A better life: The wants and worries of China's consumers


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A better life? The wants and worries of China's consumers is an Economist Intelligence Unit report, sponsored by Bayer. It examines the aspirations of Chinese consumers, both urban and rural, looking at material wants as well as larger life concerns. The report's quantitative findings come from a wide-ranging survey of 2,651 respondents in China conducted between December 2009 and March 2010. The Economist Intelligence Unit's editorial team designed the survey, in consultation with Professor Huo Deming, National School of Development, Peking University, and Professor Wellem Burgers, Bayer Chair Professor of Strategy and Marketing, China Europe International Business School. The Economist Intelligence Unit analyzed the results, conducted additional research and wrote the report, which is available in English and Chinese.

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A better life: The wants and worries of China's consumers

  1. 1. Cover_final.pdf 8/4/2010 5:06:28 PM Paper size: 210mm x 270mm A better life? The wants and worries of China’s consumers LONDON 26 Red Lion Square London WC1R 4HQ C United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 M E-mail: london@eiu.com YCM NEW YORKMY 750 Third AvenueCY 5th FloorCMY K New York, NY 10017, US Tel: (1.212) 554 06000 Fax: (1.212) 586 0248 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 A report from the E-mail: hongkong@eiu.com Economist Intelligence Unit GENEVA Written in co-operation with Boulevard des Tranchées 16 Professor Huo Deming, 1206 Geneva Switzerland National School of Development, Tel: (41) 22 566 2470 Peking University Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com Sponsored by
  2. 2. A better life? The wants and worries of China’s consumersContentsPreface 3Executive summary 4Introduction 8Part 1: Life near the top 11 The wants: New homes and cars, but a greener environment 13 Homes 13 Cars 16 The worries: Environment, health and children 18 The environment 18 Health 20 Children 22Part 2: Life near the bottom 25 The wants: A university education for the children and a cozier home 27 Education 27 A cozier home 30 The worries: Health and money 31 Health 31 Money 32Part 3: Confidence in the future 36 A tenuous net—even for the well-off 37 Building security 38 Shifting aspirations 39Appendix 40 © Economist Intelligence Unit 2010 1
  3. 3. A better life? The wants and worries of China’s consumers © 2010 The Economist Intelligence Unit. All rights reserved. All information in this report is verified to the best of the author’s and the publisher’s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Economist Intelligence Unit.2 © Economist Intelligence Unit 2010
  4. 4. A better life? The wants and worries of China’s consumersPrefaceA better life? The wants and worries of China’s consumers is an Economist Intelligence Unit report,sponsored by Bayer. The findings and views expressed in this report do not necessarily reflect the viewsof the sponsor. The report’s quantitative findings come from a survey of 2,651 respondents in Chinaconducted between December 2009 and March 2010. The Economist Intelligence Unit’s editorial teamdesigned the survey, in consultation with Professor Huo Deming, National School of Development,Peking University and Professor Willem Burgers, Bayer Chair Professor of Strategy and Marketing, ChinaEurope International Business School. The Economist Intelligence Unit analyzed the results, conductedadditional research and wrote the report. © Economist Intelligence Unit 2010 3
  5. 5. A better life? The wants and worries of China’s consumers Executive summary One of the legacies of the 2008-2010 global financial crisis has been a new focus on the latent power of the Chinese consumer. As demand in the United States and Europe has waned, exports have weakened as an engine of China’s economic growth, and Beijing has turned its attention to stimulating domestic demand. In parallel with its Rmb4trn (US$590bn) stimulus package, the Chinese government began offering vouchers in 2009 for appliances, furniture and even cars to encourage consumers to open their wallets. In mid-2010, China ended export tax rebates for certain sectors and eased the renminbi’s peg to the US dollar—all part of a strategy to reduce reliance on exports and shift the focus to domestic consumption. Faced with persistently weak sales in traditional OECD markets, foreign investors and local businesses have continued to sharpen their focus on the Chinese consumer. What will be the end result of all of these efforts? Will Chinese consumption live up to its promise? We believe that in order for Chinese consumption to be truly unleashed, consumers need to feel confident that life is getting better. If they are worried about the future, and about basic needs such as healthcare1 According to EconomistIntelligence Unit and National and education, they will be less likely to spend. To gauge their confidence—and consumption priorities—Bureau of Statistics data. the Economist Intelligence Unit has surveyed Chinese consumers, both rural and urban. The surveys,We spoke to consumers withannual household incomes conducted between December 2009 and March 2010, spoke to two very different groups of consumers.of between US$10,000 andUS$100,000. Of this sample, We should note that our conversations with respondents coincided with a remarkable recovery in40% have incomes between the Chinese economy, largely driven by the government’s massive investment programme. China’s GDPapproximately US$10,000and US$20,000, and 26% growth had slumped to 6.2% in the first quarter of 2009 (year-on-year), but had recovered to 10.7%earn between US$20,000and US$30,000. Just under growth by December 2009 when our survey was launched. The economy grew even more quickly in the2% earned slightly less than first quarter of 2010, hitting 11.9%. The government’s role in successfully steering the Chinese economyUS$10,000, and 33% earnedmore than US$30,000. These through the hazards of the global financial crisis has been praised by many analysts, and has no doubtincomes will go farther insome cities than others – helped to maintain confidence within the country.US$10,000 goes farther in Our survey encompassed some (but by no means all) of the diversity within China. In one group areChangchun than in Shanghai.Our respondents set aside relatively well-off urbanites. In income terms, the sample falls in the top 21% of the population in cities.1one-third of their income fordiscretionary spending. The other criteria for participation were home ownership, a white collar job—either managers at foreign-2 Because estimates of rural owned enterprises, government officials, managers at state-owned enterprises, private entrepreneursincomes in China vary widely,in designing the sample we or other professionals—and at least one-third of their income available for discretionary spending. Withused average adjusted income fairly secure finances, high education levels and few material wants, this group should be feeling veryper head figures from the Na-tional Bureau of Statistics, ad- confident indeed.justing them upwards slightlyto account for somewhat In the other group, we have relatively low-income farming households2 (in contrast to their urbanhigher estimates provided by counterparts). The rural consumers we surveyed are farmers—rural residents who largely make theirprivate research groups. living selling agricultural products, not from working in a factory or on a construction site. To focus more fully on rural households, we looked at provinces where primary industry accounts for more than 10% of provincial GDP, thus comprising the more traditional economic backbone of the country. We selected an array of income levels as a proxy to the range of household incomes comprising the rural sector at the4 © Economist Intelligence Unit 2010
