Chinese Youth Will Propel Economic and Political Changes

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by: Shaun Rein

My wife, Jessica Lo, and I recently had the occasion to be introduced to Tony Blair. It was our first time meeting him, and I must say he is incredibly charismatic. He commands attention and confidence in him in a way few, even the most polished politician we know, can garner. He is quite opposite to Larry Summers or Chen Shui-Bian as I have written before for Seeking Alpha.

We had a nice discussion with Mr. Blair on Chinese youth and how their optimism and confidence will help propel changes in China in both the business and political arenas in a good way. As China's economy begins to waver from the financial crisis, much of its future lies with Chinese youth who will become the major drivers for growth and how they react to a downturn. If they continue spending, then domestic consumption will be able to take up 50% of the economy vs. the 1/3 now as we predict will happen in the next 5 years. Or, if their salary and bonus increases are not realized during the Chinese New Year period, then retail sales will be hit hard in February and March and fall the way exports have as they cut back on spending.

The outlook on life for Chinese youth differs greatly from older generations that were raised during the turmoil that smacked China before 1978 and who save 50% of their salaries because of fear of increasingly expensive medical care and a weakening social security-like net. Chinese youth are very similar to Americans in their search for justness, as we saw when they rallied quickly to help the Sichuan earthquake victims in the face of many critics who say Chinese are not charitable, and on internet BBS and blogs where they vilify evil deeds in China.

Many analysts and consulting firms somehow miss this generational divide when they analyze the Chinese consumer, and they lump Chinese into one, unmoving and unchanging Chinese cultural stereotype. For instance, McKinsey argues that Chinese do not like to buy on credit, but that smacks in the face of reality. For instance, in interviews we have conducted in 15 cities in China, our research suggest that urban Chinese youth have effective savings rates of 0 as they want instant gratification in their consumption and also believe the notion of "why save now when tomorrow we will be making so much more money?" This is why credit cards have boomed in China from 13 million at the end of 2005 to over 115 million at the end of Q2 in 2008 and why even relatively young white collar workers are consuming lots of luxury products. We estimate credit card growth to continue at a 20% clip in China for the next 5 years which could be a boon for Visa (NYSE:V) and Mastercard (NYSE:MA) as I wrote for Forbes, In China, Online Shopping Soars.

Understanding the needs and wants of Chinese youth will be incredibly important for both multinationals like Disney (NYSE:DIS) and Estee Lauder (NYSE:EL) trying to sell to them to investors understanding what companies have built strong brand loyalty to the market. In today's difficult climate, the companies that develop the most consumer-centric marketing and sales channels to target Chinese youth will be the winners once the financial crisis passes. Our research suggests that best of breed companies use difficult times to extend their leads over competitors that are too financially weakened to launch the marketing campaigns and new product development they need to. This is also the best time for weaker companies to move to the head of the pack by focusing on the most profitable sales channels and cutting out the fat in operations.

This younger Chinese generation continues to confound many marketers and investors. Where and how do they spend? How can marketers reach them?

Our research findings show that the #3 big ticket item Chinese youth want to buy after a car and apartment is a mobile phone. If they cannot afford an apartment or a car, then they will spend money on mobile phones from companies like Nokia (NYSE:NOK) and Apple (NASDAQ:AAPL). Even if the face of difficult times, the mobile phone is incredibly important to them and they will keep spending. However, instead of changing for a new phone everyone 6-9 months as they have been the last few years, they will buy more second-hand phones on e-commerce sites like Alibaba's (OTC:ALBCF) Taobao. Indeed, Taobao virtually controls the consumer satisfaction market in auction and e-commerce sites in China, beating handily Ebay (NASDAQ:EBAY). Look for consignment, second hand, and interent discount sites to boom in the coming year.

What does all this mean for companies? First off, they need to become much more savvy in determining which marketing and sales channels to employ. As I discussed in the Wall Street Journal recently in an interview with Loretta Chao, companies need to spend more budget in digital marketing because that is where Chinese youth spend their time. If you are selling to Chinese youth, it does not make sense to advertise in newspapers and magazines where youth do not spend their time. Digital marketing accounts for only about 3% of total advertising spend in China, though it should take up more than in the US, which falls around 10%. For many brands, allocation to digital marketing should be around 20%. What is critical is to advertise with mediums that are effective and both building market awareness and, more importantly, triggering sales. Brand awareness should not be the goal as it is for too many marketers -- it should be about triggering sales and getting cash flow.

On the good side, marketers and media buyers like Mindshare (NYSE:WPP) are starting to understand the importance of digital marketing. This will provide a boon for many portals like Baidu (NASDAQ:BIDU), Sina (NASDAQ:SINA) and Sohu (NASDAQ:SOHU). Some of the online video sharing sites like Youkou and Tudou should also benefit if they can stay around before their coffers full from private equity money run dry from way too high operating costs.

The other area that marketers need to focus more on is in-store displays. Our research findings indicate that for certain products in certain regions, the point of sale is as important if not more to triggering sales than TV and outdoor display marketing.

Investors should look to invest more in companies that target lower to middle class Chinese youth. For instance, the online game sector will do very well as games cost very little yet provide great entertainment as well as digital marketing companies that have built up strong sales pipelines with brands. Online game companies are able to withstand any general malaise which will hit upper middle class targeting companies like Starbucks (NASDAQ:SBUX). Unlike video sharing and social networking sites which most have not demonstrated a proven business model, online game companies from Shanda (NASDAQ:SNDA) to Netease (NASDAQ:NTES) have. Look for them to do real well in 2009.

It is clear that China's economy is slowing but there is reason for optimism for many sectors, especially those that target Chinese youth. I disagree with many Wall Street analysts who are predicting end of world scenarios. China's government is reacting quickly to the turmoil and will be able to offset some (not all) of the slowdown coming from the US and Europe and the drop-off in exports. More importantly is that 80% of Chinese consumers we have interviewed say they have confidence that the Government will implement the right policies to stimulate the economy.

We still believe growth will come in between 8-9% in 2009 as the benefits of local governments green-lighting projects that were put on hold in boom times start to trickle to the economy in the second half of 2009. What will be key is whether or not Chinese youth continue to spend. There is reason for optimism that they will. I agree with Tony Blair -- Chinese youth will be the drivers for growth for good in all facets of Chinese society.