table of contents · list of illustrations figure 2.1 figure 20.1. list of tables table 2.1. ......

Table of ContentsTitlePageCopyrightDedicationPreface

January15,2008AcknowledgmentsIntroduction:TheChinaDream

OurIntentTheCountrywithinaCountry

PartI:History,Culture,andLanguageMatter—TheBirthofChineseConsumerismChapter1:FromFeudalismtoFendi

BacktotheFutureChineseConsumption:What'sOldIsNewAgain(Tenfold!)China'sGrowthIsDifferent

Chapter2:OrientationACodetotheChineseMind-setContradictionandParadoxSummary

Chapter3:ASelf-ContainedEmpireChapter4:TheFirstGlobalizationChapter5:MarcoPoloandtheTwoAdmiralsoftheSea

TheTwoAdmiralsoftheSeaChapter6:AnInsatiableAppetite

FreedomCreatesWealthintheWestChapter7:Opium,Imperialism,andDecay

OpiumandWar

ACenturyofExploitationEndofWar—ContinuationofWar

Chapter8:ThePeople'sRepublicTheNewChina

Chapter9:TheMandateofHeavenOpeningandReformGreenShoots

PartII:TheChineseSuperConsumer—FromBirthtoAdolescenceandMaturityChapter10:ABoomIsBorn

ABoomStartswithaSwooshandaShotofEspressoChangeatHyperSpeed

Chapter11:FromSandpapertoSephora—TheFirstSuperConsumers

AmericanCenturyReduxWant.Need.Buy.ShowOff.KeepUp.SuperConsumptionGoesGlobalGoWest,YoungManChina'sOwnPostwarBoomandBirthoftheChineseSuperConsumerIntheBeginning

Chapter12:TheChinaMarket+TheChinaGlobalDemographic=China'sSuperConsumers

TheChinaWhispererSpinninginaWhirlpoolTheGreatPizzaWars:InChina,EverythingIsPossible,butNothingIsEasyListentotheGreatOneStaytheCourse,EvenWhentheSeasGetRough

Nestlé:NavigatingtheTeenYearsChapter13:TheChinaGlobalDemographic

ThePreciousGiftofTimeMeettheTangs

Chapter14:ChannelsDepartmentStoresStreet-LevelStoresMallsGroceryStores/SupermarketsHypermarketsConvenienceStoresNotYourFather'sPostOfficeLifestyleStoresSpecialtyRetailersMultibrandRetail

Chapter15:E-commerceandtheRiseofAlibabaAlibabaNFLFootballs“SoldOut”WhyE-commerce?

Chapter16:SupplyChainstoSatisfyChina'sSuperConsumersSupplyChainMegaprocessesPlanBuyMakeDistributeSellAligningStrategy,Structure,andImplementation

Chapter17:Segmentation

SurveyingChinaAMostDiscerningConsumer

Chapter18:MarketingConsumerImpulsesandDesiresLenovo'sApproach:TheBestofBothWorldsFromEasttoWesttoWeiEastBabyBoomBrandAdvertisinginChinaGoingNative—ToryBurch,GossipGirl,andMade-for-ChinaTVTheRoleofSocialMediainMarketing:UnitedStatesversusChinaPromotions

Chapter19:TheChineseLuxuryandPremiumMarketTheNouveauRiche:PebbleBeachorNothingTheGiftingGroupChina'sEngine:TheNewMiddleClassSeeksQualityandValueAffordableLuxury:ATiffany'sTieClipandanEntry-LevelBMWChina'sLuxuryDownturn:MythsandRealities

Chapter20:TravelandTourismTakeaWalkonBoardwalk—PassGo,Collect$200(Thousand!)

Chapter21:ChineseSuperConsumersChangingtheWorldTheMicrosoftMiracleAFinalWordaboutChina'sSuperConsumers

IndexEndUserLicenseAgreement

List of IllustrationsFigure2.1Figure20.1

List of TablesTable2.1

China's Super Consumers

WHAT 1 BILLION CUSTOMERS WANT ANDHOW TO SELL IT TO THEMSAVIOCHANANDMICHAELZAKKOUR

Coverimage:©iStock.com/samgrandy(background);©iStock.com/shutter_m(dragon);©iStock.com/AlbertoBogo(tag)Coverdesign:WileyCopyright©2014bySavioChanandMichaelZakkour.Allrightsreserved.PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.PublishedsimultaneouslyinCanada.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,orontheWebatwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions.LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescontainedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orotherdamages.Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317)572-3993orfax(317)572-4002.Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerialincludedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorinprint-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedintheversionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.FormoreinformationaboutWileyproducts,visitwww.wiley.com.ISBN978-1-118-83474-9(cloth);ISBN978-1-118-83482-4(ebk);ISBN978-1-118-90590-6(ebk)

Formyparents,HalandCynthia,fortheirunconditionalloveandwho,fromthebeginning,gavemethegiftofcuriosity,aloveforhistory,aglobaloutlook,andbeliefinthepotentialandpromiseofmylife—andformywife,Monique,andson,Julian,whohavefulfilledthatpromise.

—Michael

Tomymotherandfather,andgrandmother.Foralwaysbelievinginme.Tomydaughter,Kristi,whoismyinspiration.

—Savio

Preface

January 15, 2008Itstartedasanothernormalworkday:upearlyforcallswithChina,meetingswithclients,andworkingonamarket-entrystrategyforafashioncompany.Andthenasmallemailwithhugeimplicationscamein.Itwasanemailthatleftuswithourmouthshangingopen.SteveJobs,CEOofApplecomputer,hadwritten,askingforadviceaboutdealingwithChinaMobileandlaunchingtheiPhoneinChina.AtthetimeChinahadabout600millionmobilehandsetsinuseandChinaMobilehadnearlythreequartersofthemarket.StevefeltthattheChinesemarketwasintegraltothecompany'scontinuedgrowth.Hewasright.Therearenow900millionmobileunitsinuseinChina,andinthenexttwoyearsthatnumberwillreach1.2billion.JobsexplainedtousthathisnegotiationswithChinaMobile,thelargestmobileproviderinChina—andtheworld—wereproceedingslowlyandprogressintheshorttermseemedunlikely.TheemailwasallthemoresurprisingbecauseitcameonthedayApplelaunchedtheworld'sthinnestlaptop,theMacBookAir,atMacworld.SteveJobswasthinkingaboutChinaonamajorproduct-launchday.WesuggestedtoStevethatwhileitwastruethatChinaMobilewasthebiggestplayerinChina,itscurrenttechnology,management,andleadershippositionmeantthatitmightstillbeyearsbeforeadealcouldbestruck.WesuggestedpursingChinaUnicom,abigplayerbyanyglobalstandard,butamuchsmallerrivaltoChinaMobile.ThetechnologyneededforiPhoneswasalreadyinplace,andtheymightbehungrytobeattheirbigrivaltomarketwiththeiPhone.Mostimportantly,adealwithChinaUnicomwouldgiveApplefasteraccesstoChina'sconsumersandtimetobuilditsbrand,reputation,andmarketshareasitexploredfurtherplansforexpansion.Chinawasgrowingandchangingtoofasttowait,weadvised.

OnAugust28,2009,theiPhone—throughChinaUnicom—waslaunched.FastforwardtoJanuary16,2014.Afteryearsofnegotiations,alignmentofinterests,andtechnologicaldevelopments,AppleCEOTimCookandChinaMobileChairmanXiGuohatookthestageatApple'sflagshipstoreinBeijingtoannounceapartnershipbetweenthetwotechnologygiants.First-daypreorderstopped1millionandfirst-yearsaleswereestimatedtobe24millionunits.WhileApplestillhassomecatchinguptodotogainonmarketleadersSamsung,Lenovo,HTC,andothers,itisonsolidfootingintheworld'slargest,fastest-growing,andmostimportantmobilemarket.BecauseofitsunderstandingthatChina'sconsumerswerechangingitsindustry,itsbusiness,andtheworld,Appleenteredthemarketwiththebestshort-termpartnerwhilebeingpatientandfindingtherightdealwiththebestlong-termpartner.ApplehasgoneontomakebillionsofdollarsbygrowingwithandengagingChina'sSuperConsumers.

AcknowledgmentsIwouldliketothank:oureditorsatWiley,ShannonVargo,ElizabethGildea,andDeborahSchindlar,forbelievinginusandgivingusthechancetotellthistimelyandimportantstory.JoshBerkman,whosedevelopmentaleditingandorganizationalbrilliancegavethisbookshapeandform.JanetCarmoskyforhermentorshipandencyclopedicknowledgeofallthingsChina.RichardBerman,ofVerbFactory,anoutstandingwriterandcommunicationspro,forfreelygivingofhimselfandhisexpertise.JimTompkinsandmycolleaguesatTompkinsInternationalforbelievinginandsupportingme.SteveGanster,SteveCrandall,andthestaffatTechnomicAsia.EveryoneattheConfuciusInstituteforBusinessatSUNYinNewYork.ThegoodpeopleatTheChinaInstitute.MyfellowBoardmembersandeveryoneattheAsianFinancialSociety.AllofthegreatwritersandauthorswhosecoverageandinterpretationofChinaoverthelast15yearsprovidedmewithaneducationonChinaandbigshoulderstostandon,includingbutcertainlynotlimitedto:JimFallows,YuHua,PeterHessler,EvanOsnos,GadyEpstein,AdamMinter,HelenWang,LouisaLim,PaulFrench,SimonWinchester,OrvilleSchell,MattSchiavenza,JamesMcGregor,LaurieBurkitt,DavidBarbosa,TimClissold,andmanyothers.TothemenandwomenwhohavesupportedmycareerandshapedmyeducationinChinesebusiness,culture,history,language,andmind-set:WinstonMa,I.PeterWolfe,BobShapiro,DanHarris,EsmondQueck,IvyLiu,JessieHu,ShaoHeng,DayongLiu,HankSheller,RichardGuo,WeiWang,JohnYang,SureshDalai,ProfessorLawrenceDelson,RebeccaFanin,ProfessorAndyMolinsky,BrianGlucroft,DaiWenhong,andtoomanyotherstonamehere.Thankstoallofmyclients,pastandpresent,whohaveletmebeapartoftheirChinadreams.Andtoallmyfriends,family,andsupportersthroughthickandthin:Donna,Anthony,Nicolas,andMarcZarriello,KevinJames,MikeDelTufo,MattPolidoro,BrianVanderhoof,RobKlein,TerryZuckerman,AdamSlavitt,MarcMaurizi,George

MauriziandGayleUhlenberg,ElliottWarren,StephenHochman,KeithStillings,EthanGarr,SamBlumenfeld,theAllens,theRoodenrysfamily,theBiedermans,HitenManseta,JayIsherwood,TTYC,theMelroseDrivecrew,myclassmatesandteachersatLivingstonHighSchoolandSetonHallUniversity,andmostimportantlyIwanttothankthethousandsofChinesecitizens,businesspeople,academics,andpoliticalleadersIhavehadthehonorofmeeting,workingwith,learningfrom,andbefriendingovertheyears.Thekindness,openness,andgenerosityIhavealwaysbeenfreelygiveninChinahasprovidedmewithnotonlyagreatcareer,butasecondhome,asecondbrain,andasecondlife.

—MichaelZakkour

First,IwanttothankmymentorCharlesB.Wang,whomImet26yearsagoafterninemonthsofcold-callinghim.Hisfaithinmeandhisinspirationhavepoweredmyjourneyasanentrepreneur,thenandnow.Second,IwanttothankDunkinDonutsforgivingmemyfirstjob,makingdonutsonthegraveyardshift,sothatIcouldpayformycollegetuitionandlivingexpenses.ThatexperiencestrengthenedmeandmademeappreciatewhatAmericahastooffer.Third,IwanttothanktheformerBrooklynQueensCableTV(todayTimeWarnerCable)forgivingmemyfirstdoor-to-doorsalesjob,whichallowedmetodevelopandsharpenmysellingskillsbyknockingon165doorseverynightsothatIcouldsaveenoughmoneytostartmyfirstbusinessin1992andputadownpaymentonmyfirsthouseonLongIsland.MylistofgratitudeisprobablylongerthantheYangtzeRiver,asovertheyearsnumerouspeoplehelpedmealongthewayandIwill

trytonamesomeofthemwhodeservespecialnote.First,toJessicaJupingTu,forallherTLCandfaithinmeovertheyears.Second,toOlivia,fortakinggreatcareofKristiandwhoinstilledinherwonderfulvaluesandtookcareofhercaresothatIcouldfocusonmybusiness.Alsotomycurrentandformerbusinesspartners,ThomasW.Shinick,WalterLin,andAlbertChin,forstickingwithmethroughoutthoseyears.Manybusinessadvisorsandfriendshavealsobeeninvaluableinprovidingmeideasandsupport.HerbandNancySiegel,youbotharemyextendedfamilyandtaughtmeaboutthevalueofagreatfamilyandfriendship.JeremiahSchneeandMargaretPoswistilo,forbeingmybiggestsupportersandstrategicpartnersinmanyofmybusinessendeavors.StuartandHarrietLevine,whoreallyhelpedmeunderstandwhatwritingandmarketingabookreallymeant.IalsowanttothankmyJewishuncle,StevenDreyfus,whohasbeenunrelentinginprovidingmesageadviceandguidanceforthelast20+years.MyAsianAmericanentrepreneurialfriendshavebeenunwaveringingivingmeallkindsofsupportandencouragementandIwanttothankthem.AnilKapoorofSVAMInternational,AzizAhmadofUTCAssociates,BrianLiofA&ZPharmaceuticals,RussellSarderatNetcomLearning,FredTeng,JoyceMoy,SusanKim,RobertWong,TongLi,HelenLiu,AlexPeng,RockyZhang,AlbertandBenWei,LilyHui,GraceMcDermott,VargheseChacko,NaheedSyed,andallmyotherfriendsatUSPAACC,tonamejustafew.OtherbusinessadvisorsandfriendsthatdeservemydeepgratitudeincludePaulSchulman,PeterCuneoandfamily,DirkJungeofPitcarin,RonGreenstone,PeterGoldsmith,GlynisLong,HowardCohen,JeffKnoll,ArthurDong,mylovelysisterWeiBrian,andWillFangandallmyfriendsattheCheungKongGraduateBusinessSchool(CKGSB),BobQuintana,RobertReissoftheCEOShow,GregFurmanoftheLuxuryMarketingCouncil,IraNeimark,MichaelWolff,HarveyFeinberg,andMichaelJemal.MelanieRudinandRichardGellmanofTourneauhavebeenwonderful

partnersformybookandIwanttothankthemaswell.AlsoIwanttothankSeanCombs,CatherineLin,andAshliSoweratNiHaoMediafortheirsupportandfriendship.Lastbutnotleast,IwanttothankoureditorsShannonVargo,ElizabethGildea,andElanaSchulmanatJohnWiley&Sons,Inc.,fortheirexcellenceanddedicationinshepherdingthisbooktofruition.

—SavioChan

Introduction

The China DreamTheChinesedreamisbasedinhistoricalreality,butalsointhefuture.Itisnational,ethnic,anditbelongstoeveryChineseperson.Itisours,andmostofallitbelongstotheyounggenerations.—XiJinping

China'sleadershavetraditionallyusedbig-ideasloganstopromotetheidealsandgoverningphilosophytheywanttofosterforthepresentandfutureofthecountry.Theseslogans,dueinparttotheirsimplicityandvagueness,packalotintoafewwordsandpeoplewhoknowChina—orwanttolearnabouttheworld'smostpopulousnation—mustthinkdeeplyaboutthem.Whentheymakepronouncementsinsloganform,theleadersofChina'scentralgovernmentaren'tjustarticulatingaphilosophyortryingtoinspirepeople:theyaredefiningthevisionandendpointformechanismsoflegalandsocialdevelopment,forenterprise,andforresourcemanagement.AlandmarkstatementbythechairmanoftheCommunistPartyisnotanattempttocreateamoodorinspirethepopulation.It'sanationalstrategy.DengXiaoping,China'sdefactoleaderfrom1978to1992,setthestagefortheearlypost-Maoyearswithhispolicyof“FourModernizations”(agriculture,industry,scienceandtechnology,andthemilitary).Dengaffixedtwonamestothenextera:ReformandOpeningandSocialismwithChineseCharacteristics.ItwasamovementthatbirthedtheChineseeconomicmiracleofthepast30years.WhathemeantbysocialismwithChinesecharacteristicswasthatChinawouldpursueapathofreformsfocusedonmarketdevelopment.Thedeeper,unsaid,butreadilyunderstoodmeaningbehinditwasthatChinawouldabandontheideologicalpurityandthecultofMao—dictatorshipofthemasses—infavorofsomethingfarmorepragmatic:aversionoftheuseofcapitalandmarketsthat

wascompatiblewithChina'sowneconomichistory,andwithsomenon-Chineseversionsofcapitalismdominantinourage.In1992,whenitseemedthatpowerstruggleswithinthepartytoreversemarketreformsweregainingground,Dengmadeanotherpronouncement:“Togetrichisglorious.”WhathesignaledwiththatboldstatementwasthatChinashouldworktoelevateitsstatusasawealthy,strongnation;thatindividualswouldbepermittedtoaccrueprivatepropertyandwealth;thatideologywastakingabackseattopragmatism;andthatpragmatismmeantcommitmenttoeconomicexpansionbackedbymarket-directedcapital.Itwasn'tjustanemptyslogan;itwasamajorpolicydirection.Deng'ssuccessorsJiangZeminandZhuRongjiweresuccessfulinimplementingextensivereformsthatopenednumeroussectorstoforeigninvestmentandtookChinaintotheWorldTradeOrganization(WTO).AsthestructureanddirectionofChina'seconomydeviatedfurtherandfurtherfromthedoctrinesofcommunism,thenewpartysecretaryofChina,JiangZemin,felttheneedtodevelophisownvisionofleadership:theThreeRepresents.Announcedin2000,thevisionaimedtoreconcilethedirectionofChina'sdevelopment—moresocialreformandmorecapitalistconstructs—withChina'spoliticalstatusundertheCommunistParty.Inotherwords,itwasanattempttoansweranobviousquestion:HowisitthatacountryledbytheCommunistPartyisencouragingtheownershipofproductionbyprivateinterestsandtheaccrualofpersonalwealth?Jiang'sThreeRepresentsstatethatthepartystandsfor:1. Thedevelopmenttrendsofadvancedproductiveforces.2. Theorientationsofanadvancedculture.3. Thefundamentalinterestsoftheoverwhelmingmajorityof

China'speople.(Somuchforcollectiveownershipofthemeans

ofproduction.)Thenextgenerationofleadership—every10yearsthecompositionofthestandingcommitteeofthePolitburoandthetwoheadsofpartyandstatearereassigned—placedHuJintaoasheadofthepartyfrom2003to2013.Hugovernedfromthefoundationoftwonewandverypowerfulslogans:“HarmoniousSociety”and“ScientificDevelopment.”Intheirsimplestinterpretations,thesemeantthatChinesestability(social,government,andeconomic)wasparamount,thegovernment'srolewastoensurethatallChinesewouldbenefitfromreforms,andthateconomicstructuresthathadbeenproveninpreviousyearstoraisestandardsoflivingandglobalinfluencewouldcontinue.Thatis,whileHarmoniousSocietymakesreferencetowealthinequality,italsosignalsalackofintenttodoanythingsudden.XiJinpingsucceededHuinthetoppostin2013.DebutinginNovember2012,Xi'snewslogan,bigidea,andguidingprincipleis“theChineseDream.”XiwasinspiredtousethesloganbythethoughtsofLiuMingfu,aretiredChinesePLAcolonel,whowroteabookcalledTheChinaDream:GreatPowerThinkingandStrategicPostureinthePost-AmericaErain2010.It'sanobviousandlikelyintentionalriffontheAmericanDream,whichincludesgrowingwealthandconsumerismaswellasahealthydoseofnationalism,patriotism,andmilitaryexpansion.AllarehallmarksoftheAmericanDreamandthefirstwaveofAmericansuperconsumers.Whatliesbeyondthesurfacesimilarities?ItisXi'sregime,andtheStandingCommitteeinwhichheisthekeyleader,thatwillrunChinauntil2023.Becausecrypticpronouncementsmadebyatopleaderhavearealimpactonpolicies,it'sworthlookingforcluesaboutXi'sintent.WefindsomeinthetwelfthFive-YearPlan(FYP),releasedin2010.China'spoliticalcycleensurescontinuityandmomentumbyoverlappingthetermsofofficewiththetermofthepreviousregime'sFive-YearPlan.Xi'sregimewillreleaseitsownFYPin2015,butfirstthegovernmentneedstocompleteimplementation

oftheFYPreleasedin2010.Here'swhatthetwelfthFive-YearPlancontains:arecognitionthatmanufacturingforexport—whatmadeChinatheworld'ssecond-largesteconomyoverthepast25years—willnotsustainChina'sgrowthandprosperityforthenext25years.ThereformsofthepreviousregimesfreedhundredsofmillionsofChinesefromthegripofpoverty,allowednumerouscentersofeconomicactivitytoemerge,empoweredanewsuper-wealthyelite,and—here'sthepointthatsociologists,economists,politicaltheorists,andbusinesspeopleworldwidenowhavetoaddress—createdthelargestmiddleclasstheworldhaseverseenwhileatthesametimehistory'ssecondgroupofsuperconsumerswasborn.WhenthetwelfthFYPwasbeingdeveloped,China'sconsumptioneconomywasexplodingandithassincegrownexponentially.AndthetwelfthFive-YearPlanmakesitclearthatChina'sleadershipwantstheconsumptioneconomytogrowmore.Thereisn'tenoughmarginorproductivityinlow-valueexportstosupportrisingstandardsoflivingacrossthepartsofChinesesocietythatarestillpoor.ThetwelfthFYPisdesignedtopushtheChinesepeopletoloosentheirwalletsfurther,tospendmore,andtospendonmoreservices.Itaddressesmanagementofforestry,water,andlandresources;aerospaceandmilitary;hospitalandeducationalsystems;countlessaspectsofeconomicandsocialdevelopmentthattwo-orfour-year-termlegislatorsinmultipartysystemscouldnotimaginedealingwithasanational-policyexercise.Italsonamessectorsforfurtherliberalization,includingafewhigh-margin,capital-intensive,very-large-scaleservicessectors—suchasfinance,insurance,andrealestate—sectorsthatsell,ineffect,asenseofsecurityandstability.Thus,weknowXimeansthattheChineseDreamisbasedinastablestateaswellasahealthyandhigher-productivityeconomywithmoreconsumptionandmoreservices.Basically,thismeanspeoplepursuingagoodlivingandbeingencouragedtospendfreely.