  6. 6. A better life? The wants and worries of China’s consumersnational level: 16% of our sample earns less than the equivalent of US$1,500 a year, 70% earns betweenUS$1,500 and US$3,000 annually, and 14% earns more than $US3,000. While relatively poor compared to the urban sample, the rural consumers who participated in oursurvey are no less important. They have been the focus of efforts by the government to reduce the gapbetween urban and rural living standards, and are also the target of stimulus programmes specificallyaimed at encouraging more private consumption by rural households. In income terms, they are the ruralconsumers with the most potential for growth. Among our main findings:• Optimism, even among the relatively poor farmers surveyed, is high. Across both of the surveysamples, 91% of respondents said they are optimistic about the future. This confidence translates intoexpenditures: among the relatively well-off urban dwellers surveyed, only 17% said they were reluctant tospend money.• Everyone wants a car—but many are also worried about pollution. At 61%, car ownership among therelatively well-off urban consumers surveyed is much higher than the overall penetration rate for cars of 28per 1,000 people in China. Not surprisingly, many more of our respondents plan to buy a car. At the sametime, however, concern over air pollution is pronounced—54% cited it as the thing they would most liketo change about the area in which they live, and 53% cited it as one of their greatest concerns about thefuture. Traffic is another area for complaint. China’s policies to encourage sales of hybrid and electric carscould not have come at a better time, but encouraging even well-off consumers to buy them may requiremore than subsidies. Looking at America’s experience, sales of so-called green cars have been driven moreby personal and social preferences than subsidies or other incentives.• The passion for property will continue, and there is pent-up demand for quality housing. Therelatively well-off urban survey respondents are playing a significant part in China’s booming propertymarket—42% already own two or more properties, and 61% plan to buy a new home in the future. Manyalready live in newer homes—45% live in a house or flat that is less than five years old. But new does not necessarily mean good quality. Asked what they would like to change about theirliving conditions, slightly more than two-thirds of respondents said they wanted to make their homes morecomfortable by having such things as better temperature control. Given that 95% of respondents haveair-conditioning and 81% use some sort of heat in winter, the comfort factor is likely to have more to dowith efficiency ratings, either of the insulation standards of the buildings they live in, or the temperature-control systems and appliances used. Only 35% of the homes occupied by our respondents have insulation,and only 60% of respondents had heard of sustainable housing (described as “energy-efficient housingwith insulation in the walls and double-glazed windows and special materials to reduce noise”).• Healthcare is the number one concern of both the urban and rural consumers surveyed, butfor different reasons. With the national healthcare reform programme still being rolled out, it isnot surprising that health remains the biggest concern about the future among both urban and rural © Economist Intelligence Unit 2010 5
  7. 7. A better life? The wants and worries of China’s consumers consumers. Indeed, among rural respondents, 84% cited health as their greatest concern for the future. Rural consumers were also the most worried about the cost of healthcare: 61% cited cost as the biggest healthcare issue facing their household, and less than half that number (26%) mentioned the quality of doctors and hospitals as a concern. Of the rural residents we surveyed, 22% did not see a doctor when they fell ill. Of those who did not see a doctor, 66% said it was because it was too expensive to do so. Of the relatively well-off urban survey respondents, 60% said they were concerned or very concerned about health in the future. But their concerns were the opposite of those in the countryside—overall, 49% cited the quality of doctors and hospitals as their biggest health-related challenge, while only one-third said they were concerned about the cost of healthcare. In a separate question, 46% of urban respondents said they worry about their health. Why do they worry about their health? Job stress was the factor most frequently cited (by 31%), while pollution was the second most common. • To encourage rural consumption, more needs to be done to address basic concerns. The farming households surveyed showed a relatively weak inclination to consume—few were planning to upgrade the goods they already owned, or to make more expensive purchases in the near term. Even among the half of the survey sample that does not own a refrigerator, only 40% plan to buy one, and one-third of those see it as a purchase that is more than two years away. This suggests that more needs to be done to address their broader concerns about the future before programmes aimed at stimulating consumer demand can be more effective. The biggest hope for these respondents is to see their children go to university—42% cited this as their greatest desire for the next ten years. The hopes being placed on the next generation can be seen in the fact that while only 21% of the rural respondents said they would like to move away from farming, and only 14% said their greatest wish for the next decade was to move to a city, a mere 5% expect their children to be farmers. Unlike the well-off urbanites in our survey, these farming households have even more at stake in seeing their children succeed—71% of respondents expect to live with their children when they grow old, and 72% plan to rely on them financially. • Use of the internet, believed to be a great economic leveler, is very low among the farming households surveyed, suggesting the risk of a widening digital divide. Only 10% of our rural respondents had an internet connection, and only 16% said they ever used the internet. This is somewhat lower than the rate reported in other surveys. According to data from China Internet Network Information3 CNNIC’s data is based on a Center (CNNIC)3, there were 107m rural internet users at the end of 2009—accounting for 28% ofsurvey of 72,000 consumersaged six and over. China’s total—but the rate of growth in rural users had slowed and the overall rural penetration rate4 “25th Statistical Survey Re- was still around 15%, compared to 45% penetration in urban areas.4 Only 16% of our rural respondentsport on Internet Developmentin China,” China Internet owned a personal computer. The largest growth area in internet penetration in China is through mobileNetwork Information Center, connections, which accounted for 61% of total internet users. But while 92% of our survey respondentsJan 2010. own a mobile phone, only 9% said they used their mobile phones to get online. Affordability is undoubtedly one reason for poor take-up, but other studies suggest that lack of familiarity of how to use the internet and its utility are at least equally to blame.6 © Economist Intelligence Unit 2010
