As Incomes Rise, Local Chinese Brands Vie for a Piece of the Market

China's leaders called in November for average personal incomes in the nation to double by 2020, giving domestic consumption a stronger role the normally export-reliant economy and challenging often-avoided local brands to catch up with foreign rivals.

Chinese President Hu Jintao said at the 18th National Communist Party of China Congress in Beijing that he wanted incomes to grow from an average of US$4,940 per year. The $5.87 trillion GDP of 2010 should also double by 2020, Hu added.

Those goals could give new momentum to Chinese brands that now struggle to gain the confidence of domestic consumers, who tend to prefer overseas competitors as long as money allows. Consumers see foreign brands as more durable, more functional and higher status. Domestic companies that market researchers consider most likely to succeed include PC maker Lenovo, milk processor China Mengniu Dairy, sports apparel maker Li Ning and Internet content provider Sina-Weibo.

Whoever vies best with foreign brands must understand the unique agenda of China's consumers, analysts say. One condition: The Chinese brands that will be popular in the future probably already have some sort of an edge in the domestic market -- and the companies will need it to reach the scale of overseas rivals. "Domestic brands, unless they're already established, their rate of growth isn't going to be that significant," notes Buck Pei, associate dean of Asia programs at the W.P. Carey School of Business at the University of Arizona.

Local sellers should also hold prices below their foreign peers while proving that their products are made to last, analysts add. Consumers tend to fear knockoffs -- which is common, for example, with manyelectronics. Since China's tainted milk powder scam in 2009, many have also been wary of domestic food brands. "By 2020, you will see a Chinese consumer who, if not necessarily more sophisticated, will be buying higher-quality products," says Saurabh Sharma, planning partner at Ogilvy & Mather Advertising in Beijing.

Today, Sharma adds, Chinese consumers can "buy a tablet PC for 200 yuan (US$32). Its screen might not be too great and battery life not that long, but it's still a tablet." Some local wares also do not carry brand labels. "People [continue to] buy counterfeits, buy fakes and buy cheaper products because it's the best compromise they can make," Sharma notes. However, with increased incomes, that's likely to change. "Once money is not a constraint, you go for the very, very best."

Meeting Local Tastes

Enduring Chinese brands may start out with a regional focus, say in a single Chinese province, and air television commercials to generate familiarity that leads to word-of-mouth marketing, notes Hurst Lin, general partner with the venture capital firm DCM. Companies with known brands today regularly advertise on television, on billboards and even on the backs of train seats.

Sales of items that match local culture, rather than international consumption patterns, will do especially well, Lin says. Examples of this include tea-based drinks and traditional medicines. "As consumers become wealthier, they will shop for these well-localized brands," Lin notes, suggesting that a multinational drink maker might not have the bandwidth or inclination consider one country's individual tastes when trying to sell all over the world. "And as Chinese form taste preferences that are defined by the indigenous culture, local companies will have an advantage."

Sellers should also take into account urbanization -- about 51% of the population today lives in cities -- market analysts say. Urbanization comes with a faster pace of life that is stimulating fast food and hypermarket shopping as well as more reliance on mobile computers. About half a billion Chinese are online, many of them using the Internet (usually by mobile phone) to look for restaurants or go bargain hunting, according to a 2012 Nielsen report.

The Nielsen report also noted that Chinese consumers tend to show little store loyalty and may scan whatever is out there for low prices, bulk buys and promotions. "Today's consumer is willing to pay a higher price for certain goods if the value proposition is there," the report states. "The days of simply opening another store as a sure-fire way of driving growth are gone."

Buyers with enough money increasingly go for premium brands, sometimes to avoid the quality risks of a local equivalent and sometimes for status. "Consumption has started to shift from quantity to quality, unbranded to branded," says Weyman Gong, principal at Signature, a U.S.-based wealth management firm.

China's aging population may also influence buying decisions, albeit in ways that are yet to be determined. The number of people over age 60 will increase from 12.5% in 2010 to 20% in 2020 and by 2030, double from today's 178 million, according to Bryan Batson, president of the China Business Group consultancy in the United States.

The Government's Ambitions

The goals set forth by the Chinese government are usually met, at least on paper, and Beijing is keen to add to the wealth of common people.

Management consulting firm McKinsey & Co. forecasts that the number of households with a purchasing power parity income of more than $100,000 or more per year will rise from 1.6 million in 2008 to 4.4 million in 2015. China would have the world's fourth-largest concentration of wealthy people after the United States, the United Kingdom and Japan, Batson says.

As wealth grows, sometimes through state-driven poverty relief programs, officials in Beijing hope to depend less on manufactured exports because global economic slumps threaten demand for those assembly-line goods in the West. Some foreign-owned factories have also picked cheaper sites in South or Southeast Asia due to rising labor and production costs in China.

Domestic consumption slid from more than 60% of GDP in the 1990s to 37.3% in 2010, according to the International Monetary Fund. But it jumped back to 51.6% in 2011. The odds are still against local brands today, however, as Chinese consumers proudly buy foreign mobile phones, laptops, clothes and cosmetics. For expensive purchases, they look to labels from Europe, Japan, South Korea and the United States."I don't like domestic brands and don't think any of them are worth promoting," says Qian Xue, 29, a middle-class Shanghai office worker with a Dell laptop and Samsung phone.

The preference for foreign brands is clearest in Hong Kong, where most of the 28.1 million visitors from mainland China in 2011 were making the trip to shop. Hong Kong visitors often plan purchases, rationing an average of $1,548 per trip, Nielsen said in a separate 2012 report. Cosmetics make up 33% of mainland consumers' purchases in Hong Kong, Nielsen noted, while electronics including cameras came to 22%, clothing 22% and jewelry 17%.

Mainland shoppers in Hong Kong often stand in lines of 10 to 20 people outside fashion stores on Canton Road checking out clothes or bags by Gucci, Hermes and Prada. Some buy Nestle milk products, which are considered free of contaminants. Foreign brands are cheaper in Hong Kong than in much of mainland China for lack of a sales tax, merchants in the territory point out. There's also less risk of buying fakes.

China has no design to squelch foreign brands, but leaders at the Party congress pledged to build up China's smaller companies. Boosting the role of domestic spending in China's $7.4 trillion economy has also been enshrined in the 2011-2015 Five-Year Plan, an economic development blueprint. Along those lines, domestic investment in China grew about 20% each month from August to October 2012, National Development and Reform Commission Chairman Zhang Ping told the Congress on November 10.

But will the government's moves to boost domestic sellers be enough to sway Chinese consumers? Some experts predict that the tide will eventually change in favor of local brands.  In a recent China Knowledge@Wharton story about Estee Lauder Companies' launch of a new skincare product line in China called Osiao, Wharton marketing professor John Zhang noted: "Up to this point, Chinese consumers worship anything Western, especially in cosmetics. However, at some point in the future, Chinese customers will become more rational, they will want to go back to their roots, they will value their own heritage and they will want the things that are good specifically for them. When that day comes, pure Western brands will lose their luster.”

Knowledge@Wharton