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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Concept of the Week: Leftover Students

Leftover students – concept – that group of high school graduates in China who aspire to higher education – and who appear to have the ability to complete a degree – but who are denied that education and the attendant social mobility by China’s limited university seats and the caprice of the gaokao.

Leta Hong Fincher has done an incredible job framing and documenting the phenomenon of “leftover women” in China, explaining the roots of the phenomenon and the challenges facing women who have, for all the best of reasons, passed what serves as a marriageable age, or who have careers that make finding a suitable spouse all but impossible. If you have not picked up her book, by all means do so. As you would expect, the work does more than simply describe a unique demographic: it also offers an insight into an underlying dynamic of China’s winner-take-all culture: the leftovers.

Indeed, riffing on Leta’s research, it is not hard to discern that unmarried women of a certain age are not the only leftovers in China. Last week saw this year’s administration of the gaokao, China’s national university entrance examination. Nine million students sat for the three-day exam this year, but there are seats in China’s universities for no more than three million. While some of those who fail to gain entrance in university will try again next year, we can count on over five million young people facing a future without a university education.

These “leftover students” are a challenge for China’s leaders and an opportunity for international educators. For the Communist Party, it is no small thing to say to six million families a year that the promise of a better life for their children through education is out of reach: every four years that tallies a population equal to the membership of the Party that has often invested its hopes and treasure into the promise of education, only to have it tossed back to them.

For tertiary educators around the world, many of whom are suffering from secular population and economic trends that are pushing enrollments downwards, leftover students represent an massive pool of potential enrollees, many from prosperous families, that could save and sustain many of the world’s less popular colleges and universities, and that could potentially fuel the creation of the world’s largest market for continuing education.

Three Trends to Watch in China Hospitality

Even if 2016 does not turn out to be the year Airbnb announces an initial public offering, it may turn out to be the year of deep, fascinating Airbnb data

Source: Measuring Airbnb’s Real Threat to U.S. Hotels Using Industry Metrics – Skift

Thanks to Airbnb, apparently, we now no longer have a “hotel industry.” what we have is an evolving “hospitality ecosystem.” Nowhere is this evolution taking place more quickly than in China.

Hotel brands – and their offerings – have been diversifying beyond the traditional rankings of luxury. Local brand Orange and Starwood’s W, and boutiques like Opposite House introduced lifestyle choices to that mix. Expect to see more of that as we see greater consolidation among global brands and increasing competition for domestic tourist dollars.

Two trends to watch in hospitality in China this year: shared and recreational. Shared lodging services like Xiaozhu and Airbnb look set to take off this year for both domestic and outbound travelers as these services begin offering fapiao for business guests and usage moves beyond early adopters.

Recreational lodging, specifically camping, is the second trend to watch. We are seeing the rapid growth of legitimate, licensed campgrounds this year, primarily front-country sites that allow guests to drive up to their unimproved sites and camp. In addition, the growth of the RV industry in China is driving growth in campsites designed for Airstreams and Winnebagos as China’s prosperous are learning the joys of the road.

Finally, we’re witnessing the birth of what can be best called “nostalgia hospitality,” where lodgers are offering boutique lodgings reminiscent of earlier and simpler times in China. This deliberate step backward in time is a sort of bed-and-breakfast with Chinese characteristics, an experience designed for urbanites looking for a true getaway from the complexities of daily life. This is beginning as a part of the shared lodging trend, but will become a sub-phenomenon of its own in the next two to three years.

 

Responsa: The Influence of Business on Government

Hutong West
Shivering in SoCal
1601 hrs.

In response to my article “Standards of Influence,” an old friend and fellow China PR executive raised his hand to offer a gentle objection. While agreeing with the premise, he suggested that if commercial interest disclose their efforts, won’t the public sector put up resistance to their input, as it would be seen as bowing to foreign interests. He further suggested that there might be circumstances when it would be best to allow such processes to take place behind close doors.

This is a fair point, and needs to be addressed.