  8. 8. A better life? The wants and worries of China’s consumers• Even the well-off remain big savers, and hesitant borrowers. In theory, wealthier consumersshould be more confident and more willing to spend. Given the income bands we have targeted in oursurvey, respondents in Tier 3 and 4 cities should be very well off indeed based on the assumption thattheir incomes will go much farther given the lower cost of living in their cities. But we found that theirconfidence does not seem to show a proportional gain: savings rates were actually higher in the lower tiercities. In Tier 1 cities, 67% of respondents said they saved 25% or more of their household income, and33% said they saved 35% or more. In Tier 2, 3 and 4 cities, the figures were even higher: seventy percent ofrespondents in Tier 2 and Tier 3 and 69% in Tier 4 saved 25% or more their household income. The same story held true in terms of borrowing to finance property purchases. In Tier 1 cities, 75%of respondents said that they had relied on their own earnings or on family and friends to finance thepurchase of the home where they lived. But in Tier 4 cities, that figure rose to 83%. This thinking appearsto be deeply ingrained. Though 61% of urban respondents planned to buy a new home, they do not planto borrow much to finance it. Respondents in Tier 1 cities seemed to be more willing than others to takeon debt—47% said they would borrow between 30% and 50% of the price of their new home. In the othertiers, an average of 37% of respondents said they would borrow between 30% and 50% (though this couldalso reflect access to borrowing in the lower-tier cities). © Economist Intelligence Unit 2010 7
  9. 9. A better life? The wants and worries of China’s consumers Key points n Unlocking the power of the Chinese consumer market will require not only that the basic needs of the population are met, such as healthcare and education, but also that people are confident in their financial security and the promise of a better life. Introduction I t’s hard to miss the outward signs of China’s extraordinary growth. Its prodigious appetite for commodities, its rapid construction of skyscrapers, bullet trains and modern highways, and its investments in Africa and Southeast Asia all testify to the country’s progress and future prospects. It is safe to say the changes taking place on the inside, in the aspirations and appetites of ordinary Chinese consumers, are just as dramatic. These shifts towards greater confidence may be less visible, but they are just as important. As China grows, and incomes rise, so the desire for a better life deepens. Middle class families want nicer homes, farmers dream of sending their children to university and everyone suddenly has to have a car. And the world takes note. Indeed, one of the legacies of the global financial crisis has been a new focus on the latent power of the Chinese consumer. As demand in the United States and Europe has waned, exports have weakened as an engine of China’s economic growth, and Beijing has turned its attention to stimulating domestic demand. In November 2008, China announced a Rmb4trn (US$590bn) stimulus plan that included spending on infrastructure, healthcare, education and social welfare. The government also subsequently introduced subsidies for rural consumers to buy appliances and cars. Raising consumption is an issue that concerns more than just officials in Beijing. Chinese consumers’ conservative habits contribute to global economic imbalances, as illustrated by China’s huge trade surplus, causing friction with other nations. Local and foreign companies, faced with weak markets elsewhere, are also pinning increasing hopes on China. China is already the world’s largest market for many consumer goods, including mobile phones and TVs, as well as the biggest car market. Despite these statistics, most economists agree that Chinese consumers have not yet lived up to their promise. China’s consumption is expected to account for only5 Economist Intelligence Unit 5.6% of global private consumption in 2010, compared to the US’s 29% and Western Europe’s 26%CountryData/Haver Analytics. (Figure 1).5 Private consumption accounts for only around 35% of GDP, compared to 55-70% in most6 “Embracing China’sConsumption Boom,” Credit other major economies (Figure 2). When will this change? In Japan and the United States, consumptionSuisse, Mar 3rd 2008, page 7. began to accelerate when per capita annual income reached US$2,000, according to Credit Suisse.6 China7 Economist Intelligence Unit. passed this milestone in 2006, and its per capita GDP was just under US$3,700 in 2009.78 © Economist Intelligence Unit 2010
  10. 10. A better life? The wants and worries of China’s consumersFigure 1 Figure 2China’s share of global private consumption Private consumption as a share of GDP (2010) (%) World total = US$35.9 trn* US China 70.0 5.6% Rest Brazil 39.1% 61.9 US Japan 29.1% 59.0 EU* 57.4 India Western Europe 55.7 26.2% Russia 50.2* Forecast 2010Source: Economist Intelligence Unit/Haver Analytics China 35.6 * 2008 Source: Economist Intelligence Unit forecasts Will consumer spending follow a similar trajectory in China? While rising incomes should ensuresustained rapid growth in consumption, the answer to when and whether Chinese consumption reachesdeveloped-country levels is more complicated. Academics point to the weakness of China’s social safetynet, which covers only a fraction of its citizens, as one explanation for relatively high savings ratesand relatively low consumption—Chinese are saving for future healthcare, education and retirementexpenses. Others say that government policies favour producers over consumers, and enterprises(particularly state-owned enterprises) over individuals. Low interest rates that make it easier forcompanies to borrow from banks, for example, also mean that households get low returns on theirsavings. The state’s dominance of service sectors such as healthcare and telecommunications also inhibitscompetition and keeps prices high. 8 The surveys were conducted These are all factors in the equation—and to varying degrees they are being addressed. But more face-to-face between Decem- ber 2009 and March 2010.fundamentally, the unlocking of consumption will require a population that is confident in its future—not 9 According to Economistjust financially, but in many other ways. Consumers that are confident about the future are naturally more Intelligence Unit and National Bureau of Statistics data.relaxed about indulgence in the present, rather than delaying gratification. This is not to suggest that We spoke to consumers withconsumption is merely hedonistic—the theme of the Shanghai World Expo, “Better City, Better Life”, is annual household incomes of between US$10,000 andjust one illustration of the focus on improving the quality of life for Chinese people. As the Expo theme US$100,000. Of this sample, 40% have incomes betweenalso suggests, however, a “better life” is not just about fulfilling material