We all know the numbers:

• China’s urban population now exceeds rural population
• Urban population expected to grow another 50% in 15 years
• China’s economy marches onward and past the US in size by 2025

I certainly don’t have anything to say that would counter these prognostications.  But there are two underlying assumptions that are worth teasing about a bit:

1. How does the rural population actually migrate to the city?
2. How do migrants contribute to meaningful consumption? Read More »

It started off innocently enough.  Back in the 1980’s when the first Special Economic Zones were established there were only a handful of places you even dared talk about as “consumer markets” in China.

As a modicum of affluence appeared in Shenzhen, Guangzhou, Shanghai and Beijing, companies began making more concerted marketing efforts on a market by market basis.

Deng Xiaoping’s “Southern Tour” in the fall of 1992  unleashed (or ratified) individual efforts across China focused on the pursuit of wealth.  Soon, some people were talking about more markets than they could count on two hands.  Impressive.

Somewhere along the line in the run up to the turn of the century, discussion of “Tiers” emerged to facilitate sharing of information and depth of market penetration.  Where you only spending media in Tier 1?  Was your product showing up in Tier 3?  This was merely shorthand for talking about the big four markets, the other provincial capitals, and the rest.

The problem is that the rest is actually some amalgam of 361 official cities, 2,811 couties, and 34,171 townships.  Over the first decade of this century, some MNC’s were actually seeing their brands reach every corner of the country.  Others were managing points of sale across hundreds of cities.

Despite the blunt tool, business executives were stuck with tiers to discuss their market coverage.  These conversations could be quite frustrating.  We might all agree on Tier 1, and maybe had an 80% overlap for Tier 2, but then your Tier 3 was different from mine.  You had a tier 4, I had a tier 5.

The reocognized disconnect was that each company’s “Tier” definition was different.  And if I needed to create a market expansion plan to grow from 30 markets to 100 markets, which 70 were supposed to be my priority.   Some efforts started to appear that attempted to index all the markets in China by certain economic statistics, but if you’ve ever worked with Chinese economic statistics you know how you felt about that.

Well, I think the new decade is finally bringing around some sound thinking about how to talk about China market coverage without putting up a list of 600 cities:  Clusters.  Most recently advanced rather publicly by McKinsey, the concept was already in practice as executives looked at the total market and preceived newly defined regions that did not adhere to provincial boundries or other traditional market maps.

The cluster approach won’t surprise any practioner.  Afterall, who would ignore a neigboring market that absorbed your media, was easy to distribute to, and spoke the same dialect as your sales team?  Just because it was indexed 40 spots lower?

Talk of Clusters recognized not the indexing of cities, but the interconnectedness of markets that emerged in the wake of rapid infrastructure development, personal car ownership, and the reach of the internet.  Manageable in number (less than 30) these geographicly defined areas offer scalabilty and reach to brands that need efficiency.  Tackling 31 provincial capitals at the same time offers none.

With Clusters, executives can dismiss with talk of cities.  They can focus on reachable populations within defined geographies.  The market becomes manageable again – almost intuitive.  Distribution centers, media spend, and trade marketing investments scale up better.  Focusing on three or four clusters is naturally simpler than focusing on 50 or 75 markets.

Clearly, I’m a fan of clusters.  I recommend you adopt it in China.  Like all good ideas, this one isn’t new, but it sure feels good when you use it in a new location for the first time.

CAN CHINA MANAGE “QUALTY GROWTH” IN 2012?

The start of the year always presents an opportunity to step back from the day-to-day news cycle and take stock of annual China market prognostications.  This year, I attended a forum put on by the National Committee for US-China Relations at the NYSE to gaze into the future.

With prominent economists and academicians visting from research institutions in Beijing, I welcomed the opportunity to hear subjective interpretations from individuals who actually advise the government & the Party.  Some of what was said was for market consumption, but I’m also aware that being right matters to individuals who seek to influence the direction of their country’s development.

GROWTH IN THE CONTEXT OF STABILITY

Amidst discussion of the housing market, local government finances, RMB valuation, and other topics, each of the economists found a way to mention the phrase “manageable problem” in the context of the dissappointing economic trends.  This optimism is mainly founded on the recognition that China has a significant amount of money to save its bankers, bail out politicians, or distribute funds to the poor.

