Many analysts argue that Chinese
consumers are conservative spenders and not willing to buy on credit or
engage in e-commerce. The numbers initially seem to support such arguments
as China's household savings rate sits at 40% vs. less than 1% in the U.S.
Credit-card penetration is low, with fewer than 50 million cards in
circulation for an emerging middle class of 250 million.
While China's Internet users will hit
more than 140 million by the middle of 2007 and will overtake the U.S. as
the largest group within the next few years, critics believe that
e-commerce will never take off here because, as a matter of culture,
Chinese do not like it. But do these numbers and conclusions incorporate
the seismic shifts in consumer habits in China that have been taking place
in the last decade? The answer is a resounding no.
These skeptics fail to look at the
changing demographics of China's consumers. Sales are now being led by a
younger generation that is willing to buy on credit and shop online. In
surveys and interviews that the China Market Research Group conducted with
Chinese youth between the ages of 18 and 28 in Shanghai, Beijing, and
Guangzhou, more than 80% said they were willing to buy items online and
over 70% said they would use a credit card if they could.
Baby-Boomer Optimism
The results indicate that old
stereotypes of Chinese consumers stuffing yuan under their mattresses can
no longer be attributed to the increasingly well-off middle-class Chinese
youth segment. This bodes well for multinational companies that hope to
tap into China's fever for Web 2.0 and e-commerce.
It is true that older generations of
Chinese do save a lot—many have lost their pensions and are worried
about paying skyrocketing medical costs. Most economists look at these age
groups and argue that China's economy will have problems in the future if
the government cannot jump-start consumer spending.
However, many of these economists have
been far too simplistic in their analysis of the future of China's
household savings rates in the coming decades. Consumption patterns are
very different for Chinese born after 1978—China's baby boomers. They
have experienced 30 years of economic growth and political stability
similar to those born during the post-World War II years in the U.S.
Wearing the Wealth
Our surveys show that Chinese between
the ages of 18 and 28 save very little or actually buy on credit because
they are so optimistic about China's economy and their own earnings
potential. Their salaries are regularly increasing 25% a year as the
competition for even junior talent is fierce and they job-hop like
mercenaries.
These young professionals want to show
their status in the workplace and spend nearly all of their salary on
items such as Nokia mobile phones, Zara clothing, and Estée Lauder
cosmetics. In focus groups we conducted in Beijing, we found that more
than 70% of young women making between $500 and $2,000 a month expected to
travel to Hong Kong and/or Thailand in the next three years.
Instead of running up bills on a
MasterCard or American Express the way consumers in the U.S. do, Chinese
youth finance their lives of leisure by borrowing from their parents and
grandparents. Having experienced the bitterness of the
Communist-Nationalist Civil War and the Cultural Revolution, older Chinese
are determined to see their children (almost always their only child)
happy and want to live vicariously through them, and therefore shower them
with money.
Credit-Card Culture
Chinese youth overwhelmingly want
credit cards. To date there are fewer than 50 million credit cards in
China compared with more than 1.1 billion debit cards. However, 2006 saw
the addition of 15.6 million credit cards and 200 million debit cards, so
more and more Chinese are adopting credit cards.
This is a big jump from 2004 when only
10 million cards were in circulation. The trend will continue as the
Chinese banks up their services to compete with the onslaught of foreign
banks such as Citigroup and HSBC that are bulking up their offerings in
China due to liberalized regulations.
The No. 1 reason so few people have
credit cards, according to our findings, is not that they do not want one
but that it is simply too difficult for the average Chinese person to get
approved for one. They have to spend far too long dealing with an
inefficient system of credit checks and subpar service, where consumers
regularly have to wait in two-hour-long queues to see a teller, unless
they have VIP cards.
Keep It at Home
Another problem is that even if you do
get your hands on a credit card, domestic cards still lack viable credit
limits because of weak risk-management departments. We interviewed one
wealthy Chinese man who charges more than $1 million a year on his
international American Express card but cannot get a Chinese credit card
with a credit limit of more than $20,000. And even that comparatively high
limit was only possible because he knows the chairman of the bank
personally and has built up trust through transactions involving his
company.
