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What the West Doesn’t Get About China

A Growing Consumer-Driven Market

May 24, 2011 by George Stalk and David C. Michael
May 24, 2011

When many managers think about China, they imagine a container ship whose hold and deck are brimming with cartons of toys, clothing, iPhones, and other goods bound for the world’s consumer markets, whose populations power China’s economic engine.

That view couldn’t be more wrong.

Despite the Chinese government’s well-publicized program to encourage domestic consumption, few Westerners grasp just how much progress the country is making on this front. Although millions of peasants live on subsistence wages, millions more Chinese are moving to urban centers and achieving a recognizably middle-class lifestyle. Consider just a few data points that give evidence of China’s unexpectedly fast-paced move toward a more balanced, consumer-driven economy:

  • In a variety of consumer categories—including such items as shoes, consumer electronics, and jewelry—China already ranks as the number one or number two market in the world.

  • The combined flow of shipping containers between Asia and North America and Asia and Europe is already less than the flow among Asian nations—with much of the latter consisting of goods imported to China.

  • Domestic demand accounts for most sales of Chinese-produced air conditioners, motorcycles, trucks, and steel.

  • Adoption rates of new technologies among the rising middle class exceed those of nearly every other developing country. China has 400 million Internet users, most with broadband access. Mobile telephony is ubiquitous in urban areas, and most of its consumers have leapfrogged landlines.

  • China’s cities are growing so quickly that the country now has more urban centers than most Western nations do. For instance, China has about 90 cities with a middle-class population of 250,000 or more; the U.S. and Canada together have fewer than 70. According to projections, by 2020 China will have 400 cities with at least 250,000 middle-class inhabitants—and 50 of those cities will have more than 1 million middle-class inhabitants. And by then it is expected to have 800 cities whose residents’ real disposable incomes are greater, on average, than those of Shanghai’s residents today.

  • Looking beyond consumer markets, we find that Chinese companies are already recognized as among the world leaders in numerous business-to-business technologies, including wind-turbine blades, solar panels, high-speed rail equipment, steam boilers, port terminal cranes, and electric-transmission equipment.

Few Western managers who visit China get a realistic picture of its economic development. They typically go to Beijing or Shanghai. They stay in five-star hotels—often Hiltons and Hyatts. There’s apt to be a Starbucks in the lobby. The familiar atmosphere leads them to think that China’s market will someday resemble a typical Western economy, full of Western-made products. But in fact, cities far from Beijing and Shanghai are teeming with goods and services from domestic companies—and if Western companies don’t get to those cities soon, they’ll be left out.

To be sure, despite its rapid progress China is still far from self-sufficient in a number of areas. It remains dependent on foreign multinationals for market access—many Chinese companies lack the ability to generate significant export trade on their own. The country can provide a college education for a growing share of the population but still relies largely on foreign universities for top-flight graduate education. Its only traditional energy resource is coal, and its demand for imported oil has been a major factor in rising prices over the past decade. China is also a net importer of food. Finally, it lacks the innovative pharmaceutical and health care sectors of Western economies, and as its consumers become increasingly upscale, they will demand more of the pills and procedures that Westerners take for granted.

This article originally appeared in the Harvard Business Review and is republished here with permission. To read the full article, click here.

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