ButdidtheaverageChinesecitizenseetheChineseDreaminthesameway?In2003,I(Michael)hadalonglunchwithaninternfrommyBeijingoffice.Wetalkedatlengthaboutherupbringing,herroleinourcompany,andherongoingeducation.ShewasastudentatFudanUniversityinShanghai,oneofthemostprestigiousinChina(China'sYaletoTsinghuaUniversity'sHarvard).Iaskedherwhatshehopedforaftergraduation.Sheansweredwithoneword:Freedom.IhadbeeninChinalongenoughatthatpointtorealizethatthatwasaloadedwordandanevenmoreloadedsubject,onethatmightnotbeappropriatetodigtoodeeplyintooveracasuallunchwithayoungpersonworkinginmyoffice.Nonetheless,Iaskedherwhatshemeant.Heranswersurprisedmethen;itmakesmoresensetomenow.Shesaid,“Iwanttobefreetofindagreatjob,agreatcareer,tomakealotofmoney,andtospenditasIseefit.”Iwastakenabackbyheranswer.ItmighthavebeenmyChinanaiveté,myAmericansenseofwhat“freedom”meant,ortheinherenttakingforgrantedthatIwasbornintoacountryandculturewherethatdesirewasagiven.ButthatwasthemomentIrealizedthatmycareerwouldshift;thatthefutureformewouldbenotonlybeinproductionandsupplychainsbutinhelpingcompanies,theirproducts,brands,andservicesinChina.Thewhitelightmomentwasseeingthemeldingofthethreemostimportantbusinessstoriesofthelastthirtyyears—TheRiseofChinaasProducerandConsumer,TheInternetandE-CommerceBoom,TheGrowthofModernGlobalSupplyChains—cometogether.Myfocusfrom2005onwardshasbeenonhelpingcompaniesleveragethesethreephenomena.TompkinsAsia,whereIwork,hasprovidedtheperfectplatformtodoexactlythat.U.S.ChinaPartners,theconsultingfirmthatSavioruns,wentthroughasimilarprocess.Initiallyfocusedonproduction,forthepast10yearsSaviohasworkedwithWesternbusinessesbyfosteringpartnershipsin

ChinathathelptheirproductsandbrandssucceedinChina.Thatlunchwasmyepiphany.IsawthatsomedayChinawouldbethelargestandperhapsmostimportantconsumermarketintheworld.In2003thatviewwasnotallthatcommon.Asidefromafewluxurybrandsandthelargest,mostfast-movingconsumergoods(FMCG)–focusedFortune500companies,notmanybrandswerefocusedonsellingtotheconsumermarketinChina.Tenyearslater,asXiintroducedtheChineseDream,SavioandItalkedaboutthatlunch.HerewasChina'sdevelopmentinanutshell:asmartandambitiousyoungwoman,graduatingatatimewhenshehadopportunitiestomakeagreatliving—notonlytosupportherselfandherfamily,buttobuythethingsshewanted,notjustwhatsheneeded.Shepersonifiedtheshiftfrompoortomiddleincome,frommanufacturingforalivingwagetoconsumptionbasedonahighsalary.Toher,freedomwasabouteducation,employment,financialstability,andbecomingaconsumer.WecouldquotehundredsofChinesecitizensineverytypeofmediaroundtheworldwhosaidandsaythingsverysimilartoourintern,andtherearemillionsinChinawhofeelthiswayasprovenoutbyourresearchandthatofothers.Intheyearssincethatlunch,Chinahasfulfilledthatintern'sdream,andthoseofmillionsofothersjustlikeher.Inthecomingyears,hundreds—yes,hundreds—ofmillionsmoreChinesewillhavetheirdreamsofmaterialprosperityandastablelifefulfilled,too.Today,theyarethecurrentandfuturemembersofChina'ssuperconsumermega-class,theirsophisticationandspendingpowergrowingataratethatremindsusoftheoriginalsuperconsumers:theAmericanbabyboomers.So,howmuchdotheAmericanDreamandtheChineseDreamhaveincommon?Thesimilaritiesincludeasenseofpatriotismandcultural

confidence,abackdropofemergencefromthedarkperiodoftheirparents'generation(theGreatDepressionandWWIIvs.thedecadesofideologicalstruggleandpovertybeforeandunderMao),newnationalandpersonalwealth,adevelopinghighwaysystemandcarculture,adesireforthebetterthingsinlife,andemerginghyper-consumerism.Yetthereareverysignificantdifferences:Forstarters,thedemographicsanddiversityofearlytwenty-firstcenturyChinaarenothinglikethoseof1950sAmerica.Thentherearethedeepstructuralissues:thelegacyofeconomicmodelswhoserootsextendbackthousandsofyears;aphilosophicallandscapebasedinthelong-terminfluencesofConfucianism,Taoism,andBuddhism(mixedinwithsomerecentMaoism);andsomeobviously(andprofoundyetnot-so-obviously)differentconceptionsofpolitics,society,andsenseoftheself.Wefeelit'sfairtosaythattheAmericanDreamandtheChineseDream,nottomentionthedistinctmodernEuropeanDream,haveenoughincommonthatweshoulduseourknowledgeofthosedreamswhenmakingsenseoftheeconomictrendsinChinanow,yetaccountfortheChinese-nessoftheChineseDream.Whatisthemostobviouscommonality?Onthesurfaceitisthedesiretohaveacareer,toownabusiness,togetrich,toownahouseandacar,toraiseafamily,andtohavealongandhealthylifethatincludesagreatdealofmaterial,cultural,andpoliticalcomfortandsecurity.Thatsaid,weneedtobecarefulofanyideasthatmayimplythecommercialinfrastructureorthespecificsofconsumerpsychologyarefundamentallysimilartotheUnitedStatesorEurope.ThereisauniqueroadmapforsellingtoChineseconsumers—tohelpthemlivethedream—andwhilethedestinationmaylookthesame,thejourneyisnecessarilyquitedifferent.

Our IntentThisisnotabookabouthowtodobusinessinChinanorisitabookthatpromises“10Rules,”“5Keys,”“TheSecret,”“AComprehensiveGuideto…Branding,Partnerships,E-Commerce,etc.,”inChina.NorisitanacademichistoryofconsumerisminChina.Rather,thisisanexplorationofanewphenomenon,China'ssuperconsumers,asexplainedthroughhistory,culture,language,andmind-setandmostimportantlybythoseengagingwiththem.It'salookatwhatmotivatesthem;what,where,when,andhowtheybuy;andwhatitmeansforyou,yourcompany,andtheworld—todayandinthenext10years.Inthisbook,wewillexplorehowthefirst2,000yearsofChina'shistorysetthestagefortheemergenceofasuper-consumerclass,andhowChina'shistoryshapesthepsychologyofconsumersandthebusinessesthatselltothem.Wewillexplainwhyforeigncountriesandcompanieshavehaddifficultytrying,inpreviouserasandnow,tobreakintothemarketandselltoChina'sconsumers—whethertheyareamassmarketofonebillionoramore-definedgroupof400million,500million,or700million.WewilllookathowandwhyaChineseconsumerclasswasborn30yearsagoandhowitsmembersbecamesuperconsumerswhoarechangingtheworld.Wewillalsosharetheexperiencesandinsightsofaselectionofcompaniesandexecutives,whowefeelrepresentmanyothers,whohavesucceededinengagingwithandsellingtoChinesesuperconsumers.WehopeyouwilllearnfromandidentifywiththesestoriestoeitherimproveorbeginyourengagementwithChina'ssuperconsumers.ItisourpurposetoexplainwhoChina'ssuperconsumersare,whoissellingtothem,whatandwhytheyarebuying,andhowtheyarechangingtheworldbytellingthestoriesoftheexecutives,brands,andretailersworldwidewhoaresucceeding.ItisouropinionandexperiencethatChinaistoovast,

toodiverse,andtoocontradictory,andchangestoofastfortheretobehardandfastrulesorasecretsauce.Ourintentratheristoprovideyouwithasolidfoundation,basedonhistory,andfactstohelpyoubetterunderstandwhatyoucandotoensureyouarepartofthisbusiness/social/consumerrevolution,andnotavictimofit.

The Country within a CountryTogetasenseofthescaleoftheworldinhabitedbytheChinesesuperconsumer,considerthisforamoment:Chinahasapopulation,dependingonwhoyoutalktoandwhatstatisticsyouuse,between1.2and1.5billionpeople.TheUnitedStatesisthethirdmostpopulouscountryonEarthatabout320millionpeople,andisthelargestconsumersocietyonEarth(fornow),andyetasamarket,theUnitedStatesisChina'sroundingerror.Similarly,Europe'spopulationismorethan400millionpeople,andChinaislikelytohavealmost500milliononlineshoppersby2015.China'scurrentconsumerrevolution,atleastfornow,islargelypoweredbythe400millionorsoinhabitantsofthecountrywithinthecountry:coastalChina.Notallofthisregionisactuallyonthewater—Beijingisdryasadesert—butalloftheprovincesandcitiestowhichthetermrefersarecloseenoughtothecoast(andthetradeactivitieswiththeWest)tohavebenefiteddirectlyfromReformandOpening.“CoastalChina”includestheBohaiBaycitiesofDalian,Qingdao,Tianjin,andBeijing;ShanghaianditstwoneighboringprovincesofJiangsu(Nanjing,Wuxi,Suzhou)andZhejiang(Hangzhou,Ningbo,Wenzhou);acrossthestraitsfromTaiwanisFujianprovince(Fuzhou,Xiamen);andthemegacitiesofthePearlRiverDelta(Guangzhou,Shenzhen,Dongguan,Huizhou,andHongKong).Thefactthatthemajorityofsuperconsumersresideinthecountry-within-the-countryholdsgreatpromiseandpotentiallygreatperilforChinaaswellasforthecompanieswhosefuture,insomeway,reliesoncontinuedgrowthintheMiddleKingdom.Theupshotisthatfurtherinlandthereare500to700millionmoreconsumerswho,duetoanumberofeconomicandsocialfactors,haveyettotransitionfromlowormidlevelconsumerstosuperconsumers.ThedownsideisthatifChinadoesnotdevelopnewconsumerregionsandclassesrapidly,ensureincomedistributionacrossChina,andcreatesocialandpoliticalrealitiesontheground

thatwillprovidemoredisposableincome,thenChina'sgrowthcouldbehinderedanditspotentialastheworld'stopconsumermarketcouldbethreatened.Beforewediveintothebackgroundandthebackdropofthepast—thecultureandhistorythatshapeChina'ssuperconsumers—let'sconsiderafewmorefactstoaddtothepopulation/consumerscalefactswementionedabove.

GMsoldmorethan3millioncarsinChinain2013andexpectstosell5millionormorein2015and2016.ChinaisAudi'smostimportantmarket,andPorscheexpectsChinatobeitsbiggestmarketwithinayear.ThirstyChineseconsumemorebeerandwinebyvolumethananycountryonEarth.Chanel,LouisVuitton,andPradaarethethreemostdesiredluxurybrandsinChina,andeachderivesasignificantpercentageoftheirprofitsfromChinasales.Coach'ssecond-largestmarketisinChina(infiscal2013,Coach'ssalesonChina'smainland,HongKong,Macao,andTaiwanreached$430million,a40percentyear-on-yearincrease),andChinahasmadeMichaelKorsthemostsearchedforbrandontheInternet.Allofthe2013top10powerbrandsinChinawereforeign.OnlycaffeinefreaksintheUnitedStatesdrinkmoreStarbuckscoffeethanthoseinChina(ChinarecentlypassedCanadaasthecompany'snumber-twomarket).HersheypredictsChinawillbeitssecond-largestmarketwithinfiveyears.Chinaistheworld'slargestmarketformusicalinstruments.GuccihasthreetimesasmanystoresinBeijingasitdoesinNewYork,andLouisVuitton'snewShanghaistorehasthefloorspacetorivalitsChamps-Élyséesflagship.

Chinaalsohasanestimated700billionairesandmorethanamillionandahalfmillionaires(puttingitinthirdplaceafterJapanandtheUnitedStates).McKinsey&Co.hasforecastthatby2015upper-middle-classChineseconsumerswithannualincomesfrom$15,000to$30,000willaccountforalmostone-quarterofthenation'sluxury-goodpurchases.Ofalltheemergingmarketsnamedinthe2000sastheBRICS(Brazil,Russia,India,China,andSouthAfrica),onlyChinahasmaintainedrapidgrowthandexpansion.

ItisnothardtoseewhycompaniesfromaroundtheworldlooktoChineseconsumers—youngandold,maleandfemale,fromBeijingorQingdao,onlineoroff,wearingthebrightlycoloredcostumesofsuperheroes—toswoopinandrescuethemfromstaticandevendyingmarketsintheUnitedStatesandEurope.Theyarechangingtheworld—somuchso,thatpurchasedecisionsmadeinShanghainowhaverippleeffectsonthelivesandlivelihoodsofpeoplefromLagostoLosAngeles.Theyarechangingthewaycompaniesdesign,build,market,andselltheirproducts.Theyarechangingthebalanceoftradeonaglobalscale.Theyaremakingandbreakingbrands.Theyarechangingthewaybricks-and-mortarande-commerceretailtakesplaceeverywhere,notjustinChina.Theirshoppinghabitsandattitudes,channelpreferences,andcommunicationpatternsarechangingtheveryideaofwhatitmeanstoplan,make,buy,move,store,andsellproductsaroundtheworld.Theyarechangingbusinessesinobviousandhiddenways.Inshort,China'ssuperconsumersarechangingChinaandtheworldinwaysunimaginableeven10yearsago.Thequestionsforyouare:Areyouabeneficiaryorvictimofthisphenomenon,andwhatareyoudoingaboutit?

Part I

History, Culture, and Language Matter—TheBirth of Chinese Consumerism

Chapter 1From Feudalism to FendiChinaisoftentalkedaboutandunderstoodinthemedia,inboardrooms,atconsultancies(presentcompanyincluded),andatdesignhousesthroughtheuseofmind-blowingstatistics,superlatives,andclichés.Someofthemaretrue,someembellished,somemisunderstood,andsomearejustmisleading.Gettingpastthehype,hyperbole,andsuperlatives,weneedtoaskandanswersomerealquestions.WhendidChinastarttoconsumeenmasse?Who'swinning?Who'slosing?Whatroledoforeigncompanieshaveintheboom?WhatroledodomesticChinesecompaniesplay?WhatcantheworldlearnfromChina?WhatcanChinalearnfromtheworld?Isitazero-sumgame?WhatdowereallyknowandunderstandaboutsuperconsumerisminChina?Whereareitsculturalandhistoricroots?WhatpatternsofChina'slongeconomichistoryarebeingrepeatedoramplified?Whatpatternsarebrandnew?Also,whendidWesternersfirstrealizethepotentialimportanceofChineseconsumers?WhendidtheystartdreamingofsellingtheirbestwarestothelargestpopulationonEarth?Priortothepast30years,didanyofthemcrackthemarketandsucceed?Let'sstartwithtwoincontrovertiblefacts.First,Chinaisreallybigandreallyold.Assuch,thenation'ssenseofitselfisbothintenseanddeeplyembedded.Westernfirmsthatoverfocusonthecountry'stwentiethcenturypoliticalhistory—thatseethebehaviorsofChinesepeopleasaresponsetoorbacklashagainstcommunism—aremissingthebiggerpicture.Chinahasbeenamajorworldpowerandaneconomicsuperpowerseveraltimesinitslonghistory.Second,itneedstobesaid—andletitbesaidherewithnoambiguity—Chinaisn'taJohnny-come-latelyontheworldscene,sufferingfromalackofsophisticationandreadytoembracewhatevertheWestbrings.Chinaknowsitselfandwillembracewhatisconsistentwithitsself-image.

Still,atthedawnofthetwentiethcentury,mostpartsofChinawereoperatingasfeudaleconomies.Thirtyyearsago,aftersocialistconstructionofbasicinfrastructurefrom1949to1979,therewasstillvirtuallynoconsumereconomy.Butby2013,Chinawasseenastheworld'stopmarketforluxurygoods.So,howhasChinamoved,inthepast100years,fromfeudalismtoFendi?WhathappenedthatChinesesocietygaverisetohundredsofmillions—oreven,asJamesMcGregornamedtheminhisseminal2005book—OneBillionCustomers?Thefirstpartofthisbookwillexplainthehistory,culture,andmind-setthatshapedChina'ssuperconsumers.Thesecondpartwilldefinewhotheyareandwhy,where,when,andhowtheybuy.Itwillalsochroniclethestoriesoftheexecutives,companiesandbrandsfromaroundtheworld,andChina,whohavesucceededinunderstandingandsellingtoChina'ssuperconsumers.

Back to the FutureSo,whatdoesitlookandfeellikewhenthebalanceoftrade,commerce,andpowerintheworldyouonceknewnolongerexists?Whatdoesitlookandfeellikewhentheglobalizedworldthatyoujustgotusedto—Chinaastheworld'sfactory,Americaasthewallet—turns180degrees?WhatdoesitlookandfeellikewhentheChineseDreambecomesrealityandChinasuperconsumerschangetheworld?ItlookslikeYanWu,a28-year-oldadvertisingexecutivefromasmallvillageontheYellowRiver—nowlivingandworkinginShanghai—arrivingattheJingAnTempleStarbucksateighto'clockinthemorningtobuyherpreworkcoffee.ShewalkstothecounterinherMichaelKorsshoes.Sheiswearingastylish,sheerZarablouse(hanginglooselyoverherLevi'sjeans)andsheiscarryingaToryBurchhandbag.Shetakesa100RMBnotefromherFendiwallet,paysabout33RMB(morethan$6)forherlatte,andsitsdownatanemptytable.SheappliessomeeyelinerthatsheboughtattheSephoraflagshipstoreatNanjingWestRoadovertheweekend,washesdownsomeGNCvitamins(boughtatthenewShanghaiGNCatRafflesCity),andspendsthenext15minutescheckingemail,textingonWeChat,andbuyinganewskirtonTaoBao—alldoneonherdomesticallymadeHTCphone.Itlooksandfeelslikeaforceofnature,aonce-in-a-centurytsunamiofchangethatisripplingacrosstheocean,crashingontoshore,androllingintotheexecutivesuitesandboardroomsofcompaniesofallshapesandsizes,fromallovertheglobe,androllingbackoutagaintowashawaytheworldasweknowit.ItlooksandfeelsverymuchliketheeraofGlobalization1.0(roughly1978to2008)isover.Infact,itfeelslikewhatishappeningmustbeGlobalization2.0,whereChina'simportanceisnotasamanufacturingcenter,orevenasconsumermarket,butas

aplacethatsetsthestandardsforspeedandeffectivenessindistribution,retail,digitalandmobilemarketing,branding,anddesign.Itfeelslikeanerawherecompaniesfromaroundtheworldhavetorethinkandresettheirstrategiesaccordingtowhoandwheretheirnewestandmostimportantcustomersare,wheretomakegoods,andhowtodeliverthemonaglobalbasis,becausethe1.0modelsdon'tapplyanymore.Ifitlooksandfeelsliketheperfectstormofrisingwealth,urbanism,globalism,andhyperconsumerism,allhelpedalongbyfavorablegovernmentpolicies,that'sprobablybecauseitis.Ms.Yanandhundredsofmillionsofpeoplelikeheraretoday'ssuperconsumers,drawingtheworld'sinvestments,people,brands,andfocustotheshoresoftheMiddleKingdom.Considerwhatchangescametotheworld'smanufacturersandmarketersthelasttimeaclassofsuperconsumersemerged.ThebabyboomersofAmericachangedthetwentiethcentury;whattheywantedandbought,therestoftheworldwantedandbought.Thebrandstheylikedexpandedworldwide,spreadAmericansoftpowerglobally,andhelpedusherinwhatcametobecalledtheAmericanCentury.ArewenowlivingatthedawnoftheChineseCentury?

Chinese Consumption: What's Old Is NewAgain (Tenfold!)Historically,Chinahasbeentheworld'seconomicsuperpower.Ifwewantedtocreateacontroversy,wecouldfindthedatatoarguethatthepast400yearsofAnglo/Europeandominanceinscience,technology,andsheereconomicpowerasshareofglobalGDP,arenotahistoricalinevitability,butananomalyfromalonger-establishedpatternofChineseeconomicdominance.Counterintuitively,throughoutmostofChina'shistory(evenwhenitwasadominanteconomyandregionalpower)therewasnotalargeconsumerclassfocusedonspendingonwantsandneeds.TherewastheImperialCourtandthecivilservants(oftencalledmandarins)whorannational,regional,andlocalcapitals,andasmallmilitaryandcommercialelite.Beyondthattherewasnothingwe'dcallaconsumerclass.Peopletradedforandboughtfoodandtheessentialsofwork,family,andsurvival.Therewasabimodaldistributionofincome—atinyblipofelitesatthehighend,andahugemassofpoor,illiteratelaboratthebottom.EveninrecentChinesehistory,Chineseconsumerismwasbutadream,dreamedbybothaspiringbuyersandfrustratedwould-besellers.Inthetwentiethcentury,fromthefoundingofthePeople'sRepublicin1949untilthemid-1980s—whenDengXiaoping'searlyreformsallowedmoretradeandsaleofmanufacturedgoods—consumercultureinChinadidnotexist.Formostofthesefourdecades,allmanufacturing,trading,anddistributionwashandledbystate-ownedenterprises(SOEs).Theymadeandmovedgoodsbetweenproducersandthepeople.Thetermconsumercan'treallybeapplied,becausetherewasvirtuallynoretail,nosurplusincome,andnochoice.NothingfromoutsideChinawaslegallysoldandbought.InurbanChina,rationcouponsprovidedgrain,meat,andoiltoworkunitstowhicheveryonewasattached,eitherasaworkerorasafamilymember.Liquor,beer,andsoapcameinonebrand—whateverwasmadelocally.And

itemsthatwereforsalewerecheap.We'retalking20centsforabowlofnoodles,30centsforabowlofdraftbeer.Everythingelse—crackers,yarn,andbicycles—weresoldbystate-owneddepartmentstores.Nowhereafter1920wasHenryFord'smaximthat“YoucanbuyaFordinanycoloryouwant,aslongasit'sblack”truerthaninChina.DoyouwantyourMaosuitinblueorgray?Hadourarchetypicalsuperconsumer,Ms.Yan,beenaliveatanytimebetween1949andDeng'sfirstreforms,she'dhavebeenassignedtoaworkunitatastate-runcompany,livinginhousingadministeredbyherworkunit—withothersfromthatworkunit—andeatingherdaytimeandperhapseveningmealswithhercolleaguesattheunitcafeteria.Thesewouldnothavebeenchoicesbutratherthesolemannerforeconomicandsocialviability.Herwardrobewouldhaveconsistedoffiveorsixsimplejackets,hats,andpants—ingray,green,ornavy—hand-knitsweaters,clothshoes,nomakeup,uncomfortableundergarments,andacanvasbag.Heronlydrinkwouldhavebeentea;TCM(traditionalChinesemedicines)wouldhavebeenhervitamins.Evenifmakeuphadbeenavailable,shewouldnotriskseemingbourgeois,anti-revolutionary,orspirituallypollutedbywearingit.Withnolegalimportsofconsumergoodsandnoprivateenterprise,afactoryorganizedontheprincipleofutilitarianproductionfortheChinesepeoplewouldmakeupeverymaterialobjectsheencountered.Theideaofaneconomybasedontheconsumptionofgoodsandservices,notproduction—theideaofdreamsofcomfortandnotutility—wasunthinkable.ThesociallyconfiningeffectsofthreedecadesunderMaowouldfadegraduallythroughthe1980sandearly1990s.Consideringthatprivatetelephonesofalmostanykindwerenonexistentuntilthelate1980sandprivateownershipofacaronlybecamepossibleinthemid-1990s,consideringthatthestreetsofBeijing,Shanghai,andmostChinesecitiesarethrongingwith

peopledrivingcarsandusingsmartphones,consideringthatShenzhendidnotexistasanactualcityin1985,andthatthereweredonkeycartsonthestreetsofPuDonginShanghaiuntilthemid-1990s,weoughttoaskourselveswhathappenedthatmadesuchafasttransformationpossible?Whatisthecommercialinfrastructurethatmadeithappen?Whatisthepsychologyofthehundredsofmillionsofpeople,likeMs.Yan,whohaveexperiencedarockettripfrompovertytoposh,fromfeudalismtoFendi?Thetimeline,roughly,proceedsasfollows.AboutadecadeandahalfafterthefallofMao,Chinahadanascentretailsector,sometaxicabs,someprivatelyownedsmallrestaurantsandclothingshops,andnumerousotherwaystoconsumethatessentiallyhadnotexistedfor40years.Inadditiontosomeearlyforeign-styleshoppingexperiences,thedevelopmentofprivateindustryandmarket-basedemploymentwasexplodinginthe1990s.LargenumbersofChinesebegantofindthemselveswithdisposableincome,andtheywerelookingforplacestospendit.Beijingwastheearliestlocationforforeignengagement,soithadtheearliestforeign-investedretailoutlets:theLufthansaCenter,theLidoshoppingcenter,andtheSaite.Thesewerewhereforeign-madecosmeticsandelectricrazors,importedsuits,andtoasterscouldbeacquired.Smallbusinesseswereopening,privatecorporationswereformingandoperating,andforeigninvestmentwasflowingin.Non-Chinesefoodbecameavailableoutsideofhotels.HongKong–investedMaxim'sopenedsomelocationsinGuangzhou.InBeijing,theBaskin-Robbinsicecreamstore,operatinginthestate-ownedFriendshipStore,wastheearliestforeign-brandedrestaurant.By1994,China'sfirstforeign-investedshoppingcenterswereunderconstructioninShanghaiaswellasBeijing.Inapparel,NikeandtheHongKongbrandGiordano,Canadian-in-exilegarmentbrandPorts,andItaly'sErmenegildoZegnawereamongtheretailpioneerstoopensingle-brand,stand-alonestorefronts.Theydidsoworkingwithdeterminationandcreativity—basedontheirmassive

investmentinlocalexpertise—withinthestricturesofaregulatoryregimethatveryclearlyprohibitedforeignparticipationinretailanddistribution.In1999,whenthefirstStarbucksopenedinChina,thecitiesofShanghai,Beijing,andShenzheneachhadaboutfivelargeshoppingcentersfilledwithcounterssellingmerchandisemadebyforeignanddomesticcompanies—almostalwaysprivateratherthanstate-ownedproducers.Carrefourhadfiguredouthowtoopenhypermarketsthatsoldbreadandwine,duvets,andkitchenware.ThetransitionfromfeudalismtoFendiwasbeginning.

