TOPICS > Economy

China’s Vast Consumer Class

October 5, 2005 at 12:00 AM EDT
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PAUL SOLMAN: Shanghai’s trendy Bar Rouge, where the bartender mixes drinks with Vegas-like showmanship, and the customers are as cosmopolitan as the cocktails.

MONICA WANG. Actress: We live in a modern society now — compared to 20 years ago where China was completely you know sewed up, right? We have McDonalds and we have KFC; we have Pepsi and Coke. Of course young people are going to love and enjoy those things, right? PAUL SOLMAN: After decades of clichés about a billion thirsts to quench, the Chinese global consumer, it would seem, is here at last — starting at the top.

HANDEL LEE, Entrepreneur (in Beijing Restaurant): I bought it in ’91, and renovated it –

PAUL SOLMAN: American Handel Lee: restaurateur, art dealer, Shanghai’s first Armani franchisee — a typical global investor who’s targeting Shanghai’s high-end shoppers.

HANDEL LEE: We’re going for the top 5 percent.

PAUL SOLMAN: And how many people is that?

HANDEL LEE: Well in Shanghai according to our numbers it’s about 860,000 people.

PAUL SOLMAN: There’s almost a million people in Shanghai who can afford stuff like this?

HANDEL LEE: Absolutely.

PAUL SOLMAN: Now even if that’s not an extravagant estimate, it would still mean that 15 million people in Shanghai alone, and more than a billion Chinese in total, can’t afford stuff like this — a Marni-label outfit: around $2000, twice the average Chinese annual income.

But the point is, it seems to be no problem for mainland fashionistas: Chinese consumers now scoop up 12 percent of the world’s luxury goods –mostly when they travel abroad — compared to 17 percent by U.S. consumers. And yet not long ago, almost everyone in China dressed exactly the same.

HANDEL LEE: From the blue Mao suit to Marni. Now, it’s quite a journey. (laughs)

PAUL SOLMAN: Lee’s women’s boutique, where even the dressing rooms are theatrically upscale; a barbershop where Celine Dion serenades the clientele (music) — this is how China’s top 5 percent can afford to shop.

PAUL SOLMAN: The next 30 percent can go to — Wal-Mart.

Because it’s mainly reachable by car — and there are still only 10 million cars here, about the number the U.S. had around 1930 — Wal-Mart caters to China’s upper middle class, those who average about $10,000 a year — which goes roughly as far as $40,000 in the U.S. Fewer than 30 percent of Chinese may actually earn at this level — we remind you, amidst all the city glitz, that more than half the population is still rural. But less than 25 percent of all Chinese is still more than the entire population of the United States.

Nearly identical to its U.S. prototype, with employee enthusiasm matching anything back home, Wal-Mart has 48 stores in China, will put up a dozen more before the year is out. At the chain’s newest Super Center, in Beijing, the head of Wal-Mart Asia, Joe Hatfield, explained how the world’s largest corporation views its fastest growing market.

JOE HATFIELD, President and CEO, Wal-Mart Asia: It’s the one place in the world that you could recreate Wal-Mart all over again.

PAUL SOLMAN: Why?

JOE HATFIELD: Because of the population base and the growth and the income levels.

PAUL SOLMAN: To see how Chinese consumers increasingly go West, just look at cosmetics.

JOE HATFIELD: We started out with four foot of skin care; today it’s twenty feet. Today we don’t have deodorants, but someday down the road we will have deodorants in China. Five years ago perfumes were not a big business here. But if you look today it’s the emerging market.

PAUL SOLMAN: Even sales of dairy products are booming, though most Chinese are lactose intolerant.

JOE HATFIELD: If you’d have came to Shanghai or Beijing four or five years ago, you would have seen about 25 percent of what you’re seeing today. This market has just exploded.

PAUL SOLMAN: “Exploded” may be apt, given the symptoms of lactose intolerance, and a new issue in China: eating too much in general.

JOE HATFIELD: They drink more milk; they eat more bread and snack crackers and they eat more meat in their diet; there’s a lot less bicycles, so that takes away from the exercise side of it, so the size of people are getting larger, so what’s that tell you? Exercise equipment’s getting good, exercise wear, jogging outfits and at some point, we’ll have Slimfast and all those type of products.

PAUL SOLMAN: Slimfast in China. But while Wal-Mart may be spurring Western-style over-consumption for those relatively few at the top, its style of merchandising may have benefits here. Criticized in America as leading “a race to the bottom,” Wal-Mart in China could be leading a race in the opposite direction.

WAL-MART CUSTOMER (Translated): First, the price is good. Second, the environment is good.

WAL-MART CUSTOMER (Translated): They wear a smile on their face. They give us directions and help us to find the things we need very efficiently.

WAL-MART CUSTOMER (Translated): This supermarket is modern and cool.

PAUL SOLMAN: It’s also clean. Its meat section, for instance, features workers in masks to guard against disease.

JOE HATFIELD: It evolved a couple years ago when we had SARS; and there’s a lot of focus being given to food safety and cleanliness and sanitation; and the customers appreciate it.

PAUL SOLMAN: So, apparently, does the Chinese government. Hygiene has long been an afterthought for Chinese businesses; grocers, for example, still use fans to scatter flies. So the government can point to Wal-Mart as a model of modernization.

JOE HATFIELD: They hold us to a higher standard than others and to set the expectations for others to follow.

PAUL SOLMAN: Cleanliness, convenience, and opportunity for today’s workers, and those of tomorrow.

JOE HATFIELD: In a store like this, where we’ll hire 500 to 550 associates with opportunities to grow — when I joined the company, I started out as an assistant manager and a store manager. How would I have ever dreamed 30 years ago I would be doing what I am doing today and I think we give ten or fifteen thousand people each year those opportunities to grow.