And though I found myself wondering if China could handle a perfect storm, I recognized that those discussions weren’t new, China is keely aware of them, and there actually is a window within which they might course correct and avoid facing any financial turmoil.  So I merely noted the expressed confidence and set these issues aside for the day.

What I did keep returning to in my mind, however, was the rationale behind slow(er) growth targets.  China used to seek growth targets of 8 to 9 percent in order to absorb its ever increasing labor supply.  Now, even 7% growth in GDP appears tolerable.  Not only has the labor market tightened, but higher growth rates appear to stimulate even faster rates of environmental degredation.  A lower rate of growth is not only acceptable, but the economists felt it enables the government & the Party to address quality of life concerns widely held by the emerging middle class.

There is an important subtext to this dynamic – political stability.  If the middle class believes in a better future, and the poor believe in that same future while having access to social services in the present, then stability will largely reign across the country.  As stability equates to leadership continuity, it is not a surprise that dealing with the satsifaction of the majority of its citizenry is a higher priority for the Party than whether or not someone needs a bailout.

As we enter this election year in the US, it is worth remembering that it is also a transition year for China – only the second formal leadership transition since the founding of the PRC.  In the year leading up to it, and for the year afterward as power consolidates around the new General Secretary/President, matters of internal stability will take precedence.   In the interim, I wouldn’t expect radical economic policy changes unless the Party was supremely confident in the outcome.

QUOTES & MATERIALS FROM THE FORUM

I’ve offered up some quotes of note from the day.  You can see some of presenters materials here.

“Our accepted estimates of national debt as a % of GDP is 50%. Outside pessimists place it at 60%. But that would still make us a good EU Member if our application was accepted [jokingly said]. Frankly, as a policy we are more concerned with income inequality than our current debt management.”

- Professor WU Ho-Mou Exec Dean of National School of Development at Peking Univ.

“Our estimates by quantile for Household Income show a that the top 10% earn 93 times what the bottom 10% earn. An income range of 613RMB-19,000 covers 90% of the population. An average of 30,000RMB covers the next 5% and an average of 75,000 RMB covers the final 5%. Overall, the top 20% account for almost all the savings.”

- Prof. YAO Yang, National School for Development at Peking Univ.

“Current inventory of unsold residential property estimated at 14 months. Therefore slight softening of housing prices predicted in first half of 2012. M&A among developers likely. Building (starts/re-starts) likely to pick-up in second half.”

- Prof. ZUO Xiaolei , Advisor to the President, China Galaxy Securities

“Economic stress test conducted: if a total of 15% of outstanding developer loans become non-performing & 7.5% of personal mortgages default, the GDP CAR impact would be about 1% point. “Manageable”.”

- Prof. ZUO Xiaolei , Advisor to the President, China Galaxy Securities

“Remember, home ownership in China is at 90%, but the majority of that was housing allocated to citizens during the reform of State-Owned-Enterprises. So the majority of Chinese seek to upgrade from existing “owned” homes.”

- Prof. HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)

“We expect to see / want to see Real Estate drop below and stay below 10% of GDP (9.9% last quarter). We are watching for an overall price correction of about 20% to trigger consumer demand and stabilize price drop, but we don’t know what the bottom will be.”

- Prof. YU Yongding, Chinese Academy of Social Sciences

“As for purchases of homes, the new requirements of 60% down-payment makes us feel better about consumer defaults because the banks won’t lose principal. But you might ask how does a person earning on average $5,000 a year afford a home. Refer back to hidden income speculation.”

- Prof. YU Yongding, Chinese Academy of Social Sciences

“Systemic under-reporting in the National Statistics – especially at the high end with one estimate showing 90% under-reporting in the top decile.”

- Prof HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)

“Retail sales under-report consumption because of system errors and neglect of service sector. Household Survey reports 13 Trillion (RMB) in income, but National Accounts show 18 Trillion (RMB) – maybe as high as 23 Trillion by some estimates if other off book income is considered.”

- Prof. HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)