The combination of popular sentiment, social media watchdogs, and the Party’s desire to short-circuit the cycle of corruption is fostering greater transparency in China around the influence that companies (especially multinationals) try to exert on political decisions. Companies caught trying to change the rules in their favor are finding their operations subject to greater official scrutiny, and officials who appear to have taken part in such discussions are being investigated (or worse) with greater regularity. The potential downsides of the process are starting to outweigh the potential benefits.

This does not mean businesses cannot or should not have a voice in public decision making. Indeed, the wise regulator seeks the open input of a wide range of stakeholders, and businesses owe it to their own stakeholders to stand up and be counted. But when that voice is cloaked, the slope to malfeasance and corruption steepens and is carpeted with bacon grease. Sunlight ensures that the role of commerce in the process serves the public good as well as the private interest.

This means that those of us who operate at the nexus between industry and government in China cannot rely on the time-tested tools of government influence. We must chart a new path that is radically transparent yet equally (if not more) effective. That is a very narrow bridge to walk, and will require a great deal of imagination even in those cases where there is a high congruence between the needs of the nation and the desires of the merchant.

Yet it is critical for us to do so – and not only in China. Around the world there is a growing distaste for (and pushback against) the role that commercial interests play in the formulation of policy. Indeed, China has a deep ideological bias against such interactions. To continue to act as if these sentiments are irrelevant is aught more than denial.

Certainly, there will always be situations where it is better for all – including the public at large – for government discussions with industry to take place behind closed doors. But we should take for granted that in most cases, secrecy does not serve the public, and companies should thus shy from such approaches. If the mounting social and environmental costs of China’s development offer proof of nothing else, it is for the virtue of public scrutiny.

For a company to have real influence in policy in the future, it must first carry the burden of proof that the policies it is advocating are in the service of the public interest. Public relations people should encourage this: not only does this eliminate for companies the risk of later disclosure and the implication of impropriety, it also serves as prima facie proof of good corporate citizenship.

Standards of Influence

One of the early chapters in my book Public Relations in China focuses on the importance of the government as a stakeholder, and the means by which a non-Chinese firm could make its influence felt in the policy-making process.

In a time when the collusion between moneyed interests and government power has become a challenge in countries around the world, we have to ask, “is there any circumstance in which it is right for a commercial interest to influence policy and regulation?”

My answer is a qualified “yes.” There is no shortage of companies that have proven themselves to be bad actors, wielding a degree of influence far out of proportion to that wielded by other stakeholders, and too often acting in ways that undermine the popular best interest.

At the same time, there are occasions when it is proper for a company to make its point of view known to those proposing regulation, and, indeed, there are circumstances in which a company’s decision to withhold its expertise from the regulatory process represents an abandonment of the firm’s civic duty.

What we need is a standard, a framework within which companies can offer their input in the regulatory process without drowning the popular interest. In an effort to incite a discussion on the topic, I’ll suggest the first six criteria.

  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity has nothing to gain or lose from the resolution of the question, that entity is obliged to offer its information and analysis to influence policy for the greater good.
  • For those questions of regulation where a commercial entity has, by virtue of its collective experience or expertise a clearer understanding of a problem than a legislature or executive agency, and the commercial entity stands to gain or lose from the resolution of the question, that entity may to offer its information and analysis to influence policy provided that it is open about its interests.
  • At no time should a commercial entity use its influence to mute or silence other voices, even those in opposition.
  • At all times the information provided to the government agency must be factual and presented in as clear a manner as possible.
  • At no time may any commercial entity provide direct or indirect payments to any government official or agency that would serve to influence the resolution of a regulatory question.
  • All efforts should be publicly disclosed in real time.

Arguably, China’s central government has never been as open to outside (and particularly foreign) influence as have those of the West. Looking at the lobbying-industrial complex that has turned entire neighborhoods of the US capital into ghettos of influence peddling, that is not entirely a bad thing. But the nation needs legitimate pathways to allow an appropriate degree of input by all stakeholders, and foreign companies are no exception. Those pathways should never be closed to companies that adhere to a clear and publicly-acceptable set of standards.

On Ending Media Pay-offs in China

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On Monday Advertising Age published my editorial calling for an end to the common practice of paying journalists in China for coverage. You can read the editorial here.