aspirations. But what do Chinese approximately US$10,000consumers see as a better life? and US$20,000, and 26% earn between US$20,000 To examine this question, we have surveyed 2,651 Chinese consumers about their lives.8 What do they and US$30,000. Just under 2% earned slightly less thanwant, both materially and otherwise? What do they worry about? US$10,000, and 33% earned Our two survey samples represent very different points on the consumer spectrum. At one end, we more than US$30,000. These incomes will go farther inhave spoken to relatively well-off urbanites who already enjoy most basic material goods. Our urban some cities than others – US$10,000 goes farther insample is not the ultra-rich, but they might be described as the upper middle class. In income terms, Changchun than in Shanghai.the sample falls in the top 21% of the population in cities, although income growth projections show Our respondents set aside one-third of their income forthis group will account for 43% of urban households by 2013 and 95% by 2020.9 The speed of economic discretionary spending. © Economist Intelligence Unit 2010 9
  11. 11. A better life? The wants and worries of China’s consumers growth underlines the difficulty of a strict demarcation of social strata in modern day China, and in recognition that “middle class” is as much a state of mind and an attitude as it is an income strata, we sought households with more specific demographics that could refine our categories. The other criteria for participation were home ownership, a white collar job—either managers at foreign-owned enterprises, government officials, managers at state-owned enterprises, private entrepreneurs or other professionals—and at least one-third of their income available for discretionary spending. This sample could be said to indicate the future; having satisfied many of their basic material wants, this group is likely to be focused on more intangible desires. Their concerns, in theory, should go well beyond the basics of food and shelter.10 Because estimates of rural At the other end of the spectrum, we have focused on farming households.10 Our respondents largelyincomes in China vary widely,in designing the sample we make their living selling agricultural products, not from working in a factory or on a constructionused average adjusted income site. Of the rural respondents, 70% did not have a family member working away from home, and 56%per head figures from the Na-tional Bureau of Statistics, ad- reported sales of farm products as their main source of income. To focus on rural households, we lookedjusting them upwards slightlyto account for somewhat at provinces where primary industry accounts for more than 10% of provincial GDP. We aimed to usehigher estimates provided an income sample that accurately reflects the population of farming households. Through collectiveby private research groups.Some 16% of our sample holdings, they have title to their own home and land, and their livelihoods are still based on agriculturalearns less than the equiva-lent of US$1,500 a year, 70% production.earns between US$1,500 and This sample could be said to represent those largely left behind by China’s industrialisation andUS$3,000 annually, and 14%earns more than US$3,000. urbanisation—and, to a degree, by consumer gratification. These respondents still have many material wants, and their concerns are likely to be more basic. China’s size and internal diversity, and its rapid pace of both economic and social change, mean that there is not, and never will be, a quintessential Chinese consumer. As Chinese income levels rise, so will buying power and expectations for standards of living. Over the next decade, Chinese consumers’ desire for a better life is likely to shape the development of every global industry, from pharmaceuticals to automobiles, education to computers. It will also have an impact on issues such as environmental management. The Chinese government’s ability to understand (and balance) the needs and concerns of its citizens will be crucial to meeting its goal of maintaining economic advancement as well as social stability. The business community will also need to analyse the Chinese consumer accurately to succeed in what will surely be the largest consumer market in the future.10 © Economist Intelligence Unit 2010
  12. 12. A better life? The wants and worries of China’s consumersKey pointsn The urban consumers surveyed—members of China’s upper middle class with great optimism about the future—want for little in the way of material goods: respondents said they could use more time and money, and many also want a new home or a car.n While they want cars, a majority also wants less traffic, less pollution and a greener environment where they live—a promising sign for the promotion of green technology within the domestic auto industry and sustainable housing.n Urban respondents also worry about their health, citing it as a top concern about the future, and their children’s well-being—their future job prospects, affording property and the deteriorating environment they will have to endure.Part 1: Life near the topA s millions of people move to China’s cities over the next decade, the desires of urban, middle class residents will play an ever larger role in setting the consumer agenda for China and, by extension, theentire world. Over the next decade, 133m people will migrate to the cities in China, according to EIU forecasts.In 2012, urban residents will account for a majority of the Chinese population for the first time in thecountry’s history.Figure 3The long march to modernity Urban inflows (persons, in millions), left axis Urbanisation rate (%), right axis30 6025 5020 4015 3010 20 5 10 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Source: Economist Intelligence Unit projections Not all urban residents will be wealthy, but most will be moving up the economic ladder. Urbanisationand a shrinking workforce11 (as a result of China’s three decade-old family planning policies) will lift 11 China’s working-age popula- tion, those between 15 andincomes, helping to expand the ranks of middle class city residents. In China, as in other countries, there 64 years old, is projected tois no standard definition of what constitutes middle class. Indeed, because of the differences in the cost diminish beginning in 2015, according to data derivedof living across different cities, an income level that would be considered middle class in one city might be from the United Nations Department of Economic andextremely wealthy in another. Social Affairs/Population There is, however, consensus on one point: the number of people in China who could be considered Division, World Population Prospects 2008 (medium vari-middle class, according to household income metrics, is expected to surge over the next decade. Between ant projections).2010 and 2013, the proportion of urban residents earning more than US$10,000 will more than doublefrom 21% to 43%, according to National Bureau of Statistics and EIU forecasts. © Economist Intelligence Unit 2010 11