China's Growth Is DifferentWhileChinaisnottheworld'sonlydevelopingcountrywithafastgrowing,increasinglywealthypopulationthatismakingmoreandspendingmore,itisbyfarthelargestandmostimportant.Fromabout2002until2010,millionsofwordswerewritteninnewspapers,magazines,andbooksaboutthedualriseoftheIndianandChineseeconomiesandtheimportantroletheconsumersofbothcountrieswouldplayinshapingtheirdomesticandworldeconomies.Itwasn'tlongagothatTiger-versus-Dragoncoverstorieswerearegularoccurrence,andbusinessconferenceswereorganizedaroundBRICoremerging-marketclusters:Brazil,Russia,Indonesia,Vietnam,andSouthAfrica.Therehaslongbeenconversationamongeconomistsandtrendwatchersastowhichcountriesshouldbewatchedasmajormoversinglobalgrowth,development,trade,andconsumerculture.But,asthedusthassettled,onlyChinahaskeptgrowthatextraordinarilyhighlevels,andonlyChinahasproducedanewbreedofsuperconsumer.WeaskedJanetCarmosky,alifelongChinahandwhosepassionisexplainingtherelevanceofhistoryandculturetocommerce,why.WhyChina?Shesays,“China'sprosperityisadirectresultofthepower,thedepthandenergy,thefluidity,theresilience,theinclusiveness,andtheintelligenceoftheChineseculture.Thecollectivememoryofthisculturetellsthemtohunkerdownwhennecessary—foraslongasnecessary—andtomakehaywhilethesunshines.Rightnow,thesunisshining.”Aboutthepaceofchangeinthebusinesslandscapeandthehabitsofconsumers,Carmoskysays,“Chinahasenormouslydeepculturalroots,likethetaprootsoftreesthatcansurviveinthemostaridofclimates.Theserootsbothdefinethenation'sessentialidentity,asithasevolvedovermillennia,andallowforveryquickadaptation.Aslongasthechangeiscompatiblewith

culturalidentityandvalues,itcantakeplacevirtuallyovernight,andonamassivescale.”Chinabusinessyearscanbelikedogyears:Fifty-twoweekscantransformthebusinessandconsumerlandscapeinwaysthatwouldtakehalfadecadeintheUnitedStatesorEurope.FromourperspectiveasbusinessconsultantsinChina,itboilsdowntofewerwords:YourChinastrategyhasasix-monthshelflife;afterthat,itstinks.Therefore,somekeylessonsregardingthemarketare:

History,mind-set,andcultureshouldbeyourguide.Nonstopinnovationandchangeareamust.Yourbrand/product/service/companystorymattersbutmustbecontextualizedforChina.

Whilewehopeyoufindalloftheinformation,history,stories,facts,andfiguresinthisbooktobeinterestinganduseful,wehaveespeciallyhighhopesthatthestoriesofthebrands,companies,andexecutiveswhofound,andinmanycasescreated,theformulaforsuccessfulbranding,distribution,andsellingtoChina'ssuperconsumerswillbeofparticularuse.ThereisnobetterwaytounderstandtheChineseconsumersandengagethemthanbylisteningtoandlearningfromthosewhohavedoneit—bothChineseandforeign.

Chapter 2OrientationAnation'scultureresidesintheheartsandinthesoulofitspeople.—Gandhi

Whenweadvisecompaniesonentering,growing,orchangingcourseinChina,wealwaysstartwithadeepbackgroundoncultureandhistory.“Why?”someofourclientsask.“Wedidn'tcometoyouforahistorylessonoracourseinChinesesociologyandethnology.WecametoyouforstrategytooperateandsellinChina”or“IcantakelanguagelessonsonRosettaStone;Idon'tthinkanyofthislanguageorhistorystuffisrelevant.”Itis.KnowingtheirhistoryandcultureisaprerequisiteforunderstandingandsucceedingwithChineseconsumers.Youdon'tpersonallyhavetomastertheChineselanguage,culture,history,andmindsettobesuccessfulinChina.Butyouhavetolistentothepeoplewhohavedoneso.Otherwise,onecantooeasilyseethesuitsandthecoffee,thewine,andtheBMWs,andconcludethatChinaisawesternizedsociety.It'stoosimplistictoconcludethatappealingtoChineseconsumersshouldbenodifferentfromappealingtoconsumersinaWesternculture,say,Brazil—oranAsianmarketthatalsodevelopedsincethe1970s,sayKoreaorJapan,anditisalsotoosimplistictoassumetheydon'trespondtomanyofthethingswedo;ratheryouwanttofindthatrightmixbetweenchangeeverythingandchangenothingforChina.Chineseculture,commercialinfrastructures,andsocietyhaveadeeplyestablishedlogicalltheirown,builtoverlongperiodsoftime.Creatingtrust,fosteringpeerrecommendations,andbuildingpersonalrelationshipswithChinesecustomersisamust—andthey

alldependonyourunderstandingoftheculture.Eventhemostsophisticatedofconsumermarketinggiantscanbetrippedupbysomethingasobviousastheimportanceoflanguage.EarlytranslationsintoChineseforthequintessentialbrand,Coca-Cola,actuallyusedcompletelyinappropriatewrittencharacterstorenderthephoneticsofthebrandname.Sure,“kekoulela”soundsright,buteverysyllableinChinesehasnumeroushomonyms.Ifthecharactersmean“bitethewaxtadpole,”thenyou'vecompletelyfailedtomeettheChineseinthehallwayofculturalrelevance.FortunatelywhenCokereenteredChinaafterReformandOpeningitknewtoputsomeresourcesintounderstandingtheimportanceoflanguage.Itresearched40,000characterstofindaphoneticequivalentthatalsotranslatedtosomethingmeaningfulanddescriptiveabouttheproduct:“Kekoukele,” -,“HappinessintheMouth.”Cokewasn'ttheonlybeveragecompanytounderestimatetheimportanceoflanguage.WhenPepsienteredChina,itlaunchedwiththeslogan,“PepsiBringsYouBacktoLife.”ItfoundtheproperChinesetranslationandlauncheditscampaign.WhatPepsididn'trealizewasthatthephrase,duetoimpropertranslation,was“Pepsibringsyourancestorsbackfromthegrave.”Thisisnotagoodmarketingstrategyinacountrywhereancestorworshipisanimportantpartoftheculture.Morerecentlywehadtoadviseahome-decorationcompanyaboutitsoverrelianceonwhitecandles.InChina,whitecandlesareasignofdeathandfunerals.Theresponsewegetfrommanybusinessleadersisnotsurprising.Mostinternationalbusinesspeopleunderstandthatsomeallowancehastobemadefordifferencesinculture,law,logistics,andtasteswhenenteringnewmarkets.ButmanydonotunderstandtheprofoundandmyriaddifferencesthatexistbetweenChinaandtheUnitedStates,Germany,France,orBrazil.

WhenaCanadiancompanydoesbusinessinEngland,anAmericancompanymarketsinFrance,oraBraziliancompanyinSpain,thereissharedsenseofhistory,culture,language,andattitudesaboutlife'smeaning.Yes,therearesomemajorandmanyminordifferencesbetweentheculturesandtastesofconsumers,buttheyalloperatefromafairlyconsistentculturalblueprint.ConsiderthatWesternnationssharesomemajorculturalandhistoricalfactors:

AknowledgeofandvaluesbasedinJudeo-Christianreligion,philosophy,andguidingprinciplesANewtonianunderstandingofscienceFoundingprinciplesofmodernsocietyintheEnlightenmentASmithianunderstandingoffreemarketsAlonghistoryofdemocracy,freemarkets,andconsumerismAlinearunderstandingoftimeandhistoryBusinessconductedinatransactionalmannerAEuropeanfoundationofsocietyandculturethatwasspreadtoNorthandSouthAmerica,Oceania,andotherregionsAcommonalphabetSimilarfoodsanddrink,andaculturethatcelebrateswithalcoholAphilosophicalorientationtowardsindividualfreedomandidentity

Chinaontheotherhandhas:AConfucian/Buddhist/Taoistreligio-philosophicaltradition,andagovernmentthatopenlydeclaresitselfatheistAcircularandcyclicalunderstandingandsenseoftime,history,andrelationshipsAnalmostpurelyChinesefoundationofsocietalandcultural

norms,sopowerfulthattheyhaveshapedthesocietiesandnormsofJapan,theKoreas,andSoutheastAsiaoverthecourseof3,000years.TherewasanabundanceofcultureexportedoutofChina,butverylittlecultureimportedinThewrittenlanguageuses30,000characters—notletters—providingformuchmorenuancethanWesternlanguagesandalphabetsColorsandnumberhaveanoutsizesignificanceinChinathatisalmostnonexistentintheWestAlonghistoryofcommerce,drivenbygovernmentandconductedbyclansAnintenseandpassionatefoodculture(whileChinesepeopledrinkalcohol,thecultureisfarmorecenteredonfoodthandrinking)Status,identity,andsenseofsecurityaregroundedinthegroup

ItisimportanttolearnwhatshapesChinesesociety,culture,andthinkingbeforeyoucansellaproductorservicetoitsconsumers.ThosehopingtoconnectwithChina'ssuperconsumersmustabsorbandinternalizethefactthatsuccessorfailurewilllargelyhingeonanunderstandingoftheChinesenation'sself-image,itsdiverseregions,anditsindividuals.China'sdeeprootsinhistory,language,philosophy,andculturetrumptheconvergencetheory,whichstatesthatoncepeopleachieveacertainthresholdofdisposableincome,theywillspendinsimilarpatternstopeopleatsimilardisposableincomelevelsinothercultures.Themind-setoftheChinesebusinesspersonandconsumercreatestheconsumer'sself-image;hisideaofhisplaceinsocietyandtheuniverse;andhisambitions,needs,desires,likes,anddislikes.Themind-settranslatestopurchasemotivators.Purchasemotivatorswillandmustdetermineyourproductdesign,shape,size,color,price,sellingchannel,branding,marketing,andbenefits.

OftenwhenacompanyorproductfailsinChina,itisbecausetheseculturalbuildingblocks—historylanguage,philosophy,andculture—werenotacentralfocusfromdayone.Justtomakethisevenmoreinteresting,here'safactthatmightbeobviousgiventhegeographyofChinaandthelengthoftimeoverwhichregionaldifferenceshaveevolved:ChinaandChinesepeoplearenotmonoliths.WeapproachChinaas22distinctmarkets.(Moreonthatinlaterchapters.)Asastart,considerthatChinaiscontinentalinsizeandisquitediverseinclimate,geography,culturalinfluences,language,food,estheticvalues,andspiritualbeliefs.NowfactorinChina'scollectivememory.Overthecourseof4,000yearsofcivilization,theChinesehaveseenandbeenmanythings:sometimespowerfulandsometimesweak,wealthyandpoor,anoccupyingpower,andanoccupiedcountry.ThereasonyouneedtoknowChinesehistoryisbecausetheChinese,consciouslyornot,definethemselvesbytheirhistory.

A Code to the Chinese Mind-setSowhatmakestheChineseconsumerChinese?Ifwesaythathistoryandcultureshouldbeyourguide,whatmapdoweuse?Therearealotofsmartpeoplewhohavespentlongyearsunderstanding,workingin,andsellingtoChina,sotherearealotofguidesandmaps.Forthisbook,we'repickingtheonedevelopedbyJanetCarmosky.She'sabilingual,bicultural,self-describedculturegeekwhohasbeenworkinginUS–Chinabusinesssince1985.For18years,shewaspartofaXi'an-basedfamilyofpartyofficialsandwifetoanambitious,bilingualChinesemanwhoprosperedasoneoftheearliestreturnees.(AChinese-bornpersonwhogetsanoverseaseducationthenreturnstoChinatowork,hopefullyonthesametermsasaforeignnational.)From2003until2013,shelivedbackintheUnitedStates,tryingtointegrateandexplainherChineseandAmericantraits.WhenshestartedtotalktoU.S.businesspeopleinAmericaabouttheChinesemind-set,theywereindignant.Theywantedtoknow,“Whydon'ttheChinesekeeptheirpromises?Whydon'tcontractsgetimplemented?Whywon'tthegeneralmanagermakeadecision?Don'ttheyunderstandwin–win?Dotheyevencareaboutthelongterm?”Ratherthansimplyansweringtheirquestionsdirectly,shedrewfromherlifeexperiencestodesignaframeworkforthepsychologybehindtheseandothercommonfrustrations.ThushereightkeycontrastsbetweenthevaluesystemsofAmerica/theWestandChina/Asia,presentedinTable2.1.Whiletheseinsightsweredevelopedtohelpexecutiveswhodealwithcommercial,regulatory,andworkplacedynamicsinChina,theyareneverthelesstrueatthelevelofindividualsandconsumers.

Table2.1EightKeyContrastsbetweentheValueSystemsofAmerica/theWestandChina/Asia

Chinese/EastAsianValue American/WesternValue1.Theunitofsociety:

Groupidentity Self-sufficiency2.Thedomainofscarcity:Money Time3.Thepracticeofheroism:Practicerestraint Takeaction4.Theresolutionofconflict:Minimize Surface5.Thecontainmentofrisk:Fluidity Rigor6.Theoriginofwealth:Topdown Bottomup7.Thesourceofsecurity:Clanloyalty Civilinstitutions8.Theexistenceofabsolutes:Ambiguityastruth Pressuretodiscern

Inshort,ifyou'retemptedtoseeChinesebehaviorasavariationofWesternbehaviorwhencreatingsales,marketing,anddistributionstrategies,checkthislist.Because,asJanetsays,“Sure,theChinesedoinfactthinkexactlythesamewaywedo,excepttheyhavedifferentdefinitionsofwhattime,money,courage,risk,security,family,job,truth,andsuccessmean.“EveryonewhohaseverspenttimetryingtoworkacrosstheWestern–Chinaculturalbarrierknowsthefrustration.Wetrytounderstandwhyprocessesstallorescalate;moneyisspentornotspent;productsareboughtorignored;peopleareonboardorresistant;informationiswithheldorshared;andwhyinnocuousquestionsareavoided,whilequestionswethinkaretoughseemlikenobigdeal.Here'sthereality:CulturesinChinaandtheUnitedStatesusehard-codedvaluesystemsthatcontrastin

profound,fundamentalways.Tacticsandgamesmanshipgetusthroughsometimes.Butbeingabletoseepastthebehaviortothepsychology,andpastthepsychologytothevalues—acceptingthatthevaluesarenotgoingtochange—iswhatgetsustoahigherlevelofunderstanding.”Carmoskyfoundsomevisuals—nowveryfamous—byYangLiu,aChineseexpatriateartistinGermany,whowasalsoworkingwiththerawmaterialofwhatmakesEastandWestsodifferent.FromYangLiu'sseries,EastandWestDesigns,shepickedandshareshereherunderstandingofthreeofthem(Contacts,ProblemSolving,andSelf-Expression).ItwasastarttoshiftingAmericanthinkingawayfromtheexplanationsthatourJudeo-Christian,democracy-lovingcultureoffers(forexample,“Chinesepeoplecan'tbetrusted”or“Communismmadepeoplelazy”)andtowardssomethingmoreproductive(“HowcanIgetthemtorespectmeenoughtoshareinformation?”“Whatelseisgoingonthattheschedulekeepsslipping?”).Thewordsandimagesaremeanttoprovoketherealizationthatweactdifferentlybecauseweseetheworlddifferently.TheChinesemind-setisonewherethedistancebetweenaproblemandasolutionisnotbydefaultstraight,transparent,orimmediate.Wherepeopleseethemselvesassointerconnected,allactionseithercarefullyalignwiththelargercontext,ortheyarecounterproductive.LookattheContactspictureinFigure2.1.ItshowsthedifferencebetweenChinesesocialnetworks—withnumerouslinks,widelyspread,allinterconnected—andWesternones,whicharelimited,point-to-pointrelationshipswiththoseclosesttous.Inworkplaceterms,theChinesemodelofcontactsmeansthatgroupdynamicsarefluid;thatChinesepeoplefieldandprocessmoreinformationfromnumeroussources;andthatcomplexandinterconnectedrelationships—includingbusinessones—arethenorm.

Figure2.1BusinessandCultureinChineseandWesternWorldsSource:JanetCarmosky2004;DrawingsbyYangLiu.

Basically,theChineseareintenselysocialcreatures,alwaystallyingthestrengthandstateoftheirnetworksandextremelyconsciousoftheirplaceinthehierarchy.ThishasadirecteffectonwhatChineseconsumersbuy,wheretheytravel,whatrealestatetheyinvestin,andwhichbrandstheylove.Inanyculture,ournetworksarewherewefindsecurityandgainanddisplayprestige.LookatthepicturesintheWestcolumn.InAmerica,ifourspouseandbossarehappywithus,andwetakeavacationeveryyearwiththesamecouple,mostofusfeelstableandsatisfied.Wegrababeerorcoffeewithafriendonceinawhile.InChina,peoplegotodinneringroupsof6to10.BusyChineseathigh-incomebracketseatdinnersandlunchesoutmostdaysoftheweek,withmanydifferentgroups.Networkscutacross

socioeconomicbrackets—includingchildhoodfriends,schoolfriends,relatives,andextendednetworksofhometown.NoteveryonehasgottenrichinpostreformChina,andthosewhohavedonebettersharetheirgoodfortuneamongtheirnetworksinmanyways,giftgivingamongthem.Networksarethesinglemostimportantsourceofmoney,security,andstatusinChina.Whenafriendcomestotownonanunexpectedvisit,chancesarethateveryonewillfindtimetobewithher,feedher,andputherup.ComparethatwithlifeintheUnitedStates,whereoldfriendsandevenfamilymembers,whentheyhearyouareintownforafewdays,can'tpossiblygetaway.“BobbyhasaLittleLeaguegame,”or“Ijustputachickenintheoven.”“Toobad!Hey,someothertime.”NuclearfamilyisthecoreofAmericanlife,buthistoryhastaughttheChinesetohavethebiggest,strongestsafetynetstheycanmanage.ThatisthewebofcontactsthatyouseeinthepicturesrepresentingtheEast.Ittakesahugeamountofenergytomaintainabignetwork.Sometimesitisexhausting.Butnetworksarecrucialtosurvival,sotheChinesemakethemapriority.Thegivingandreceivingofgifts,alongwiththesharingoffood,arethedailypracticesinnetworkmaintenance.Likewise,preservinganimageofsuccessandabundanceisanetcontributiontotheoverallsenseofwell-beinginthenetwork,aswellastheindividual.Thusbadgebrandsandface-givingexperienceswithdocumentationofsucharecritical.ThesecondpictureinFigure2.1,ProblemSolving,belongsinaslidedeckaboutworkingwiththeChinese.IthassomeimplicationsforsellingtotheChineseaswell.“Thecustomerisalwaysright”doesn'tbegintodescribetheimportanceofgentlenessinresolvingissues.Ifthecustomerbrokethewatchandnowwantstoreturnit,aChinesemanagershouldhandlethatconversation.Inbroaderterms,theChinesehaveawayofputtingthingsbehindthem,withoutdealingdirectly.PartoftherolethatChina's

collectivememoryservesistoraisetheskeletonsofthepastatsomefuturemomentwhenitisn'tquitesoscarytodealwiththem.TheSelf-ExpressionpictureinFigure2.1showsthe10,000-wordstorythateveryonewhoworksbetweenChinaandtheUnitedStatesknows.Americanstalk.Wethinkaboutsomething,wefeelsomething,wetellsomeone.Politicians,teachers,parents,andpsychologistsdevelopsophisticatedprocessestodecidewhetherornottospeakaboutsomething,towhom,andhowandwhentosayit.Butinmostcases,formostpeople,ournaturaltendencyistojustputitrightoutthere:“Idon'tlikeher.”Weconfront:“Yousaidsomethingthathurtmyfeelings.”Weconfess:“IthinkIjustdidsomethingwrong.”InaChinesecontext,wherepeopleareallconnected,wherehistoryhastoldusthatbadthingshappentogoodpeople,comingrightoutandsayingwhatyouthinkisrisky.Disclosureisaprocessoffeelingoutthekindestandsafestwaytobringoutbadnews.Persuasionisawalkaroundthegarden,notapresentationofcompellingfacts.That'sthepathofmanyturnsthatYangLiu'spictureshows.Theverystructureofourtwolanguages—EnglishandMandarin—shapesourexpressivestyles.Englishservesasthelanguageofinternationalbusiness,treaties,andlawinlargepartbecauseitisprecise.Withaverylargenumberofwords,verbtenses,cases,articles,andsentencestructures,Englishforcesustobeeitherclearorgrammaticallyincorrect.Chineseismuchtheopposite.Everywordhasnumeroushomonyms.Ellipticalsentences—omittingthesubject—arecommon.Nounsdonothaveobjectiveorsubjectivecasesandsingularorpluralforms.Thereisnodefinitearticle.Verbshavenotenses.EverythingabouttheChineselanguageiscontextual.Precisionisnotonlycompletelyoptionalbutalsonearlyimpossibletoachieve.HowdotheChineseunderstandeachother,then?Well,theygettoknoweachother.Theyspendtimetogether,theysharehistory,andtheylearntoreadeachother,respecttheirsilences,andtreasure

theirconfidences.Theyhavetofigureeachotherout.Inbusiness,thetakeawayis,bepersistentinthepursuitofclarity.Askalotofquestions.Followup.Triplecheck.Donotassumethatyourcolleagueshavetoldyouabouteveryobstaclethat'scomeup.Donotassumethateverythingdiscussedtranslatedintoanactionplan.Youmaythinkyouhavebeenclear,thattheyhavebeenclear.Followup.Ifyou'reaccountablefordetailsandschedulestoanAmericanboss,you'llhavetoputmoreenergythanyouexpectintostayingontopofateamthatreallywouldrathernottellyoueverythingthatisgoingon.HowdoestheChinesestyleofself-expressionrelatetoconsumers?Simplyput,aspareapartmentismoreusefultoafriendinhardtimesthanashouldertocryon.Treatingafriendtoameal,theuseofyourcaranddriver,avacation,aspatrip,clothing,orjewelryexpressestheesteeminwhichyouholdhimandthehopesyouhaveforhim.InAmerica,wehavesupportgroupsandlongtalkswithourlovedones.InChina,retailtherapyisn'ttheonlygameintown,butitsclose.Whilewecouldfillvolumesonthescope,nature,andimplicationsofChinesehistory,culture,andmind-set;itscurrentpolitical,socialandculturalnorms;anditsresultingconsumerbehavior,wewilllimitourselvesheretosomekeyhistoricalfactsandeventsthathavehelpedcreateandshapetheChinesesuperconsumer.Wewillrevisitthesesubjectslatertopresentapracticalunderstandingandguidefortheapplicationofcultureandmind-setasweunpackthestrategiesandtacticsnecessarytosellinginChina.

