As I travel around China, whether on a business trip with one of our clients or to speak at large scale conferences, events and expos, I can’t help but notice the rapid development in the two areas which keep China buzzing: World Class Innovation and Domestic Consumption.
During my travels, I’ve met with Chinese entrepreneurs and business leaders who are focused on innovation and moving up the value chain and are keen to work with western businesses which can give them access to premium skills, experience, technology and/or products. They believe this will help them stand out from their competition in China. What does this mean for you and the rest of the world?
Innovation: an important moment for China
When I started leading executive study tours to China in 2005, China was known as “the world’s factory” and a very cheap place to buy clothes, electronics and fake handbags, causing many of our delegates to buy extra suitcases to make room for the stash of goods that they gleefully bought at cheap prices in flea markets. The locals found it amusing to see foreigners buying these cheap copies (whilst at the same time complaining about China’s lack of respect for IP protection) whilst they saved up their money to travel to Europe to buy the real thing.
Today, China is determined to dominate the world in high-tech manufacturing and the Government’s “Made in China 2025” vision is a blueprint to upgrade the manufacturing capabilities of Chinese industries by leveraging subsidies, mobilising SOEs and acquiring intellectual policy from around the world “to catch up with – and then surpass – Western technological prowess in advanced industries.” The plan focuses on high-tech fields including the pharmaceutical, automotive and aerospace industries, which are presently dominated by foreign companies. Their goal is to increase the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025.
Instead of talking about Artificial Intelligence (AI) as some kind of future phenomenon (as portrayed in sci-fi movies) in China it is referred to as a catalyst for the growth of new industries, with jobs being replaced by robots and new products and services emerging to meet the new demand created by extra leisure time and an appetite to explore new travel destinations. With 18,000 new Chinese companies being created every day, mainly internet, AI and big data companies, and with the 5G network expected to be fully functional in China before the end of 2020, we’re going to see some enormous changes in just the next 18 months.
These are just some examples of Chinese innovation and, with China’s ability to innovate at scale and engage the users of over 700 million smartphones which are in almost constant use, Chinese companies are already designing, defining and creating the future. Foreign entrepreneurs and business leaders who own, or have access to, new technologies, systems, capabilities and intellectual property which can be commercialised and scaled up in China, have a once-in-a-lifetime opportunity to export their innovations to China and participate in this alluring innovation story.
Domestic Consumption: a big turnaround
Back in 2008, at the height of the global financial crisis with the very real fear that, in the absence of the US consumer, China’s export led economy would plunge into recession (resulting in unimaginable chaos and poverty), many respected and well known international commentators predicted it could take up to 30 years before Chinese consumption would be strong enough to maintain a positive growth rate for the overall economy. How wrong they were.
In 2019, China’s domestic economy is booming and you can track the start of this growth to around 2008, when the likes of Alibaba, Tencent and Fosun, three of the big names I visited earlier this year, really got going. Whilst China continues to welcome foreign brands to enter their market, particularly if they offer something unique and different (eg British heritage, French sophistication, German engineering, Australian kangaroos) you get the feeling that time is running out.
China’s economy today is driven by domestic consumption. In 11 of the 16 quarters since 2015, consumption has contributed more than 60% of GDP growth and, in addition to becoming the world’s biggest market for online retail, the country now represents more than 30% of global market in luxury goods, automotive, consumer appliances, mobile phones, and spirits. After 20 years as a global manufacturing hub (think Apple smartphones, Samsonite suitcases and Barbie dolls) there isn’t much that China can’t design and produce themselves, and so their focus is on the domestic consumer rather than worrying about the rest of the world (a point that was highlighted to me earlier this year by a senior executive at Alibaba HQ in Hangzhou when I asked him about their global expansion strategy)
In 2019, it is predicted that 80% of China’s GDP growth will be generated by domestic consumption, a remarkable turnaround and a fair indication that the window of opportunity for foreign companies to enter the market is narrowing.
Ticking the boxes
Now that China’s domestic consumption has reached a level of (almost) self-sufficiency, and the focus is on innovation, IP and moving up the value chain, it’s got me thinking about how to evaluate a foreign business proposition for the China market and measure its chances of success.
