Chinese Youth Will Propel Economic and Political Changes 13 comments
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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 (V) and Mastercard (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 (DIS) and Estee Lauder (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 (NOK) and Apple (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 (ALBCF.PK) Taobao. Indeed, Taobao virtually controls the consumer satisfaction market in auction and e-commerce sites in China, beating handily Ebay (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 (WPP) are starting to understand the importance of digital marketing. This will provide a boon for many portals like Baidu (BIDU), Sina (SINA) and Sohu (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 (SBUX). Unlike video sharing and social networking sites which most have not demonstrated a proven business model, online game companies from Shanda (SNDA) to Netease (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.
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This article has 13 comments:
probably the oppposite is true - when the youth finds out in 2009 that future is not so rosy and they cannot expect to get bigger and more expensive toys very year, then some of them will turn attentions to forcing change in the country.
in fact, everyone including the communist party chiefs knows that the key to political stability in china has been the economic prosperity of the past 20 years. Sadly, China really needs a crisis now to force the necessary changes - so that it can prosper more later.
Please send Ms Rosy Scenario home. We need her here in the US. And don't forget to bring back a copies of her famous report "Decoupling".
we should know from our own younger generation that youth will not hold back on spending, nor will people use to technology give it up. this is especially good new for Apple who's innovative technology has always appealed to early adaptors and youth. Of the 3 things mentioned, a house, a car and a phone...the phone is within reach for more people everywhere than the other two and in a bad ecomony, i think Apple especially will continue to grow.
It's true that some Chinese youths are spending their parents' savings...not too different from ours!! Since i'm an APPL stock holder, I hope they choose an iPhone.
as to the Rosy Scenario...i don't think doomsday thinking helps anyone. We need to be realistic, but getting everyone into despair is only going to lead to more depression...people feeling so frozen with fear that they can't even search harder for jobs is not the answer.
We need reasonable financial attitudes but not frozen ideas.
What we are seeing was the inevitable result of years of wastrel living in the West following WW II. Many of us have spent all our money, poisoned our environment, and lived lavish, conspicuously consumptive lifestyles in our greedy pursuit of ever more wealth, huge SUVs, McMansions, etc.
Now it is time to pay the piper - in terms of off-shored jobs (themselves now collapsing due to lack of demand), people drowning in debt who are losing their foreclosed houses (crammed to the seams with tons of useless shite that nobody really needed, much of it bearing labels stating "made in China"), and grossly obese people with major health issues, and many other problems - and yet you are suggesting we and / or the Chinese youth can and should spend our way out of it to sally forth into a brave new world of yet more spending on useless gew-gaws? Are you all stark raving mad? - wait a minute, this IS an investment site - so many here are the same people who helped create the monster... even me, who has led a relatively simple life, has invested a few bob (although I have tried earnestly to do so in a socially and environmentally responsible fashion).
mollytjm - get used to gloomy scenarios, because that is what is and will be transpiring - and you and all of us had better pray (or whatever you do in lieu thereof) that it won't come down to a REAL "doomsday" scenario - which is all too possible - history is rife with examples, easily discernible to those of us who read more than the Financial section of the papers and look beyond the end of Q4.
Most of you folks have minus zero idea of how close to the edge "civilization" is all the time, never mind in times like these, or how easily it can and has been toppled.
As to those who, like the author, believe that it is a good thing that Chinese youth adopt our profligate lifestyle and that they can propel "good" political change thereby (by which one assumes that they will establish a capitalist so-called "free market" and "democratic" government), I would say that it is more likely that they will spend their parent's hard-earned savings (as some of the others here have mentioned) and that if they try to make any substantive changes, they will meet with the same iron fist that was unleashed in Tienamen Square.
Summary? Dream on... but don't be surprised when reality hits you between the eyes...
Mr Rein, many Europeans (especially its young people) are not much impressed by "charismatic" political leaders - Tony Blair included.
Such 'charisma' has often turned bad - the list is as long as my arm -especially with the lure of power.
"Power corrupts...and absolute power corrupts absolutely"...
gatwickcity.phpbb3now....
This American-style attitude should raise more alarms instead of the author's misplaced optimism. Conspicuous consumerism and living beyond one's means contributed to the economic mess we're in.
I for one find it to be very unlikely that China will be able, or even willing, to consume it's way out of this growing mess. Much like the rest of us, they will soon be unable to do so, as the recent global boom was driven entirely by cheap and easy credit. Stealing from the future was never a viable way to generate economic growth in perpetuity. . .As we are learning to our detriment now.
In short, we are all renewing our acquaintance with the notion of "sound credit," and no one in their right minds is lending at the moment. I'm skeptical that China (and Japan) will be able to avoid a pretty crushing, 1930's style depression, complete with the unrest that these events typically bring. I hope I am wrong, but only time will tell. Some people are slowly starting to offer an alternative view of what may be in store:
scotlandonsunday.scots...