Is there an opportunity for home appliance brands in China?
NOTE: This article is an edited extract from a larger analysis of China’s consumer market.
CHINA, AN ATTRACTIVE MARKET IN ASIA PACIFIC
Thanks to its vast population and growing middle class, China is an attractive market in Asia Pacific. Projected to become one of the world’s largest consumer economies, home appliance players have turned their attention to China, looking to boost their global market share. Several trends are creating these market opportunities.
One is China’s growing middle class. There is also a wave of migration as the working youth continues to move out of the top-tier coastal cities into more inland lower-tier regions. These regions are less saturated and less competitive, an opportunity for new businesses to enter. With these migrations, there is also an uptick in home ownership which further feeds the market demand for home appliances.
Since Chinese consumers buy both domestic and international brands, and because home appliances are viewed as a high price elasticity category, there is little brand loyalty. With more intense competition on the horizon and little brand loyalty, prices will inevitably drop reducing profit margins. There, is, however, an opportunity for more premium brands to establish a clear presence and a strong emotional bond through the application of a strategic brand positioning that is relevant and consistent.
Brands that have a positive reputation, credibility, a proven track record, design sensibility, and access to resources are poised to penetrate China’s market successfully.
ONE OF THE WORLD’S LARGEST ECONOMIES
China is the largest APAC market; in both population and potential revenue. Economically, China’s GDP is at $21.27 trillion (2016), making it one of the world’s largest economies, outperforming even the U.S. China’s middle-class is expected to reach 54% by 2022 (Barton, 2013). Global brands with existing relationships with local Chinese distributors and manufacturers, as well as those engaged in joint ventures have a strategic advantage that can facilitate their marketing efforts in this market (Hoovers, 2016; Liu, 2005).
With nearly 1.4 billion people, China is the most populous country in the world. This country is also the fourth largest in terms of size. It stretches from Eastern Asia all the way to the Yellow Sea, connecting these vast regions together, much the same way as the historic Silk Road, created during China’s Han Dynasty (Mark, 2014).
For the last four decades (since 1978), China has been systematically reconfiguring its economic structure. The country has been gradually moving away from the pure socialist system of Mao Zedong era towards a more market-oriented system initiated by Deng Xiaoping (Manuel, 2016, & The Economist, 2016).
The result has been a fast-growing economy. With a booming economy and a shift towards a more capitalistic philosophy, China’s middle-class has witnessed an explosive growth in the recent years. According to a report by McKinsey & Company, by 2022, three-quarter of China’s population would be considered middle-class (Iskyan, 2016, & Barton, 2013).
THE RISE OF ZHONG CHAN
It is worth noting that the concept of middle-class is a relatively new one among the Chinese and one that came into use during the 1990s. This segment of the Chinese population is mostly made up of the younger generations, those born and raised during the post-Mao era. Zhong chan, the closest translation of the idea of a middle-class in Mandarin, refers to people who have enough income to be able to own a home, buy a car, pay for education and leisurely activities (Yu, Chan, & Ireland, 2007; Barton, 2013). It is about having a budget for discretionary spending.
One of the outcomes of China’s rising zhong chan has been increased spending on technology, content, and consumer products, not to mention more free time for leisurely consumption of and engagement with media (IBISWorld, 2013 & 2016). This makes China and its booming middle-class an attractive market for many global and multinational brands. However, for multinationals, it is important to acknowledge that:
(1) China’s middle-class is principally different, in both attitude and behavior, from its Western counterparts (Roll, 2015)
(2) despite China’s rapid economic growth in the past two decades, the country is facing signs of an economic slowdown which will have implications for any global brand that has its eyes set on this country (Manuel, 2016)
A GENERATION OF CAUTIOUS CONSUMERS
The economic slowdown in China is in part due to the high debt levels accumulated by state-owned enterprises (Brown, 2016). There is also a realization that while China has all the trappings of a consumer economy, in practice people are not spending enough (Waldron, & Bagnall, 2016). Country experts speculate that one of the reasons behind the lower than expected consumer spending may be China’s aging population.