  13. 13. A better life? The wants and worries of China’s consumers Many of China’s new middle class will live in cities unheard of outside of China, as the rural population migrates to less developed Tier 2, 3 and 4 cities, according to Clint Laurent, founder and chief executive of consultancy Global Demographics. Currently, half of all urban households earning over Rmb60,000 (about US$8,850) a year are in 65 of the 762 cities in China, according Global Demographics. By 2020, only 34% of households earning that amount will be in those 65 cities, with much of the other 66% dispersed among emerging township-level and satellite towns. For policymakers, this means that public expectations for a higher standard of living (including access to good healthcare and schools, affordable housing and transportation) will be rising in hundreds of smaller cities and towns. For businesses, such fragmentation will be hard to service commercially: to reach consumers of the same level of wealth, companies will need to have a presence in twice as many cities as they do today. In general our urban sample seem a pretty happy lot. A whopping 91% said they are optimistic about the future. Asked what is missing in their life, an enviable 18% said, simply, “nothing” (Figure 4). But other answers indicate that the wants of urban consumers are moving beyond the material. Intriguingly, the second most common element missing in our urbanites’ lives was “time” (cited by 17.5%), followed closely by money (17%). Asked about their greatest desire for the next ten years, after a new home (25%), the most common responses revolved around work—career development, promotions, salary increases and so on (cited by 17%, Figure 5). The Figure 4 What is missing in your life? third most common answer was around personal Urban survey response (Top five answers, % respondents) well-being—happiness, good health, security. Nothing 18.1 Children’s education, including the desire to Time have them study abroad, was the fourth most 17.5 Money common answer. Asked if they are reluctant to 17.0 spend money, only 17% said yes, and indeed 98% Car/house said they are spending more than two years ago. 15.0 Child But the nature of their concerns about the future, 3.8 and their reported savings habits suggest some Source: Economist Intelligence Unit 50.2 residual insecurities. Figure 5 35.6 What is your greatest desire for the next ten years? Urban survey response (% respondents) Buy a new home 25.0 Move to the countryside/suburbs 4.0 Other 71.0 Top five “Other” answers: Work focus—career development, promotion, increase salary 17.1 Family/personal—happy, healthy, safe 14.3 Child—education (including desire for child to study abroad) 7.9 Travel 7.9 Materialistic—new car, house 7.9 Source: Economist Intelligence Unit12 © Economist Intelligence Unit 2010
  14. 14. A better life? The wants and worries of China’s consumersThe wants: New homes and cars, but a greener environmentHomesMost of our urban sample looked, on paper at least, like middle class consumers anywhere in the world.More than 80% had between three and five people in their household, and most were between the agesof 20 and 65. As is to be expected of our relatively well-off urban survey respondents, many already enjoymost of the modern conveniences of their counterparts in more developed countries: televisions andmobile phone ownership were universal in our sample (Figure 6). Ownership of refrigerators, washingmachines, personal computers, gas cookers, hot water heaters and air-conditioners was nearly universal.The two material goods still being sought after are a car or house. These were the only material items tocome up among responses for what is “missing” from urban middle-class lives. Asked what is their greatest desire over the next decade, one-quarter of the urban survey respondentschose a new home, and just over one-fifth said a house or apartment would be their next major purchase(though 61% said they envisaged buying a new home at some point in the future). Given that all respondents are already homeowners, this response suggests two things. The first ispent-up demand for better housing. Many already live in relatively new dwellings—45% live in a flat/Figure 6 Figure 7Which of the following consumer goods do you own? How old is the house/apartment in which you live?Urban survey response (% respondents) Urban survey response (% respondents)Television 1 year 100 2Mobile phone 1-5 years 100 43Refrigerator 6-10 years 99 39Washing machine 11-20 years 99 14Personal computer 20 years 99 2Gas cooker 98 Source: Economist Intelligence UnitHot water heater 95Air conditioner 95 Figure 8DVD player How big is the house/apartment in which you live? 74 Urban survey response (% respondents)Audio system 100 sq metres 62 37Car 100-160 sq metres 61 60Motorcycle 160-200 sq metres 20 3Dryer 200 sq metres 5 0.3Electric cooker Source: Economist Intelligence Unit 1Satellite dish 1Source: Economist Intelligence Unit © Economist Intelligence Unit 2010 13
  15. 15. A better life? The wants and worries of China’s consumers house that is less than five years old, while 84% live in houses that are less than ten years old (Figure 7). And homes are not small by urban standards—63% live in homes of 100 square metres or more (Figure 8).12 China Statistical Yearbook This represents a dramatic improvement in living standards, at least for this group of citizens: in 1990,2007. the per capita floor space in China’s urban housing Figure 9 averaged a mere 13.7 square metres, but this What would you like to change about your living conditions? Choose all that apply. had grown to a per capita average of 26.1 square Urban survey response (% respondents) 12 More comfort (eg, temperature control) metres by 2005. 67 Surprisingly, 58% of our urban respondents More space 61 have been living in their current home for less Better interior decoration than five years—but new does not necessarily 56 mean good. Asked what they would like to change More energy efficient 34 about their living conditions, slightly more than More privacy (from neighbours) two-thirds of respondents said they wanted to 16 make their homes more comfortable by having Other, please specify 2 such things as better temperature control (Figure Source: Economist Intelligence Unit 9). Given that 95% of respondents have air- conditioning and 81% use some sort of heating in winter, the comfort factor is likely related to deficiencies in building and appliance quality (and indeed, the fact that 65% of the homes occupied by our respondents do not have insulation). Beyond more comfort, 61% of the urbanites sampled said they wanted a larger apartment, while 56% wanted better interior design. The second thing suggested by our respondents’ keenness to buy property is the already well- documented use of real estate as an investment vehicle in China. Indeed, across the four tiers of cities covered by our survey, 42% of our respondents owned more than one property (a finding which we cover in more depth later in the report). With low returns on bank deposits, a volatile stock market and limited legal ways to invest abroad, many Chinese consumers have turned to real estate as an investment, spurred on by rising house prices and local governments that have come to depend on revenues from land transfers to developers. The National Bureau of Statistics estimates that the volume of residential13 Peter Bottelier, “Beijing’snew challenge: China’s property sales rose 44% in 2009 over the year before. Overall real estate prices (including commercialpost-crisis housing bubble,”Carnegie Endowment for units) jumped 24%, the biggest increase in 15 years.International Peace Policy The passion for property raises a number of challenges—and