Contradiction and ParadoxWerefertoChinaasacollectionofmarketsratherthanasinglemarketnotjustbecauseacountrythislargecannotbeapproachedallatonce.Thereisgreatregional,generational,andpsychographicdiversity.It'struethattherearesomequintessentialChinesevaluesandtraits.Itistruethatfromprovincetoprovince,citytocity,andyeartoyear,modernChina'scontradictionsandparadoxesareprofound.Theseparadoxesapplymostdirectlyatthelevelofcommercialsystems—differentsegmentsofconsumershavedifferenttastesandbehaviors,ofcourse.Butthewidestcontradictionsconcernthelandscapeforactuallygettingyourproductintoamarket.Afewko'ansaboutmodernChina:

Itisveryrichandverypoor;verymodernandquitebackward.Itishypercapitalistinsomeplaces,stillveryCommunistinothers.Thegovernmentisalwayspresentandcontrolling,exceptwhenitisn't.Ithassuper-developedconsumersandmanywhostillmerelysubsistatamateriallevel.China,insomeplaces,istheepitomeofnaturalwonderandcleanlinessandithassomeofthemostpollutedplacesonEarth.

Themind-setisthepreconditionforgettingpasttheconfusionthatcontradictionscause.Remember,you'reinadifferentecosystem,socheckyourassumptions.Oneexample:AbeddingtextilecompanyintheUnitedStateshiredTompkinstoprovideitwithacomprehensiveanalysisofthebeddingmarketinChinaandtoprovideitwithanentryandgrowthstrategy.ItspecializedinblanketsandbeddingmadefromfleeceandwasverysuccessfulintheUnitedStates.

WhileourresearchshowedmassivegrowthinthebeddingproductscategoryinChina,withinaweekwerealizedthatthecompanycouldnotenterChinawithitscurrentproductsandbusinessmodelforseveralreasons.

Practical:Chinahasonlya2percentpenetrationratefordryers.ThevastmajorityofChineseairdrytheirclothesandbedding.Fleecewouldtakealmosttwodaystofullyairdry.BeliefSystem:Chinesepeoplebelievethatfleeceoranyothernon-naturalfiberisbadfortheskin,badforhealth,andposesaparticularthreattochildren.Traditional:Blanketsmadeuponly2percentofsalesofallbeddinginChina.AlmostallChineseuseaheavycomforterandasheet,butnoblankets.

Intheend,weusedthisinformation—basedonhistory,culture,andmind-set—todeterminetheneedsandpurchasemotivatorsofChinesebeddingconsumersandcreatedanalternatemodelandproductmixforentry.ThereinwastheChineseparadox:It'sthefastestgrowingbeddingmarketintheworld,butsomeproductswereano-gobasedonsuperstitionandlackofdryerpenetration.ThisdidnotmeanourclientcouldnotsucceedinChina;inmeantitneededtothinkandactinChinese.

SummaryChina'ssuperconsumersdidnotemergefromaculturalvoid,orfromaculturesimilartoourown,butfromnationalandregionalculturesthathavedevelopedovera4,000-yearperiod.AcceptingthatmodernChinahasgrownandbeenshapedbyitsownlong-establishedpatternsandlogicisthefirststeptoseeingChinaanditsconsumersastheyreallyare.PurchasetriggersforChineseconsumershavetobedevelopedtoworkwiththedeepvaluesofthetargetaudience.AmarketingprogramforJapanorKoreaisasirrelevantasonefromBrazilorAustralia.AprogramforBeijingwillnotnecessarilyconnectinGuangzhou.MarketresearchdatafromChinathatresemblesapaststageinyourhomecountry'sdevelopmentdoesnotimplythesamemarket,channel,orproduct-developmentprocess.Checkyourassumptionsaboutdevelopmentatthedoor.Alloftheabovemustshapeyourstrategyforbranding,merchandising,pricing,rewards,channels,colors,sizes,andoperations.Anunderstandingofhistory,culture,andmind-setmustbecoupledwithanunderstandingofmodernChina'scontradictions,paradoxes,andrealitiesontheground.Marketopportunities—forexample,concerningpartnershipanddistribution,pricing,andchannelstrategy—mustbeapproachedinthecircularChineseway,notalwaysintheWesternlinearway.

Chapter 3A Self-Contained EmpireStudythepastifyouwoulddefinethefuture.—Confucius

Nowwebeginourquickandtargetedtourofhistory:fourmillenniaofbackstory,highlycondensedforitsrelevancetoChina'ssuperconsumers.Asyoureadtheseshortchapters,remembertwoincontrovertiblefacts:Chinaisreallybigandreallyold.ThemoreyouworkwithChina,themoremeaningandrelevanceyou'llseeinthosesimpletruths.ModernChinahasgrownfromitsownlogic,fromitsownlong-establishedpatterns.It'struethatChina'ssuperconsumersareespeciallyreceptivetobrands,especiallyintriguedbywhatbrandsmean,andparticularlywillingtospendextremelylargeamountsofmoneyonconsumergoods.Butthisbehaviorisnotsimplytheresultofmarketingskill.It'stheresultofbringingWestern-basedmarketingskillsintoaperfectstorm:justtherighttime,conditions,andpsychology.AmericanstendtocallEuropeandtheplacestheirancestorscamefromtheOldCountry.WhencomparedtoChina,though,the1,400-yearhistoryoftheEnglishmonarchylookspositivelyfresh—andAmerica's250years?Amereblip.AmongthereasonswhyAmericansseeChina'seconomicpowerasanewphenomenon:1. AmericadoesnothaveimmediateneighborsotherthanCanadaandMexico.Further,itisayoungandhugenation,boundedbytwooceans.Assuch,Americaissoself-referentialthatitdoesnotreallyhaveamainstreamcollectivememoryofthehistoryofnationsotherthantheonesthatitsdominantpopulationcamefrom.

2. TheNewWorld—aNorthAmericacolonizedbyEuropeans—didnotexistduringChina'spreviouspeaksofglobaleconomic

power,TheSilkRoadEra(TangDynasty),theMonogolianworldconquest(YuanDynasty),ortheheightoftheQing—China'sfinalimperialdynasty.FromthetimeofourcolonialperiodthroughourCivilWar,ChinawasinfactsomethingofanobsessionfortheBritishEmpire.ItendedwithChinahavingsomucheconomicpowerovertheBritishEmpirethattheywenttowar.

ThenthereistheotherreasonwetendtobelessawareofChina:Itisitselfaself-referential,continentalpower.There'snothingsubtleinwhytheChinesenamedthemselvestheMiddleKingdom(betweenHeavenandEarth).Forthevastmajorityofitshistory,China'soutlookandfocushavebeeninwards:lookinginamirrorratherthanthroughawindow.Theland,theculture,therivers,andthepeoplewereallself-sustaining,andproduced(formuchofitshistory)therichestandmostadvancedcivilizationonEarth.WhiletheEgyptiansbuiltthepyramidsandthenletthemcrumble;whiletheGreek,Persian,Roman,Mayan,Aztec,NativeAmerican,andnumerousancientandmodernEuropeanempiresroseandfell;andasJudaism,Christianity,andIslamwerefoundedandflourished,Chinahardlynoticed.TherewereinteractionsbetweenEastandWestattimesbeforethenineteenthcentury,butforthemostpartthetwoworldswereseparate.China,foritsownpart,wasverybusy.TheancestorsofthepeopleofmodernChinasurvivedcountlesscivilwarsthatwerewonandlost,andthenfinallywonnumerousterritorialconquests;prosperedunderthehealthyreignofgreatemperorsandcollapsedunderthetyrannyofcorruptones;outlasteddroughtsandfamines;achievedtechnologicalandartisticgreatness;andwatchedmagnificentpalacesandcitiesburn,takingcenturiesofculturalachievementswiththem.Inmanyways,Chinawasaself-containedempire,aninsularandinward-lookingnationandcultureformostofitsancientand

modernhistory.UnliketheRomanandGreekEmpires,whichwereexpansionistandcolonizinginnatureandneed—whichputthemintocontactandconflictwithothercultures,languages,foods,religions,andlifestylesverydifferentfromtheirown—China'sexpansion,growth,andconsolidationhappenedalmostsingularlywithinitsownhomogenouscultural,linguistic,andgeographicspheres.China'sdynasties,wars,conquests,rivalries,andmajorhistoricaleventsbetween3,000BCEandthepresentlargelytookplaceinthelandmassthatmakesupGreaterChina(Mongolia,Tibet,Xinjiang,HongKong,andTaiwan).Thisisn'ttosaythatChinahasnoneighbors.Itborders16othernations,morethananyothercountry.Andithaswagedwarandcarriedoutdiplomacyoverthemillenniatoestablishtheboundarieswiththese(atleast)16differentpowersaswellasnearlyadozenothermaritimeneighbors.Throughoutitshistory,whentheImperialGovernmentofChinalookedoutward,itmeant:

DealingwiththeMongoliansandothernomadicandTurkicraiderstothenorthandnorthwest,andmanagingrelationshipswithTibetansandManchuriansinthesouthwestandnortheast.StabilizingthecentralAsialands—contemporaryKyrgyzstan,Tajikistan,Turkmenistan,Kazakhstan,PakistanallborderChina—topermitoverlandcommercewithArabiantraders.EstablishingtributaryrelationshipswithotherEastandSoutheastAsiankingdoms,suchasthehistoricalprecedentsofmodernVietnamandKorea,Malaysia,andSriLanka.

HowdidtheChinesechecktheambitionsoftheirneighbors?Thesamewayaseveryothernation—moreadvancedmilitarytechnology.Plusoneothersecretandapparentlyverypowerfulweapon:gifts.

DemonstratingacivilizationricherandmoretechnologicallyadvancedthananyofitsneighborswasadeterrenttotheambitionsofChina'snumerousneighbors.ThetreasuresofChinesecraftandindustry,suchasbronzeandjadejewelry,silksandporcelain,lacquer,andthemostexquisitemetalwaresbecametoolsofdiplomacy.TheChineseemployedgiftstocurryfavor.Gifts—proofpointsofculturalsuperiority—weredeployedatmassivescaleandwithgreatsophisticationthroughoutreachableAsia.Thefirstthemeofthesuperconsumersrootedinthishistoryisanintenseappreciationformaterialgoods,especiallywhenluxuriousorveryfinelymade.Domestically,thegovernment'sbriefmeantmanagingagriculture,industry,military,waterandlandresources,education,andtaxes—andalsopreventingrivalriesfromspringingupinInnerChina,theestablishedsettlements,towns,andcitiessurroundingtheYangtzeandYellowRivers.China'sfirstdynastywasestablishedin221BCE,becomingthefirstgovernmentruledbyaself-proclaimedemperorwhoconqueredallthelandshecouldknow(ratherthansimplyakingofacertainterritory).TheFirstEmperorstandardizedweights,measures,currency,thewidthofroads,andthetaxcode.Thedynasticsystemwouldlast2,100yearsuntilthefallofthelastemperorin1911.Therewerecountlesscivilwars,famines,droughts,floods,rebellions,andextendedforeigncampaigns.Pointsofcontinuitythroughoutthesetwomillenniainclude:

ToleranceforvariedspokenlanguagesbutuseofonestandardwrittenlanguageGovernmentadministrationofcommerceandagricultureAnonhereditarycivilservicesystembasedonmeritAbimodaldistributionofwealth—averysmall,educatedeliteandalarge,illiteratemass

AdesireforlastingstabilityInageneralsense,China'slongandmagnificenthistoryhasbeenmarkedbylongperiodsofstabilityandunitybutoftenpuncturedbychaosanddecline.Thriftisawell-knownAsianvirtue.Clearly,inaworldpronetofallingapart,nothingconveyssecurityaswellascash,exceptgoldandsilver,thatis.Overthearcofhistory,thependulumswingsfromchaostoprosperity.TheurbanstandardsoflivingduringtheHan,Tang,Song,andMingDynastieswerefarhigherthananythingknowninEuropeatthetime.TheamountofwealthaccruedbytheSongDynastyeliteisstaggeringbyanymeasure—andsoistheirpatronageofartandcraft.Thesecondthemeofhistoryandsuperconsumers:Asensethatcurrentprosperityisanaturalphaseofcelebration.Thestateofaffairscircaearly2000s—eventotheconfigurationofgovernment—isfullyalignedwiththearcofhistory,andisnormal.Thetimeofnecessarythrifthaspassed.ThroughoutmostofChinesehistorytherehasbeenathemeofself-confidencerelativetotheworldbeyonditsborders.Understandably.AsdemonstratedsoartfullyandscientificallybyIanMorrisinhisbrilliantbookWhytheWestRules—forNow,wecanlookata15,000-yeartimelineofdevelopmentandlivingstandardsinChinaandtheWestandseethatChinawaseitherequaltooraheadoftheWestformostofthepast4,000years.Tosummarize:WithalmostzeroinfluencefromtheoutsideworldChinainvented,between500BCEand1500CE:

Awrittenlanguagethathasenduredlargelyunchangedformorethan3,000years,whichalsoservedasthefoundationofwrittenlanguageforlaterAsiancivilizationsinKoreaandJapan.Atypeandmethodofagriculturethatsustainedapeopleandbuiltacivilization.

Asystemoftraditionalmedicinethatisstillrelevantandinuseinnumerouspartsoftheworld.Paper—secondcenturyBCE.Moveabletype—estimatedat600CE(800yearsbeforeGutenberg).Gunpowder—asearlyas620CE.Themagneticcompass—approximately900CE.Thebristletoothbrush—1487.Porcelain—608CE.Silk.Teaandtheteapot.Toiletpaper.Thenoodle.Thewheelbarrow.Theship'srudder.Castiron.Fireworks.Thehorsecollar.Hundredsofotherusefultoolsandconsumerproducts;hundredsofscientificinstruments,farmingtools,weaponsofwar,medicaldevices,andmedicines;andpleasure-givingproductsofallshapesandsizes.

Interestingly,asidefromsilk,porcelain,andtea,theChinesedidnotseektodevelopinternationaltradefortheseinventions.Asenseofconfidence,itcanbeargued,alsounderlythewillingnessofChina'sleaderstoimportphilosophiesthattheybelievedwouldstrengthenChina.Afewexamplesofimperial

invitationsextendedtoforeignemissariesasteachers:Buddhism,whichtheTangEmperorbelievedwouldaddstrengthtotheculture.Therehasbeencoexistenceandcyclicofficialembraceofoneormoreofthethreenativespiritualpractices:ancestorworship,Confucianism,andDaoism,inadditiontoBuddhism.Arabicnumbers.Islamicbankingpractices.AppliedmathematicsandastronomyfromtheJesuits.

Wecouldaddcommunistrevolution(advisorsimportedfromRussiain1910s)andtheWorldTradeOrganization(accessionappliedforin1990s)butthatwouldbeskippinganimportantpoint:Inthemodernera,beginningin1500CE,Chinagradually—andthendramatically—fellfarbehindtheWestonalmosteverymeasureofeconomic,scientific,socialdevelopmental,andstandardoflivingmeasures.AsEuropeanmercantilepowersrosebybuildingshipsandseekingrichesthroughtrade,EuropeansattemptedtoengageintradewithChina.Butatthisstage,undertheManchuQingDynasty,China'sself-confidencedeterioratedintocomplacency.TheQingcourtwasutterlydisinterestedintheworldbeyonditsownbordersasanythingotherthanasourceofcashexchangedforChineseexportsoftea,porcelain,andsilk.ThequesttomakeChina'speopleintoconsumersofEuropean-madegoodsledtoinvasion,war,occupation,andexploitationofChinabyforeignpowers—includingAmerica.Throughmuchofthenineteenthandearly-twentiethcenturyChinafeltprofoundlyhumiliatedbytheWestandWesterntechnology.Now,athirdcontributionofhistorytothesuper-consumerphenomenon:Chinahasbeenrestored,anditspeoplecanproudlyoccupyaplaceneveravailabletothembefore—asconsumersofgoodsmadeorinspiredbytheworldbeyonditsborders.

Thus,manycenturiesofrelativeself-sufficiency,lowconsumption,andthriftbringstoshoppingtodaythesweetnessofdelayedgratification—adelaythatspansnotthepast50years,butthepastfivegenerations.

Chapter 4The First GlobalizationIthasbeensaidthatarguingagainstglobalizationislikearguingagainstthelawsofgravity.—KofiAnnan,formerSecretaryGeneraloftheUnitedNations

TheenlargementoftheEast-to-Westmovementofpeople,goods,andideasthatstartedduringthetimeofAlexandertheGreat,andthatpeakedwiththeMongolexpansionoftheSilkRoad,markedthefirstperiodofglobalization.Afterarelativelyisolationistperiod(450to1000CE)followingthefallofRome,Europewasweakincommerce,powerprojection,andstandardsofliving—trulytheDarkAges—whileChinafloweredandflourishedaswehaveseenpreviously.Europebeganitsreemergenceasacenterofthearts,science,commerce,andstandardofliving(thoughitwouldtakenearly500years)bytwoimportantevents,bothofwhichwouldleadtoEuropeanandWesterndominancefromabout1500totheearlytwenty-firstcentury.Thefirstwasoneofthebloodiestchaptersinhumanhistory.LaunchedbyPopeUrbanin1096,theCrusadeswereostensiblyeffortstoretaketheHolyLandfromtheMuslimconquerorswhohadruledoverthemfor400years,aswellasanefforttostopArabandMuslimexpansionintoEurope.ThetruthwasthatthepopewascontendingwithmultiplecripplingissuesincludingwarinGermany;conflictwithFrance;awarwiththeHolyRomanEmperor,HenrytheIV;andthequestionofwhohadtherightofinvestiture(appointingbishops),popesorkings.Amasspilgrimageand/orwarthatwoulduniteEuropeansundertheChristianbannerseemedjustthetonictoeasehisqueasystomach.

ThecrusadesbroughtEuropeanarmies,ideas,foods,bankingsystems,andculturetotheEast—alongwitha250-yeartrailofdeath,destruction,rape,fire,disease,andgeneralwretchednessonacross-continentalscale.Butcrucialtoourstory,theCrusadesalsobroughtnewideas—aswellaslong-dormantones—backtoEurope.Inparticular,theMuslimcaliphsandthegreatArabempiresthatruledfromIndiaintheeast,toMoroccointhewest,toMongoliainthenorth,andEgyptinthesouthpreservedtheancientphilosophies,sciences,andtreatisesongovernment,art,andscienceproducedbytheGreeksandRomans.Theyalsomadetheirownhugeadvancesinscience,art,metallurgy,governance,andareligionoftheirown.ManyoftheseoldandnewideasenteredEuropeforthefirsttimeduringtheGreatCrusadesorreenteredEuropeafteralongabsence.VeryfewoftheseideasflowedeasttoChina.ThegreatbarriermadeupofAfghanistan,India,theSteppes,andtheGobiDesertkeptChinaisolated.WestandEastonlymetthroughthemiddlemenwhotraveledalongtheearlySilkRoadformanyyears.Ironically,alackofconflictbetweenChinaandtheWestwasakeyreasonforisolationbetweenthetwosidesatthistime.China'spreviouslymentionedself-sufficiencyandisolationistbentwereothers.Thedevelopment,expansion,andprofoundsuccessoftheMongolEmpirewasconcurrentwiththelaterCrusadesoftheearlythirteenthcentury,whichledtothelargestandmostsuccessfulexpansionoftheSilkRoad—essentiallytheInternetofitsera.Themostcriticalresultofthistransferofproducts,science,andideasbetweenWestandEastwas—combinedwithasetofemergingEuropeanideasaboutnature,God,religion,andman—thatithelpedlaythegroundworkfortheRenaissanceandtheAgeofExploration,whichwouldensureWesterninfluenceovermostoftheglobe.

WecouldspendvolumescataloginghowtheWestandChinadivergedfrom1096until1400,butinsteadwewillshinelightonthesplitthroughthestoriesoftwoseavoyagesthathelpedchangethefatesofEastandWest.