Early reactions are mostly supportive, but there are a number of people who believe that the problem will never be solved. I respectfully disagree. Historically the media in every society have gone through a corrupt phase. Current journalistic practice and standards in the developed world did not suddenly appear ex nihilo: nearly all were created to address an extant practice rather than to anticipate one that might arise.

Viewed against the canvas of history, China’s media are relatively young, and the industry has experienced profound disruptions in the past 70 years. There has been too little time for standards and high-minded practices to develop, and we are probably a generation away from seeing Chinese journalism rise above the shackles of propaganda, yellow journalism, and corruption.

But rise they will, and the sooner we discard the notion that there is no hope for these practices to end, the sooner the problem gets fixed.

Sophisticated Chongqing

Hutong Forward
LAX bound for Bangkok and Shanghai
1215 hrs.

My first trip to Chongqing summarily destroyed all of my preconceptions of the central Chinese river terminus.

Instead of an immense but slightly provincial city, I came away after three days with the impression that Chongqing is about as provincial as Hong Kong, and is in many ways a lot more livable than its coastal cousin.

People were fashionable and stylish, at least as much as Beijing. The streets along the river were lined with remarkable restaurants and shopping districts that made Shanghai’s Xintiandi look both quiet and unsophisticated by comparison. The Pedestrian Street between Minzu Road and the Liberation Monument bisected the central business district with a sophistication that rivals Nanjing Road and Wangfujing. And the people have that warmth that seems to come so readily to the people of Sichuan.

I berate myself now for delaying my visit for so long. There really is more to Chongqing than a foggy, overgrown river port, and I suspect that I will be going back again soon.

The True Measure of Urban China

On the Hutong Express
Somewhere in Central China
1123 hrs. 

As I hurtle through 2,800kms of Chinese countryside, a question occurs to me about China’s massive urbanization. The shift is unprecedented, and for that reason alone begs for close examination.

The truth is, we are not examining the scale of urbanization as closely as perhaps we should. Is China urbanizing as quickly as statistics suggest? Or are we – at least in part – witnessing some statistical sleight of hand?

The thought that provoked me on this trip was the villages. Admittedly, my survey was back-of-napkin and limited to those villages alongside the high speed rail lines, but there seemed to be more building, more development, and little blight. That made me wonder. Are people really leaving their villages and heading to the Big City, or are they staying put, and statisticians taking villages and towns previously designated as “rural” or other non-urban areas and predesignating them as “urban?”

There is more to this question than statistical nit-picking. If many people are urbanizing in place, this means that China faces a very different set of challenges in addressing urbanization, including rethinking the infrastructure that needs to be built and probing whether this means that more of the country’s shrinking stock of arable land is in jeopardy.

For marketers, it would mean that a growing percentage of potential customers are physically beyond the reach of their current advertising, retail promotion, and distribution infrastructure.

Either way, it is time we tarted probing China’s urbanization statistics rather than take them as gospel.

The Limits of Coercion

Persuasion trumps coercion. Even in China. The government has a monopoly on force, but it does not retain that monopoly by employing it without consideration of public opinion.

The days of high-handed government action are over, and this makes the government’s task more complex – and delicate – than ever. Power my grow from the barrel of a gun, but the nation’s leadership cannot ignore that it remains rooted in the people.

Concept of the Week: Urbanizing In Place

Urbanizing in placeconcept – the idea that China’s urbanization is not being driven entirely by migration from the countryside to the cities, but that large areas that Beijing’s statisticians might once have considered “rural” are now considered “urban.”

In-place urbanization could occur in one of three scenarios.

The physical area of a municipality has been expanded to include what was once surrounding countryside.

In the second scenario, a village that was once considered part of the countryside has now grown into a town that a demographer or statistician would now classify as urban.

In the third scenario, a group of villages in a given area are considered to be conglomerated as a single administrative entity and reclassified as a single town.

In these cases, China’s urbanization is taking place without migration, and presents a different set of policy, marketing, and personal challenges and opportunities than classical migration-based urbanization.

