China’s economy will experience never before seen transformations that will change the way people consume goods and services. With government support being a fundamental plus, the country will continue to migrate from an investment-driven model to a consumption- and services-driven model. From a manufacturing powerhouse to an active leader in digital innovation, the countdown has already started. This will have implications for both multinational and domestic businesses. China’s economy will rely on consumption to grow, and the consumers spurring that growth needs to be analyzed and understood in order to profit from it.
Challenges in the Chinese market
There are uncertainties. Slower middle-class growth could have a very different effect, with consumers refocusing on functional needs. Also, if governments’ policies around the world favor protectionism it would lead to a rise in nationalism. More protectionist and nationalistic policies would reduce consumption and shift Chinese consumers’ attitudes away from a Western lifestyle, contributing to a higher household savings rate.
Top 10 Trends in China
The growth of the middle class is defining consumption. Over the next ten years, household consumption will grow by an average of 6% annually to reach RMB 56 trillion, with the middle class potentially representing an estimated 65% of households. By 2027, household income will have increased by around 5% annually, with industrial jobs redistributed to service sector jobs. Population movement will occur from rural to urban areas, where incomes are higher, resulting in low- and lower-middle-income households, with more spending advancing from necessities to discretionary product categories. China’s government is supportive of the transition to a consumption- and services-driven economy, implementing policies to encourage spending in such areas as health and pensions, discouraging saving.
China has an aging population that has created new demands. By 2027, an estimated 324 million people will be over 60 years of age. The percentage of working-age labor will decrease while the pressure on social benefits will increase, creating economic challenges as well as expand opportunities for products and services tailored to this demographic. Elderly consumers spend more on health-related expenses such as dietary supplements, disease treatments, senior care, and insurance. Optimum price is important. There is also a demand for senior housing as many of the new elderly will not be able to rely on their children for care.
Children born in the 1990s will make up 15% of the population, and those born in the 2000s will represent 21% of China’s population, in 2027. This younger demographic differs from predecessors in two aspects:
- They received financial support from their elders, and they grew up in a life improved by technology and digitalization. They consume more, are less price-conscious, and seek instant gratification. They demand higher standards for convenience, quality, and variety. Premium and personalized products and services are required to meet the needs of this demographic.
- Housing, health, and education are areas that will continue to grow, due to larger families and changes in lifestyle.
China’s urbanization rate will continue to increase over the next decade, from 57% in 2016 to around 70% in 2027. The Chinese government is taking a different approach to urbanization by moving the focus away from megacity centers toward newly established economic clusters. This has been made possible by advances in technology in the transport and information sector. High-speed trains and drones will make logistics cheaper and faster. High-speed Internet connectivity has a number of possibilities, including the lack of necessity to physically leave your home.
With this tactic of spreading urbanization throughout the country rather than focusing on already established urban areas, people all over China will be able to enjoy a lower cost of living, more recreational space, and less pollution.
The sharing economy, which took hold so easily in China, was estimated to be worth about RMB 3.45 trillion ($520 billion) domestically in 2016, a sum that included spending both by consumers and businesses. Chinese consumers already have a culture of paying for access rather than ownership, and by 2027, this model of consumption will become a routine part of their lives.
Areas such as taxi transportation and bicycle sharing, are examples of how the sharing economy can be a success, giving more people access to goods and services than ever before. China is home to more sharing economy start-ups than any other country in the world. Technology is shrinking the convenience gap between sharing and owning.
By 2027, technology will dramatically reshape the retail industry in China, such as the IoT Internet of Things) and AI (Artificial Intelligence) digitalize real-world actions (widgets to digits), self-driving vehicles and drones improve logistics, and augmented reality has changed the shopping experience. The retail sector will benefit from the integration of data and the customer’s journey between offline and online shopping, which will deliver an upgraded experience.
The role of physical stores will transform. Most small-format offline channels will be digitalized and linked to online platforms, and overcome the barriers related to economies of scale. Throughout the customer journey, most successful retailers will engage with customers via online or offline channels. Cashless transactions and ubiquitous traceability of consumption will become the norm.
Consider that Chinese third-party mobile payments total in the trillions of dollars—compared with billions in the United States. By 2027, almost all daily transactions will be on mobile devices and digitally traceable, giving companies the means to generate invaluable consumer insights that will help them develop better-tailored products, services, and delivery options.
Personalized content in media and personalized marketing is leading the way in China. By 2027, the personalization of products and services will become a necessity for businesses. The emergence of AI, robotics, 3-D printing, and other technologies has reduced the cost of personalizing product design, manufacturing, and consumer communications.
Corporations that control data will have great influence and substantial competitive advantage. Data is the new top currency. By 2027, China may have less than five companies in control that will extract, process, refine, value, sell and buy consumer data. Emerging technology that makes data more usable, such as machine learning, will resolve this challenge that differentiates owning data and integrating it across platforms.
Rapid technological development is creating both opportunities and risks for consumers and society. Digitalization and privacy are major concerns in China, especially if a small group of companies owns billions of consumer data points privacy infringement is a big problem. It may pose a serious problem unless a regulatory framework protecting Chinese consumers’ privacy is put in place.
Another concern is the inequality of inclusive growth. The digital gap between those who have access to technology and its benefits and those who do not will widen as technology advances. Solving this requires understanding and serving the different needs and aspirations of people across all demographics.
The rising toll technology takes on the environment and sustainability, must also be addressed. On November 2017 Singles’ Day online sale in China, overall orders from major e-commerce platforms summed up to 850 million RMB, according to China’s State Post Bureau, requiring at least 331 million packages to be shipped from one day’s purchases. Packages and vehicles required for delivery create major environmental and infrastructure challenges that will become more problematic as the industry grows.
Over the past decade, two influences have come to shape Chinese consumers’ attitudes toward culture and lifestyle. Firstly, consumers are more affluent and have greater access to Western culture and lifestyle, thanks to China’s open policy and technological development. Secondly, the government encourages strengthening China’s cultural heritage by incorporating it into national education.
The split in consumers’ lifestyle preference is almost evenly divided across income groups, generations and geography. It is also visible in consumers’ chosen sources of trusted information.
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