By 2030, roughly 400 million Chinese will be over the age of 60 (Manuel, 2016). This aging segment will need to rely on China’s younger working-age to support it; a group that accounts for less than 50% of China’s population (Manuel, 2016). The younger Chinese expect to work and save to support not only their immediate families (spouse and children) but also their parents and possibly grandparents.
What was once referred to as the “iron rice bowl” (the equivalent of a pensions plan in the Western world) is no longer a realistic vision of China’s future (Manuel, 2016). These, combined with the telltale signs of the economic slowdown can potentially mean a generation of cautious consumers in China’s horizon (Manuel, 2016). This phenomenon will have direct implications for foreign investors and global brands that hope to establish a presence in China in hopes of owning a slice of its consumer economy.
Although China’s economy may be facing a slowdown, it still accounts for a significant portion (approximately 73%) of the total growth in the developing markets (Roach, 2016), not to mention 25 to 30% of the overall global growth (Worstall, 2016). This country contributes to roughly 15% of the world’s GDP (Worstall, 2016) and ranks on top when it comes to purchasing power parity (PPP).
Although China’s economy may be facing a slowdown, it still accounts for a significant portion (approximately 73%) of the total growth in the developing markets
The Chinese middle-class is not as promiscuous as its Western counterparts when it comes to making purchases, yet, it does spend more money than the previous generations. The new Chinese middle-class, having lived during a period of economic boom and prosperity, generally holds a more optimistic view of the future and is less frugal than the previous generations (Bergstrom, 2012). In other words, regardless of the slower rate of economic growth in the recent times, China is still considered to be a growing consumer market, and a desirable target for multinational corporations (Bergstrom, 2012).
LOWER-TIER CITIES HOLD THE GREATEST POTENTIAL
China’s lower-tier cities and rural areas are expected to enjoy an economic boom in the coming years.
These markets are sometimes referred to as “first-class opportunities,” and according to reports dating back to 2011, they accounted for more than half of the total U.S. imports into China (Mullich, 2011). Not surprisingly, many companies are targeting these developing regions to set up or expand their operations (Hoovers, 2016). The relatively less competitive business environment and cheaper labor mean lower costs of operations as well as fewer barriers of entry thanks to less market saturation (Bergstrom, 2012).
Regarding infrastructure, these cities have significantly benefited from various government issued stimulus packages, with improved roads, highways, and transportation systems in place (Mullich, 2011). Additionally, in the early 1990s, the government’s control of the land and the real estate shifted toward privatized ownership (Yu, Chan, & Ireland, 2007). This policy change further stimulated the move away from crowded cities into less developed areas as homeowners sought to get the most from their property investments (Yu, Chan, & Ireland, 2007).
With more prospects and opportunities, there are also more wage earners migrating from the first and second tier cities into these new regions. These migrants hope to obtain a higher standard of living in these markets, ultimately achieving success in life (Bergstrom, 2012). Since many of these new homeowners seek to get the most from their investment, the trend has been a move away from crowded cities and into less developed areas.
Of course, for any multinational that hopes to operate in these newly formed urban cities, it is critical to recognize that China is a tapestry of subcultures and populations (Roll, 2015). In other words, China is not homogeneous. The strategies applied in top-tier markets will not necessarily work in the other regions (Davis, 2012).
The same message may be interpreted differently in the north versus the south of China (Davis, 2012). Joint ventures are therefore often viewed as a preferred form of market entry into China. Collaboration between foreign and domestic partners not only expedites the business process but increases the chances of success by more effectively leveraging local knowledge, relationships, and resources (Davis, 2012; Roll, 2015).
A UNIQUE CONSUMER CULTURE
China’s middle-class is mostly made up of the younger generations, those born and raised during the post-Mao era (Yu, Chan, & Ireland, 2007). As mentioned earlier, China and its middle-class are not homogeneous (Roll, 2015). This segment of the Chinese population is made up of a diverse group, with unique distinctions in their values and outlook towards life depending on when they entered the workforce.
