Understanding Chinese Consumers

20131115_4After spending 15 years in North America, I returned home to China and found some fascinating phenomena.  A bottle of 2006 Penfolds Bin 389 cabernet, which costs $37 in the U.S., is about $77 in Beijing. Huggies diapers cost about the same in the U.S. and China, but the ones in China are of lower quality. Why are these global brands using different marketing strategies in the U.S. and China? Why did eBay, so successful in North America, fail miserably in China? The key to answer these and many other questions lies in the understanding of Chinese consumers, their characteristics, and their changing needs. 

Below are just a few considerations:
Chinese Consumers Are Price Sensitive, but Brand Conscious
Although this seems to be a puzzling mix, the price-sensitive but brand-conscious Chinese consumer reflects an important duality. Price wars occur on a regular basis. This is clearly hurting companies, but nobody can afford not to participate in a price war, as price is often the determining factor for Chinese consumers when making purchase decisions.
At the same time, the Chinese are very brand conscious, as is shown by their fondness of luxury brands. According to Bain & Co., the luxury sales market in greater China is expected to grow by 6-8% this year, to exceed $35B — making it second only to America.
Why are the Chinese price sensitive and brand conscious at the same time?  The key to understanding this puzzle is to appreciate the Chinese culture, where face and social status are crucial. If a brand can signal a higher social and/or economic status, Chinese consumers would be happy to pay a premium. If it doesn’t, they become very price sensitive.
For brands that can signal status, such as luxury watches and wine, the price is usually at least two times more in China than it is in the West. However, for brands that people use in private, and thus do not have the signaling function, MNCs are producing comparably priced items for the Chinese market, yet with lower quality than those sold in the West. Glad’s Press’n Seal plastic wrapping paper costs about the same in the U.S. and in China.  However, in China, you can press, but it doesn’t seal! In the short run, these global brands can still profit in China, but such a myopic strategy will eventually damage the brands as consumers in China become more informed.
There’s a Lack of Trust in China
EBay requires buyers to pay first and then wait for the item to be delivered. This model works in a society where the trust level is high. However, there is a serious lack of trust in China right now, so to ask buyers to pay first without seeing the product is a hard sell. That’s why eBay failed so miserably in China.  Taobao, on the other hand, came up with a different model. It introduced a third-party payment system, namely AliPay. Buyers will pay the money to this third-party account owned by Alibaba (Taobao’s holding company), and only after they have confirmed receiving the products, Alipay will transfer the money to the seller. This model effectively solved the trust issue, and was immediately successful.
Food safety is another big concern in China right now. For example, the Chinese do not trust local milk brands due to the notorious milk contamination incident in 2008. As a result, there is a high demand for foreign milk brands. In China, I pay double the price of what I used to pay for milk in North America.
China’s One-Child Policy Means Kids Play a Central Role
Due to the one-child policy, many young Chinese families now have one child surrounded by two parents, four grandparents, and often times a nanny and a driver. Thus, the entire industry providing kid-related services is growing at an unprecedented speed, and parents are usually much less price sensitive when buying for their kids than for themselves. For example, a one-hour art or sports class for a 4- to 10-year-old costs around RMB200 (about $33) in Beijing, a price much higher than what parents would be willing to pay for themselves. Similarly, Best-Learning English, an after-school program that has American teachers teach English to school-age kids, can cost up to RMB28,000 ($4,700) per year per child. And the demand is so high that the school now has six centers in Beijing alone, and 24 in China. Tuition at established international schools in Beijing costs twice as much as those in the West, yet the demand far exceeds the supply. Understanding what parents want for their kids, be it English education and creativity cultivation, would be crucial for MNCs to compete in China.
Chinese Consumers Are Becoming More Informed, More Sophisticated, and More Active
In 2012, Chinese took 83M foreign trips, up by 18.4% from the previous year. These experiences, along with technology development and social media channels, have helped Chinese consumers become more informed and sophisticated. For example, many Chinese travel overseas to buy branded products, as it is much cheaper than in China. Similarly, Chinese are now looking for subtler ways to signal their status by avoiding brands that have loud logos.
At the same time, Chinese consumers are becoming more active in protecting their rights. In 2011, some consumers discovered a problem with a Siemens refrigerator, and started to complain to the company. However, Siemens refused to acknowledge the problem at the beginning. Then Luo Yonghao, a celebrity in China, organized various activities to boycott the brand, which caused a crisis for Siemens, and they eventually had to acknowledge the mistake and apologize. But the damage had already been done.
China has changed.  It’s no longer just a place for companies to outsource their production. The market is big, diverse, and has tremendous potential. Thus, “Made in China” is being replaced by “Made for China”. In order to really thrive in this market, foreign companies have to truly understand the needs and changing characteristics of Chinese consumers, and build quality products and services to meet these needs.

Harvard Business Review - HBR
Understanding Chinese Consumers Understanding Chinese Consumers Reviewed by Unknown on Sunday, November 17, 2013 Rating: 5

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