Chapter 5Marco Polo and the Two Admirals of the SeaHark,nowhearthesailorscry,smellthesea,andfeelthesky,letyoursoulandspiritfly,intothemystic.…—VanMorrison

ThereissomemythanduncertaintyregardingMarcoPolo'stravelsandadventuresinChina,butthereisnodisputingthathewasthefirstEuropeantodocumentingreatdetailthewonderstobefoundintheMiddleKingdom.MarcoPolowasborninVenicein1254toasuccessfulandadventurousfamilyofmerchants.Hisfather,Niccolo,andhisuncle,Maffeo,becamewealthytradersinEuropeandAsia.Eventually,theirtravelsbroughtthemtotheFarEastwheretheyjoinedadiplomaticmissiontothecourtofthegreatMongol,ChineseEmperorKublaiKhan,grandsonofGenghisKhan.There,overseveralyears,theybecameintimatewithandadvisorstotherulerofthelargestempiretheworldhadeverseen.TheytraveledbacktoVenicein1269and,almostimmediately,theyplannedtheirreturntoChinaandtheKhan.Whentheysetoutin1271,youngMarcoPolojoinedthemfortheadventure.IttookthemfouryearsofbrutaltravelbeforetheyreachedKublaiKhanathissummerpalace,knownasXanadu.Bythistime,MarcohadabsorbedthesightsandsoundsoftheMiddleEastandCentralAsia,butnothinghadpreparedhimforthesplendorandplentyofChina.Notlongafterhisarrival,MarcoPoloearnedtheadmirationandtrustoftheKhan—somuchsothatheallowedhimfullaccesstohisEmpireandsenthimasaspecialenvoyalloverAsia.Intotal,hespentabout17yearsinChina.HeprovidedmostofEuropewithitsfirstglimpseandunderstandingofChina.Previously,theconnectionbetweenWestandEastintradeandideaswasbufferedbythethousandsofmilesoftheAsianland

massandseverallayersofmiddlemenwhotraversedit.VeryfewEuropeanshadsetfootinChinaandnonehaddocumenteditwell.Polo'sbookabouthisadventuresanddealingsinChinasetimaginationsablazeinEurope.Itwasthebirthofthe2,000-year-olddreamoftradingwithandsellingtoChina.ThebookalsohelpedinspiretheexplorersoftheAgeofExploration,includingChristopherColumbus,tofollowinPolo'sfootstepsandfindasearoutetoIndia,theSpiceIslands,andChina.

The Two Admirals of the SeaTheItalianseafarerChristopherColumbus—sponsoredbythekingandqueenofSpain—sailedforIndiain1492.HesoughtafastpassagethatwouldopentradeandexplorationintheEast,onlytolandintheEasternCaribbean.Despitehishorrificrelationswiththenativepopulations—whattodaywouldbecalledcrimesagainsthumanity(enslavement,genocide,disease,exploitation,kidnapping,andmurder),anddespitethefactthatuntilhisdyingdayhebelievedhehadfoundtheWesternsearoutetoIndiaandChina,itwasaseminalmomentinthehistoryofEast–Westrelations.AfterthecollapseoftheSilkRoadandEuropeandefeatintheholylands,thepathtoChinafortradewasstillblocked.Polo'sbookinspiredmerchantsandkingstofindawaytotradewithChina.ButasyetnoEuropeanpowerwouldorcouldpassthroughtheMiddleEastfordirecttrade—notunliketheirGreekandRomanforebears.ItcanbearguedthattheAgeofDiscoveryandWesterncommercialdominancewasbornofadesiretosellproductsinChina.EuropeansrealizedthattheyneededasearoutetotheEastiftheywereevertofindawaytoimportmuchsilk,tea,andporcelainfromChina—aswellasthespicesandcottonofIndia—andtoselltotheuntoldmillionstobefoundonthoseexoticshores.TheEuropeanRenaissancegavenewlifeandvigortoEuropeanart,culture,religion,architecture,andmostimportantly,commerce.InItaly,Venice,Florence,andGenoareachedtheirpeaksascommercialcity-states.TheFlemishregionwastheprogenitoroftheindustrialrevolution.EnglandandFrancebecamegreatpowers.Europewasrebornandreinvigorated.But,itwasthisveryrebirththatledtothedesireformorecommerce,moreroom,moreland,andnewfrontiers.ThepopulationexplosionsanddesireforwealthandknowledgethatcameoftheRenaissancecouldnotlongbecontainedinEurope.

Chinawasstilladominantworldandregionalpower,albeitwithoutmuchcontactwiththeoutsideworld.Infact,ChinahadthechancetobeatEuropeansintheraceformodernityandworlddominance.ButColumbussparkedtheAgeofDiscoveryaswellastheimperial,religious,andcommercialcolonizationofEurope,NorthandSouthAmerica,Africa,andtheFarEast.Allofthisusheredina500-yeardominanceofWestoverEast.Butalmost90yearsbeforeColumbusconvincedthekingandqueenofSpaintofinancehisgreatvoyage,oneofthegreatestseamen,explorers,andleadersofmeninworldhistorysetsailonhisownvoyageofdiscovery.HewasAdmiralZhengHe(1371to1433).ItisalmostimpossibletooverstateZheng'sabilitiesasaseaman,soldier,andintellect;hisinsatiablecuriosityabouttheworldhelpedChinaseefurtherbeyonditsbordersthaneverbefore.SomeChinesemapsofthetimetypifiedtheclosednatureoftheMiddleKingdominthattheyonlyshowedChina,surroundedbytheoceans.ZhengHecouldandwouldchangethat,foratimeatleast.ChinesetoArabtradeduringthefourteenthcenturyincreasedandChina'sknowledgeandcuriosityabouttheworldgraduallygrew.AsituationdevelopedwhereChinatradedwiththeArabworldbutnofurtherwest,andtheWesttradedwiththeArabworld,butnofurthereast.TheYuandynastysoughttobuildalargerbaseofknowledgeandtradearoundtheworld,butitwastheearlyMingDynastythatengagedintherare(forChina)ideaofterritorial,commercial,andimperialexpansionoutsideofitsimmediatesphere.DuringtheearlyMingDynasty(1368to1644)questionsandconfrontationsregardingborders,loyalties,andpositionswithintheroyalcourtwererife.Inthemidstofthistumultayoungboy,hailingfromwhatisnowKunminganddescendedfromaprestigiousMuslimfamily,wasintheroyalcourtofZhuDi,PrinceofYan.Theyoungboy,ashegrew,showedincredibleacumenformilitaryaffairs,politics,intrigue,andscholarlypursuits.Hesoonbecamea

favoriteandtrustedadvisoroftheprince.Intheyears1393to1402,therewereseveralinternecinestrugglesforpowerwithinandoutsidetheMingCourt.In1402,ZhuDi,hisarmy,andhisclosestadvisor,ZhengHe,marchedintoNanjinganddefeatedanephewwhohadclaimedthethrone.AfewdayslaterZhuDiwasproclaimedtheYongleEmperorandwentontobecomeamajorforceforchangeandadvancementinChina.ZhengHeheldseveralimportantseniorpostsundertheemperor,butmostimportantlyhewasmadeadmiralandembarkedonthefirstofsevenexpeditionsin1405.TheYongleEmperorwantedtodominatetradeintheIndianOcean,takeforeignersasslavesandsailors,andtoexacttributefromlandsinAfricaandArabiaastheyhadbecomemoreawareoftheextentandwealthoftheseforeignrealms.AdmiralZheng'sfirstvoyagesetsailfromSuzhouinJuly1405.Itincluded:

Afleetof317ships.Almost30,000men.Dozensoflinguists,whoweretrainedatanewacademyinNanjingjustforthepurposeofthetrip.Thelargestwoodenshipsinhistory(tothisday)ranginginlengthfrom216feetto420feet(afootballfieldisabout300feet).

Hemadehissevenvoyagesbetween1405and1435,visitingtheHornofAfrica,Arabia,Brunei,Thailand,India,andSoutheastAsia.Alongtheway,heandhissoldiers,sailors,andscientistsestablishedtradewithseveralkingdoms,exactedtributefrommanymore,andbroughthomenewideasaboutscience,technology,andcosmology.ItseemedasthoughChinawasonapathtoimperialdominationhighlightedbytwo-waytradewithotherAsianandAfrican

countries,kingdoms,andtribes.Anditisnothardtoassumethat,soonafter,theseenormousfleetswouldhavesailedbeyondAfricaintotheAtlanticOceanandmayhavebeenthefirstold-worldexplorerstodiscoverthenewworld.Butthatwouldnotbethecase.TheYongleEmperordiedin1424.Hissuccessor,theHongxiEmperor(1424to1425),stoppedthevoyages,burnedthefleet,destroyedallitsrecordsandcutofftradeevenwithChina'sclosestneighbors.Althoughhisson,theXuandeEmperor(1425to1435)allowedonemoreexpedition,ZhengHe'smissionwasover.ChineseshipswererestrictedtocoastalwatersandChinaturneditsgazebackinward.Duringthenext200years,theEuropeanRenaissanceandAgeofDiscoverywouldturnthetideandhistoryofglobaldevelopment,livingstandards,science,art,technology,andcommerceonacourseofWesterndomination.TheWestwouldruleforthenext500years.Fromthelatefourteenthcenturyuntilthelatesixteenthcentury,Europewasreborn.Thearts,science,philosophy,andnewformsofreligionflowered.TheperiodgavetheworldMichelangelo,Caravaggio,Galileo,andDaVinciinthearts.ItgavenewlifeandimportancetotheclassicalthinkersandphilosophiesofGreeceandRome.TheProtestantReformationchangedthewaymuchoftheworldworshippedGodandconducteddailyaffairs.Humanismandsecularismbegan.Thefoundationsformodernsciencewerelaid.Perhapsmostimportantly,aperfectstormofenvironmental,geographic,andhumanfactorsforcedEuropetolookbeyonditsbordersforwealthandexpansion.WiththepathtotheEastanditsricheslargelyblocked,Europelookedwestward.ThediscoveryandsettlingoftheNewWorldperWebster's,thecommercialactivity,andthecolonialismthatfollowedspurredthegrowthofaWestern-dominatedworld.

Chapter 6An Insatiable AppetiteEveninthecenturieswhichappeartoustobethemostmonstrousandfoolish,theimmortalappetiteforbeautyhasalwaysfoundsatisfaction.—CharlesBaudelaire

WhileallofthiswashappeningintheWest,Chinacontinuedtoflourishinitsownrealm.TheMingandQingEmpireswouldsustainChinaasaregionalpoweruntiltheearlynineteenthcentury.Butstill,thegoalofsellingthefruitsoftheRenaissanceandtheNewWorldtoChinawasoutofreach.But,thatdoesnotmeanforeignersdidnottrytoselltoChina.Thereweresomebriefsuccesses,butthehistoryoftradewithChinaisonemarkedbyChina—whenitfeltlikeit—exportingandsellingproductsabroad,butalmostneverbuyingproductsfromtheoutsideworld,acceptingonlysilverandgoldspecieinreturnfortheirluxurywares.Why?

ThroughoutitshistoryChinahasbeenfocusedinwardduetoitssize,population,andself-sufficiency.ForcenturiesChinawastheleadingscientificandeconomicpowerintheworld.Chinainventedmanyofthetoolsandproductswestillusetoday,andforalongtimefeltnoneedtosellthemorspreadthemtotherestoftheworld;itinventedeverythingitneededtostayviableandhealthyforthousandsofyears.TheEuropeanAgeofDiscoveryandExpansionhadmanyeconomicandconsumerimplicationsandeffects;discoveringanddesiringChinesegoodswasoneofthem.

England,Spain,Portugal,France,andHollandcolonizedtheNewWorldandestablishedlucrativenewinternationaltraderoutesandregimes.Theeconomic,nautical,scientific,andcommercial

successofthisnewworldordermadeEuropeanswealthy.Theresultwasadesiretobuythethingstheywantedandanincreaseddesiretoexpandtradeevenfurther.Duringthe1600sandearly1700s,EuropeansestablishedtradewithAsiathroughaseriesofcommercialports,colonies,andmassivetradingcompanies(theDutchEastIndiaCompanyisonegreatexample).EuropeansnowfoundthemselveswealthierthantheyhadbeensincethetimeoftheRomans.ThedesiretotradewithAsiaonlyincreased.Starry-eyedproto-capitalistsandtradersenvisionedaworldwhereEurope,theAmericas,andAsiacouldbeconnectedbytradeandprofits.Whiletradeduringthe1600sand1700sdevelopedandflourished,itwaslargelyaone-waystreet:EuropeanscouldnotgetenoughofChinesesilk,cotton,porcelain,andtea,butChinaonlywantedgoldandsilverspecieinreturn.ThishadthedebilitatingeffectofdepletingEuropeantreasuriesofmuch-neededcurrency.Ofcourse,italsoblockedtheestablishment,letaloneevolution,ofanyrealtrade.Aswehaveseen,therewasanactivetradebetweenChinaandtheWestthroughoutmostofrecordedhistory.Products,ideas,andpeoplemovedeastandwestacrosstheAsianlandmass—throughnumerousintermediaries—fromthetimeofAlexandertheGreat'sconqueststhroughtheheightoftheRomanEmpireandintotheByzantineera.TheseexchangesintensifiedduringtheCrusadesandtheearlystagesoftheSilkRoadera.Stillthetradewaslargelyoneway,withtheWestprovidingcoinandrawmaterialsinexchangeforexquisiteChinesefinishedgoods,allthroughmiddlemenandmiddle-countries.EvenaftertheMongolconquestofAsiaandduringthegoldenageoftheSilkRoad,throughtheexplorationsofMarcoPolo,theexpansionofWesterncolonialandimperialist-backedtradeundertheDutch,Portuguese,French,andEnglish—andevenafter

EuropehadprovenithadaninsatiableappetiteforChinesegoods,therewerestillnobuyersfornon-ChinesegoodsinChina.Thisbegsthequestions:WerethereactuallyconsumersinChina?Weretherepeoplewhoboughtnotonlythethingstheyneeded,butusefulthings,prettythings,andthingstheywanted?WereChineseconsumersbuyingallthethingsinventedandmadeinChina?AndiftherewereconsumersinChina,andtheydidbuythingsbeyondthebarenecessities,itbegsanotherquestion:WhywastherenomarketforforeignproductsandgoodsamongtheleadersorthepeopleofChina?

Freedom Creates Wealth in the WestFirst,let'saddresswhethertherewereconsumersinChinabetween500BCEand1600CEfirst:Theshortanswerisno.Byandlarge,therewasnoconsumerclassinChinaduringthisperiod.Ofcoursetherewasvirtuallynoconsumerclassanywhereintheworldpriortoseventeenth-centuryEurope.Kings,aristocrats,militaryleaders,conquerors,andtheverywealthyfromancientGreecetoRome;fromthepopes,Charlemagne,andHenryVIIIintheWesttotheemperors,mandarins,shoguns,sultans,caliphs,andmogulsoftheEast—alldesired,made,andboughtthebestthingsinlife.Theywereprotoconsumers,buttheywereaverysmallpartofanypopulation.Theyboughtandusedproductsthatallowedthemtoenjoyalifestylebeyondtheimaginationoftheaverageperson.Theywereabletocommissionorbuythebestthattheircounties,provinces,andkingdomscouldproduce.Inmanycases,andwithfewexceptions,theyalsotradedwithotherempires,kingdoms,andpeoplestoenjoythebestthingsthatotherscouldoffer.Asmarketersarepronetosayingnow,“Thericharoundtheworldtendtobehavemorelikeeachotherthanliketheirownpeople.”AByzantineemperor'spalacewouldbeadornedwithgoldandsilverdecorativeitemsfromacrosstheNearandFarEast.Histablewouldfeaturespices,fruits,meats,andvegetablesfromacrosstheMediterraneanBasin.AndhispalacewallswerebuiltfromthecedarsofLebanonandRomanTravertinemarble.Theshopkeepers,farmers,merchants,andlaborersheruledwouldbeluckytoowntwosetsofclothes,someusefultools,andafewtreasuredpersonalpossessionsorheirlooms.ThiswastrueacrossEurope,Asia,andtheAmericasatthetime.ItwasnotuntilthemiddleofthesixteenthcenturyandthebeginningoftheseventeenthcenturythatEuropeanditscoloniesproducedthefirstnascentconsumerclassoutsideoftheelites.

SowastheAgeofExplorationthedawnoftheconsumerclass?AsRussellShortoexplainsinhisoutstandingbook,Amsterdam:TheStoryoftheWorld'sMostLiberalCity,therichesproducedbyDutchtraders,theDutchEastIndiaCompany,andthemerchantsandentrepreneursofAmsterdam'sgoldenageproducedwhatwasarguablytheworld'sfirstmiddle-classconsumersociety.TheDutchneverhadasystemofkingsandnoblesdependentonpeasantswhorentedtheland.Rather,theDutchworkedtogethertotamethesea,buildacity,andbuildacountry.Theywere—bynecessity—tolerantandacceptingofeachother,inordertoaccomplishmajorpublicworksthatwouldbenefitsocietyaswellasindividuals.ItwasDutchliberalismthatallowedforthereligioustolerancenecessarytocreateahavenanddestinationforforeignerstowork.TheDutchfocusonindividualliberty,alongwiththelackofalegacyclasssystem,enabledtheDutchtofarm,trade,andprosperinwhatbecameEurope'srichestandmostproductivecountryfornearly100years.Thissystemproducedamiddleclassthatboughtjewelry,art,furniture,food,drink,andcreaturecomfortsthatimprovedthestandardoflivingandprovidedforcomfortablehomesinfusedwithuniqueaesthetic.Togreaterorlesserdegrees,inotherEuropeancountries,inAmericancolonies,andinEasterncolonies,thesamewashappening.Afocusonindividuallibertyandfreedomofcommerce—aswellastherichesfreedomproduced—createdprotoconsumerclassesthathadneverexistedbefore.

Chapter 7Opium, Imperialism, and DecayAllempiresfall,eventually.Butwhy?It'snotforlackofpower.Infact,itseemstobetheopposite.Theirpowerlullsthemintocomfort.—MaxBarry

KingGeorgeIIIofEnglandsentadelegationtoBeijingin1792,ledbyLordGeorgeMcCartney,inthehopeofincreasingtradewithBritain,establishingatradeport,andopeningapermanentembassyinBeijing.ThemissionwasanabjectfailureendingwiththeQianlongEmperorsendingacondescendingandmockingletterbacktotheking,whowasnotpleasedwiththeChineseemperor'srefusaltoevenconsiderallowinghissubjectstopurchaseanyBritish-madegoods.TheBritishEmpirewasimportingmassivevolumesofteafromChinaandwaspayingforallofitinsilver.LordMcCartneywasfamouslybanishedtothebarrenrockknownasHongKong.Decadebydecade,Britishimportsgrewandsilverreservesdwindled.ExportingthefruitsoftheIndustrialRevolutiontothecoloniesreplenishedBritishcoffers,butpaymentwasnotalwaysinsilverandtheamountwasneverenough.AttimestherewereconcessionsbyQianlong'ssuccessors.Forexample,verysmallforeignlegationswereallowedtobuildsmallwarehousesonthedocksincontrolleddistricts.Clergywereallowedtoenterandministertothesmallcommunitiesoftraders—betheyDutch,British,orPortuguese—inFormosa(nowTaiwan),Canton(nowGuangzhou),orMacao.Buttheseweretokenmeasures,uselessinacrisisofmountingproportions.

Opium and WarBy1810,theBritishneededastrategytoreversetheflowofsilver;tofindsomemiracleproductthattheChinesewouldpaysilverfor.TheyfounditinthepoppyfieldsoftheirSouthAsiancolonies:opium.InitiallytheChinesecourtagreedtoallowasmallquotaofopiumimports,tobenegotiatedannually.Thenitappointeddistributorstodealwiththe“foreigndevils”thatshippeditintoCantontoreachinlandmarkets.Foreignimportswerebeingallowed,butinatightlycontrolledandexperimentalway.Sellingopiumdoescarryinherentrisks.Asthepopulationofusersgrows,itceasestobemerelyaproblemforanindividualaddictandhisfamily;itbecomesgenerallydetrimentaltosociety.By1840,thevolumeofimportshadskyrocketed.GiventhegeneralstateofdeclineoftheQinggovernment,thetimewasrightforcultivatingoutrage.AshipmentofBritishopiumwassetafire.ReparationsweredemandedbytheBritishandrefusedbytheChinese.ABritishgunboatignoredtherulesandsailedintoaninlandwaterway.ThingsescalatedandtheBritishgunboatseasilywontheday.

A Century of ExploitationThentheBritishwonatreatyrequiringoutrageouswarpenaltiesandworse:therighttoestablishportsettlementsunderBritishcontrolonChineseland.Othernationsdemandedrightstocolonizeonthecoastalso,andtheso-calledTreatyPortswereborn.Amongthebetterknown:TheBritishtookHongKongandGuangzhou,whiletheGermansmadeQingdaotheirbasefortradeandestablishedaveryfinebrewerythere.Frenchandinternational(British,Russian,American,andother)concessionswereconstructedinafishingvillagecalledShanghai.TheseoutpostsofforeignwealthandpoweronChinesesoilwerenotonlysymbolsofChina'sdeclinerelativetotheWest;theywereinstrumentsfortheeconomicexploitationandculturalhumiliationofChinabyforeignpowers.Inaclimateofgrowingdisintegration,banditspreyedonthepowerless.Impoverishedarmiesofbeggarsandbandits,organizedunderaleaderclaimingtobethebrotherofJesusChrist,carriedoutadecade-longuprisingcalledtheTaipingRebellion,inwhichmillionswereslaughtered.Foreignarmieshadtobecalledintoendit.Intheperiodfrom1850to1894foreignpowersestablished,atlast,thegoalpursuedbyexplorersandEuropeankingsforcenturies:tradebetweenChinaandtheWest.Inthesedecades,Chinahaditsfirstexperimentwithconsumermarkets,althoughthesemarketsservedonlysmallpopulations,suchasforeignresidentsandtheChinesetraderswhoworkedwiththem.Acenturylater,thesecoastalcitieswouldbecomethetestinggroundforaneweraoftradeandmarketliberalization.Backtothenineteenthcentury.Duringthistime,preciouslittleofthetradingwealthfedadomesticmarket.Customsduties,bankingfees,andmarine-cargoinsurancepoliciesallrepresentedrevenueforforeigncompanies.ForeignerscontrolledChina'sportcities.Theyhadtheirownpoliceandtheirowncourtsaswellasseparategeneratorsandwatersystems;andtheyshelteredmissionariesand

criminalswithintheirboundaries,beyondthereachofChineseauthorities.TheseTreatyPortyearswerethedeaththroesoftheQingDynasty.Itsfallcanbeattributedtomanycauses,butthemostconcisediagnosismaybe,simply,failuretomodernize.NotallQingeliteswereblindtotheextentorcauseofdecline.Infact,intheyearsfrom1880to1899,theQingPrinceGuangxusponsoredagroupofreformerswhosoughttobringmodernmilitary,education,andpoliticalsystemstoChina.Thoughthe99ReformsadvocatedstudyingWesterntechnology—toborrowwhatwasusefulandignoretherest—theywerepresentedtotheEmpressDowagerasself-strengthening.Oneofhistory'sgreatculturalchauvinists,theEmpressDowagerhadtheprincejailedfortreasonin1899.Twelveyearslater,theXinhairevolutionof1911overthrewthemoribundQingDynasty.Pointedly,themajorsourceoffinancingfortherevolutionwastheChineseinAmerica.ThechildrenofthemenwhobuiltAmerica'srailroadsheardtheferventpleasofaGuangdong-born,Japanese-educateddoctornamedSunYatSen,whospokeofdemocracy.Intime,theNationalistgovernment,ledeventuallybytheKuomintangParty(KMT),inheritedthemantleofpoliticalcontrolthattheXinhairevolutionhadwrestedfromtheQing.MeanwhileJapanhadsignedupforthemodernizationprogramthattheQingDynastyshunned.Japan'sMeijiRestorationofthelatenineteenthcenturybroughtconfidenceandwealthtotheislandsthatwerebroughttotheworld'sattentionwithvictoryintheRusso-Japanesewarof1904–1905,whichwasfoughtoverimperialaspirationsforbothinregardtoManchuriaandKorea.Emboldenedbyhisnation'sgrowingprosperity,EmperorHirohitosoughttoexpandthelandmassunderJapanesecontrol.Firstthroughtreaties,thenthroughoutrightinvasionandoccupation,JapantookcontrolofNortheastChina.Intheyearsfrom1899to1927,Manchuria'srichagriculturallandbecamethebreadbasketforHirohito'sarmies.Onebyone,thecitiesofManchuria—Dalian,

Changchun,Jinan,andShenyang—becameindustrialbasesforHirohito'swarmachine.TheKMT,seekingmilitaryaidtocombattheJapaneseoccupation,becameaclientstateoftheUnitedStates.TheKMTpaidoccasionallipservicetoChristianidealsandsecuredmillionsofdollarsinAmericanaid.Unfortunately,theNationalistgovernmentwasalsoaglorifiedwarlordregime:corrupt,violent,andwillfullyignorantofitspeople'ssuffering.