The Third Way on Xi

English: "Long live the great Communist P...
English: “Long live the great Communist Party of China” in Xinhuamen, Beijing ‪中文(简体)‬: 新华门左标语“伟大的中国共产党万岁” (Photo credit: Wikipedia)

“Is the Chinese dragon losing its puff?”
Peter Harcher
The Canberra Times
March 16, 2015

Professor David Shambaugh’s recent essay in the Wall Street Journal suggesting that China’s political system is about to hit some very rough times (“The Coming Chinese Crackup“) has provoked intense debate. Peter Harcher’s article written in response offers a neat summary of what makes Shamgaugh’s conclusions so debatable.

I nevertheless absolutely reject his conclusion which I find astonishingly ill-informed. The pervasive sense of dramatic change is, I have found, combined in almost all Chinese minds with satisfaction and confidence that the change is urgently needed–indeed long overdue—and in the right direction.

It also demonstrates that the American academy has powerful competition as a source of cogent analysis on Chinese politics.

Any serious discussion of China’s future must include non-Academics like economist Arthur Kroeber and Australians like Geremie Barmé of the Australian National University and David Kelly of China Policy in Beijing.

Barmé, for his part, writes off Shambaugh’s collapsism as the view of an American deeply anxious about America. Kroeber, an American himself, argues that the Party remains as strong and adaptable as it was in 2008, when Shambaugh wrote his excellent China’s Communist Party: Atrophy and Adaptation.

My problem with both sides is the determinism implicit in the arguments. The Party’s collapse might not be imminent, but neither is its adaptability without real limits, imposed upon it by important groups and individuals within its own ranks. I find it hard to believe that Barmé and Kroeber would argue that point.

We thus must agree that there may be circumstances under which the Party might prove insufficiently adaptable to avert an existential crisis. And before you protest, let us agree that there may be circumstances under which any polity, however strong and adaptable, might face the same limits. In that case, the answer is neither “the Party will collapse” nor “the Party is too adaptable to collapse.” It is, rather “under what circumstances would the Party face the danger of collapse?”

Like most of us, neither I nor my clients can afford to treat China like its future is a game of roulette: bet on Red, the Party stays in power. Bet on black, and it collapses. Creating strategy in business means contending with all possibilities, balancing them, and coming up with a pathway that appropriately addresses them.

We can be neither Cassandra nor Polyanna. We should not overestimate the considerable challenges Xi Jinping faces as he guides the nation through roiling and uncharted waters, but none of us can afford to underestimate them.

Shameless Plug Dept.: New Fast-Food Paper

Hutong West
Contemplating lunch
1253 hrs.

My most recent paper, this one on addressing the challenges facing fast food franchisors in China, “Jumping China’s Great Food Wall (pdf),” is now up on the Allison+Partners website.

Failing that, you can find the paper on Academia.edu here.

This is more of a practical paper than my last one, giving a quick overview of the uneven success enjoyed by fast food companies in China, and offering a series of prescriptions designed to avoid some of the more serious rocks and shoals, and mitigate the effects of many others.

Beijing’s New Internet Buzzphrase

Hutong Forward
Planespotting at Reagan National
1655 hrs 

In a ten minute speech last month in London at the 50th Meeting of ICANN, Lu Wei, the Minister of China’s Cyberspace Affairs Administration, introduced a set of seven principles under which, according to him, the Internet should be governed. While not much attention was paid Mr. Lu or his speech outside of the confines of the attendees, we can assume that it was an official statement of government policy, and therefore worth understanding, analyzing, and discussing.

His principles, as I heard them, are:

  1. The Internet should benefit all mankind and all of the world’s peoples, rather than cause harm;

  2. The Internet should bring peace and security to all countries, instead of becoming a channel for one country to attack another;

  3. The Internet should be more concerned with the interests of developing countries, because they are more in need of the opportunities it brings;

  4. The internet should place emphasis on the protection of citizens’ legitimate rights instead of becoming a hotbed for lawbreaking and criminal activities, let alone becoming a channel for carrying out violent terrorist attacks;

  5. The internet should be civilized and credible, instead of being full of rumors and fraud;

  6. The Internet should spread positive energy, and inherit and carry forward the outstanding culture of human beings;

  7. The Internet should be conducive to the healthy growth of young people, because that concerns the future of mankind.

There is a lot to grist in these, but what jumped out at me was this catchphrase “credible Internet.”

