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China’s Booming Consumer Economy: An Opportunity for American Businesses

Not long ago, when American business leaders thought about doing business with China, their focus was on sourcing product or moving manufacturing operations offshore. But China’s fast-growing economy has opened up a whole new market for U.S. companies. This issue of Business Edge explores how midsize businesses are selling in China, as well as opportunities to expand into other Asian countries.

Understanding the Chinese market

"There is no question that China will be the world’s second largest economy sometime in the next decade," says Lakshman Krishnamurthi, A. Montgomery Ward Distinguished Professor of Marketing at Northwestern University’s Kellogg School of Management. "In purchasing power parity terms, China’s gross domestic product was estimated at $10 trillion in 2006, while the U.S. was at $13 trillion."

How has China’s economic growth affected consumer purchasing power? "The average 9% annual growth rate in the Chinese mainland since 1978 has helped the country’s per capita income to grow from $168 that year to $2,458 in 2007," says Anita Tang, managing director of Royal Roots Global Inc.

"Urbanization—building infrastructure, improving industrial production and encouraging consumer spending—makes China a bigger and more concentrated consumer market," Tang explains. "Through productivity development, China seeks to build a society of largely middle class families by 2020 with a per capita income of $3,000 in its 1.6 billion population."

China’s burgeoning consumer economy has created many new opportunities for U.S. companies willing to do their homework.

Why are U.S. goods attractive to the Chinese?

"For some companies, as recently as three years ago, it didn’t make as much sense for U.S. firms to sell into China," says John Tomaszewski, vice president of NaviAsia Consulting Group Inc. "But today, China’s growing middle class has more disposable income to buy American products. The adjustment to the U.S. dollar is also making American products more affordable for the Chinese."

Another advantage to U.S. marketers: the positive brand identity and image of American products. "U.S. goods are usually known as better-made, better-quality products," says Tomaszewski. "Especially in light of the problems such as lead paint, which China has had with its products—the identity with a foreign brand or product image is strong in China, and U.S. companies should play to this strength.

"Travelers going back to China are frequently asked to  carry some products bought in the U.S. to bring back to family members in China. That could be anything from baby food or vitamins to products, toys or clothes," Tomaszewski notes.

Don’t compete on price

"You don’t want to be competing in China based on price," Tomaszewski warns. "You want to compete based on image, quality and the service behind your products. If you ever went down the path of competing on price, China manufacturers can duplicate products, so there would always be a way to underbid you. 

"The key is to have select niche markets to participate in as a company," Tomaszewski explains. "But you have to marry your product with your overall assessment of internal capabilities of selling into China. For middle market companies, it takes years to create a brand name or image."

And it’s very important to create the right image from the start. "I had a client who was looking at selling some old inventory into China," Tomaszewski recalls. "But doing that would create a lower brand impression than being a high-quality food manufacturer from the U.S. The company saw an opportunity to gain revenue from old products by offloading them on the Chinese market. But if they did that, and later decided to further participate in the Chinese market at a higher-end value, they would wind up being discounted based on the initial ‘getting rid of old product’ mentality."

Consider the Chinese culture

Anita Tang stresses the importance of U.S. companies tailoring their business model to the habits and tastes of the Chinese people. 

Case in point: Pizza Hut vs. Domino’s Pizza. "Pizza Hut is extremely successful in China, but people don’t even know who Domino’s is," says Tang. "Why? Because Domino’s went into China with the exact same business model they use in the U.S.—they deliver huge pizzas.

“In China, families are small—so a household has one child, two parents and maybe the grandparents. Pizza is not a part of the Chinese diet; it’s a novelty,” Tang explains. “In China, if you have a Domino’s pizza delivered and can’t finish it, all your neighbors will want to come and try it—at your expense.

“Pizza Hut considered the local tastes and culture when they entered the Chinese market,” Tang explains. “They offer different flavors. They have smaller pizzas. They make going to Pizza Hut an experience. Perhaps the parents are taking their child there to try something new. And when Chinese people are dating, couples go to Pizza Hut and it’s an experience.

“U.S. products like Starbucks or Häagen-Dazs are very expensive in China,” Tang notes. “A pint of Häagen-Dazs sells for more than $10. You have to really study the markets in China because these companies are selling more than just a product; they’re selling a lifestyle.

“Procter & Gamble might not be selling the Sam’s Club size of shampoo in China. They’re more likely selling a one-time-use package because in the rural areas of China, people don’t wash their hair every day, and water isn’t readily available.

“If an American firm wants to go into a new market in the Far East, learn the culture,” Tang advises. “Learn the habits. Learn the income level. Then figure out a business model—including marketing—that can sell to your target market.”

Consumer education is often a key aspect of marketing in China. “I know a French marketer selling champagne in China,” says Tomaszewski. “His marketing strategy includes awareness-building on what champagne is and the experience of drinking it. The Chinese want that education; they want the prestige of being able to drink champagne.”
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.