End of War—Continuation of WarWhiletheUnitedStatesdefeatedtheJapaneseandendedtheoccupationofChina,itwastobeanotherforeignideologicalimport—Communism—thatfinallyendedimperialandwarlordrule.Inpart,theCommunistsgainedlegitimacyandpopularsupportbyfightingmoreactivelyagainsttheJapaneseoccupationthantheNationalists.Whenthecivilwarresumedinfullbetweenthetwosidesin1945,anotherfouryearsofbitterfightingforthefutureofChinalayahead.WhentheCommunistsfinallywon,andtheNationalistsfledtoTaipeiin1949,Maoestablishedanewgovernmenttopresideovertherebuildingofanationshatteredby100yearsofwarfareandexploitation.Understandably,sensitivityoverforeigninvolvementinChina'seconomypersistedforsometimefollowingtheestablishmentofthePeople'sRepublicofChina.Inpsychologicalterms,ChinahadaverybadexperiencewiththeWest,duringwhichitlostpower,prestige,territory,anditsself-confidence.Inpracticalterms,China'sinfrastructure—banks,roads,schools,andfactories—waswhollyinadequateasafoundationforamid-twentiethcenturystate,nevermindaconsumereconomy.Thentherewastheissueofideology.Clearly,ifthereweregoingtobeconsumers,letalonesuperconsumers,theywouldhavetowaitforthewheelofhistorytoturnanothercycle.

Chapter 8The People's RepublicArevolutionisnotadinnerparty,orwritinganessay,orpaintingapicture,ordoingembroidery.—MaoZedong

DefeatinwhatAmericanscallthePacificTheaterofWordWarIIandwhatChinesecalltheWarofResistanceagainsttheJapanese—inwhichtheCommunistfightersaretheheroes—forcedaJapanesewithdrawalfromChinain1945.Forfourmoreyears,civilwarbetweentheCommunistsandtheNationalistsraged.ThenonOctober1,1949,whentheNationalistsfledtoTaiwan,MaoZedongstoodatoptheGateofHeavenlyPeace—theentrancetotheancientdomicileoftheemperors(theForbiddenCity)—topronouncethefoundingofthePeople'sRepublicofChina.Itwasthesymbolicandmanifestendtoalongperiodofdecline,decay,dismemberment,anddisruptioninChina.MaoclaimedthatChinahadnowstoodup.Buttowhatend?Thenationwasonanewjourney,butonethatwouldnottrackdirectlytothegoalofregainingitstraditionalplaceintheworldeconomyorregionalpoliticalprestige.Asmuchas80to90percentofChina'spopulationwasrural.Thecountryproducedlittleinthewayofmachinery,vehicles,technology,consumergoods,ormostofthetimesavingandlifestyle-improvingproductsthat,bythistime,theWestandmuchoftherestoftheworldweretakingforgranted.Washingmachines,refrigerators,modernstoves,andothercommonhouseholdgoodswereunheardofoutsidemajorcitiesandstillrareinthem.Cartspulledbydonkeyswerethedominantmodeoftransportationandox-drawnplowsweretheprimaryagriculturalimplement.Maoandtherestoftheleadershipwerewellawareofhowfar

behindChinawasfromtherestoftheworldintermsofindustrializationandmodernization.ChinahadessentiallymissedoutontheIndustrialRevolution.AsMaostoodattheGateofHeavenlyPeace,manyofChina'speoplelivedin1949muchastheyhadlivedin1749.

The New ChinaThefirstthoroughreorganizationwaslandreform.InruralChina,Communistpartymembersorganizedtenantfarmerstooverthrowthelandlordclass.Landbecamepropertyofthestate,buteachfarmerwasgivenanallotmentoflandtoworkastheentitlementofhisfamilyandforthecollectivesustenanceofthevillage.Decadeslater,asideologicalbattlelinesescalatedinthelate1960s,landreformescalatedintolarge-scalecollectivizationoflandintocommunes.Thesecondinitiativewasclassstruggle.Inwhatmustbethelargest-scaleepisodeofmasochisminhumanhistory,for30yearstheChinesepeoplesubjectedthemselvestorelentlessself-criticism,betrayaloftheirlovedones,andothercampaignsofideologicalpurity.MaodrovetheChinesepeopletoself-sacrificeforthenationalgoodandthegoodofCommunisttriumph.Thesystemofclassbackgroundwasanideologicallyrigidapplicationofaffirmativeaction,inwhichthepoorestfarmersweredeemedtheworthiestofallChinese.OtherclasseswereideologicallysuspectinproportiontotheirmaterialsecurityandexperiencewiththeWest.Interestingly,thisphase—from1950to1980—standsastheonlyeraofChinesehistoryinwhichtheofficialdoctrineheldthatprosperitywasequateddirectlytomoralunreliability.Atallothertimesfromantiquity,China'sleaderswouldupholdwealthasasocialgood.Moreover,nomainstreamspiritualtraditioninChinahaseverstoodinjudgmentoftherich.Thethirdmajorinitiativewasindustrialization,butofaproductivistnatureasopposedtoconsumerist.IndustrializationwasbasedonwhateverChinaneededtobeself-sufficient.Upontheideologicalbasisofprovidingforthebasicneedsofeachperson,Chinaestablishedasystemofproducingentities.Whetherproducingtowels,motorcycles,lightbulbs,orcannedtomatoes,eachfactoryhaditstradingarmtoexchangewithotherproducers.Eachproducerwasaworkunitthatprovidedhousingtoworkers

andtheirfamilymembers,andthatalsodistributedrationcouponsforgrain,milk,meat,andeggs,aswellastowelsandsoap.InitiallytheSovietUnionsteppedinandprovidedvitalguidance,materials,bestpractices,andinfrastructure—asocialistIndustrialization101effort.By1958,however,thetensionsbetweenBeijingandMoscowhadescalated.Takingthingstoapointofnoreturn,MaolabeledtheRussians“revisionisttraitorsoftherevolution.”Thesplitwasnevermended.In1989,31yearslater—astheBerlinWallfellandtheSovietUnioncollapsed—ChinaheldtoitsjudgmentoftheRussiansasgreatteachersofwhatnottodo.EspeciallyafterthesplitwiththeSovietUnionin1958,theeconomicpoliciesofNewChinawerebasedinferventxenophobia.Self-sufficiencybecametherallyingcry.China'sgovernmentwouldprovidetheIronRiceBowl,givingeachandeveryChinesecitizenallthatheneeded(intheory)andnoneofwhathewanted.Inmanyways,NewChinawasthefamiliarphaseofisolationredux.ZhengHe'sfleetburned.LordMcCartneywasrebuffed.ReformerswereimprisonedbytheEmpressDowager.Intimesofgreatprosperityandgreatdifficultyalike,theMiddleKingdomhasarecordfortryingtomaketherestoftheworldgoaway.So,withaneconomythathadtobestartedalmostfromscratchtheChinesepeoplehadnotthetime,theleeway,northeideologicalpermissiontobeconsumers.Becausethereweremanytriumphsandpositiveoutcomesintheearlyyears,womenwerefreedfromchattelstatus.Publichealthsystemswereestablished.Thewritingsystemwassimplified,literacyratesskyrocketed,andtechnicalinstitutionswerebuilt—anemphasisonscienceandengineeringdevelopedgenerationsoftalenttobuildthecountry.Chinagotitsnuclearbomb,andthethreatofinvasionended.Thenation'sindustrial,economic,andphysicalinfrastructuregreatlyimprovedandthepeople'sstandardoflivingwasenhancedinanumberofkeyways.Yetthechaosofclassstrugglestillpreventedasenseofsecurityindailylife.ThestagewassetforChinatoemergeonceagain.Butnot

beforetheGreatLeapForwardandtheCulturalRevolutionwouldleadto30yearsofstruggle,suffering,andideologicalpurityoverpragmatism.

Chapter 9The Mandate of HeavenZhongGuoisChineseforthecountrywecallChina(asrenderedinPinyinChinese,writteninArabicletters);ittranslatesas“themiddleplace,”“middlecountry,”orthe“CelestialEmpirebetweenheavenandearth.”ForthousandsofyearsChineseemperors(andtheirsubjects)believedthataleaderwasnotonlyasonofheaven,adivinebeinghonoredandobeyedassuch,butthathispositionandrighttorulewasmandatedbyheaven(tian).Themandatedidnothavetimelimits,itdidnotdecreethatarulermustbeofnoblebirth,orevenbeofHanChineseorigin.TheemperorsoftheYuan(1271to1388)wereMongols,andtheQing(1644to1912)emperorswereManchus.Buttherewasoneveryimportantcondition.Themandatewascontingentuponanemperorrulinginthebestinterestofthecountryanditspeople—atalltimesactinginajustandrighteousmanner.Chineseideals,evenbeforeConfucius,stressorderfromthetopdownasaparamountconditionforharmonyonearth.Thosebelowmustobey,butthoseabovemustbeexemplarsofrighteousconduct.Failingtoactasthoseexemplarswouldbringbadharvests,widespreadpoverty,instability,andnaturaldisaster.Themandatefromheavencouldbewithdrawnbasedonbadbehavior.Thedynastywouldfall.Chaosandmiserywouldreign.Acrosssome3,000years,thecyclerepeated.Foratime,anemperorandhissuccessorscouldenjoytheMandateofHeaven,imposetheirwillonChineselife,landscapes,cities,armies,neighbors,friends,enemies,andhistory.Until,inevitably,theydidn'tanymore,andthecyclewouldbeginanew.TheresidentsofTangshan,amedium-sized,working-classcityinHebeiProvince,northeastofBeijing,wenttosleepthenightofTuesday,July27,1976,intheirwork-unitresidencesor

collectivizedfarms.Aftereatingatthecanteentheylikelylistenedtotheradio,orplayedbadmintonorcards.Theywerereadyforsleepafterworkinthefieldsorattheirworkunits.Theytookbuses,biked,orwalkedhomeintheirnavy,green,orgraypantsandsummer-weightT-shirts.Theyexpectedtowakeupandheadofftoanotherhotdayofwork.Intheirhourofpeaceandrest,preciselyat3:42A.M.,onWednesday,July28,somethinghappenedthatwouldalterthecourseofChineseandworldhistory.Theearthbegantoshake,wallsbegantotremble,andthenathunderousexplosionwasheard.Theshakingintensified.Amassiveholeintheearthopenedup.Suddenlytheworldexplodedandcollapsedinonitselflikeasupernova.Sooneverything,includingpeople—formilesineverydirection—wasbrokenandburiedindirtandash,likeamodernapproximationofPompeii.Itregistereda7.8ontheRichterscaleandlastedforanunusualandhellishsixteenseconds.Inthefirstfiveminutes,morethan150,000peopledied.Sixteenhourslater,a7.1magnitudeaftershockhitandanother100,000soulswereextinguishedwhileuntoldnumberswereinjuredandmadehomeless.WhateverwasleftofTangshanandthesurroundingcountrysideaftertheinitialearthquake,collapsedintotwistedmetal,limbs,anddustafterthesecond.Itwasthethird-worstearthquakeinrecordedhistory.Someestimatethattheactualdeathtollwascloserto500,000.Noonewillreallyeverknow.BecauseChinahaddisengagedeconomicallyfromtherestoftheworldin1949,becauseithadbrokenoffrelationswithitskeyally,Russia,in1958,andbecauseonceagainthecountryhadcommitteditselftoself-sufficiencyandisolation,therewaslittlehelpfromtheoutsidetobehad.TheUnitedNationsandcountriesthathaddiplomaticrelationswiththePeople'sRepublicofferedaidtoearthquakevictims.Chinarefused.ThequakehadcomesevenmonthsafterthedeathofChina's

belovedPremier,ZhouEnlai.Hewastheultimatemartyrtohisnation,amanwhoheldthecountrytogetherduringtheCulturalRevolutiondespitesufferingenormouslyinpersonalterms.HisdeathmovedmillionsofpeopletoTiananmeninanationaloutpouringofgrief:theywept,leftflowers,andpoems.TheGangofFour(Mao'slastwifeJiangQingandthreeotherpowerfulpartyofficialswhoheldswayduringtheCulturalRevolution)hatedZhouEnlaiandattemptedtoprohibittheshowingofgrief.Butthegrieverstookitfurther.NotonlydidtheyleavepoemsforZhou,butinasignofthingstocome,theyleftlittlebottles—ahomonyminChineseforthenameofanotherbelovedleader:DengXiaoping.Itwasnotclearatthetime,buttheTangshanearthquakewasperhapsthemomentwhenMao'sregimelosttheMandateofHeaven.ItwasthedisasterthatsetChinaonanewcourse,onethatwouldchangetheworld.Afewweekslater,onSeptember9,1976,MaoZedong—NewChina'sfounder,militaryleader,philosopher,andpolitician;theChairman;theGreatHelmsman;theicon—wasdead.Chinesehistory,tradition,andmythseemedtohavestayedtruetoform.Thegreatnaturaldisaster,bookendedbythedeathsofChina'stwomostimportantfigures,endedthecycle,portendinggreatchanges.IntheabsenceofMaoandZhou—thefirebrandandthecaretaker;thegreatrevolutionaryandthegreatstatesman—wasagreatvacuum,andnotjustofleaderstofillthetoptwoposts.ThescaleofmourningforthedeadanddamagedofTangshan—thelossoftheGreatHelmsmanandthepeople'sprotector—wasprofound.Allofthelosscreatedspaceforsomethingdifferent.Thequestionwas:WouldChinaseizethemomentandsetanewcourse?Most,ifnotall,ofBeijing'spowereliteknewthatnotonlywasthenextgenerationofleadershipatstake,butthefuturedirectionofthecountry'seconomy,theParty,andthepeoplewereatstake.TheGreatLeapForwardandtheCulturalRevolution—alongwithacentralizedcommandeconomyandcollectivizedfarming—had

failedtoputChina'seconomyintheworld'stop5,ortop20ortop50,evenwiththelargestpopulationonEarth.ThesemovementshadfailedtorestoreChina,agreatcivilizationandapowerfulnation,tofullerleadershipintheworld.Instead,thefaminesoftheGreatLeapForward,thedemonizationofintellectualsduringtheCulturalRevolution,athird-worldmanufacturinginfrastructure,andagriculturalpoliciesthatdisincentivizedfarmerstogrowmoreleftChinanearthebottomofalmosteverycategoryofmodernization,industrialization,andeconomicstandingintheworld.ManyinChina'spowerstructurethoughtthecountrynotonlyneedednewleadersbutthatitalsoneededanewsystem,anewsoul,andanewwaytostandup.Symbolicallyandmaterially,throughomensofdisasteranddeath,thestagewassetfortheinsidestruggle.Therewere,ofcourse,factionswhowishedtoupholdadherencetoMaoist/Marxistdoctrinesandpractices.Therewerethosewhothoughtthatthepurityofthestrugglehadbeencompromised,andthatgivenenoughtimeandeffortpurecommunism/socialismwouldprevailoverdemocracyandcapitalism.Remember,itwas1976.WerenottheSovietsgivingtheAmericansarunfortheirmoneyintheColdWar?Didn'tSovietCommunismruletheeasternhalfofEurope?Wasn'ttherevolutiontriumphantinNorthKoreaandVietnam?Weren'tcountriesinAfricaconsolidatingandexpandingCommunistinfluenceandrule?AcrosstheAtlantic,CastroandotherleftistsinCentralandSouthAmericawerefightingandinmanycases,winningthebattleagainsttheWest.EvenIndia'scommunistpartyreacheditsapexinthe1970s.Therewereothersthough—thosewhohadinternalizedtheeventsofthepast30years,thepast10years,andespeciallythepastyear—whoseemedtohaverealizedthat(asthesayinggoes):“Thedefinitionofinsanityisdoingthesamethingoverandoveragain

andexpectingadifferentresult.”Therewerethosewhoasked,“Whatcanwedodifferently?”“Whatcanweabsorbfromprosperousnations,whethercapitalist,socialist,totalitarian,ordemocratic,withoutlosingourownidentity?”Theyasked,“Whatcanwedo,withintheautocraticframeworkoftheParty,toimprovethecountry?”Theyasked,“WhatcanwedotoensurethePartyremainsinpowerwhileatthesametimecatchingupwiththeWesternWorld?”“ShouldChinacontinueinisolation,realignwiththeUSSR,createandleadablocofthird-worldnations?”“WhatisitthatallofourbrothersinCommunism/Leninism/Maosimacrosstheglobehaveincommon?”theyasked.Theanswerwastheyhadtheideology,thedoctrine,thedogma,andthewilltofight.Theywerefightingracism,colonialism,exploitation,andtheterrorofwealthyelitesimposingtheirwillontheworkingclass.Theonlyproblemwasthatithadbecomehardertodenythatthecapitalist,democraticWestwaswealthy,whichmeantahigherqualityoflife,longerlifespans,andaninfrastructuralfootprintthatcreatedoptionsforfuturedevelopment,and—mostofall—politicalstability.Tobeclear,thereformerswerereadytoleadChinaoutofpovertybutnotintocapitalism.Thepriorityofearlyreform—asin1898—wastoborrowtechnologyfromtheWestwhileavoidingitscorruptingmoralinfluences.We'lltakehighways,butleavetheopiateofthepeople,religion;we'llimporttrucksbutdeclineprivateautomobiles.Thegoalwasnottocreateaconsumersocietybutrathertohaveenoughprosperityandtechnicaldevelopmenttoguaranteesovereignty,andmoreovertoassumeaplaceofdignityandparticipationinglobalaffairs—aboveall,toremainChinese.Chinawantedwhatitoncehad:wealth,well-educatedpeople,regionalprestige,andstability.Tothesemenandwomen,thefirstorderofbusinesswastoaccumulatecapitalfordevelopment,togetrichasanation,torisepeacefullyontheworldstage.Everything

elsewouldfollow.Gradual,incremental,logicalchangethatwascompatiblewithstability,andafoundationforreclaiminggreatnessagain—ifitbeChina'sfate.Whichwasittobe:adoublingdownontheCommunist/Maoistsystemorincrementalchangethatwouldprovideanewpathtopower,wealth,andinfluence?Thefactionsandkeyplayerscontinuedtostruggle.Atfirst,inthewakeofthepurgeoftheradicals—ledtheGangofFour—placinganyonebutaMaoloyalistinhisshoesaspartychairmanwashighlyunlikely.AndsoHuaGuofeng,whoseideologywasessentially,“WhatwouldMaodo?”wasplacedinthepost.Amonghisactsinpowerwastherehabilitationofahighlyregarded,yetthrice-purgedpartyveteran,DengXiaoping.ThelittlebottlesplacedatTiananmentomournZhouEnlaihadbeenseen.Notlongafter,DengwouldriseandreplaceHuaasdefactoleaderofChina.ItistestamenttoDeng'smoralauthoritythatinanationwiththreecentralgovernmentstructures—party,military,andstate—DengessentiallyruledChinafrom1978until1992withouteverholdingthetoppartyorstatetitles,andheheldthetopmilitaryroleforfewerthan10years.ItseemedthattheMandateofHeavenhadbeengiventoDengandanewcyclehadbegun.

Opening and ReformItwasDengwhowouldprovidetheimpetus,thespirit,andthedeterminationthatwouldleadtothechangesinChinaforevermemorializedandreferredtoasReformandOpening.Byhimself,andthroughhishandpickedsuccessorJiangZemin,DengnavigatedtheminefieldthatistheChineseCommunistPartyandbroughtChinatoawatershedthatchangedtheworld.Thepoliticsinvolvedarewellbeyondthescopeofabookaboutconsumers,butsufficeittosaytheeventsDengputinmotionsetthestageforChinatocreatetheworld'ssecond-largesteconomyandtocreatetheworld'ssecondclassofsuperconsumers.DenginitiatedtheReformandOpeningmovementwiththetheoryofthesocialistmarketeconomy,whichhealsodescribed—withanodtotermssuchasnorthernEuropeansocialism—as“socialismwithChinesecharacteristics.”ThesocialistmarketeconomywouldseeChinamovefromsimplymakingthingsthatmadeotherthings—steel,oil,andchemicals—andthingsthatonlyhadautilitarianbent,toproducinggoodsthatcouldbeconsumedinandofthemselves.TakeamomenttoconsiderwhyDengusedthosetwoterms,ReformandOpening.Reformmeantthatthecentralgovernmentwouldhavetopromoteandaccommodatechange—specifically,thechangesthatwouldallowChinatoprosper.Reformneverimpliedarejectionofsocialism,thedictatorshipoftheparty,ortheChineseculturalidentity.ItdidimplythatDengwouldnotindulgeinunnecessaryideologicalscrutinyofmethodsthatwouldreliablyprovideforthebasicneedsoftheChinesepeople.Keyandearlydomesticreformsincludeddecollectivizationofagriculture:allowingfamiliesandvillagestodeveloptheirownsystemsforfeedingtheirpeople.Tendingtheirownplotsandsellingtheexcessatmarketswouldprotectfarmersfromthemassstarvationofthe1950s.

OpeningwastherealizationthatChinacouldnotsurviveasahermitkingdom.Thecountrywouldneedtoallowforeignideas,practices,people,andinvestmentsifitweretoreallystandupontheworldstage—andifitspeopleweretorealizeastandardoflivingcomparabletothedevelopedworld.Theexperimenttoallowforeigninvestmentbeganwithfourspecialeconomiczones(SEZs).Shenzhen,acrossthelandborderwithHongKong—whichin1985wasatinyvillageoffisherman,smugglers,andprostitutes—wasthemostsuccessful.Today,itisamegacityof14millionpeople.TheotherthreeSEZssoughttotaptheinvestmentcapitalofoverseasChineselivinginTaiwan,Thailand,andMacao.Shenzhendid,infact,attractmountainsofHongKonginvestments.Thethen-Britishcolony,withbothmanufacturingandfinanceindustries,neededahinterland.Withtaxholidays,preferentialpoliciesforhiring,flexiblestructuresinleasing,andapilotprogramforlicensingforeigninvestorsandbringingforeigncapitalintoChina,Shenzhentookoff.Asthe1980sturnedintothe1990s,theSEZswereprovingtobeahugesuccessandthousandsofcompaniesfromaroundtheworldseizedontheopportunitytomake,produce,andprocureChinese-manufacturedproducts.ItisimportanttonotethattheinitialmanufacturingmodelwasnotbasedontheJapanesemodel.TheJapaneseproductsthatstormedtheworldmarketsinthe1970sand1980swere,byandlarge,dreamedupandengineeredinJapan—byJapanesepeopleandcompanies,brandedasJapanese,andexportedtotheworldasJapaneseproducts.Chinesemanufacturingontheotherhand,fromthestarttothepresentday,ismarkedbyforeigncompaniesandpeoplebringingtheirproductideasanddesignstoChinaformanufactureandassemblyandthenbeingsoldundertheforeigncompany'sbrand.

