The rise of the Chinese middle class is anything but middle.

Working Paper No. 12

Why the biggest middle class ever is emerging in China and how they redefine what middle class is.

The typical emerging market customer has long been studied thoroughly in international marketing. It has generally been concluded that they are young, work and study hard, have a positive outlook on the future seeing their economy grow, but would not be likely to reach more than USD 35 K yearly income in their lifetime. They also have lots of first experiences in their life (Silvester): they are often the first in their family to own a washing machine, a microwave or use hair conditioner. We also learnt that traditional marketing techniques like sampling and coupons can work well for them.

In the past decades, however, we came to experience an emerging new trend: the rise of a brand savvy, westernised middle class particularly in China and as a result, we need to redefine how we think about emerging market customers. The growing Chinese middle class is extremely unique in many ways. First, they are a force to be reckoned with: their number is expected to increase from 430 to 780 million by the mid-2020s with those earning over USD 35K+ jump from 18 to 38 million during that period. (Mc Kinsey). Second, their relationship with brands is fascinating: having grown up in an era of „shanzhai” (counterfeit culture in China), they perceive brands quite differently. However, when it comes to the business of luxury worldwide, 90% of the total growth of personal luxury product sales came from China in 2019 (Bain and Co) particularly from middle class Chinese females.  Third, the Chinese government’s China 2025 strategy is having a profound impact on their power and wealth.  Let’s have a closer look at these three developments.

One consumer, seven pockets.

Obviously, 780 million people cannot be treated as a homogenous mass. The mass affluent consumers (earning approx. USD 29K) will rise the fastest and by 2030 they are expected to take up 45% of all population in Mainland China- a staggering increase from merely 2% in 2010 (McKinsey) and bringing about massive changes in society. At the same time, there is the emergence of the so-called „seven pocket customers” who benefit from the wealth of four grandparents, two parents, plus their own income (also thanks to the one-child policy). (Rambourg).  This purchasing power used to desire mostly „Western” brands, but this is no longer the case. Almost 10 years ago, the top 9 out of the 10 brands for in China were Western ones. By 2020, only one made it to the top: Dove. (YouGov). According to Young and Rubicam’s BAV (Brand Asset Valuator), the Chinese customers look at the Western world and its brand as old and tired: German and Japanese engineering and  luxury companies are perceived favourably only. (Silvester) They increasingly shop online and buy local products, and the online customer experience of Chinese retailers  like Zaful and SheIn surpass  those of most Western competitors.

Long gone is the time when spending was about primary needs like food and accommodation for the middle classes. The consumption of high-end products increase sharply, the demand for entertainment, restaurants, travel, and luxury purchases are on the up.  The new emerging middle class do not compare themselves to other Chinese consumers: they think of themselves as cosmopolitans.

From faking Paris to overtaking Paris

By 2025 (Rambourg), 50% of luxury customers are predicted to come from mainland China (in 2019, it was 38%), as the rising Chinese middle class has an increasing fondness for genuine luxury.

 „Shanzai” is a very well-known concept in China. The word originally means a place that is devoid of any rule or authority and is occupied by outlaws. In everyday language it is used for something that is a fake or a counterfeit.  The shanzai industry started to proliferate during the cultural revolution in China.  There has for example been a range of mobile phones by the names of Nokir, Samsing,Suni-Ericcsun that looked  almost like the original, for the fraction of the price. Telecommunications show a great range of shanzai ingenuity like a company that was named Harvard Communications with a spokesperson called Obama advertising a phone called BlockBerry9500 with a slogan: „This is my BlackBerry!”  (Yu Hua) There has been a wide range of shanzai products in electronics, food, medications, detergents, and even pop stars. Sociologists claim that the shanzai is the manifestation of  the fight between the lower  and the upper classes, the official and the unofficial. In terms of branding, it has made counterfeit acceptable and part of the culture in a way, a symbol of yearning for better. At the same time, it shows us that there has always been a desire for Western style brands, and this also partly explains the Chinese middle class’ desire for real luxury as soon as they are able to afford it.  In 2014 it cost 45% more in Shanghai than in Milan or Paris (Rambourg) to purchase luxury goods, nowadays the price gap is half as that thanks to lowering import duties and VAT. Thanks to this and the travel restrictions due to Covid, Chinese customers tend to shop for luxury increasingly at home resulting in growing  retail profitability.

 While Chinese brands gain popularity in consumer goods and electronics, Western brands still dominate the luxury market, partly as there are no viable alternatives-yet. Entry level luxury like watches and handbags sell extremely well, with the typical customer being middle class and female.  We can see established luxury brands tailoring their design and in case of Burberry, even compromising their (very British) heritage in favour of conquering the young Chinese customers.

Finally, when it comes luxury, we must not forget the strengthening effect of the confucianist culture of „guanxi”- the relationships you develop with your family, friends and colleagues in which luxury gifts are validation points, just like Dend Xiaoping’s „to get rich is glorious” motto. (Rambourg)

Pushing brand China

In the meantime, the Chinese government is actively working on shifting the image of China from being the production plant of the world to a high-tech  savvy,  innovative,  brand-driven powerhouse. One of the main objectives is to increase the domestic content of the products to 70% and gain more traction in innovation-driven high-tech industries.  The government also aims to improve and create Chinese brands, and at the end of day, redefine the meaning of „Made in China”. As a response to Covid, the budget of the initiative got increased by an additional 1,4 TR USD. This will undoubtedly have a profound effect on establishing further the professional middle class in China with increasing wealth and more sophisticated brand choices. 

After this radical redefinition of what emerging market middle class is and can be, it will be interesting to see what other cultural standards that we take for granted change next. For now, marketers are better to keep a very open eye on China and gain further insights about this powerful new segment.

Sources:

Erwan Rambourg: Future Luxe, 2020 Figure 1 Publishing, Canada

Yu Hua: China is Ten Words, 2011 Random House Publishing Group

Simon Silvester: The World Order of Global Brands, 2011 www.marketingsociety.com

McKinsey: China and the World-Inside the Dynamics of a Changing Relationship

Bain and Co: China’s Unstoppable 2020 Luxury Market

https://www.bain.com/insights/chinas-unstoppable-2020-luxury-market/

https://wwd.com/business-news/business-features/bain-china-luxury-forecast-1234679338/

The future of luxury https://www.bain.com/insights/the-future-of-luxury-bouncing-back-from-covid-19/

Most popular brands for Chinese Women  https://marketingtochina.com/popular-brands-chinese-women/