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A friend of mine just returned from a trip to Asia and told me that he couldn’t find top quality tuna in Japan because they all went to Hong Kong. When he was in Malaysia, he observed many expensive properties being gobbled up by the Chinese. Wherever he traveled, he just saw Chinese consumers voraciously buying up all the best and most expensive products. Indeed, some of the record price purchases in the world recently have been attributed to a Chinese consumer. For instance, a Tibetan Mastiff dog was bought for USD$582K, a 511-pound tuna in Tokyo for USD$177K, and a five bedroom apartment in Hong Kong for USD$57 million.

China is a fast growing economy, on track to be the second largest in the world and some even predict that it will surpass the U.S. in 2020, which is the not very distant future. According to the Hurun Rich List on October 2009, the world’s most populous nation of 1.3 billion people has 130 billionaires (USD) and ranks second only to the United States in the number of billionaires. China is the world’s fifth-largest consumer market, behind the United States, Japan, the United Kingdom, and Germany. In 2009, China surpassed the U.S. as the world’s largest auto market with an estimated 13.6 million vehicles sold.

But the behavior of the Chinese consumer is often unclear - not only to foreigners, but even to the Chinese government itself. This is because the historical statistics of Chinese consumptions are vague or non-existent, the ones that exist are non-reliable, and most importantly, the rapid industrialization of the Chinese economy has drastically changed the spending pattern of their consumers.

Anyone who wants to understand the current global economy must understand the Chinese consumer. Without it, you will be missing a big part of the puzzle. To shed some light on the matter, I will debunk 5 myths about the Chinese consumer.

Myth 1: Chinese people are no longer impoverished


Fact: The big ticket item purchases that often make the headlines, as previously discussed, are made by the upper class consumers in China. But this group comprises less than one percent of the Chinese population. Yes, many Chinese are benefiting from the industrialization of the country, but the per capita GDP of China is just USD$6.5K versus the United States at USD$48K and there are many people still living in poverty.

While the Chinese communists’ embrace of capitalism has lifted 300 million people out of poverty during the past three decades, the disparity of income in China is still huge, unlike many developed nations. What foreigners tend to observe are the behaviors of only the upper class Chinese, the urban dwellers of Beijing, Shanghai, and Guangzhou, and the affluent tourists. In many parts of the country, especially in the rural areas such as Shaanxi, Gansu, Yunnan, Guangxi, and Sichuan, people are still struggling to make ends meet.

The State Council Leading Group Office of Poverty Alleviation and Development states that China had 40 million people living below the poverty line at the end of 2008. But the number is misleading, accordingly to Professor Li Xiaoyun of China Agricultural University, because the official poverty line that China uses was set 30 years ago. Li further asserts that China’s poor actually totals 150 million, if using the internationally accepted $1 per day income guideline.

Now let’s step back and compare the poor Chinese with Americans who are burdened with debt or have negative net worth. Two questions come to mind: Who is poorer and who is better off?

To answer the first question, let’s look at the following excerpt from The Art of the Comeback by Donald Trump where he discusses about one of the toughest times he had been through.

One day, while walking down Fifth Avenue, hand in hand with Marla, I pointed across the street to a man holding a cup and with a Seeing Eye dog. I asked, "Do you know who that is?"

Marla said to me: "Yes, Donald. He's a beggar. Isn't it too bad? He looks so sad!"

I said, "You're right. He's a beggar, but he's worth about $900 million more than me."

She looked at me and said, "What do you mean, Donald? How could he possibly be worth $900 million more than you?"

I said, "Let's assume he's worth nothing (only from the standpoint of dollars)--I'm worth minus $900 million."

As to the question “Who is better off?”, I would say definitely the Americans as we can often just walk away when buried with debts that range from credit cards to mortgages. We can just click home on our browser and we are back to square one. That’s why the number of negative net worth households in the U.S. is always compressed. Americans also have much better access to credit and are able to get more government assistance when needed. Even when haunted by a high unemployment rate of 9.7%, many are still living off the unemployment paychecks from our government. When Donald Trump filed for bankruptcy, he still had quite some excesses around his waist, didn’t he?

Just to summarize, if you were to travel to various parts of China, you will realize that not everyone in China is as rich as many foreigners tend to observe or read about. While it’s predominantly true that most people’s lives have improved across the board compared to thirty years ago, the road ahead is still long.

Myth 2: The richest in China are predominantly old business people

Fact: Remember the Hurun report that shows China has the second most billionaires in the world? Well, 94 of the 130 billionaires in China are under the age of 40. A report by McKinsey shows that China’s affluent population is extremely young, where 80 percent are under 45 while the United States is 30 percent and Japan 19 percent.

The fact that this upper class is comprised of many young entrepreneurs who acquire their windfall in a short time frame translate into a different spending habit than the affluent population of other nations. Just to give you an example, various reports have shown that 80% of people who win the lottery in the U.S. will file for bankruptcy within 5 years. Some say 75%. Whatever the real number is, you get the picture.

Consumers who acquire their wealth easily tend to have a different financial management and consumption mindset than people who build their wealth through many years of hard work. I am not saying that the Chinese billionaires will end up bankrupt, most likely not, because their ability to earn money is far greater than a typical lottery winner. The focus is on their spending behavior and that’s probably something worth studying for businesses who intend to tap this market.

I’ll have a harder time imagining Bill Gates or Warren Buffett buying a dog for USD$582K! Even Li Ka-Shing, the wealthiest man in Asia, who acquired his wealth through many years of hard work, is known to have frugal spending habits.

