China pushes towards a consumption-driven growth model as the country renews it's commitment to quality of growth and technology

CHINA PUSHES TOWARDS A CONSUMPTION-DRIVEN GROWTH MODEL AS THE COUNTRY RENEWS ITS COMMITMENT TO QUALITY OF GROWTH AND TECHNOLOGY

In a new report, World Economic Forum and Bain & Company identify the forces that will shape consumption in China and the subsequent implications for business and society

New York – Jan. 25, 2018 – China’s leadership recently announced that it had entered a new era of development due to continue through the middle of the 21st century. Among other priorities, China reconfirmed its commitment to transition the country to a consumption- and services-driven growth model over the next 10 years. A new report, Future of Consumption in Fast-Growth Consumer Markets – CHINA, by World Economic Forum’s System Initiative on Shaping the Future of Consumption in collaboration with Bain & Company identifies several key forces that will shape consumption – “what” people buy, “criteria” when buying, and “how” people buy – resulting in implications for business and society.

In the context of the Fourth Industrial Revolution, China will transform from a follower to a leader, defining new growth trajectories as part of the government’s “innovation, technology and entrepreneurship” mantra. Within this regulatory and policy environment, the World Economic Forum-Bain report outlines four major drivers of consumption in China through 2027:

  1. Economic growth: China’s economy will continue to migrate from an investment-driven model to a consumption- and services-driven model;
  2. Demographic shifts: China will move from a relatively younger to a relatively older and aging population;
  3. Technology and innovation: China will advance from being a major manufacturing power to an active leader in digital and other technological innovations such as AI – a path it has already begun; and
  4. Consumer attitudes: With significant growth and transformations in China, consumers will evolve from their relatively price-sensitive mindset to a more premium-seeking attitude, but distinctions between Chinese and Western lifestyles will remain.

“Many stakeholders will have a hand in shaping China’s consumption future: the government with its supportive policies, emerging entrepreneurs with their innovative business models, and academic institutions with their progressive education models,” said Bruno Lannes, a Bain partner, who led the research on this project. “These stakeholders can help deliver an ecosystem that benefits not only consumers but also society at large.”

As these major drivers evolve, they will create a “base case” for the most likely scenario for consumption in China by 2027, along with two alternative scenarios based on underlying uncertainties:

  • The world’s largest middle class, fueled by income growth, will reshape consumption. From 2016 to 2027, consumption is expected to grow by an average 6 percent annually to nearly double, from RMB 29 trillion ($4.3 trillion) in 2016 to RMB 56 trillion ($8.2 trillion) in 2027, stimulated by the middle class that will comprise an estimated 65 percent of households by 2027.
  • Growth of the elderly population will create new demands. By 2027, an estimated 100 million people will have joined the ranks of those over 60 years of age; this age group will represent 22 percent of the Chinese population for which new services will have to be developed.
  • The digital “little emperors” (generations of the 1990s and 2000s) will have higher expectations. In the next 10 years, about 200 million people born in the 1990s will be starting families, and about 150 million in Generation Z will transition from school or university to the Chinese workforce. Their consumption pattern will differ significantly from preceding generations.
  • Consumers will share – not own – assets and services across many more categories. The sharing economy will grow at a rate of 40 percent annually and could account for 20 percent of China’s GDP by 2025.
  • “Widgets to digits” will reshape retail on a much wider scale. Offline and online channels will be seamlessly integrated around data in what is described as “new retail.” By 2027, retailers will attain a wider reach via online channels and they will invent new roles for offline channels. Cashless payment will be generalized.
  • Personalization will become the new mass market. Within the next decade, the personalization of products and services for millions of Chinese consumers will not be an option, but a must-have. It will be enabled by technology such as 3D printing and the wide use of consumer data.
  • Data will become the new oil. By 2027, consumption will be totally dependent on data; fewer than five companies in China will likely control most consumer data, and will extract, process, refine, value, sell and buy this key resource, creating major shifts in profit pools across categories.
  • Urbanization will take a new direction. About 70 percent of China’s population in 2027 will reside in urban areas, with more urbanization occurring in inland provinces and in tier 2 and 3 cities instead of in saturated coastal megacities.
  • Technology will also pose a risk. The development of technology will bring about not only new opportunities for business but also risks for consumers and society, including tension between digitalization and privacy; the challenge of inclusive growth; and the challenge to the environment and sustainability.
  • Consumption will continue to have unique Chinese characteristics. The preference for a Westernized vs Chinese lifestyle today in China is split approximately 50/50 and is expected to remain unchanged in the next decade.

Due to several uncertainties that may occur, two major alternative scenarios are possible. The first is the “Middle-income trap,” which predicts that around 25 percent of manufacturing jobs will be automated by 2027, creating displaced workers. Given the skills gap among manufacturing workers, a slower shift to higher-paying service jobs will result in slower middle-class growth and reduced consumption expenditure that could total RMB 15 trillion ($2.3 trillion) less than in the base case. Second is the “Turning inward” scenario. In this case, overall consumption expenditures will be an estimated RMB 5.5 trillion ($0.8 trillion) lower than in the base case due to an increased savings rate and a decrease in net exports. The negative impact will be biggest for foreign brands, as elements of value will reflect traditional Chinese attitudes, which favor local brands.

“China will not only be a great consumption story, but will also be notable for its unprecedented pace of change,” said Lannes. “In response, companies will need to adapt quickly and in multiple ways. Multinational firms in particular will have to change significantly, bringing their learnings from China to other operations worldwide.”

To thrive in China over the next decade, businesses serving consumers will need to rapidly develop certain critical capabilities, including becoming customer-centric, more digitally driven, highly agile and open to rapid transformation. They must also be able to recruit and retain the right talent, and be socially responsible as an organization.

In line with these changes, the coming decade will also bring a host of major challenges that will need to be addressed at the societal level. To ensure a better future, responsible leadership as well as potential collaborations through public-private partnership will be required to mitigate accelerating challenges, such as employment, social inclusion across income, geography and age, environment and sustainability, and trust and transparency regarding fake products and consumer concerns about data privacy.

Editor's Note: To arrange an interview, contact Nicholas Worley at nicholas.worley@bain.com or +852 2978 8830

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