For example, the 80s’ generation idolized the Western lifestyle and associated Western brands with success. Those from the 90s were less likely to be enticed by where something was made but were rather more interested in whether the product delivered quality and could help improve their lives (Yu, Chan, & Ireland, 2007). Aside from their generational differences, even their geographic location plays a role in shaping their values. Different regional cultures, historic experiences, and dialects, collectively add an extra layer of nuanced complexity to understanding the local consumers (Davis, 2012; Manuel, 2016).
Regardless of their generational differences, the Chinese middle-class are collectively more experimental and consequently unpredictable in their behaviors than their Western counterparts (Yu, Chan, & Ireland, 2007). They are also constantly evolving when it comes to their characteristics, behaviors, and motivations lives (Yu, Chan, & Ireland, 2007). How China’s Zhong chan looks and acts today could be wildly different from the middle-class of the next decade. Many factors impact these shifts, but perhaps the biggest reason may be the period during which they were raised.
Regardless of their generational differences, the Chinese middle-class are collectively more experimental and consequently unpredictable in their behaviors than their Western counterparts
Some researchers have summarized the motivations of the young Chinese generation into the following four dimensions: “individuality, new experiences, social connection, and contribution to China’s success” (Yu, Chan, & Ireland, 2007). Some marketers have coined the term “chuppies” when referring to China’s middle-class; a melding of two words: Chinese and yuppies (Bergstrom, 2012). Success in life is a key driver of chuppies, and to them, success means having enough money to make one’s parents proud, gain access to the lifestyles of the outside world, and impress one’s friends (Bergstrom, 2012).
On the surface, this may sound somewhat superficial and materialistic. However, when examined within the context of China’s cultural values and evolving history, they take on a slightly different meaning. The young Chinese middle-class is interested in happiness in life. For them, happiness is not achieved through the accumulation of objects or from obtaining the latest shiny new thing imported from the West. They seek meaningful and quality experiences, and so they look to brands as a facilitator (Bergstrom, 2012).
Geert Hofstede’s Cultural Dimensions: Geert Hofstede provides a standard framework for understanding the cultural differences that underpin the decisions, norms, and behaviors of different societies. This framework, although not perfect, is helpful in providing a foundation for marketers as they plan entry into new markets.
Through the lens of Hofstede’s cultural dimensions, China indexes high on power distance which means foreign brands must know and respect their place in the Chinese society. It is high on collectivism, suggesting that brand ideas should communicate benefits to the family and the community. China indexes high on masculinity, indicating that Chinese consumers need to believe that the brand will help them be better at what they do and succeed in life. China scores high on long-term orientation; in other words, brand/product durability and reliability are essential for winning in this market. Finally, China indexes low on uncertainty avoidance, which reinforces the importance of gaining Chinese consumers’ trust and commitment by delivering quality and high performance (Hofstede, 2001; www.geert-hofsteded.com, n.d.; Roll, 2015).
As is often the case with anything new and different, there are many misconceptions about the Chinese consumers among Westerners (Roll, 2015).
Aside from the assumption that all Chinese are the same, some of the other common misconceptions include the idea of China as a patriarchal society. In the new China, women play a key role (Clode, 2016), especially when it comes to decisions impacting household purchases. Simple is not good enough in China; Chinese consumers are arguably the most sophisticated and advanced when it comes to technology and digital media (Clode, 2016; IBISWorld, 2016). The best opportunities are no longer in the first-tier markets (Clode, 2016). Future growth will come from lower-tier and rural regions (Mullich, 2011). Foreign brands are no longer luring simply for being non-Chinese (Clode, 2016). Brands, foreign or domestic, must offer a clear, unique, and relevant proposition that fits the lives and culture of the Chinese (Clode, 2016).
A CHINA STRATEGY
China is a market influx, with its social, economic, cultural, and political environment in a constant state of change and evolution. Furthermore, every brand, category, and industry is different and requires an in-depth analysis before formulating a strategy plan to enter and compete in this complex market. As such, the following outline is by no means a universal roadmap but rather a starting point for discussion, debate, and hypotheses generation.
