Amid much discussion about rising labor costs in China, and debates about whether it’s now better to consider re-shoring or near-shoring to perhaps Mexico, it’s important to remember that China isn’t just a source of labor. Indeed, it’s also a quickly growing market.
So, for instance, Trevor Miles had an interesting post yesterday, in which he wrote that from a supply chain perspective, the question that needs to be discussed isn’t “How do we get goods to the West from China?” but instead, is “How do we design, market, and manufacture goods to satisfy demand in China and India?”
Just how large is this potential Chinese market? A Knowledge@Wharton article from the Wharton School of the University of Pennsylvania, explains that a quarter of a billion people have migrated from the countryside to the cities of China in the last 25 years, and rising incomes are now driving the expansion of the middle class. Thanks to SupplyChainBrain, by the way, for leading me to the article—which goes on to say that by 2025, China’s middle class is expected to number 612 million, or 76 percent of the population. That will be up from 43 percent in 2006, according to the McKinsey Global Institute. Eventually, that segment will be spending an ever greater portion of their annual income in stores, says McKinsey.
Many of the changes taking place in China are common results of rapid industrialization. For example, rising incomes, urban living, better education, postponed life stages, and greater mobility are exactly the types of changes that took place in Japan during the 1950s and 1960s, and in South Korea and Taiwan during the 1980s.
Interestingly, until now, multinational companies operating in China faced a choice: to target only mainstream and affluent consumers or to stretch the brand to serve the value segment of the population who have a lower amount of disposable income, says a CFO.com article that originally ran on McKinsey Quarterly. Those companies taking the first course could more or less maintain the same business model they applied in other parts of the world, without needing to de-engineer their products, according to McKinsey. But in taking that approach, they limited themselves to a target market of 18 million households. Companies that chose to serve the value category benefitted from a much bigger market--184 million households—but their products had to be cheaper, they were forced to adapt their business models, and profitability was lower, McKinsey also notes.
That’s all changing, however, due to the rapid growth of a middle class. Indeed, because the wealth of so many consumers is rising so quickly, many people in the value category will have joined the mainstream market by 2020, McKinsey forecasts. In fact, mainstream consumers will then account for 51 percent of the urban population, but their absolute level of wealth will remain quite low compared with that of consumers in developed countries. Even so, McKinsey estimates this group—approximately 167 million households, and close to 400 million people—will become the standard setters for consumption because they will be able to afford family cars and small luxury items.
So the question then becomes, how best to reach that rapidly expanding market? Obviously, there will be an impact on manufacturing, but also on the way regional divisions operate since China is such a large country with regions that are considerably different. So while an argument can be made for re-shoring or near-shoring some operations, this also may well be the time to expand operations in China.