There is a ring to it that suggests that we are going to be hearing this much more in the coming months, but the aim seems clear. While in the past the boundaries of online expression have been defined by prurient content on the one hand and seditious content on the other, there is now a third piece to that troika: rumors.

This is worrisome: “non-credible” content implies a much wider scope for restriction than the modus vivendi we have enjoyed in the past, and opens to official censure a vast swath of online content. You can avoid posting prurient content rather easily by avoiding adult themes and illustrations. You can dodge seditious content by steering clear of domestic political issues. But “non-credible” content is in the eye of the beholder, and can easily extend to commercial content and company web sites as well as posts on Weibo or WeChat.

Watch this space, as I suspect we are going to learn more about where the authorities are going to be drawing the line. In the meantime, any company or individual producing a content-laden Chinese site or posts on Weibo or WeChat should err on the side of caution. Chinese law is unkind to those whom the authorities accuse of spreading rumors, and demonstrable veracity may not be enough to keep you out of the wrong kind of spotlight.

Edelman, Rui Chenggang, and China PR

Hutong Forward
In the Shadow of the Pentagon
1710 hrs

As more details about ties between the China operations of Edelman Public Relations and erstwhile China Central Television (CCTV) anchor Rui Chenggang are released, a wave of schadenfreude has risen amongst both Edelman’s rivals and the detractors of public relations. As happened when Edelman was caught in a similar ethical imbroglio when it hired ostensibly independent bloggers to post on behalf of Wal-Mart, PR‘s detractors believe that ethical lapses suffuse China’s public relations industry, while practitioners who don’t work for Edelman see this as a large, hubris-laden market monster getting its due.

Both are wrong.

Ethical lapses are common in PR in China, but “common” is a far cry from endemic. There are PR firms, executives, and teams in China who insist on the highest possible ethical standards. Rather than going broke, they discover that while some clients will shun them for these reasons, a growing number of clients, particularly MNCs, are insisting on high ethical standards and are willing to sacrifice short-term results for a clean reputation. Clean business is good: not only do these PR firms keep very busy, they have to turn opportunities away.

But while these firms are the future of the business, they are still the exception that proves the rule, and no agency executive or corporate PR manager should guffaw too loudly at Edelman’s expense. For far too long as an industry and a craft we have turned a blind eye to practices considered unethical, immoral, or even illegal in more developed markets, failing to see that China was developing and that a reckoning was coming.

Two issues prevent widespread improvement in PR industry ethics in China. First is a persistent exclusivist belief that because this is China, things are done the Chinese way, and always will be. Operating ethically is seen as naive at best, and culturally imperialist at worst (“how dare you impose your values on us!”)

The second issue is fear. PR executives and their agencies believe that if they don’t take advantage of every opportunity, however morally ambiguous, they will lose revenue and clients to competitors who lack – or opportunistically ignore – their moral compasses. The pressure is greatest among the larger agencies where the focus is exclusively financial performance. The accountants calling the shots in New York and London are not measuring ethical compliance: they measure revenues and profits. Faced with the choice of losing a sizable client or cutting some ethical corners, there is no contest.

But the persistent idea that China is an island untouched by ethical standards for the conduct of public relations is now demonstrably so much cow manure. Those who cling to such exceptionalism – and you know who you are – are dinosaurs whose time in this business is limited, regardless of the success they appear to enjoy today.

What happened to Edelman could have happened to any of dozens of local and international PR firms. Rui had made himself a target, and Edelman is the largest PR firm in the world. But the rest of us have now been given a shot across our bows. Either we bite the bullet now, change course and adopt ethical tactics and practices, or we leave our firms, our people, and our livelihoods at the mercy of government caprice. If we don’t, this will happen again, and when it does we will all find that it will not be a single firm in the spotlight – it will be every PR practitioner in China.