I think that a proposition for China needs to include some or all of the following:
- Something innovative, creative and/or design focused which stands out for being ‘world class’, ‘premium’ and superior to anything that exists in China at the moment
- Ideally in the key sectors of opportunity, especially food, healthcare, education or tourism
- Preferably with an environmentally-friendly angle e.g. including energy efficiency, accessing new sources of energy, pollution control/reduction/monitoring etc.
- With some kind of innovative/technology angle, especially AI, robotics, 5G, smart algorithms, big data, app enabled for smart phones etc.
- Something that will particularly appeal to “Chinese Millennials” (see below)
- A transformational opportunity that, if successfully commercialised in China, will allow them to become (or at least offer the potential of becoming) a global player with all the associated IPO and other capital-raising opportunities
If a product, service or capability can at least tick some of the above boxes, it must have a real chance of success in China and would be worth pursuing, researching and/or evaluating. That’s where I come in.
Of course, that’s the easy part. The hard part comes later when you begin the difficult job of finding a way to stand out and attract attention amongst all the noise and competition. And find a suitable partner, agent or distributor and start building a long term relationship. But at least you’re starting from the right place. In the words of the great philosopher, Lao Tzu, “A journey of a thousand miles begins with a single step”
Case Study: Starbucks
The growth of Starbucks in China, a country known for its obsession with tea (‘all the tea in China’) is nothing short of amazing.
Starbucks now has about 3,800 outlets in China – more than in any other country outside America. When I first heard that Starbucks was planning to open a new store in China every day for the next five years, I started worrying about whether there was enough coffee in the world to satisfy the growing demand in China.
And then came Luckin, the fast rising competitor, which listed on the Nasdaq last week, is already trading at 20% above its list price and ‘has nearly 2,400 stores compared to Starbucks’ 3,500, but it has plans to more than double that number by the end of the year as it seeks to become the country’s coffee king’. Can that really be possible?!
The average Chinese still only drinks five cups per year. That is just 1.3% of the amount consumed by the average Japanese or American. But coffee has become fashionable among the middle class. An amazing and real example of the domestic consumption story.
Case Study: Tencent
WeChat, the all pervasive app developed by Tencent, is the 5th largest internet company in the world, with 1.1 billion active users, of which over 50% spend at least 90 minutes on WeChat every day, it has transformed the internet age in China and is rapidly attracting overseas users aswell (20 million international users so far and growing fast).
The method by which Tencent designed and developed WeChat is legendary, and a great example of how China is driving innovation within fast growing companies. Rather than tasking the QQ team (their desktop equivalent of WeChat) to come up with a brand new app for mobile users, Tencent asked the manager responsible for desktop emails to head up the project team to design a new app and gave him freedom to innovate by ring-fencing them from the rest of the business. WeChat was launched in January 2011 and the rest is history.
Remarkably, despite their amazing success and growth, Tencent are now attempting to completely reinvent themselves once again by launching their ‘Industrial Internet’ project which will merge the ‘virtual world’ with the ‘physical world’ to transform many sectors, utilising big data, AI and CRM. I guess we’ll have to wait and see how this new strategy will transform our lives (as WeChat has) but you can be sure it’s coming very soon!
Imagine a group of people with more members than the whole population of the United States, a group that does not have to worry about loans or mortgages as their parents take care of all that, a group that has only seen prosperity, and a group that is determined to have the best the world can offer.
Meet “Chinese millennials”, a group that will not only reshape China, but also the world. Chinese millennials, those born between 1981 and 1996, number more than 350 million, or over 25% of China’s population.
They are the main drivers of the country’s surge in consumption, with spending by those under the age of 35 accounting for 65% of total consumption growth. This spending is projected to increase by 11% annually until 2021:
- Millennials are more educated than previous generations, with 25% of them holding a bachelor’s degree or higher.
- One in three foreign students in the US is Chinese and most are paying full fees.
- Two-thirds of all Chinese passport holders are millennials.
- Over 90% of them have a smartphone
- more than half of all luxury goods purchased by the Chinese are bought by millennials.
- They are transforming every sector of the economy, from travel to education.
Millennials were key catalysts of the total $115 billion spent by Chinese visitors on global travel in 2017, and those born after 1990 increased their spending on international travel by 80% in 2018.