The Uncomfortable Chinese Middle between Louis Vuitton and Oreo

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There are so many reasons consumer brands are running around Summer Davos salivating left and right about opportunities to expand.

For the likes of Louis Vuitton and Gucci, China is now the second largest luxury market in the world. For Kraft, Oreo cookies have become a surprising phenomenon. But most of the Western success stories to date have been at the very top aspirational level of the pyramid or the bottom-functional part of the market, like Wal-Mart and KFC. What of China’s burgeoning class in the middle?

This is where China has seen the greatest social change and will continue to see more. It’s unquestionably the largest, juiciest part of the market. Depending on how you break it down there are 120 million people in China’s middle class—more than the number of households in the United States, according to a panel at Summer Davos about the Asian consumer. That should double in the next ten years. Numbers aside, it’s an attractive market as the savings rate is higher in China than in the US and most of these customers are buying things like cars or, say, a refrigerator for the first time.

But selling to this middle class represents a new challenge for Western companies and they shouldn’t assume a down-market version of a luxury good will have the same appeal, panelists warned. When a Chinese consumer is buying a Louis Vuitton bag—or an iPad—they are doing it for the brand, the cool that that item already brings. Otherwise, they wouldn’t pay up for it. Louis Vuitton or Apple doesn’t have to change or tailor its product for the local market at all, because people are voting to buy something international. But one step below that? Watch out.

Why would someone in China buy a lesser Western-version of an Apple gadget when thousands are made in China? A copy-cat from America doesn’t have a Western aspirational halo, it’s just another copy-cat. Last time I was in Shenzhen I met with Roy Ho of CK Telecom, a company that you’ve probably never heard of that does more than $1 billion in annual revenues, making pretty sophisticated phones for the emerging world, including QWERTY-keyboard smart phones, designed from the chips up in Ho’s vertically-integrated factories. Copy-cat? Sure, he said. But aside from Apple, everyone is a copycat in smart phones right now. If the game is chasing Apple, Roy Ho—with his factories and distribution networks—can run faster.

And don’t underestimate local pride and local understanding. This is why the consumer Internet has never done well at attracting this group. Panelists cautioned Western companies to distinguish between “modernization” and “Westernization.” This burgeoning middle class wants a modern lifestyle, but the distinctly Chinese version of that and will foreign investment, local investment and entrepreneurship on fire in the country, there are increasingly few reasons for the consumer to look outside for purchases that rank above a KFC meal but below an iPad. One panelist compared the emerging Chinese consumer to Japanese consumers saying “Japan is modern but it is more Japanese than it has ever been and I see the same thing in China.”

It’s a sad truth the Internet already discovered: The largest middle class in the world is not necessarily up for grabs.

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