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Home >About Us >Media >Publications >bulletin >bulletin online >Content >2010 >4/10 - Consumption
4/10 - Consumption

China's Great Thirst for Luxury

Martin Regnet, Journalist

18.10.2010 In Shanghai, the People's Republic of China has long since transformed itself into an opulent consumer paradise. For the luxury brands of the world, China is now a veritable gold mine. That's because the Chinese, more image-aware and individualistic than ever before, have a weakness for brand products.


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Chinese Consumers Are Craving for Luxury Goods
Sunday in Shanghai. Ultramodern architecture and the brands of the world sit comfortably side by side in the Super Brand Mall. On a Sunday afternoon, people elsewhere might be lazily reading a book or going for a walk. But in the glamorous malls of Shanghai, it's all about shopping. Shortly after 1 p.m., the first wave of consumers move on from their lunch to this retailing temple, where shops stay open until 9 p.m. Shopping in China is very much a family experience. Indeed, for a growing number of fashionistas, shopping is actually a leisure pursuit to which the weekend is dedicated. The idea of going "gòuwù" – shopping – alone is alien to the Chinese. Material fortune is something to be shared with relatives and friends.

Splash Out on That Pricey Nokia, Pinch Pennies on Veggies
Although China has a per capita income of only around 6,600 US dollars a year, even those on only a modest income will not hesitate to splash out on high-end products. Indulging in luxury is something that is found across all strata of urban society. It is not uncommon for a taxi driver who gets by on fairly limited earnings of 4,000 yuan (around 700 dollars) a month to nonetheless possess the very latest Nokia mobile phone in the upper price segment. Consumption is done differently here, as is thrift – which might manifest itself in day-to-day haggling with vegetable traders, for example.

Shopping is writ large in Shanghai like in no other Chinese city. Here the country is already experiencing what will probably become reality all over the country in 10 years' time: a consumer boom. While Beijing has a reputation for rather conservative political lobbying and Guangzhou has turned itself into the leading center of industrial production, Shanghai has used the Chinese economic miracle to establish itself at the forefront of consumerism. It is from Shanghai that almost all the retail industry's global players have driven forward their Chinese expansion strategies. And nor do they look out of place – every imaginable international brand looks like it belongs in this metropolis on the Huangpu River, a city that is also home to the tallest buildings in China, the Chinese stock exchange, the world's second-largest port, two airports, a Formula One race circuit and Expo 2010.

Successful? Then Show It!
For the rich to flaunt their wealth is not vulgar but chic in China. This is readily confirmed by Jim Siano, CEO Asia Pacific of the luxury brand Montblanc: "Our clients are often entrepreneurs or company executives who are typically better educated than most of their fellow countrymen. But Chinese consumers generally have come a long way." While high prices may conflict with China's reputation as a country producing cheap goods, they certainly don't act as a bar to the Chinese consumer. Quite the opposite: "In the last 20 years, Chinese consumers have spent a significant proportion of their monthly income on luxury products. High-quality luxury goods are truly prized in China," observes Siano, a New Yorker by birth who has been scrutinizing the Chinese consumer intensively for the last two decades. Siano is impressed by the level of detail that the Chinese consumer will go to before purchasing a brand product: "For the Chinese, the origin of a product is very important, as is the brand and its history. They'll do lots of research in order to learn more about the background – what a name stands for, where the strengths of a product lie – and only then will they make their buying decision."

The Rich Get Much Richer
An increasing number of Chinese can easily afford luxury articles like the watches, pens and leather goods that are sold by Montblanc in its 95 Chinese stores. The richest 10 percent of households in this country have experienced a quantum leap in wealth over the last few years. On average they currently earn 255 percent more than they did in 2005, and now account for more than 35 percent of the total income of all Chinese households, although it is also true that almost all Chinese are better off than they were a few years ago. For the world's luxury brands, the affluent Chinese represent a target group that is now increasingly exercising a decisive influence on the global market for high-end consumer goods. Jim Siano reaffirms the point: "Our store in Shanghai's CITIC Square has been the largest of any of our stores in the world since it was opened in 2008. However, we are now planning to increase the size of this outlet threefold." An important factor for brand consumers is also the choice of location: "The Chinese luxury goods market is seeing a major drive toward much larger stores at leading retail locations. I'm expecting much more competition in the retail industry, and between operators of shopping malls as well as between brands."

Even the financial situation of Chinese in the lower income brackets is undergoing "moderate growth." The poorest 20 percent now earn more than half as much again as they did in 2005. Those in the middle income brackets have seen their earnings rise by 98 percent over the same period, i.e. virtually doubling.

Little Emperors to Leave Their Mark on Consumption Patterns
This trend is likely to continue, as the savings rate in China is falling rapidly. Whereas consumers were still saving 26 percent of their income back in 2004, the proportion of income set aside had declined to just 12 percent in 2009, as established by the Consumer Survey of Credit Suisse.