opportunities—on the policy front. InOutlook, Jun 30th 2010. terms of challenges, the rising prices that have resulted from the recent boom are putting the dream of14 “6th Annual DemographiaInternational Housing home ownership out of reach of many Chinese consumers, especially in the biggest cities. The rapid priceAffordability Survey: 2010,”www.demographia.com. rises are also driving migrants back to their hometowns, or to smaller cities where the cost of living—andThe survey measures metro- property—are lower. In big cities in eastern China, housing prices have risen to more than ten timespolitan markets across sixdeveloped countries. The average incomes today, compared to between four and six times a few years ago (the ratio is even higherlatest survey is from Q3 2009.Affordability is defined as the in some areas of these cities, and varies significantly between cities).13 By comparison, other indices putmedian house price in each the figures for New York City and London at about 7.14market divided by the medianhousehold income. Beijing has responded by cracking down on speculation in property. Regulations introduced this spring14 © Economist Intelligence Unit 2010
  16. 16. A better life? The wants and worries of China’s consumersprohibited the purchase of second and third properties, and introduced residency requirements for homebuyers, forcing the property market to a standstill in some cities. The government has also pledged toincrease spending on affordable housing, pouring Rmb63.2bn (US$9.3bn) into the sector this year. Ithas promised to build 3m low-income houses and renovate 2.8m dilapidated properties before the endof the year. But in the absence of alternative investment vehicles, the tendency of the more well-offconsumers—whose ranks are growing—to invest in the property market will be difficult to contain. One policy opportunity presented by the continued churn in the property market, combined with thepent-up demand for better housing, lies in the area of improved energy efficiency, a stated goal of theChinese government. China has set a target of reducing its carbon intensity, or greenhouse gas emissionsper unit of GDP, by 40-45% below 2005 levels by 2020. It has also pledged to reduce its energy intensity—the energy used per unit of GDP—to 20% below 2005 levels by the end of this year. There are many different issues to be addressed in trying to improve energy efficiency. One place to startis with consumer education. For now at least, Chinese consumers tend to conserve energy at home morethan their Western counterparts: their homes, on average, are smaller, with fewer appliances, and manyhomeowners use wall-mounted air-conditioners and switch them off when leaving a room. But as they growricher, the demand for larger, better-equipped homes will increase.Figure 10 Our survey findings indicate that there is stillHave you heard of sustainable housing (energy-efficient scope to educate. Even among our well-off, well-housing with insulation in the walls and special double glazedwindows and special materials to reduce noise)? educated urban sample, awareness of sustainableUrban survey response (% respondents) housing (described as “energy-efficient housingYes 60 with insulation in the walls and double-glazedNo windows and special materials to reduce 40 noise”) has room to improve (as it does in other 15 Lawrence Berkeley NationalIf yes, is sustainability something you would consider when Laboratory; Boston Consult- countries). Energy efficiency ranked fourth in ing Group/National Resourcesmaking improvements to your home or buying a new home?(% respondents) terms of what these urban consumers would like to Defense Council (NDRC) analysis, as quoted in “FromYes 80 improve about their homes. But among those who Gray to Green, How Energy- Efficient Buildings Can HelpNo were aware of sustainable housing, 80% said they Make China’s Rapid Urbaniza- 3Not sure would consider sustainability issues when buying a tion Sustainable,” Oct 2009. In total, commercial buildings 17 new home or making improvements to an existing and residential buildings accounted for 25% of China’sSource: Economist Intelligence Unit one (Figure 10). energy use in 2007. If the This trend is significant, as according to one energy used to produce build- ing materials and that usedestimate 15 residential buildings in China account for 16% of China’s energy consumption, or more than in construction is included, buildings account for 30-40%the iron and steel industry (and this does not include the energy consumed to make building materials of China’s total energy usage.and construct housing16). 16 Testimony by Jennifer L. Given rapid urbanisation and rising incomes, the demand for new and more comfortable housing Turner, Director, China En- vironment Forum, Woodrowwill continue to increase, with buildings (and the raw materials that comprise them) remaining a major Wilson Center, before the US- China Economic and Securitysource of energy consumption. The demand factor, articulated by informed consumers, will be crucial in Review Commission, Apr 8thchanging industry practices: Peggy Liu, chairperson of the Joint US-China Collaboration on Clean Energy 2010. http://www.uscc.gov/ hearings/2010hearings/(JUCCCE), notes that individuals have less of a say in determining the energy efficiency in residential hr10_04_08.php. © Economist Intelligence Unit 2010 15
  17. 17. A better life? The wants and worries of China’s consumers buildings in Chinese cities because property developers and management companies make decisions about inputs such as insulation and air-conditioners for the entire building. However, the government sets the rules by which companies must operate. Beijing and several local governments are already taking steps to address the issue of energy efficiency in general, and for buildings in particular, by setting standards, conducting audits and supporting the construction of green buildings as pilot projects. In 2006, the then Ministry of Construction (later renamed the Ministry of Housing and Urban-Rural Development) introduced rules to encourage the use of energy-efficient technologies, including insulation, heating and cooling systems, and lighting. Beijing is strengthening labeling requirements for home appliances such as refrigerators. The Ministry of Housing and Urban-Rural Development has been setting up an association for green buildings. With many studies and directives underway, the challenge going forward will not be the standards and laws, but the personnel to enforce them. China still needs more people trained in auditing compliance with these standards. JUCCCE’s Ms Liu argues that discussion of sustainability with consumers in China should focus on the consequences of the environment for health and wealth, as well as the importance of awareness and policy interventions at the current stage of the country’s development. “China has a unique opportunity to set new habits for an entirely new culture,” says Ms Liu. “We’re setting new habits when it comes to driving, residential living space, what we eat, what we wear. All of this is being defined now. I think education of youth is really important.” Of course, China is not the only country struggling with this issue. In the US, for example, the17 “The State of the Nation’s residential building sector is responsible for about 20% of energy consumption.17 A recent report