Last week, we discussed about China’s ecommerce landscape (see link here) and typical ways in which Chinese consumers purchase overseas products.
This week, I want to discuss about China’s economy and what it means for US businesses.
Background: GDP growth is slowing. True. But Why?
You probably have heard that China’s economy is slowing down. The country’s Gross Domestic Product (GDP) has decreased from double digits (11-12%) year-over-year growth to single digit (6-7%) growth. This might concern potential companies in making a decision to invest in China. Although I am not an economist, I want to share couple informed thoughts.
First, most financial experts attribute the slow growth rate to China’s transition from a manufacturing economy to a consumption-based economy (source WSJ). The previous years’ amazing growth rates were mostly attributed to manufacturing and construction spending because China had a competitive advantage on labor and raw material costs. As a result, living standards of average Chinese have significantly improved. The manufacturing jobs that had once lifted the country, are now disregarded by younger generations who can afford to pursue their own dreams, resulting in increased labor costs.
Therefore, manufacturing businesses have lost their competitive advantage. As a result of this shift, consumer spending per capita has increased in average. While the overall GDP rate has decelerated, consumer consumption’s contribution to the GDP figure has actually doubled in the last two or three years. (source: CNBC)
Consumption is just fine.
Secondly, the growing middle class in China prefers goods and services that are completely different than before. According to Mckinsey (link here), the middle and upper classes will constitute 70% of country’s population. Additionally, should all this play out as expected, urban-household income will at minimum double by 2022.
What it means for US businesses?
Based on my personal experience, Chinese consumers’ shopping behaviors are quickly catching up to those of Americans. For example, 5 years ago, Abercrombie were extremely popular in China; 3 years ago, Coach brand was the #1 choice for mass female consumers; nowadays, Michael Kors and Tory Burch are picking up in terms of adoption rate among 20-33 years old female consumers.
What does it mean? Brands that are currently popular in the US are very likely to be next big things in world’s the largest consumer market, China. Plus, Chinese like US brands because they convey a sense of quality, health and trustworthiness. BCG data (link here) shows that more than 65% of European consumers prefer products made in their home countries … a surprising 61% in China said they would pay a premium for American-made goods than for products made in China.
Above were my thoughts on the outlook of Chinese consumer market. Happy Friday and have a good weekend!