FEMALE WORKER (Translated): Before, as peasants, all we faced every day was fields and vegetables. Now I get information from all sides, and I can develop myself. That’s the difference.

MALE WORKER (Translated): My goal is to become district manager in one year and manager of all of Wal-Mart in five years.

PAUL SOLMAN: Do you hope to be Joe Hatfield someday?

MALE WORKER (Translated): I’d like to be his boss. (Laughs)

PAUL SOLMAN: There’s the same can-do spirit in Wal-Mart’s book section, where customers take their inspiration from the likes of Dale Carnegie and his “How to Win Friends and Influence People:” A “Made in America” philosophy in a store whose goods are almost all made in China.

Still, as with so much foreign investment in China, the vast majority of the poor are out of the picture. And Wal-Mart’s low-price policy forces Chinese suppliers, says labor activist Han Dongfang, to treat their workers badly.

HAN DONGFANG, Chinese Labor Activist: They make these subcontractors compete with each other, against each other and Wal-Mart just sits here and see these people biting against each other and they’re bleeding and then they get the lowest point — price; it’s based on exploitation of Chinese workers.

PAUL SOLMAN: Meanwhile Wal-Mart itself has reportedly yet to turn a profit in China. The underground parking garage in Beijing was conspicuously empty. Plus, there are regulatory headaches galore to undermine the efficiencies of Wal-Mart’s famed centralized distribution system.

JOE HATFIELD: We have to buy produce locally from the countryside; we have to buy liquor locally; we have to buy tobacco locally.

PAUL SOLMAN: A mile away, Wal-Mart’s local competition, the giant Chinese chain, Wu-Mart, takes a more traditional approach to wooing the urban Chinese consumer. Wu-Mart subcontracts to local services, like this barbershop, and fills its supermarket settings with traditional Chinese sights and sounds.

PAUL SOLMAN: What does he say?

XU YING, Wu-Mart: That’s the price.

PAUL SOLMAN: Oh, he’s shouting out the price?

XU YING: Yeah, the Chinese people still, we like this kind of atmosphere. It makes people feel very excited.

PAUL SOLMAN: And, says Wu-Mart executive Xu Ying, so does the sale on a kilo of eggs, especially popular with older consumers — 11 eggs for 30 cents — and the bargain tables: most items a dime; top price, 60 cents. PAUL SOLMAN: She put that one back and is looking at the other one.

XU YING: Yes just to compare the other, see if there’s any small problem, check the quality; from the face you can see they are very happy.

PAUL SOLMAN: Here too, though, global marketing is having an impact on some of the world’s pickiest shoppers.

PAUL SOLMAN: Do you go to Wal-Mart and see what they’re doing? Do you check them out?

XU YING: Well we do. We could also send our staff there to learn and then compete. We are regarded as a competitor, direct competitor of Wal-Mart; that means we are approaching that level, the world class company level.

PAUL SOLMAN: So, do Chinese consumers want to become westernized? No, says ad man Tom Doctoroff, head of J. Walter Thompson’s Shanghai office; they want to become modern, while remaining emphatically Chinese.

TOM DOCTOROFF, Greater China CEO, J. Walter Thompson: Chinese believe fundamentally in the superiority of the Chinese worldview. The one thing that has unified China despite wars, despite emperors falling and dynasties rising, is the Chinese worldview and a belief in it as almost a religion; it is almost spiritual cohesion. So people don’t want to become westerners. People think that western is a dead-end. What they want to be is international. What they want to be is modern.

PAUL SOLMAN: So Doctoroff puts a Confucian spin on, for instance, his Nike ads in China. They seem to stress western individualism, but it’s never outside the group.

TOM DOCTOROFF: Individualism in China — it’s the illusion of being different, of having a better, smarter, cleverer way, but it always has to remain understated within the context of social barriers of a Confucian society.

One thing that, you know, is interesting about Chinese youth is they’re very ambitious. They want to show off in front of their peers, but because it’s not truly an individual culture, they show off but in an understated way so the tone and the manner of these is very quiet and then the joy and the showing off and the peer endorsement happens.

So Chinese don’t want to define themselves independent of society. They want to as individuals climb up a very regimented social hierarchy.

PAUL SOLMAN: Doctoroff applied the same insight in a Chinese diamond ad.

TOM DOCTOROFF: This is a fundamentally different ad than what you’d see in the West. A diamond is forever — in the West, you know, it’s really about sex. This is really a commercial not about romance but about commitment.

The man ties a red string to the woman’s finger. The Chinese have a belief that two people, because of fate, are born with a red string attached to their intended, the person they’re meant to be with.

PAUL SOLMAN: As for you PBS viewers who think fewer ads in general might not be a bad thing –

TOM DOCTOROFF: Advertising is about profit and profit is good for capitalism and capitalism is making China move forward.

PAUL SOLMAN: It’s an argument that upscale young Chinese have now begun to buy.

PAUL SOLMAN: We’ve always heard that Chinese like to save, not spend money. Is that true of your parents?

MONICA: Very much so.

PAUL SOLMAN: And you?

MONICA: I spend ahead of my earnings. (laughing)

PAUL SOLMAN: You spend ahead of your earnings?

MONICA: Yeah.

PAUL SOLMAN: Is that true of your friends as well?

MONICA: I think so. It’s true of all young people.

PAUL SOLMAN: Millions upon millions of new Chinese consumers, then, globalizing in their own way at a dizzying pace; yes, they’re a tiny fraction of the total: more than a billion Chinese could never afford a drink here.

But at the rate China has been changing, it could become — with its own peculiar twists — the world’s largest market someday — perhaps, someday soon.