MNCs face a real, possibly non-recoverable threat in China, and many don’t even know it yet.
In China, audience persona’s created for western brands are almost all identical. The same archetype pops up in hundreds of marketing meetings across China. MNCs appear to all be marketing to the very same person – a very small segment of the total population. MNC personas all identify the same person, in their early-30s, working in a tier one city for a multinational company (probably an advertising agency or other marketing/creative role), focused on getting ahead at work, a fashionable/creative flare, with an over-inflated paycheque.
MNC brands who normally strive to differentiate, are all clustering around a remarkably similar audience segment (designed more to suit their product/price than the reality of the market). Most western brands are marketing products to the very top end of the middle class. And, that layer of the middle class is pretty small when compared to the overall population in China.
MNCs appear to be mis-sizing the current opportunity, getting segments wrong and following up with tactics that don’t fit the game as well as local competitors.
Myth of the China Middle Class
Based on macro-economic data, the number of people in China’s middle class is exploding and is currently estimated at between 300,000 – 400,000 people.
However, when you dig deeper into what this group looks like, its clear that its not the same middle class as what marketers coming from the US or EU are accustomed to. While the total number is huge – bigger than the entire US population – the threshold for inclusion into China’s middle class is very low. Based on research from McKinsey in 2013, to be included into the urban middle class, a family must earn more than US$9,700/year. By comparison, the US national, median household income is estimated at between US$43,00 – $50,000 (as of 2011). The comparison gets even more unbalanced when you consider that the national, median income for a family in China was 13,000 renminbi, or about US$2,100 (as of 2012, according to Peking University research).
Western marketers, who’s products have been optimised for middle classes overseas are all fighting over a very, very small number of consumers in China. They are really targeting an urban audience of 43.5million, who make upwards of US$17,000 (in family income/year). And many brands are likely really only targeting the 3% of urban consumers or make more than US$37,000 per year (using McKinsey’s segmentation of 256 million in the urban middle class). That 3% is a total of 7.68million, which is similar in size to Sweden, although still not as affluent on a per household basis. (Of course, this is not an entirely accurate picture of personal buying power in China, as there are other sources of income but its an important analysis none the less.)
Positioned for Growth?
Most western brands are way, way ahead of where the market currently is, with prices and value propositions that are beyond where they ideally should be if they want to properly align with where the real growth is in China’s urban middle class. What makes things even more problematic is that a lot of these brands have tried to move their products up-market from where they are positioned elsewhere in the world – with higher prices – pigeoning themselves into a smaller premium/luxury hole.
MNCs use global strategies but Chinese brands have strategies designed for China.
Too many western brands are anchoring themselves to the same affluent persona and waiting for the bulk of the market to catch up. They all want to create a relationship with that one same “influencer” and hope that this person’s appeal will hold sway over the masses until they move up into a higher consumption bracket. They are applying very intensive strategies built around sophisticated data, targeting, engagement and loyalty. These efforts are better suited to more mature markets where market positions are relatively more fixed and consumers are less price sensitive. They might be better off using much more extensive, blunt marketing methods to grow market awareness, together with more promotional efforts.
Chinese brands are in a much better position to succeed. They are in-step with the market and offer prices that match the expectations of the growing (affluent) urban class. Smartphone maker, Xiaomi is a perfect example of this. They compete with global giants like Apple and Samsung but offer prices that are one-third to one-tenth of these premium players. And, in the case of Xiaomi, they dont sacrifice much in terms of quality and functionality to achieve a lower price. They are re-directing money otherwise spent on marketing, distribution and inventory, to fund a low-price strategy built around market growth. Its a strategy that is so incredibly well suited to where the market is (as opposed to where it might move to).
For most categories in China, its still a race to capture market share. Its unclear whether most global brands are going to be able to penetrate the market much further with prices that are so out-of-step with the majority of consumers. By the time the market “arrives,” MNCs may find that nimble Chinese brands have taken most of the market. While the mass market may be “aspiring” for global brands, they will be busy buying local products from Xiaomi, Anta, LiNing, BeLLe, BYD, Lenovo, and a growing list of quality local options.
Remedies for Western Brands
For the last ten years global brands have been able to sell to the top end of the market and ride a wave of growth. However, signals from the luxury/premium segment of the market are indicating that growth from the top is slowing. If you are not a true luxury brand in China, then at some point you need to figure out a way to grow market share more extensively.
Global brands need to get more “real” about who is going to bring them the next round of growth. Rather than continuing to employ strategies best suited to the top end of the market, MNCs ought to take a fresh look at the market by re-sizing and re-segmenting, looking more to less affluent, younger audiences.
While some of the answer might be to initiate more “push” strategies, with more blunt promotions and price cutting, very few MNCs can win in China by moving to a “low-cost” strategy. A more detailed understanding for the “next round” audience (ie. building new persona’s) will allow brands to find solutions which do not entirely rely on price competition but uncover hidden motivations/opportunities.
Depending on the type of brand and the insights yielded from better audience segmenting,
some of the other possible remedies include;
One – Taking a page from Xiaomi’s marketing playbook by building up digital presence and the systems to do online promotions and sales. By doing this, MNCs can make their products more broadly available and more accessible through periodic discounts and value-added efforts (as Xiaomi has done so well).
Two – Creating more localised brand assets by moving past simple celebrity endorsements and KOLs. MNCs should starting building more iconic, sustainable brand assets (content/messaging/symbols) – specifically created to resonate locally. By giving local marketing teams and agencies more freedom to interpret the brand, MNCs will increase the likelihood of having an authentic following – by letting Chinese consumers know that the brand is “for them.”
Three – Creating new products and/or brands specifically aimed at more local tastes and at lower price points.