become the leading global consumer group by 2016. Despite the challenges that the middle class present to the market, it is important to understand the specific needs and purchasing patterns of this group. Essentially, China’s middle class have a rising purchasing power and are willing to spend more on quality, differentiated products and powerful brand names. Masud (2009) has noted that China’s middle class, which is relatively new, consists of a diverse population. Currently, the lower middle class (households with annual income between $5000 and $12000) constitutes 40% of the total middle class population while the upper middle class constitutes the rest. Each segment in the wider middle class group exhibit different consumption trends. This means that foreign companies eying the Chinese market must factor the different consumption patterns of the various segments in the middle class group. Nevertheless, as the middle class matures, the number of households in the middle and upper middle class will dramatically spike. It has been noted (Li, 2008) that China’s lower middle class consumers prefer top-tier products, which can reflect their status and wealth. In the contrast, upper middle class Chinese consumers, majority of whom are more experienced in brand types, tend to seek exclusively high quality products. This group picks out products which reflect personal tastes and does not pay much attention to brand names. The upper middle class are a highly energetic consumer group and consists mainly of professionals and skilled workers in tertiary industries and junior managers in large corporations. Members of this group tend to be well educated with an exposure and interest in the outside world, the reason why they are earlier adopters of latest products. According to Dickson (2007) both lower and upper middle class consumers in China are the trendsetters in emerging consumption patterns and are ready to search for information online and share it with others. Therefore, companies targeting China’s middle class consumers will have to focus more on purchasing behaviours as well as demographic features rather than merely on income as a key step in understanding the consumption patterns of the middle class. Technology, which seems to drive consumption patterns among the middle class, has been introduced to China by multinational corporations through foreign direct investments, importation of machinery and participation in the global trade (Zhou, 2005). Moreover, financial innovations have facilitated rapid growth in consumer credit and mortgages for the ever-increasing population. All these factors have made the middle class to be a special focus group for new products and global marketing campaigns. Market surveys indicate that China’s middle class is willing to become the global leaders in consumption (McKinsey Quarterly, 2006)). It is such considerations which have drawn the attention of global retailers and forced them to focus on the potential and future of China’s middle class. An important drawback, however, is that China’s middle class is still small as a proportion of the country’s total population (about 16%). This is one of the reasons why China will have to rely on exports and investments as drivers of its economic growth. If investments and exports slow, the middle class alone will not be powerful enough to propel economic growth forward at the pace of the past. The Future of China’s Middle Class Consumption China’s rising economy, if sustained, will lift millions of households from poverty. Currently, about 70% of China’s population lives on less than US$5000 a year. With the impressive economic growth, these figures will dramatically change in the next few years. By then, China’s urban households will be one of the greatest consumer markets in the world. This means that China’s future purchasing power will rise. According to Li (2009) rapid economic growth will transform China’s egalitarian society into one with distinctive income classes. Currently, this evolution is creating a widening gap between the poor and the rich and addressing the resulting economic and social tension is a major government policy. Two important features will be particularly notable in China’s middle class. The first of these features is that the middle class will be particularly young compared with that in the developed economies such as the United States, whose highest income earners are primarily the middle aged. In the US, income tends to peak during the age of 45 and 55 years. But since high paying jobs generally require high education and training, the Chinese government is making extensive investments in higher education for its young population. This means that China’s wealthiest consumers and hence the middle class will be aged between 25 and 45years (Zhou, 2005). The second feature of China’s future middle class is that the proportion of urban middle class’ total spending will be greater than that of urban-affluent consumers, although the latter will remain to be a critical market for certain companies. Although total spending by China’s middle class consumers will exceed that of the urban –affluent consumers, the latter will control much of the country’s accumulated wealth (Dickson, 2007). As such, this group’s importance to financial services will increase. As in other countries that have had under-developed markets for consumer credit, Chinese middle class is likely to buy expensive items such as durable goods and automobiles. Nevertheless, the increasing size of the Chinese middle class offers promising opportunities for foreign companies offering mass consumer goods (Goldman Sachs, 2009). As household incomes rise and the size of the Chinese middle class expands, consumption patterns will significantly change. Households will shift to buying more of the discretionary and luxury goods and the budget for clothing, food and necessities will considerably shrink. This shift seems to be happening more rapidly in China than was the case in the developed countries. Nevertheless, while consumption on basics will decline as percentage of total consumption for the middle class, the consumption will continue to grow in line with the economy. These consumption dynamics fuelled by the changing nature and size of China’s middle class presents all sorts of opportunities for foreign investment in the Chinese market (McKinsey Quarterly, 2006). Opportunities for Australian Companies to Invest in China’s Telecommunications Market The government of China has opened up the market for telecommunications equipment for about two decades. With China’s admission into the World Trade Organization, foreign investors particularly from Australia, the United States and the European Union are keen to enter the Chinese telecommunications market. Considering the huge size of China’s population, high economic growth rate and an ever-expanding middle class size, the Chinese market is one that none of international companies can ignore (Goldman Sachs, 2009). With the massive market scale and a relatively young nature of the market and consumption patterns and dynamics, China’ telecommunications market continues to attract investors from all part of the world. According to