Myth 3: Chinese are big spenders

Fact: Some believe that saving is deeply rooted in the Chinese culture while others begin to question this notion after witnessing purchases made by the Chinese that often make the headlines. Chinese consumers actually have one of the highest savings rates in the world at over 30 percent of household disposable income, while Americans stand at around 6 percent (much lower before the financial crisis). As a matter of fact, Chinese consumers save more than even the Japanese.

Several prominent reasons for the high savings rate include a high return on investment (such as residential property) which encourages people to invest, college education for their single child, and the uncertainty of their medical and pension future as many of the State Owned Enterprises are increasingly privatized. The basic safety net is a dominant reason as consumers, middle-class and the poor alike, will probably not blow their savings on luxurious and high priced items when they know that they will need to rely on these savings when they age or become ill.

A recent study by Professor Wei of Columbia University suggests that the gender imbalances in the one child policy of the country are also contributing to the high savings rate. According to Wei, there are about 122 boys born for every 100 girls today. “The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Chinese consumers’ savings rate is high even when people are spending more money because their income is growing at a much faster rate. For instance, a farmer had been saving $50 of her $150 monthly income in the past few years and spending the rest in food and basic needs for the family. Business this year has improved significantly where she now makes $500. So she decides to save $300 and spend the rest on new clothing for her family as well as her customary purchases. While her spending has increased from $100 to $200, her savings rate actually improved because her income has gone up significantly.

The Chinese consumer market is already huge, but what this high savings rate tells us is that it is not far stretched like that of the U.S. where many consumers have very low savings rates and are heavily in debt. While there has been a surge in credit card usage in China, many people are still without the plastic card and the Chinese government imposes relatively strict rules on its issuance. The potential of China to be a much bigger market explains why many companies such as Apple (NASDAQ:AAPL), Wal-Mart (NYSE:WMT), and Starbucks (NASDAQ:SBUX) are so eager to get a foot in.

Myth 4: Just sell to the Chinese, they are all the same

Fact: This is actually far from the truth as the market is extremely segmented. The rate of growth, consumer retail habits, and level of economic and social development differ widely from region to region, and the ones that were growing yesterday may be lagging tomorrow.

Some retailers divide the country into the first, second, and third tier cities. For instance, Shanghai, Guangzhou, Chengdu, and Beijing would be considered first tier, the poor rural areas third tier and the rest would go to the second tier. However, an experienced retailer would not disagree that such a distinction is superficial at best. For instance, urban dwellers with all their basic needs fulfilled may be looking for upgrades on their phones while the rural peasants would only dream of having a microwave or a heater; regions with a high density aging population, such as Shanghai with over one fifth of its population over the age of 60, would be more concerned about their medical needs compared to regions like Shenzhen that are filled with young migrant workers; brand name products would be more appealing to the affluent consumers in the coastal regions than their inland counterparts; and the prevalence of professionals and office workers in the east would make a MacBook more marketable there than it would be in the west where there are more agricultural workers.

China should be viewed as an assemblage of pieces much like Europe. Chinese from different regions speak different dialects, eat different food, and even think differently. Just the language alone would surprise many who are unfamiliar with it. I personally understand four Chinese dialects – Mandarin, Cantonese, Hokkien, and Hakka. These are some of the most spoken dialects in China and I consider myself very fortunate to understand them as very few Chinese can actually communicate in as many dialects. However, even I found myself unable to communicate when traveling around China.

Myth 5: Companies that can penetrate the Chinese market will prosper

Fact: Any businesses that wish to expand internationally (especially in developing countries) have to understand this basic concept: If the local Government wants you dead tonight, you won’t live to see the sunrise the next morning. Challenges that foreign businesses encounter in China include restrictions on foreign investments, widespread counterfeiting, and segmentation of local markets. But the biggest risk of all is really the Chinese government itself.

The rules and regulations imposed by the Chinese government can significantly increase the costs of doing business for foreign companies. For instance, web sites such as Google (NASDAQ:GOOG) in China are required to employ many additional people to monitor and delete objectionable content, and taxes such as the recent maximum tariff of 105.4% on American chicken would diminish the profits of foreign businesses and make them less competitive in the local market.

Moreover, the tendency of the Chinese government to favor domestic businesses will limit opportunities for foreign entities. For example, foreign banks that have been eager to set their foot in the Chinese market were disappointed when many of the projects triggered by Beijing’s USD$586 billion stimulus plan were funded by the country’s large state-owned banks, essentially limiting foreign banks to doing business with mostly multinational companies or small and midsize local firms.

The National Development and Reform Commission, China’s top economic planning agency, had also ordered national, provincial and local government agencies to buy only Chinese-made products and allowed imports only when no suitable Chinese products were available as part of the stimulus program. Another example is the new China’s Postal Law that forbids foreign global express carriers like TNT, UPS, DHL, and FedEx (NYSE:FDX) from delivering express letters in China.

For people who still think that going into China is a sure bet, you may want to note that even big firms such as Yahoo! (NASDAQ:YHOO) and eBay Inc (NASDAQ:EBAY) have given up on the Chinese market after years of sluggish performance. Just yesterday the Financial Times reported that Google is “99.9% percent” sure of shutting down in China.

If you were to study Japan, you would see that most American firms that tried to set foot into the Japanese market during its boom time have failed miserably except probably for IBM and Boeing (NYSE:BA). While the fundamentals of Japan are widely different from China, the point is, doing business in a foreign country is often not easy. After all, just like China today, Japan was also a booming market that many foreign businesses had been drooling over in the 80s.

Despite the many obstacles to doing business in China, I am not saying that everyone should run for their lives. I would just caution investors to be cautiously optimistic when investing in companies that do business in China. Beware of the risks involved and understand that many companies may fail; but equally undeniable is the fact that enormous opportunities certainly exist in China and should be given due consideration by investors.

Disclosure: No positions

Source: 5 Myths About the Chinese Consumer