Green ShootsThroughoutthe1980s,asReformandOpeningwasassertingitself,tangiblechangesinlifeinChinawereapparent.Itwasduringthisperiodthatthefirstforeignbrands,luxuryitems,andhotelsbegantoappear.Afterstrugglesbetweenconservativesandreformersandpoliticalstrugglesinthelate1980s,whenthefutureofreformwasinquestion,DengXiaopingtouredsouthernChinatoassertthatthereformmovementwouldcontinueandthat“amarketeconomywithChinesecharacteristics”washeretostay.Asthe1990sprogressed,state-ownedenterpriseswerebeingprivatizedonamassivescale.DengXiaoping'stwoproclamations—“Togetrichisglorious”and“Itdoesn'tmatterifacatisblackorwhiteaslongasitcatchesmice”—werenowbecomingreality.Thepent-upworkethicandentrepreneurialspiritthatcharacterizessomanyChinesewasletloose.Peopleweremakingthings,bothforexportanddomesticconsumption.“Duringthisinitialperiodofmarket-economyexperimentation,consumptionwasstilllargelybasedontrade,”notesDr.BaohongSun,aprominentprofessorofmarketingattheCheungKongSchoolofGraduateBusinessinHongKong.“InthelatenineteenthandearlytwentiethcenturiestherewereagreatnumberofhomegrownChinesebrandsoftea,medicines,food,beverages,clothing.Chinawasnotaconsumersocietyinthemodernsensebutwasatrade-basedsociety.Thisactivitywashaltedafter1949.IntheearlyReformandOpeningera,thishomegrownbrandtradesocietystartedtoreemergeandwasanimportantstepinthetransitiontoarobustconsumersociety.”Themorepeoplemade,themoremoneytheyhadandthemoretheycouldbuy;andthemoretheycouldbuy,themoretheywantedtomakeandbuyevenmorethings.Therefore,muchlikeAmericansuperconsumers,Chinesesuperconsumerswereborninthe

furiousrushtoindustrialize,modernize,andmake.Inthewakeofatragiceventasystemfell,anewonewasestablished,andhundredsofmillionsofpeoplebegantoprosper.Theinsatiableappetitetobuyandthebirthofaworld-changingdemographicwasborn.

Part II

The Chinese Super Consumer—From Birthto Adolescence and Maturity

Chapter 10A Boom Is BornReneeHartmannandSageBrennanhavealwaysbeenalittlebitaheadoftheirtimewhenitcomestoChina.BrennanfirstwenttoChinain1987asastudentwhohadbecomeinterestedinallthingsChinese.Hestudiedthelanguage,becamefluent,andsoakedinChineselifeandcultureatatimewhenveryfewforeignerswereeventhinkingaboutChinabeyondthetermRedChina—helistened,learned,andlaidthefoundationforwhatwouldbecomehislife'swork.Hartmannbeganhercareerinfinanceandinvestorrelations.ShefirstenteredChina'sbusinessworldandlearnedtheropesbyadvisingChinesecompaniesseekingtogopubliconoverseasstockmarkets.In1999,shetraveledtoChinatoadviseonesuchclientonitsplanstolistonNASDAQ.Duringameeting,thecompany'sinsidecounselasked,“Wehaveheardofatermcalledinsidertrading,isthissomethingweshouldknoworbeconcernedabout?”Afterthatexperience,HartmannsawanurgentneedandopportunityforsomeonewithherexpertiseinChina.ShemovedtoChinain2000,wenttoworkforadvertisingandpublicrelationsgiantOgilvyandMather,andstartedthefirstinvestor-relationspracticeinMainlandChina.AsshewasbuildingOgilvy'sinvestorrelationspractice,Brennanwasrealizingthedreamofhisyouth—livinginChina,wherehewasadvisingforeigncompaniesoninvestments,marketstrategy,andtechnologyprojectswiththeleadingtechnologyconsultingfirminBeijing,BDAChina.BrennanandHartmannreturnedtotheUnitedStatesin2003topursuetheirMBAdegrees;BrennanattheUniversityofNorthCarolinaatChapelHillandHartmanndownthestreetatDukeUniversity.Despiteanumberofotherinternationaljob

opportunities,theybothwantedtoreturntoChinainordertoparticipateinwhathadbecomeafull-fledgedboom—especiallyduringthelead-uptothe2008BeijingOlympics.UponreturningtoChina,Hartmanncofoundedalifestyleapparelandfootwearbrand,calledeno,withagroupofformerNikeChinaexecutives.Atitspeak,enohad25storesinfirst-andsecond-tierChinesecitiesandwashugesuccess.HerunderstandingoftheChineselanguageandculture,herparticularinsightsintoChineseyouthculture,andthelessonsshelearnedforsuccessfuloperationsinChinawerekeyfactorsineno'ssuccess.Perhapsmostimportantofall,shefoundtheperfectblendoftheUSoriginal(streetwear)andChinification.HerdecisiontohireChinesedesigners,whoknew,literallyandfiguratively,theirintendedcustomersgaveenoitscompetitiveedge.Itisremarkablethatshe,asaforeigner,couldfoundabrand,openastore,secure$8millioninfunding,expandto25stores,andfindasuccessfulexit.Thetimingwasrightaswell.Aconsumerboomwasbeingbornjustwhenenoopeneditsdoors.HartmannandBrennanbothstartedtoseethatChineseconsumerspendingwasmaturingandgrowingexponentially,andthatbrandwasthekeydriverforChineseluxurybuyers,outboundtravelers,andgrowingmiddleclass.Thisledthetwo,nowmarried,tostartanewcompany,calledChinaLuxuryAdvisors,aboutiqueconsultingfirmthathelpsbrandsandretailersbuildandimplementstrategiesforengagementwithChineseluxuryconsumers.OverthecourseoftheirtimeinChina,HartmannandBrennanhavehadafront-rowseattotheriseofChina'sconsumerboom.Priorto2000,consumerisminChinawasstillinitsearlychildhood—theboombarelyexistedbeyonditsinfancy;itgainedmomentumintheearly2000sand,by2005,itwasinfullswing.Tohighlighttheboom'sevolution,HartmannrelatesthestoryofhowinitsearlieststagesNikeshoesinChinawereonlysoldinshrink-wrappedpackagesfromunderthecounteratstate-owned

stores,suchasShanghaiNo.1departmentstore.“Consumerscouldnoteventouchorfeeltheproductandwouldbeservedbysurlyladieswhosebestfeaturewasascowl,”shesays.“ThiswastheexperienceofChina'sfirstgenerationofemergingconsumers.”

A Boom Starts with a Swoosh and a Shot ofEspressoAsHartmanntellsthestory,“Nikerealizeditcouldneverbuildalarge-scale,sustainablebusinessinthecontextofthisonerousbrandingandretailingenvironment.”Therewere,ofcourse,issueswithdemand.“Thefitnesslifestyleboom,whichNikehelpedcreateintheUSAinthelate1970s,hadtobeignitedinChina.Thecompanyinvestedheavilytocreatedemand—forexample,buildinghundredsofbasketballcourtsatChineseschools—whilesimultaneouslylookingforretailmodelsthatcouldworkwithinChina'srestrictiveregulatoryenvironment.Insodoing,NikepioneeredChina'sretailindustry,furtherfuelingtheresurgenceofconsumerism.”ThestartingpointwasStateCouncilProclamation13.Earlyforeigninvestorsinnumeroussectors—fromagriculturetoaviation—neededstrategists,negotiators,accountants,andlawyersindrovestofindwaystoworkwiththeconstantlyevolvinggrayareaofmarketaccess.Dependingonwhichministryoragencywrotewhichregulationorguidelineatwhichtimeandplace,investorscouldmakeanargumentandthenanapplicationforinvestmentapproval.Retailanddistributionwerenotgrayareas.NoministryoragencycoulddevelopapolicythatdirectlycontravenedtheStateCouncil.AndtheStateCouncilhaddeclared,verysimply“foreignparticipationindistributionandretailisprohibited.”AsHartmannexplains,“ThefactthatNikewasproducinghighvolumesofshoesandapparelinChina,forexport,didnotmeanitcouldlegallysellanygoodsinChina.”AChineseapparelorshoemanufacturercould,however,taketoretailwhatevertheyactuallyproduced.“Thedominanceofthesingle-brandretailformatinChinaisalegacyofthatlegalstructure.Underlyingthislegalstructurewas

theinterplayofvariousphilosophiesthathaveimpactedtheChinesemind-setovercenturies.First,theConfucianphilosophytaughtthatagriculture,civilservice,andcraftsarenobleactivities,buttradeisparasitic.Second,wasMarx'sTheoryofSurplusLaborValue.Thatis,theaddingofvaluetogoodsthroughpackaging,transport,financing,branding,andretailingisinherentlyunnecessary.Giventheseembeddedvalues,itisonethingtoallowChinesetoearnmoneyfromtradingandretail,buttoallowforeignfirmstocontroldistributionandretail,tocollectcashfromChineseconsumers,andexporttheirprofits?Thatisanotherthingentirely.”InAmerica,wemayknownothingabouttheOpiumWar.Butit'shardforvictimstoforgetacenturyofhumiliation,poverty,andawarthatprofitedforeigncompaniesandpowers.Inmanyways,whenChinajoinedtheWTO(WorldTradeOrganization)in2002—andallowedforeigncompaniestomanagetheirownretailinChina—itwasproofthatthecountryhadfinallyregaineditsconfidencerelativetoforeigneconomicpowers.TheexhilarationwithwhichChinesesuperconsumersembraceforeignbrandsisapsychologicalechoofthisreclaimedglobalpower.BacktoNikeintheearly1990s:IthadproductionandwarehousesinChina,andconsumersinChinawhowanteditsproduct.AllthatstoodinthewayofbuildingaretailnetworkwasProclamation13.Asaforeignfirmthatcouldnotapplyforabusinesslicensewithascopethatincludedretail,distribution,ortrade,whatcoulditdo?Indeed,itcoulddowhateveryforeignbrandthatmanagedtogetproductontoChineseshelvesdid:usetwoentitystructures.Hartmannelaborates,“Onestructure,knownasthestrawman,involvedaChineseprivatecompanylicensedtobuyandsellgoods.SuchacompanywouldserveasthelegaloperatorofNike'ssingle-brandstore.Thesesingle-brandstoreswerelocatedindepartmentstoresandsometimesstand-aloneatstreetlevel,dependingonthestrawman'sabilitytosecurealeaseandnegotiateterms.Thecashcollectedfromsaleswouldgointothestrawman'sbankaccount.

Obviously,therewasabitofarisk.Whathappensifthestrawmandecidesnottohandoverthemoney?”SageBrennanexplains:“SoNikefoundapartner—infact,severalpartners—toopenNikestoresinaquasi-franchise,joint-venturebasis.Itmighthavebeenacashrisk,butitworkedwithconsumers.Nike,whichbuiltitsbusinessthroughtheexpansionofkeymultibrandconceptsinAmerica,suchasFootLocker,foundthatthekeytosuccesswasforNiketocontroltheproduct,thebrand,andtheexperience.”ThisrevelationmaysoundlikeRetail101,butinthefinaldecadesoftwentiethcenturyChina,itwasrevolutionary.Starbuckswasanothersuccessfulpractitionerofthecontrolled-brandexperienceinChina.Itcameinthelate1990s,laterthanNike,butitusedthesamesystem.Workingthroughthreejoint-venturepartners—oneinGuangzhou,oneinBeijing,andoneinShanghai—thecoffeechainbuiltitsbrandbyholdingitspartnerstofranchise-liketermsofpricing,presentation,andservice.Brennancontinues,“ThesecondentitytypegainedpopularityinthefewyearspriortoWTO.Inthemanufacturing-orientedenterprise,orMOEmodel,manufacturers—evenmanufacturerswithsomeforeigninvestment—wereapprovedforbusinesslicensesthatpermittedsalesofproductsthattheentityhadmade.Inthismodel,paymentriskdeclined,becausetheforeignbrandwouldcontrolthebankaccount.Yetitwasalsonotentirelyauditproof.NikecouldlegallyoperateafewstoresinShanghaibasedonaproductionfacilityinSuzhou.ButthegoodsmadeinSuzhouwouldnevermatchuptothegoodssoldinShanghai.Thatis,whatsinglemanufacturinglocationturnsoutshoes,runningbras,T-shirts,andsocks?”Eventually,thankstotheWTO,therulesofretailownershipandoperationsinChinawerestreamlined,andforeigncompaniescouldoperatefullylegally.By2010,StarbuckshadboughtoutitsChinesejoint-venturepartnersandtookcontrolofitsstores.Now,

themajorshoppingstreetsandmallsineveryfirst,second,andthird-tiercityarelinedwithinternationalbrands,manyofwhichnolongerrelinquishcontrolofpresentation—orcash—toaChinesepartner.AsChineseconsumerswereincreasinglyintroducedtoforeignretailconcepts—conceptsfromdevelopedconsumereconomies—theirdesiretoexperienceshoppinggrew,layingthegroundworkforthecomingconsumerboominChina.ThecombinationofagrowinghungerforWesterngoodsandservices,togetherwithlooseningrestrictionsinretail,meantthatthousandsofnewcompaniescouldenterChina,whichfurtherfueledtheconsumercycle.Choicesanddesirewereonaninfiniteloop,feedingeachother.Aboomwasborn.Theboomwasbornintheearly1990s,whenOpeningandReformallowedChineseprivatecompaniestobringforeign-producedgoodstoretail.Itexpandedinthelate1990sasthelegalmodelsthatworkedaroundProclamation13becamecommonplace.Itintensifiedin2002to2007,asWTOprovisionstolegalizeforeignparticipationinretailtookeffectandforeignretailersresponded.Anditrapidlyexpandedafter2008,astheconfidenceandwealthofpost-BeijingOlympicsChinafoundexpressioninconspicuousconsumption.Today,ReneeandSage,throughChinaLuxuryAdvisors,haveusedtheir15yearsofaccumulatedexperiencestudyingChineseconsumerbehavior,operatingretailoutletsinChina,andhelpingdefinetheeraoftheChinaGlobalConsumer(morelater)tohelpforeigncompaniesunderstandtheiroptionsinChineseretailandtohelpthemengageChinesesuperconsumersonaglobalscale.

Change at Hyper SpeedHavingexperienceditfirsthand,andhavinghelpeddozensofcompaniesenterandgrowinChinaduringthisperiod,wecanidentifyseveraltrendsandeventsthattookChinafromanascentconsumermarkettoaconsumerboom.Theseinclude:

MassurbanizationThepent-updemandofChineseconsumersThemyriadnewchoicesforconsumersNewwealth,feedingthedesiretodisplaystatusAmplifiedexposuretoWesternbrandsandlifestylesthroughmedia,travel,andretailpresenceNewrulesandregulationsregardingretailoperationsandinvestmentRapidentryandinvestmentbyhundredsofnewforeigncompanies,willingtoexperimentwithsomewhatriskymodelsChina'sadmissiontotheWorldTradeOrganizationIncreasedsophisticationonthepartofdomesticbrandsandretailers,whichfeedandserveconsumptionThesurgeinconfidencebybothgovernmentandthepeoplefollowingthe2008BeijingOlympics

Luxurysalesalsostartedtoskyrocketduringtheinitialconsumerboom,aspremiumbrandsandproductswerenolongertheprivilegeofthefew,butaccessibleanddesirabletomany.Threedecadesofurbanizationresultedinpent-updemandforwhitegoodsandhomefurnishings.TheabilitytobuyWestern-stylefoodanddrinks,suchasStarbuckscoffee,Heinekenbeer,Frenchwines,Häagen-Dazsicecream,KFCchicken,andMcDonald'shamburgersaffordedthebuyerwithasenseofstatusandprestige.CarculturealsohelpedsparktheconsumerboominChina.As

recentlyas2002,bicycles,pushcarts,andscootersstilllargelydominatedthestreetsofmajorChinesecities.By2007,autotrafficdwarfedothertypesoftransportoncitystreets.Virtuallyeveryconsumerproduct,technology,andfoodandbeveragecompanyintheworldnowhadtoatleasthaveaChinaplanonthetable,whetherreadyforentryornot.Commentingonthechangeinconsumerattitudesfrompre-boomtoboom,Hartmannnotesthat,“evenasrecentlyas2006,forforeigncompaniesitwasallabouteducation:educatetheconsumer,educatethemonyourproducts,onyourbrand'slifestyle,onhowandwheretoshop.Thentheystartedtospend,inrecordnumbers.Nowinmanywaysithascomefullcircle.BrandsandretailersneedtolistentoandbeeducatedbytheChineseconsumer.”Weagreethat,inmanycases,Chineseconsumersarenolongercontenttosimplybuywhateverabrandhastooffer.Theyaretellingthebrandwhattooffer,withthepromisethatifthebrandcan'tdeliver,theywillmoveon.Chineseconsumershavethereforebecomeverybrandaware,butnotverybrandloyal.AsBrennanputsit,“nowyouhaveworld-classretailersandworld-classshoppingexperiencesinChina.Manyofthestoresandflagships,runbytheforeigncompaniesthemselves,arebigger,moreglamorous,andbetterperformingthantheirhometownoriginals.Additionally,yousuddenlyfindworld-classconsumers.Thishasallhappenedinthelasttenyears.”TheawakeningofglobalcompaniestothepotentialofChineseconsumers,changesingovernmentrulesandregulations,rapidretailexpansion,anewmiddleclassandwealthyChinesecitizens,andthedreamofmakingandspendingalotofmoneyallplayedaroleinignitingtheChineseconsumerboom.But,eventhen,itwashardtoimaginethataboomwouldturnintoaworld-changingphenomenonandthatChineseconsumerswouldturnintosuperconsumerswhowouldhelpshapetheworldinwhichweallworkandlive.

Chapter 11From Sandpaper to Sephora—The FirstSuper ConsumersWhenyouhaveonlytwopenniesleftintheworld,buyaloafofbreadwithone,andalilywiththeother.—ChineseProverb

Inpost-1949China,womenwerediscouragedfromwearingmakeup,iftheycouldevenfindany.ItwasconsideredbourgeoisandantirevolutionaryforthetypicalfemaletotrytomakeherselflookWesternortostandoutwithrouge,eyeliner,orlipstick.AfterReformandOpeningbeganandthisstrictureeased,cosmeticswerestillextremelyrareandhardtobuy.Manywomenimprovisedbyrubbingtheircheeksandlipswithsandpapertogivethemselvesthetouchofredthatwouldmakethemlookandfeelmorefeminine.InFebruary2013,Sephora—thewildlypopularandsuccessfulFrenchcosmeticsandbody-carechain—openeditslargestflagshipstoreinShanghai,atthecornerofNanjingRoadandMaomingRoad.AfteropeningitsfirststoreinChinain2005andseeingsteadygrowthandprofits,itwasclearthatdemandformultibrandcosmeticsretailingwashighandwouldcontinuetogrow.AccordingtoSephora,thenewflagshipstorehasmorethan1,500squarefeetofsalesspace,spreadoverfivefloors,whereChineseshopperscanchoosefrom118differentbrands(17ofwhichareAsian)andnearly7,000products.Thestoreemploys100people(outof2,500employeestotalforSephoraChina).Duringmorethanadozenvisitstothestore,weobservedthatitisalmostalwayspackedandtraffic-to-salesconversionsarehighcomparedtootherWesternretailersinChina.Howdidtheconsumerwholatentlyandinstinctivelywantedafresh,healthylook—buthadtoresorttosandpaper—transformandmatureintotheconsumerwhocouldsupport133Sephorastores

onthemainland?HowdidChinagofromsandpapertoSephorain30years?ThestoryisamicrocosmofChina'stransformationfromrationcardsandpapersandalstoshoppingmeccas,rivalingFifthAvenue,thatoffervirtuallyeveryproductavailableintherestoftheworld.China'ssuperconsumersevolvedfromnon-consumers,tonewconsumers,toconsumerboomers,tosuperconsumersinasimilarprogressionasthatofthefirstgenerationofglobalsuperconsumers.

American Century ReduxTounderstandtheevolutionofChina'sconsumerrevolution,itmakessensetolooktotheUnitedStatesasaparadigm.WhenWorldWarIIfinallyended,aftersixhorrendousyearsontheEuropeanFrontandafternearly10yearsinthePacific,mostofEuropelayinruins.TheEnglishempirewasazombie,soontodisappearcompletely.WhileRussiawastriumphant,ithadlostmorethan20millionpeopleandhadtorebuilditsinfrastructurewhileconcurrentlyloweringtheIronCurtainacrossEurope.IntheEast,Japanwasreducedfromagloriousandfar-reachingempiretoahumiliated,defeated,naked,andstarvingstate.MuchofSoutheastAsiawasdestroyedandhadtorebuildandresetforapost-colonialworld.Chinawould,afterbeingridoftheJapanese,renewhostilitiesbetweentheNationalistsandtheCommunists—andKoreawasheadedforcivilwaraswell.Standingaloneaftertheflamesandgoreofthemostdestructivewarinhumanhistory(morethan70milliondead)andphysicallyunharmed,withaneconomyroaringfromwartimeproduction,wastheUnitedStates.Thecombinationofvictory,economics,demographics,andaworldonitskneescombinedtolaunchtheAmericanCentury.TheseedsoftheAmericanCenturywereplantedinthefirstwaveofhyper-industrialization,duringthepreandpost–CivilWarperiods.MajorgrowthcontinuedduringtheRoaringTwentiesandthefirsteraoffinancializationoftheeconomy.TheGreatDepressionputatemporaryhalttoAmerica'sseeminglyinevitableriseontheworldstage,butwiththeendofWorldWarII,thestagewasemptyofotheractors,andtheUnitedStates—forabriefperiodbeforetheColdWarstarted—wasleftaloneasaneconomic,industrial,andpoliticalpower.Interestingly,theUnitedStateswas,onceagain,leftaloneasaunipolarpoweraftertheendoftheColdWar,anditwasduringthisperiodthatChina'srise

beganinearnest.ButperhapswhatmostdefinedandpropelledAmericanexceptionalismanddominanceinthe1950s,1960s,andearly1970swasthebirthoftheAmericansuperconsumer,theworld'sfirstsuchclassofconsumers.Withthewarover,millionsofG.I.sreturninghome,andnorealcompetition,Americanindustryproducedthegoodsandservicesthatmillionsofnewlyprosperousandgrowingfamiliesneededandwanted.TheG.I.Billeducatedmillionsofveteransandputthemtoworkineducation,technology,manufacturing,andservices.FurtherfuelingAmericanindustryandprosperitywasthefactthatmanufacturingwascrippledinEuropeandAsia.TheworldneededAmerican-madegoodstorebuild.Evenwithglobaldemand,itwasthenewdomesticdemandformaterialgoodsthatcreatedtheAmericansuperconsumer.America'snewmiddle-classsuperconsumerswentabouttheworkofbuildingnewlives,newindustries,andnewfrontiers.PostwarAmericawasalsotheplacewheretheworld'sfirstandlargestmass-mediamovementdeveloped.Radioexpandedwhilenewspapers,generalinterestmagazines,andjournalsflourished;Hollywoodfoundanewgoldenagebut,perhapsmostimportant,theintroductionandrapidadoptionoftelevisionchangedthewayAmericanswereinformed,entertained,andmarketedto.Addedtothesetwophenomena,anewlysophisticated,scientific,andall-encompassingapproachtoadvertisingandmarketingemerged.Theperfectstormofprosperityandneed,massmedia,andadvertisingcreatedthelargestspendingspreeandconsumerclassintheworld'shistory.Thespendingspreeofthe1950sand1960swasareflectionofage-oldAmericanidealslikeindividualism,freedom,self-expression,andaprojectionofnewones(suburbanliving,conspicuousconsumption,statussymbols).Millionsofnewhouseswerebuiltaswellandeverymannerofdecoration,appliance,and

entertainmentequipmentweremadeandboughttofillthem.Newtelevisions,radios,patiofurniture,aluminumsiding,andTVdinners;appliances,cosmetics,suits,ties,andshoes;transistorradios,foodprocessors,furniture,andmatching12-piecesetsofchina.Americansboughtpinkflamingosforthelawnandtoysforjunior—inshort,Americanswerebuyingeverythingtheyneededandwantedwhentheywantedit.

