Consumers: There’s More to Buying Power than the Paycheck

 

Catching up on reading over the weekend, I came across a report Goldman Sachs published in March about China’s “new consumer class.” (“The Rise of China’s New Consumer Class.”) The title is a bit deceptive: the researchers at Goldman note correctly that there is not a single class of consumer, but several. They’re partly right.

The problem with the Goldman report is that it focuses on income as a primary differentiator. While income has some practical value as a predictor of consumer behavior in China (poor peasants are unlikely to be potential buyers for Rolexes or megayachts,) that value is limited because incomes are not as closely tied to buying power as they are in other economies, and for two immediate reasons.

First, as one friend of mine noted on Twitter, incomes are notoriously hard to pin down in China. Reporting is spotty, and even the Chinese government lacks the wherewithal to really understand an individual’s income. What is more, there is a vast population of individuals who nominally make very modest incomes (government officials, leaders of state-owned enterprises, senior military officers), but whose actual buying power far exceeds their incomes. Add a third group – those who supplement their incomes via transfers from relatives overseas – and you can see how any company that targets its consumers by nominal income is going to miss a massive chunk of their addressable market.

Second, China’s consumers tend to consume based less on their income than on their desire for face and fulfillment. Purchases of automobiles (which are 12 to 14 times more expensive in China than in the US based on income and price differences), high-end mobile phones, and houses are far out of line with the incomes of those buying them. Parents and even grandparents will often kick in their own savings to help a young man make a downpayment on a house; newly-graduated urban workers will spend up to three months of their income on a mobile phone or a laptop; and the more entrepreneurial will take up a side business off the books or even engage in illicit activity to allow them to have the things they desire.

Classifying China’s consumers by income is, at best, an economics exercise. Classifying them by their values and priorities is far more relevant to businesses, and is a far better indicator of the degree to which you have a market – or not – in China.

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