onHousing 2009,” Harvard JointCenter for Housing Studies, the US market for energy-efficient homes notes that while public awareness of energy efficiency has2009. increased, there is still opportunity to educate not only homeowners but construction professionals as18 Energy Efficient Homes, Pike well.18 Incentives are important: the 2009 American Recovery and Reinvestment Act extended incentivesResearch, 2010. to consumers who installed renewable energy sources, such as solar electric power or geothermal heat pumps, in their homes. The act also provided subsidies for purchases of certain plug-in electric vehicles. Legislation, financial incentives and tax credits have acted as major catalysts for the market, but the report expresses concern that the momentum may be lost if funding is taken away. Cars Somewhat surprisingly, given their relative wealth, only 61% of our urban survey respondents own a car. Only 11% of current car owners had plans to upgrade. But in a sign of the national popularity of the car culture, one-third of all urban respondents listed a car as their next major purchase. As PT Black, a Shanghai-based partner and consumer culture researcher at Jigsaw International, a market research firm, puts it: “the massive automobilisation of the country is just starting.” Despite government incentives designed to spur car purchases, a car does not seem to be within immediate reach of a good number of the urbanites surveyed. Of the 39% of respondents who didn’t already own a car, 80% planned to buy one. But only one-quarter of those said they would buy one within the next year. One-third said the purchase was more than two years away. This could be explained by a number of factors beyond price. It could be that consumers place a16 © Economist Intelligence Unit 2010
  18. 18. A better life? The wants and worries of China’s consumersFigure 11Passenger car sales*(in thousands) US China20,00015,00010,000 5,000 0 2005 2006 2007** 2008** 2009** 2010*** 2011*** 2012*** 2013*** 2014**** Registrations. ** Figures for 2007-2009 for China are estimates. *** Figures for 2010-2014 are forecasts.Source: Economist Intelligence Unithigher priority on buying homes, or on saving. Or it could reflect the relatively undeveloped marketfor car loans and consumers’ reluctance to borrow money. But it could also reflect the more expensivetastes of this well-off group: though the F3 from local car-maker BYD, which sells for US$8,830, has seena surge in sales in recent months, among the car owners in our sample 87% owned a more expensiveforeign brand. This suggests that rather than take advantage of the availability of cheaper models (orgovernment incentives aimed at spurring car sales, particularly promoting more fuel-efficient smallcars), this group of consumers would rather hold off for the model of their choice. All of the top fivebest-selling brands are still multinational marques (though made in China in joint ventures with localcompanies): VW, Toyota, Hyundai, Honda and Nissan. China’s passenger car market is at once huge and undeveloped. In 2009, it overtook the US as theworld’s largest car market, with just under 10.5m cars sold that year—growth of 55% over the previousyear (Figure 11).19 China had not been expected to surpass the US market for car sales until 2020,but government incentives for car purchases in China and a decline in sales in the US as a result of thefinancial crisis accelerated its rise. The Economist Intelligence Unit is forecasting more modest growth of 19 Economist Intelligence Unit Industry Briefing.16% for 2010, with sales hitting 12.2m units. 20 “Rush Hour for China’sFigure 12 Still, China’s car penetration rate, at about 28 Automakers,” Finance Asia,Passenger cars per 1,000 people* (2009) vehicles per 1,000 people—is well below other Apr 14th 2010.UK 506 countries (Figure 12). In smaller cities, the rateFrance is closer to 10 vehicles per 1,000 people. By 501 comparison, the US has 434 cars per 1,000 peopleUS 434 and in the UK the figure is 506.Russia There are many opinions on what is driving car 204Brazil purchases. Some analysts see a desire to “keep up 110 with the Zhangs”.20 “What’s driving the demandChina 28 for automobiles is the life stage that consumersIndia are in, where they now have the ability to afford 12 something that represents the achievement of a* EstimatesSource: Economist Intelligence Unit certain level of success in their career,” says Bill Russo, a Beijing-based senior advisor at Booz © Economist Intelligence Unit 2010 17
  19. 19. A better life? The wants and worries of China’s consumers Company, a consultancy, who specialises in China’s car market. But Jian Shuo Wang, Shanghai-based founder of online classified company Kijiji and a proud Nissan owner, said that the value of a car as a status symbol was declining as the number of car owners rose. “The show-off function only works when 5% of the population have a car,” he says. Today, his friends are buying cars because they need them for commuting. In meeting the consumer desire for cars China faces both challenges and opportunities. As we see in the next section, environmental issues, particularly air pollution and traffic, are growing concerns among the urbanites surveyed. At the same time, the relatively low car ownership in China presents a huge opportunity to steer the industry—and consumers—towards greener cars. The worries: Environment, health and children The environment Asked what they would like to change about the area where they live, a majority of urban respondents (54%) said they wanted less pollution, better air quality, a greener environment and better hygiene (Figure 13). Traffic in particular was mentioned by more than one-quarter of respondents as an area they would like to improve. Figure 13 Thinking about the area in which you live, what would you like to change? Urban survey response (Top five answers, % respondents) Less pollution/better air quality/better environment/more green 54 Traffic (more convenient/fewer jams) 26 Better public security/lower crime 10 Transport (distinct from traffic) better/more convenient/wider roads/more metros 8 More prosperity/higher income/faster growth 8 Source: Economist Intelligence Unit Taken together, it’s clear that some Chinese consumer appetites may make others harder to satisfy. Consumers want more cars, but they also want cleaner air, less traffic and more trees in their neighborhoods. Many also say they want fewer traffic jams. Even in the leafier suburbs, Chinese consumers won’t be able to have it all: more cars by definition means more pollution and traffic. Chinese consumers tend to blame the government (and look to it for solutions) more than people in other countries for environmental pollution. In a 2008 survey by Landor Associates, a brand consultancy, 39% of respondents said that the central government was primarily responsible for environmental problems. By comparison, more Americans blamed private companies than any other group. Beijing is trying to encourage cleaner development of the country’s car industry, based on a recognition that the country’s development will not be sustainable if it is built on the same energy consumption model as Western economies. When it introduced measures to boost the car industry as part of its overall plan to protect the economy from the global financial crisis, Beijing introduced incentives on cars with engine displacement smaller than 1.6 litres. It slashed the tax levied on those vehicles in18 © Economist Intelligence Unit 2010