Consumption has a major future in China: As a result of the birth control policy introduced in 1980, the vast majority of Chinese under the age of 30 are single children. The Chinese born in the 1980s and 1990s grew up as the focal point of attention for their family, and are now accordingly being targeted by brand producers as high-spending consumers with serious purchasing power. This generation of "Little Emperors" – as they are termed in Chinese – has enjoyed the strongest growth in income over the last three years, a position they will maintain over the next three years too.

Mobility and Urbanization as Growth Drivers
China's real estate market is currently one of the world's "hottest," particularly in high-earning cities such as Shanghai and Beijing. One of the major drivers of the Chinese economic boom is the procurement and fitting-out of residential property. Urbanization is proceeding at breakneck speed in Zhongguo, or the "Middle Kingdom," as the Chinese frequently term their own country: Credit Suisse is anticipating an annual growth rate in urbanization of 0.8 percent. This means that the 46 percent of Chinese who lived in urban areas in 2009 will rise to 60 percent by 2030. Dramatic growth is expected in the medium-sized cities of central and western China in particular. In other words, some 190 million new Chinese urban residents will have to be provided for in terms of both infrastructure and residential space. Analysts at Credit Suisse are convinced that it is precisely these "new urban dwellers" who will drive the boom in consumption. This also goes hand in hand with the Chinese government's goal of increasing domestic demand so as to reduce the country's dependency on exports.

The result? Another massive surge in Chinese consumption. Dong Tao, an economist at Credit Suisse, expects this to undergo a quantum leap from 1.7 trillion dollars this year to 15.9 trillion dollars by 2020. This would see China increase its proportion of global consumption from 5.2 percent in 2009 to 23.1 percent in 2020, thereby leapfrogging the US to become the world's largest consumer market.

Audi Selling More New Cars in China Than in Germany
In a number of areas, the future is already very much in evidence. For example, China's automotive market is already the world's largest in terms of numbers of units. Since 2004, the proportion of households owning a car has risen from 12 to 28 percent, i.e. more than doubling. But this proportion is set to rise further. In the Credit Suisse Consumer Survey 2009, around 35 percent of households responded that they were either "definitely" or "probably" going to buy a new car within the next three years. For foreign automotive manufacturers, China is now the ultimate growth market, something that applies to German car brands above all. In the first five months of this year, Volkswagen Group China sold some 778,000 vehicles, a 48 percent rise on the record year of 2009. Plans for the construction of the tenth Volkswagen factory in the Middle Kingdom – in the city of Foshan in the Pearl River Delta – are already at an advanced stage. In the first half of 2010, Audi sold around 109,800 cars in China, 2,000 more than in its domestic market. BMW has enjoyed sales growth of some 100 percent in the first six months of this year. German manufacturers will gladly meet special requests of their Chinese customers, for example their preference for a significantly elongated wheelbase. Upmarket brands such as Porsche are likewise increasingly focusing on their Chinese customer base: In 2009, the company chose to unveil its Panamera model at Auto China in Shanghai.

Domestic Brands Catching Up
Similar trends are also apparent in the markets for flat-screen televisions and notebook PCs. Consumer interest in both products has risen continuously over the last few years. Where the former is concerned, Chinese consumers are latching on to the high-end segment with screens of between 37 and 45 inches, with a strong trend toward higher specification evident here too.

Although many Chinese brands have become increasingly accepted and their market share has risen, particularly in the last two years, international brands remain exceptionally popular: In particular, the great advantage held by foreign brands has been maintained in the area of technologically sophisticated products and luxury goods. Where fast-moving consumer goods such as food, drink and cosmetic products are concerned, foreign and domestic manufacturers appear to be running neck and neck. However, Chinese companies have a much stronger position in sectors such as the Internet and travel, a situation partly explained by the market barriers faced by new entrants.
Rural Population Participating in Growth to Only a Limited Degree
The boom also has its negative aspects. Today's Chinese consumers show much less interest in issues such as sustainability and social responsibility than their Western counterparts. When it comes to energy efficiency in manufacturing, China still lags far behind international standards. Water and air pollution levels are often considerable. The rural population as well as the western, northeastern and central provinces of the country are participating in this growth to only a limited degree. Within the developing regions, too, the gulf between rich and poor can often be immense.

Nor is the rest of the world immune to the negative aspects of the Chinese consumer boom. China's hunger for raw materials is already resulting in a number of market distortions. The export of valuable ground resources – such as "rare earths," for example, which are particularly important in high-technology industries – has recently been restricted. This is having a dislocating impact on entire industry sectors. China also now occupies a leading position as an emitter of greenhouse gases. Last but not least, China continues to be reproached for a currency manipulation policy that critics claim gives the country an unfair competitive advantage.

These problems notwithstanding, most Western manufacturers, investors and employers are hoping that the surge in Chinese consumption will maintain its strong momentum, and that the escalators of consumer temples such as the Super Brand Mall in Shanghai will remain packed with shopaholics. And not just on Sunday afternoons.
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