Misunderstandings abound when it comes to all things China-related. For example, through previous ChinaFund.com articles, we’ve highlighted many manufacturing-related ones, for example the (grossly outdated) idea that China can only put low-quality, low value-added products on the table. Similar outdated stereotypical thinking examples also pertain to the Chinese consumer.
To put it differently, China has been perceived as a poor country with poor citizens for decades upon decades. As the effects of Deng Xiaoping’s post-1978 reforms started kicking in, leading to an impressive economic growth trend, this line of thinking was altered and the prevailing thought current shifted to a “rich country, poor citizens” perspective. In other words, China became an economic powerhouse as a function of its economic growth and sheer population, but the average citizen remained remarkably poor.
To this day, this stereotype tends to persist.
Indeed, as is frequently the case, there is some truth behind it. For example, the average rural Chinese citizen is still in a sub-optimal financial condition. Or, if you will, the average inhabitant of let’s say Western China is hardly in stellar shape from a financial perspective. But what about Shanghai? What about Beijing? What about the highly industrialized regions of China? In a wide range of cases, we are dealing with Chinese consumers that have become affluent by Western standards and their tastes/needs more sophisticated as a result.
The facts speak for themselves, yet many observers remain oblivious to them.
According to a recent McKinsey & Company report, China accounted for over 50% of the growth in global luxury spending between 2012 and 2018, with it being expected that it will account for roughly 65% of the world’s additional luxury-oriented spending by 2025. For the year 2018 alone, Chinese consumers have spent approximately 770,000,000,000 RMB (or roughly $115,000,000,000) on luxury goods (a third of global spending).
By the year 2025, this figure is expected to almost double, with 1.2 trillion RMB being eyed, or 40% of the worldwide spending on luxury goods. This is expected to be made possible by the robust upper middle class demographics, with upper middle class households expected to rise by 28% yearly (compounded) from 2018 until 2025. To put some earnings figures behind these projections, it essentially means that 350 million individuals are expected to earn between $2,600 and $3,900 monthly by 2025. The trend will most likely prove to be strong when it comes to affluent households as well, with 65 million people expected to earn north of $3,900 monthly by the same year.
Make no mistake, China is most definitely a country of extremes.
For example, while growth with respect to upper middle class as well as affluent households will most likely prove to be impressive, tackling poverty remains a goal when it comes to quite a few Chinese regions. While regimes such as the Jiang Zemin one have been criticized for aiming for economic growth at all costs (with social implications being all but ignored), the trend has shifted as of the Hu Jintao era and nowadays, the Xi Jinping administration is also doing its best to tackle poverty. However, it will most definitely remain a challenge for the foreseeable future.
The same “China is a country of extremes” principle is also valid as far as the luxury goods market is concerned. According to Bain & Company’s 2018 Bain Luxury Goods Worldwide Market Study, the domestic luxury goods market grew by an impressive 20% in 2018, marking its second year of 20% growth. But did all players on the market take advantage of this growth rate in an equal manner? Most definitely not.
Like other industries, the luxury market also has a pronounced “winner takes all” element associated with it in China. In fact, the overwhelming majority of profits are secured by the top 20% Chinese entities… polarization at its finest or, if you will, the Pareto Principle on steroids. On a similar note, it is also worth pointing out that a lot of attention is paid to large global brands but like in many other cases, the authorities are implementing policies aimed at encouraging domestic consumption from domestic brands. Therefore, expecting a trend which revolves around domestic players continuing to gain market share would be reasonable.
As a conclusion, the Chinese luxury goods market presents generation-defining opportunities. However, it is proven time and time again that uninformed/superficial investors who simply want a slice of the pie without putting in the necessary legwork end up on the losing end of the equation despite being involved in an industry which is experiencing explosive growth. As mentioned previously, “polarization” is the operative word with the respect to quite a few of China’s most promising industries and navigating these seemingly generous waters can be far more dangerous than it seems. As such, the ChinaFund.com team is at the disposal of those who want to tap into China’s extremely lucrative luxury goods market by working with an entity which prides itself in being thorough. We do the legwork and number crunching so you don’t have to… and love every minute of it!