Who: The booming affluent middle class has accelerated the rate of home ownership in China which in turn has created an opportunity for self-expression and establishing a unique identity through home decorations and customization. This includes home appliances. “As these young couples rush off to fill their homes with symbols of modern living, appliances and electronics are also enjoying record sales” (Yu, Chan, & Ireland, 2007).
The bullseye target in China is the upwardly mobile, middle-class woman raised during the post-Mao era. She is either single or married and lives in lower-tier markets away from the coastal regions. Savvy with technology, she is comfortable shopping online and through social e-commerce. She is active on social media, uses WeChat to stay connected with her social circles or shop, and when she has time, likes to go to movies or watch digital video content online (IBISWorld, 2016).
What: China’s home appliance category today offers consumers “a wide variety of sizes, shapes, and colors, a stark contrast to the generic designs of past decades when appliances were made by state — owned companies” (Yu, Chan, & Ireland, 2007). Brands are expected to offer high quality, reliable, stylish products that are also highly functional and able to perform many relevant tasks. Appliances that could simply be upgraded by adding additional attachments (instead of having to purchase new units or devices) will have an advantage.
Why: Products and brands that communicate status are especially popular with the rising middle-class. Home appliances can act as a vehicle for showcasing one’s affluence, social status, and personal sophistication (Yu, Chan, & Ireland, 2007). This is beneficial to those brands that are globally positioned as being premium.
Brands that connect emotionally with their Chinese audiences will face a lower risk of contributing to the category halo. After all, emotional connection is an important element of success for any brand. For example, stylish designs and appliances that empower users to explore their creativity and desire for experimentation have the potential to establish meaningful bonds with their targets. The ability to give back to one’s family while fulfilling the desire for self-expression are qualities that could help facilitate deeper connections.
Where: Distribution channels for this category include online retailers, as well as home appliance stores, large retailers, and chain stores. “Consumer electronics and small appliances are two well-established online categories, with e-commerce reaching around 30 percent of total retail sales [in China]” (Wang, Lau, & Gong, 2016, p.2). Having an e-commerce platform that enables Chinses shoppers to buy directly from the brand site could be beneficial. Also, the websites should be designed to reflect the local culture; it is not enough to just translate the content to the local language.
One of the advantages of global brands that enter China is that through acquisitions and joint ventures they have cultivated strategic alliances inside China (including in the lower-tier markets). These connections provide the brands with the necessary distribution channels, allowing them to fulfill their supply chain needs (Hoovers, 2016). For instance, through relationships with local distributors and delivery businesses, as well as shipping companies, global brands could facilitate the product delivery without having to invest into building the distribution channels.
With greater adoption of e-commerce in China, retail sales at brick and mortar stores are expected to slow (Yu, Chan, & Ireland, 2007). On the other hand, “shopping in stores that display an international aesthetic and lifestyle gives consumers a sense that their living conditions and design choices are on par with the rest of the developed world” (Yu, Chan, & Ireland, 2007).
These observations suggest that there is value in building a flagship retail presence for certain brands in the lower-tier markets. These stores could be a place for people to explore and learn about the various products and devices, use them before committing to purchase, socialize with their friends and get their opinions, building transparency and trust. Activities could include workshops on how to use various appliances and opportunities to meet celebrities who endorse the brand.
In other words, the retail space will not be a place to sell but to create high engagement, experiential branded content — a channel for brand building and generating awareness. This strategy helps forge meaningful relationships between the brand and its target, shows how the brand can contribute to the community and people’s happiness, and gives the consumers an outlet to express their personalities through association with the brand.
Price: In China, pricing is often dictated by retailers who are reacting to consumer demand (IBISWorld, 2016). The manufacturers or suppliers typically have little control over the pricing strategy. However, for brands that are positioned as premium status brands, it is possible to deviate from the category pricing strategy. They could adopt the pricing strategy of luxury brands — through both positioning and by generating artificial demand through scarcity (e.g., limited numbers) (Bergstrom, 2012).
Other pricing considerations relate to cultural symbols and semiotics. Certain numbers in the Chinese culture are more desirable — for example, ending in an eight instead of a nine. Consulting with local partners is essential in ensuring that the brand’s decisions are sensitive to the local culture, norms, and traditions.
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