International | Jun 13 2006
By Greg Peel
Many global companies have already tapped into the voracious market that is the new "affluent" of China. The affluent earn in excess of 100,000 renminbi a year (US$12,500) and represent 10% of the country’s disposable income while only representing 1% of the population.
The recent McKinsey Quarterly economic studies publication notes it has been fairly easy for foreign companies to secure a slice of this pie without needing to modify their goods or sales practises. Concentrated in the big cities, the affluent are easy to serve.
However, McKinsey suggests a fixation on the high end would mean companies could fail to capitalise on the greatest potential consumer boom seen in decades – the emergence of a Chinese middle class. Over the next 20 years, says McKinsey, more Chinese will migrate to the cities for higher-paying jobs and these working consumers – once the country’s poorest – will steadily climb the income ladder to become a massive market.
China’s rising economy will lift literally hundreds of millions of households out of poverty. McKinsey notes today 77% of Chinese live on less than 25,000 renminbi a year, but estimates that by 2025 this figure will drop to 10%. Middle class urban households will then make up one of the largest consumer markets in the world, spending around 20 trillion renminbi per year, or about what all Japanese households spend today.
While there is a growing problem of income disparity in China, such that the government is looking to introduce combating measures, the dispersal of income through the middle classes will be smooth, rather than lumpy, McKinsey suggests. Two phases of steep growth will occur. Firstly, by 2010 a lower-middle class will be established, with households earning 25,000 to 40,000 renminbi. A decade later the upper-middle class will follow, with incomes of 40,000 to 100,000 renminbi.
By 2025 McKinsey estimates the middle class will represent some 520 million people, or half of the urban population. And the country’s wealthiest consumers will be young – between 25 and 44 years old.
Chinese are currently great savers, tucking away about a quarter of weekly income. While the emerging middle class will also be good savers, they will spend increasingly. China will become the fastest growing food market in the world. Health care, housing and education will also be exploding markets.
McKinsey advises foreign companies to "serve tomorrow’s middle class today". Multi-tiered branding strategies will enable a company to follow the Chinese up the income ladder. More affordable goods at the low end of the scale will be the best the average Chinese can afford now, but soon they will be able to step up to classier brands.