Chinese banks are also pushing to issue
more credit cards to stave off flocks of Chinese shifting their money to
foreign lenders. The state-owned China Daily newspaper
conducted an online poll that showed 57% of Chinese wanted to switch their
savings to foreign banks once they are able to in March. Chinese banks are
continuing to reform and see credit cards as an important component of
their futures if they want to compete on an international level.
The Industrial and Commercial Bank of
China and Bank of China have each issued 10 million credit cards to date
and market leader China Merchants is pushing hard to develop credit cards
for use in online transactions. China Merchants has done more than any
other Chinese bank to come up with co-branded credit cards for use by
Chinese consumers—especially younger consumers. To date, China Merchants
has forged relationships with Young Card, Bertelsmann, Rayli, Hello Kitty,
MSN mini, Ctrip , Air China, and China Southern to name a few.
Virtual Money
The rise of virtual currency used in
online gaming environments in China shows that Chinese youth love
e-commerce—if taking part is convenient. Because of the lack of credit
cards in circulation, for many Chinese consumers the first introduction to
e-commerce comes through the use of virtual currency. Several hundred
million dollars' worth of virtual currency was purchased last year, and
the size of the virtual currency market is growing 30% annually.
The numbers have become so large that
the Chinese government has issued warnings about the effect virtual
currency can have on China's financial stability by causing money supply
problems, inflation, and avenues for money laundering.
Millions of Chinese youth are spending
hours each week playing online games, writing blogs, chatting through
instant-messaging services such as QQ, and streaming music from portals
such as Baidu.com . To facilitate online transactions and retain active
users, many of these Internet sites have minted virtual currency that can
be exchanged for goods and services.
Chinese netizens like virtual currency
because acquiring some does not require a credit card or even a bank
account. Tencent, the provider of the leading QQ instant-messaging service
and leading online game host, is China's virtual-currency leader. Its
customers can purchase Q-coins using cash, through mobile-phone cards
offered in tandem with China Mobile, or up until recently, by winning the
coins in online gaming competitions.
eBay vs. Taobao
The coins, which are purchased at a
rate of one Q-coin to one yuan, are valuable to online consumers as they
can be used to purchase ringtones, use antivirus software, send e-cards,
and in some cases buy tangible goods. When one combines the Q-coins with
similar offerings from Netease.com, Baidu, and Sina, the virtual-currency
market becomes a power that can influence China's financial markets.
Although eBay did not do well in China,
e-commerce is booming. Many Chinese are going to online auction sites and
stores in search of broader product selection or better deals than they
can find around town, and every year more and more Chinese are flocking to
online auction sites such as Alibaba's Taobao or online sellers such as
dangdang.com and Amazon subsidiary Joyo.com to buy products and services.
The aggregate of all online
transactions in China is impressive. Last year, the total value of all
online transactions, both business and consumer, soared to $127.5 billion,
up from $85 billion in 2005. The consumer side represented a fairly small
portion of this amount, but with an estimated 50 million Chinese engaged
in e-commerce, growth is extremely promising.
Credit Grows Commerce
As more credit cards are adopted,
then e-commerce will continue to grow. The demand is there, as shown by
the eager adoption of virtual currency. China's banks have to catch up to
the demand by issuing more credit cards. Multinational companies that can
integrate e-commerce processes to tap into China's emerging middle class
will do well. - BUSINESS
WEEK 2007
According to the latest
research from luxury thinktank L2, based at New York University,
founder Scott Galloway said in an interview
with Bloomberg TV, “when you look at the sheer size of incremental
revenue that the Chinese market offers, especially online, you could hit
singles in every market, but as long as you connect with the ball in
China, your shareholders are going to be just fine.”
Percent of Luxury Consumers
under 45 | Source: NYU Stern
The numbers are staggering. Galloway
and his team report that 840 million people will be online in China three
years from now, which means there will be more people online in China than
the US, Europe and Japan combined. More than 80 percent of Chinese luxury
consumers will be under the age of 45, a digitally savvy, voracious online
consumer.
“You couple that kind of growth
online with the fact that you have a younger more digitally native
consumer, and you have the largest channel anywhere…for luxury goods,
the online channel in China might be the biggest market worldwide in five
to ten years,” says Galloway, with a luxury market growing at 15 percent.