Masud (2009) the Chinese middle class presents a profitable market segment for such telecommunications products as computers and mobile phones as well as related accessories, which are opportunities that Australian companies can venture into. Currently, the number of mobile telephone subscribers in China stands at 750 million-the highest in the world- and it is ever increasing. This however presents only 50% of China’s population and hence implies that the Chinese mobile telephone market still has significant opportunities for foreign investors (Zhou, 2005). According to Masud (2009) it is clear that China, although an emerging economic giant continues to enlarge the global demand for telecommunication products. This is primarily due to the rapid expansion of China’s domestic market. Since 1995, the Chinese government has invested heavily in the development of the telecommunication infrastructure and this has in turn resulted in an enormous development of the telecom market. Obviously, this is an impressive opportunity for Australian telecommunication companies (Zhang & Peng, 2008). In order for Australian telecommunication investors to find a suitable niche in the Chinese middle class market, it is important to have a clear understanding of the current telecommunications market vis-à-vis the middle class population. As has already been noted, China’s middle class consumers constitute an important market segment that not only shows high preference for luxury and leisure products but is also ready to spend extra coins on high quality products. This means that foreign investors from Australia can find a ready market in China for latest mobile telephone technologies and products, which not only indicate social status and class but are also suitable for China’s fast-rising middle class consumers. Following China’s entry into the WTO, the Chinese government immediately opened the telecommunications market to other members in the WTO. This made China’s telecommunications market one of the few markets in the world that foreign investors cannot afford to overlook. For Australian investors, China’s exploding middle class population presents numerous opportunities for a profitable foreign investment. Zhang and Peng (2008) have noted that when telecommunications markets in the developed countries (such as Australia) get mature, the Chinese market becomes attractive. Conclusion The middle class has played a significant role in the economic development of many countries and continues to offer a lucrative market for multinational businesses. The rapid economic growth and development which has been achieved in China has been driven by a large proportion of the middle class. The expansion of the factors of production in the country has happened with a significant support from the middle class. In China, education and savings have been undertaken even by relatively poor households in the face of high returns from such ventures. To a great extent, the unlocking of the consumption powers of middle class in China and other emerging economies has been achieved in part through economic liberalization. All these factors present lucrative opportunities for foreign investment in China. In particular, China’s telecommunications market, which is open to foreign competition, is a good one for Australian investors. The large and ever increasing size of middle class population in China means a stable market for mobile phone products and technologies, which Australian investors can readily take advantage of. References Dickson, B 2007, “Integrating Wealth and Power in China: The Communist Party’s Embrace of the Private Sector”, The China Quarterly, No. 192, pp. 827-854. Goldman Sachs Global Markets Institute 2009, “The Power of the Purse: Gender Equality and Middle-class Spending”, 5th August. Li, C 2008, “The Growth and Present Situation of the Chinese Middle Classes”, Jiangsu Social Sciences, Vol. 5. Li, C 2009, “Profile of Middle Class in Mainland China”, Working Paper of CASS. Li, P and Ji, Y 2008, “Size, Identity and Attitudes of Chinese Middle Class”, Society, Vol. 28, no. 6, pp. 67-89. Masud, S 2009, In China, opportunities abound, but perils remain for equipment vendors,Telecommunications, Vol. 34 (January, 2009), pp 9-10. The McKinsey Quarterly 2006, The Value of China’s Emerging Middle Class, special edition. Zhang, B and Peng, M 2008, Telecom competition, post-WTO style, The China Business Review, Vol.27 (May/June2008), pp12-21. Zhou, X 2005, Survey of the Chinese Middle Class, Beijing, Social Sciences Academic Press. Appendix Jing, Y., Stumbling on the Rocky Road: Understanding China’s Middle Class. International of China studies Understanding China’s Middle Class 435 Vol. 1, No. 2, October 2010, pp. 435-458. China’s rising middle class has attracted the attention of both policymakers and the academia. In a mature industrial society, middle class is the mainstream. It is not only the major source of consuming power, but also the stabilizer of the society, providing an ideal buffer zone between the upper class and the lower class. China is still far from being a middle class society. In the Mao era, class structure remained as simple as the “alliance” of workers, peasants, and intellectuals. Since the 1978 economic reform, the middle class has emerged and gained in number, complexity, cultural influence and sociopolitical prominence amidst rapid industrialization and urbanization. This growth momentum is likely to continue in the 21st century. Indeed scholars from the Chinese Academy of Social Sciences (CASS) have claimed that the 21st century will be the “golden age” for the growth of China’s middle class. In China, the pace of social change is so rapid that scholars are now differentiating between “new” middle class and the “old” middle class like those in Western societies during the industrializing period. The “old” middle class mainly refers to the self-employed, small merchants and manufacturers grown out of China’s early market liberalization in the 1980s. Into the 1990s, the “new” middle class of mainly salaried professionals and technical and administrative employees who work in large corporations ushered in its initial expansion and soon overshadowed the “old” ones in terms of status and prestige. Unlike its Western counterpart, the Chinese burgeoning capitalist class – mostly owners of small- or medium-sized enterprises, constituting 2.6 per cent of the total population in 2006 – is usually regarded as part of the new rising Chinese middle class. Therefore, China’s middle class composes of not only the majority of white-collar workers and well-educated professionals, but also those at the top of the social hierarchy in terms of wealth. Except for the new middle class who exhibits the most democratic mentality compared with the other two groups, China’s middle class as a whole has yet to hold a distinctive sociopolitical ethos, be it directed at self or others. Their acknowledgement of the state authority is similar to that accorded by the rest of the society. As long as the majority of the middle class are able to maintain their current lifestyle despite the social policy reform, the force of democratization is unlikely to become strong. Read More