  20. 20. A better life? The wants and worries of China’s consumershalf. That tax rate was lifted to 7.5% for 2010, but it’s still below its previous high. In June 2010, Beijingannounced more plans to stimulate and direct sales of cars. It is also offering a subsidy of Rmb3,000(US$440) per car for purchases of models with engines 1.6 litres or smaller. More substantially, China announced a pilot programme in Shanghai, Shenzhen, Hangzhou,Changchun and Hefei (cities where Chinese green car manufacturers have their headquarters) to offerincentives of Rmb50,000 (US$7,380) on every qualified plug-in hybrid sold and Rmb60,000 (US$8,850)for pure electric cars.21 Separately, Beijing has set a goal of selling 60,000 alternative energy vehicles 21 “Green car subsidy program not to affect China’s fuelin ten cities by 2012. Miao Wei, vice minister of industry and information technology, has indicated the demand,” Xinhua, Jun 7thplan is to have alternative energy vehicles account for 15% of total sales by 2020. Assuming that car sales 2010.reach 20m units annually by that date (a modest assumption22), that would mean sales of 3m alternative 22 The Economist Intelligence Unit’s forecast for passengerenergy vehicles annually. car sales in 2014 is 17.3m. A key factor in the success of this plan will be price. Hybrids and battery-powered cars still accountfor only a tiny fraction of total car sales in China, largely because they are more expensive than petrol-powered cars, but also undoubtedly because infrastructure to support them is not yet widespread. (Aspart of its package to promote hybrids and electric cars, Beijing has promised investment in relatedinfrastructure in the five cities being used as pilot programmes.) A made-in-China hybrid Toyota Camry sedan, which went on sale this spring, costs betweenRmb319,800 (US$47,170) and Rmb364,800 (US$53,810; by comparison, a traditional Camry only costsRmb189,800). Chinese manufacturer BYD sold only 48 F3DM plug-in hybrids last year for Rmb148,000(US$21,830) each. By comparison, it sold more than 290,000 petrol-powered F3s, which carry a stickerprice of Rmb59,800 (US$8,820). Toyota did slightly better, selling 271 units of the Prius, which carried aRmb259,800 (US$38,320) price tag.23 Toyota sold almost 140,000 Priuses in the US in 2009. Even with 23 “China drivers shun hybrids, electric cars on lack of subsi-the subsidies, the lowest-cost hybrid, the F3DM, will cost about US$6,000 more than the conventional F3. dies,” Auto China, Apr 22nd Mr Russo says he expects that most of the cars sold under the new incentive plan will be sold not to 2010.individuals, but to fleets run by taxi companies and other organisations. But the sales will allow themanufacturers the chance to develop their cars further. As well as reducing the impact of increasing car ownership on the environment, China’s policymakersalso hope to spur development of the domestic auto industry by encouraging a focus on newtechnologies. More than half of the fuel-efficient cars approved for the Rmb3,000 subsidy were thosemade by joint ventures involving foreign automakers. But the fact that the pilot scheme for hybrid andelectric models is limited to cities with local carmakers suggests that China’s green car subsidies areaimed at boosting sales of domestic brands, and by extension the “domestic” green car industry.24 The 24 Yang Jian, “GM: The unintended winner ofcities concerned will undoubtedly support the scheme. The southern city of Shenzhen, home to BYD, has Beijing’s push for greensaid it expects private purchases of “new energy” cars will increase to 25,000 units by the end of 2012.25 vehicles,” Automotive News, Jul 6th 2010. With government subsidies and Chinese consumers’ demonstrated interest in cars as a status 25 “Subsidy on private pur-symbol, the key to unlocking greater sales of green cars in China may well be making them cool. Our chases of new energy vehicles underway in Shenzhen,”sample expressed a strong preference for models made by foreign-invested joint ventures: of those who Xinhua, Jul 12th 2010.owned cars, 21% had a VW model, 11.3% drove Hondas, 11% drove a GM car and 10% drove Toyotas.By comparison, Chery, a popular local maker, accounted for only 2.5% of the cars owned by our urban © Economist Intelligence Unit 2010 19
  21. 21. A better life? The wants and worries of China’s consumers sample. It is safe to assume that these well-heeled consumers will continue to prefer foreign marques unless they have good reason to go domestic. Though China’s car market undoubtedly has different dynamics than America’s, it still may be useful to look at the motivations of green car buyers in that country. In a survey of Prius owners by the New York Times, the number one reason buyers cited for their purchase was that the car “makes a statement about26 Micheline Maynard, “Say me.”26 Lower emissions ranked fifth, behind higher fuel economy and distinctive styling. A 2008 study‘hybrid’ and many people willhear ‘Prius’,” New York Times, at Harvard University’s John F. Kennedy School of Government found that just 6% of existing hybrid carJul 4th 2007. purchases were attributable to tax incentive schemes, while 33% were driven by personal and social27 Kelly Sims Gallagher, ErichMuehlegger, “Giving Green preferences, and 27% to rising gas prices.27 Company incentives for use of alternative energy and highlyto Get Green: Incentives and fuel-efficient cars, like those offered to their employees by Google, Bank of America, Timberland and ClifConsumer Adoption of HybridVehicle Technology,” Working Bar in the US, could also help. In China, local governments in cities where green vehicle manufacturersPaper RWP08-009, John F.Kennedy School of Govern- are headquartered may add their own subsidies, as Shenzhen (home to BYD) is already doing.28ment, Harvard University, Feb2008. Health28 Chen Hong and Li Fangfang, Air pollution is directly related to another urban concern: health. Among our survey respondents, 46% said“More Sops for Green Cars,”China Daily, Jul 7th 2010. they worry about their health, and 60% listed it as one of their top concerns about the future (Figure 14). Figure 14 What is your greatest concern about the future? Please rate the following concerns from 1 to 5, where 1=very concerned and 5=not at all concerned. Urban survey response (% respondents) Very concerned 1 2 3 4 Not at all concerned 5 Health 29 31 25 11 4 Job 7 21 33 22 17 Child 25 30 26 10 9 Money 8 26 40 18 8 Natural disaster 10 17 27 27 19 Pollution 27 26 24 16 8 Crime 6 12 22 25 35 Source: Economist Intelligence Unit Why do they worry about their health? Job stress Figure 15 What are the major health challenges facing your household? was the factor most frequently cited (by 31%), Choose all that apply. while pollution was the second most common. Urban survey response (% respondents) Quality of doctors/hospitals Perhaps not surprisingly given their rising 49 economic status, quality was the healthcare Cost of healthcare 34 issue of most concern to the relatively well-off Access to doctors/hospitals consumers we surveyed. Overall, 49% cited the 28 Other, please specify quality of doctors and hospitals as their biggest 8 health-related challenge, while only one-third Source: Economist Intelligence Unit20 © Economist Intelligence Unit 2010