Want. Need. Buy. Show Off. Keep Up.TherewasaproductforeveryrealandimaginedneedorwantintheAmericaofthe1940s–1970s.ButnoneperhapsloomedlargerduringthepeakyearsofAmericansuperconsumptionthanthecar.In1956,PresidentDwightD.EisenhowerauthorizedconstructionoftheFederalInterstateHighwaySystem,andinfewerthan10yearsAmericabuilt50,000milesofhighways.Detroit,flushwiththeprofitsofwartimematérielproduction,expandedandgaveAmericans,in1,000styles,sizes,andpricepoints,thecarstodriveonthoseroads.AmericancarculturewassodeeplyentwinedwithAmericanpostwarprosperity,freedomofmovement,andconsumerism,thateventoday—whenwethinkofthe1950s—oneofthefirstimagesthatcomestoourmindsarebig,tail-finned,muscularAmericancarspullingintodrive-indinersanddrive-inmovies,andthenewritualoftheautomobilecommutefromsuburbtocity.ItwasalsoatthistimethatAmericansuperconsumersbegantotraveltheworldinastoundingnumbers.TheywenttoMexico,Canada,theCaribbean,andEurope.Thereweresomanyofthem,withmoremoneythanexperiencethattheimageofthe“UglyAmerican”loudinclothesandvoicesandwithlittleappreciationorknowledgeofothercultureswasborn.Houses,cars,vacations.Themiddle-classascendant.

Super Consumption Goes GlobalAmericansuperconsumersnotonlychangedtheirownlivesandtheUSlandscape;theyalsohelpedchangedthelives,tastes,buyinghabits,dreams,andaspirationsofpeoplearoundtheglobe.AtfirstAmericaprovidedtheworldwithwhatitneeded,butincreasingly,theworldstartedtoconsumethesoft-powerproductsofAmerica.PeopleeverywherewereexposedtoandinspiredbyAmericanlifestyleaspirationsandaestheticsthroughmovies,TVshows,music,andcelebrities—theseandothersoft-powertotemsandiconsmademanywanttolook,talk,act,live,andbuylikeAmericans.Whynot?Americanswereseenastriumphant,powerful,wealthy,healthy,andhappy.Theyweremiddleclass,upper-middleclass,upperclass,andsuperwealthy.Thefalsehopesofmanypoorimmigrants,who,inthenineteenthcenturyweretoldthatthestreetsofAmericawerepavedwithgold,wereinmanywaysnolongerfalse,buttrue.EventhepoorinAmericaweremuchricherthanpoorpeopleinAsia,Africa,andEurope.TheAmericandreamwasondisplay,anditwasmanifestlytruetolife.Americansuperconsumershelpedsetthestandardsforconsumptioninthe1950s,1960s,1970s,and1980s.Theywerespreadglobally,butnotyetonanAmericanscale.Thatisnottosaytherewasuniversalappreciationfor,ordesireto,imitateAmericansorthatthepossibilityofdoingsowasfeasibleinmanypartsoftheworld.Butenoughinfluencesspreadto—ironically—JapanandGermany,thecountry'sformerfoes,tohelpmakethemearlyadoptersofpostwardemocracy,capitalism,andconsumption.Otherswouldfollow.

Go West, Young ManNomatterwhatcountry,nomatterhowpoor,nomatterhowdifferentfromAmerica,nomatterhowfreeoroppressivethegovernment,onethingwassure:MillionsofpeoplefromhundredsofcountrieswereinspiredbyAmericansuccess,affluence,culture,andproductstomakethemwanttomovetoAmericaormaketheirworldmorelikeAmericaandtoimprovetheircomfortandwell-beingthroughconsumption.Europeans,Asians,SouthAmericans,Mexicans,andMiddleEasternerscametoAmericainthepostwaryearstotaketheirchancesincreatingstableandprosperouslivesforthemselvesandtheirfamilies.InsomewaysAmericansuperconsumershelpedstrengthenAmericabydrawingthebrightest,mostambitious,andhardest-workingpeoplefromaroundtheworld.TheAmericandreamsaidyoucouldworkhard,moveup,makemoney,andspenditonanythingandeverything.Whilethiswas,sadly,nottrueforallAmericansatthetime,itwastrueenoughforamajorityofpeopletobeattractivetooutsiders.AgreatexampleisHalZakkour,Michael'sfather.Hewasbornin1941,andgrewupinTripoli,Lebanon,oneof10children.TheZakkourswerepeopleofmodestmeans.Whattheylackedincreaturecomfortstheymadeupforwithfamily,food,love,andthebeautyoflivingontheMediterraneanSeawiththemountainsandthecedarsofLebanonattheirback.Butwithallthat,therewasn'tenoughspace,freedom,oropportunityfor10kidstomakeitinthistinystate,smallerthanNewJersey.Therewasalsotheinherent,ancient-Phoeniciandesiretomoveaboutandsettletheworld,tobemerchants,tomakeone'swayintradeandlife.HalZakkourwasluckyenoughtobeeducatedatanAmerican-sponsoredEpiscopalschool,whereheplayedbasketballandvolleyball.ThefirstTVshowheremembersseeingwasILoveLucy.Athome,

helistenedtoElvis,BuddyHolly,andRichieValensontheradio.OnthecornerwithhisfriendsheworeLevijeans,awhiteT-shirt,andRay-Ban–likesunglasses.Uponhighschoolgraduationin1960—withtheseedsofAmericansoftpowerplantedinhim—hepackedhisfewpossessionsandemigratedtoAmerica.Heworkedlow-skilledjobsinMiamitosupporthiscollegeeducation,earninganaeronauticalengineeringdegreefromEmbry–RiddleAeronauticalUniversity.HemovedtoNewJerseyin1964andwenttoworkforAT&Tasanengineer.Eventually,HalmetCynthiaMaurizi,thedaughterofSylvesterandGraceMaurizi,ofLodi,NewJersey,sonanddaughter,respectively,oftheMaurizisandMaricondas,ItalianimmigrantswhocametoAmericain1894and1895formanyofthesamereasonsHaldidin1960.Theymarried,hadMichael(and18monthslaterDonna),andstartedtolivetheAmericandream.Ambition,hardwork,andcleanlivingproducedalifewithalloftheneededandmanyofthedesiredthings,anicehouseinthesuburbsofNewYork,cars,vacations,goodeducationsforthekids.Soinspiringwastheresultthat,inthemid-1970s,Hal'sthreeyoungerbrotherscametoAmericaandallthreehavebuiltandlivedthesameAmericandream,theallureofwhichwasenhancedandputondisplaybythenexusofAmericanconsumption,technology,media,andsoftpowertoHalZakkourin1958.AndinapowerfulillustrationofthewaythatAmericansuperconsumerschangedtheworld,byattractingthosewhowantedtoearnandspendlikethem,Michaelgrewuptowritethisbookandnowtherearemorethan50ZakkourslivinginNewYorkandNewJersey.Allofthemaresuccessfulprofessionals,engineers,corporateexecutives,businessowners,traders,allofthemwithlovingfamilies,allofthembuyersandcreatorsoftheAmericandreamandtheAmericanpromiseof“Makeandspendandyeshallbesetfree.”LestanyonethinkthatAmericanconsumptionnolongertakes

centerstageinAmerica,rememberthat,forbetterorworseinthedaysafter9/11,PresidentGeorgeW.BushimploredAmericansto“gooutandshop”asthewaytosupportAmericaincrisis.Americaprovidedtheworldwithitsfirstsuperconsumersand,almost50yearslater,Chinawouldproducetheworld'ssecondsuperconsumers,whoseeffectandinfluenceontheworldisandwillbeevenmoredramaticthanthefirst.

China's Own Postwar Boom and Birth of theChinese Super ConsumerOnthescaleofhumandevelopment,China'ssuperconsumershaveadvanced,overthepast20years,frombirthtotoddlerhood,tochildhood,andnowontoadolescence.Withoutevenhavingyetreachedadulthoodtheyarechangingtheworld,andtheywillonlygrowinnumbersandinfluenceinthecomingyears.“YoucannotbeaglobalbrandandignoreChineseconsumers,”saysDr.AnnLee,aprofessoratNYU,authorofthebookWhatAmericaCanLearnfromChina,andakeenobserverofhowChineseconsumersarealteringtheworldorder.“Infact,youhavetomakethematoppriorityorrisknolongerbeingrelevantglobally.”But,whatandwhoareChina'ssuperconsumers?InasensetheyarequitesimilartotheirAmericancounterparts.Theseedsoftheirgrowthwereplantedinanearlierera.InthiscaseitwastheperiodbetweentheabdicationoftheLastEmperor,Puyi,andthefoundingofthePeople'sRepublic.JustastheseedsofAmericansuperconsumerismwereplantedinthepost-CivilWarandRoaringTwentieseras.WhentheRepublicofChinawasfoundedbySunYatSen,EnglandwasattheheightofitsEdwardianpower.EuropeanandAmericanmerchants,traders,andmanufacturerswereactiveinShanghaiandelsewhere,spreadingthegospelofconsumerism,capitalism,and—itmustbesaid—hedonism.Inthese20-someyears,undertheKuomintang(KMT)government,China'smostaffluentcitizensinChina'smostdevelopedcitiesenjoyedthefinerthingsinlife,includingimportedgoods.ItwasduringthisperiodthatShanghaicametobecalledtheParisoftheOrient.“Fromthemid-nineteenthcenturyintothe1940s,Chinesebusinesspeople,merchants,andretailerscreatedbrands,differentiatedtheirproductsthroughmarketingandregionalcachet,andcreateddistinctivepackagingtoenticeconsumerstobuytheirproducts,”notesProfessorSunBaohongoftheCheung

KongGraduateSchoolofBusiness.“TherewasanascentconsumerismthatemergedfromthedeaththroesoftheQingEmpireperiod.”InShanghai,Canton,Tianjin,Qingdao,andotheropencitieswhereforeignerslivedandtraded,localChinesebusinessesalsolearnedaboutandabsorbedthenuancesofWestern-styleconsumerproductcreationandsales,retailmerchandising,andmarketing.ThefirstlimitedliabilitycompaniesinChinawerefoundedinthelatenineteenthcentury,breakingnotonlyapatternofmillenniainwhichcompanieswereeitherstate-runmonopoliesorfamilybusinesses,butalsochallengingtheConfucianstigmaontradingandcommerce.TheresultwasthaturbanChineseontheeasternandsoutherncoastsofChina—throughacombinationofexposuretoChineseandWesternproductsandbrands,products,advertising,materialism,andliving—becamethefirsttrueconsumersinmodernChinesehistory.Forthefirsttime,manyChineseoutsideofthepowereliteshadthemoneyanddesiretobuythingstheywanted,notjustneeded,andhadawidearrayoflocalandforeigncompaniestoservetheirdesires.ButthemiseriesoftheJapaneseinvasion,thecollapseoftheRepublic,andtheescalationoftheCivilWarbetweentheKMTandtheCommunists,quashedChina'syoungandpromisingconsumercultureandusheredinalongeraofmilitary,political,cultural,andspiritualstruggles.MuchastheGreatDepressionandWorldWarIIputAmerica'spathtohyperconsumptiononhold,Chineseconsumerismwasputonhold—notfor10years,butalmost70.ThecollapseoftheQingEmpire,Westernimperialism,civilwar,theJapaneseoccupation,andmorecivilwar,weredevastatingforChinaandproducedwhatmanycallthe“100yearsofhumiliation”or“100yearsofweakness.”ItwasatimewhereChinabecameweak,poor,andbackward.ThefoundingofthePeople'sRepublicofChina(PRC)in1949

markedtheendofthiseraandthebirthofthenewChina.ThiswasthestartofChina'sfirstpostwarperiod,from1949to1979.WhilethePRCgovernmentendedwarandraisedliteracyandlifeexpectancy,itdidnotcreatethewatershedforprosperityandconsumercultureexperiencedbytheUnitedStatesinthe1950s.Ittookanother40years—30yearsofacentrallyplannedeconomyand10yearsofexperimentationanduncertaintyaboutmarketeconomics—toplantthatseedinfertilegroundandtoconfirmthatamarket-styleeconomywouldbeafirmpolicycommitment.Atlast,inthe10yearsfromDeng'sSouthernTourin1992toWTOimplementationin2002,thesuperconsumerwasborn.

In the BeginningChineseconsumersbegantoengagewithforeignproductsandamarket-basedsysteminthemid-1980s,whenconsumerscouldonlybuyforeigngoodsfromafewspeciallydesignated,state-ownedstores.EventuallytheruleswereloosenedandChinesecompanieswereallowedtosetupprivatelyownedentitiestoselldomesticandforeigngoods.Pivotingoffthismodel'ssuccess,theChinesegovernmentthenstartedtoallowforeigncompaniestoenterintojointventurestosellproductsinaretailenvironment,whetherthroughstand-alonestoresorthroughothersaleschannels.Finally,thecentralgovernmentallowedforeignretailersandbrandstooperateontheirowninChina.Duringthisprogression,Chineseconsumerswereexposedmoreandmoretopractical,utilitarian,fashion,andlifestyleproductsfromaroundtheworld.SomeoftheearliestentrantsintothemarketwereEuropeanluxurybrandslikeLouisVuittonandErmenegildoZegna,aswellasbig,American,fast-movingconsumergoods(FMCG)companieslikeProcter&Gamble,Kraft,andColgate-Palmolive.OtherearlymoversincludedfoodandbeveragegiantslikeCoke,Pepsi,andYum!brands.Inthe1980sand1990s,theregulatoryenvironmentwasdifficultandunknownterrain;distributionandsaleswerelimited;costswerehighaswell.Intheseearlyyears,however,virtuallynoforeignbrands—regardlessofproductcategory—weremakingmoneyinChina.Rather,thesebrandsbelievedinthepromiseofChina;theytookthelong-termviewthatin5to15years,Chineseconsumerswouldhavethedisposableincometobuytheirproducts.ThedifferencebetweentheconsumerboomyearsandtheeraoftheChinasuperconsumerismostdramaticallymarkedbythefactthatnotonlythemarketof400millionincoastalChinaareyour

potentialcustomers,butthatconsumerismandconsumerproductshavepenetratedallofChinatoonedegreeoranother.Withtheexceptionperhapsofonlythemostdesperatelypoor,evenlowincomeandruralcitizensareconsumers.AsubsistencefarmercanstillbefoundusingP&Gtoothpaste,drinkingaCoke,andapplyingdomesticallymadecosmetics.Thebigwinnersfrom2000to2014werethecompaniesthatenteredearly,absorbedlosses,learnedthemarket,and—mostimportantofall—builtmindshareandbrandloyaltythroughmajorinvestmentsinmarketing,merchandising,andphysicalplant.ThosethataresucceedingtodayandwillsucceedinthefuturewithChineseconsumerswillbuildonpastlessonslearned,askChineseconsumerswhattheywant,understandthattheyareaglobalaswellaslocaldemographic,andengagethemontheirownterms.Withthisbackgroundwecananswerthequestion,“WhatistheChinasuperconsumer?”

Thesecond-largestandpotentiallylargestconsumerclassintheworld(bynumbersanddollarsspent).Alreadyleadersinconsumptionofselectproductcategories.HavetakensomecuesfromAmericanandotherWesternsuperconsumers,buttheirpsychology,desires,andpurchasemotivatorsareChinese.Stillintheadolescentphase—tryingtodefinethemselves;changingtheirlooksandhabitsfrequently.Theyarestillsomewhatfickle;butarealsofullofvitality,vigor,andenergy.Changingthewaysbusinessisconductedaroundtheworld,whethercompaniesareconsumerproduct,businesstobusiness,ortechnology.Willbethelargest,contingent,andmostfree-spendingoutboundtravelerintheworldby2020.Alreadyaccountfor25percentofluxury-goodsalesglobally,

andspends60percentofthatoutsideMainlandChina.BringschangetothenaturalenvironmentinChinaandabroad.Nolongerdefinedbythecompaniesthatwanttoselltothem,Chinesesuperconsumersaredefiningthemselves.ServedbyamixofforeignanddomesticChinesecompaniesandhisorherpreferenceswillmakewinnersorlosersoutofmanyofthem.Agame-changingglobaldemographic,notjustamarket.

Chapter 12The China Market + The China GlobalDemographic = China's Super ConsumersThirtyyearsago,ifyouhadachoicebetweenbeingbornageniusinBombayoraverageinPoughkeepsie,youwouldhavechosenPoughkeepsie,becauseyourchancesofenjoyingadecentlifeweregreaterthere.Now,inthenewplugged-in,interconnected,flatworld…IwouldratherbeageniusborninChinathananaverageguyborninPoughkeepsie.—BillGates

WhatistheChinamarket?Howdowedefineit?Isitaplace?Isitagroupofpeople?OrisitlikeancientRome—anidea,adream?WestartbyfirstrecognizingthattherearethreedefinitionsoftheChinamarket,andallthreehaveplayedaroleinthecreationandcontinuinggrowthofhyper-consumption.1. China.Chinaisacontinent-sizedcountrywithapopulationofapproximately1.3billionpeople.AmongthefewtraitssharedbythemajorityofpeopleacrossChinaareitswrittenlanguageandthefactthatabout90percentofthepopulationismadeupofethnicHan.Forallbutafewbrandsandcompanies,sellingnationallyinallofChinaisnearlyimpossibleandnotnecessarilydesirable.

2. CoastalChina.CoastalChinaismadeupofastringofcitiesandprovincesthatstartwiththecapitalinBeijing,inthenortheast,runningdowntheeastcoastthroughShanghaiandthemajorcommercialandindustrialcitiesofJiangsuProvince(Suzhou,Changzhou,Nanjing,Wuxi),furthersouthintowealthyZhejiangProvince(Hangzhou,Ningbo,Wenxhoi),anddownintoFujianProvince.Fromthere,asharpturntothewestbringsyoualongChina'ssoutherncoastandthemega-citiesofGuangdongProvince(Shenzhen,Guangzhou,andDongguan)aswellastheSpecialAdministrativeRegion—HongKong.Coastal

Chinaisacountrywithinacountry.ItisthemostfinanciallydevelopedandwealthyportionofChina.Ithasthemostexperienceinmarketeconomicsandconsumption,anditistheplacewheremostforeignersvisit,live,andconductbusiness.Inshort,itistheplacewhere,forthelast15years,China'sconsumerboomtookplaceandwheretheChinesesuperconsumeremerged.

3. Chinaisnotamarketatall.TheChineseconsumermarketisn'treallyamarketatall.It'sactually22distinctmarketclusters,eachwithhugevariationsinclimate,geography,language,incomelevels,economies,history,andculture.

WebelievethatthethirddescriptionisthemostaccuratewaytodefinetheChinamarket,especiallysinceconsumptionandhyperconsumptionarenolongerlimitedtoCoastalChina.TodaythereisconsumptioneverywhereinChina,albeitatdifferentlevelsofdevelopment.TosaytodaythatyouareenteringtheChinesemarketisakintosayingyouareenteringtheEuropeanmarket.TreatingChinaasasingle,monolithicmarketisarecipefordisaster.ItwouldbelikeenteringtheNetherlands,theUnitedKingdom,Poland,Spain,andLatviawiththesamelanguageonthepackagingaswellasthesameproductmix,pricing,merchandising,advertising,andpublicrelationsplans.CompaniesmustnotonlyspendthetimeandresourcesneededtofullycomprehendthenuancesofcommonChinesehistory,culture,andmind-set,buttheymustalsospendanequalamountoftimebecomingfamiliarwithChina'sdistinctmarketclustersinordertounderstandwheretheirproductsandbrandsbestfit,wheretheyshouldbelaunched,andwheretheywillfindtheirfuturemarkets.Finally,theymusttakecaretocraftbrandimageandmarketingsoasnottoappearirrelevant,ignorant,oroffensiveinanyparticularcluster.

The China WhispererSteveGansterisuniquelyqualifiedandpositionedtoofferinsightontheimportanceofunderstandingtheChinesemind-set—withitssymbols,language,ethos,socialcomplexities,andhistory—andhowitshapesconsumerbehavior.There'salineinthefilmJerryMaguirewherethedown-on-his-lucksportsagent,Maguire,ispleadingwithhisonlyclient,NFLplayerRodTidwellto“Helpme…helpyou.Helpme,tohelpyou!”Insomeways,Ganster,managingdirectorandCEOofTechnomicAsia,hasspentthelast25yearsactingastheJerryMaguireofChina.Hewasoneoftheearlymoversinmarket-strategyconsultinginChinaandhashelpedhundredsofWesternfirmstosetupandgrowtheirChinaoperationsoverthelast30years.UnderstandingSteve'shistoryinChinaandthedevelopmentofTechnomicAsiaagainstChina'smarketandconsumerdevelopmentisawindowontheexperiencesofmultinationalfirmsinChina.ItalsoilluminatessomeoftheprinciplesforsuccessinreachingtheChinesesuperconsumer.Ganster'sAsianinterestbeganatVassarCollegeinNewYork,wherehereceivedhisundergraduatedegreeinEnglishandAsianStudiesin1974.Hesaysit'spossiblethathisinfatuationwithAsiawastriggeredasaresultofdatingaJapanesegirlwhileatVassar,whoinspiredhimtostartstudyingtheJapaneselanguage.AfterVassar,heattendedtheThunderbirdSchoolandearnedamaster'sdegreeininternationalbusiness.AtThunderbird,GanstercontinuedtostudyJapanese,whichservedhimwellinhisearlyAsianforayswhenJapanwasthefocusofforeigninvestmentintheregion.In1977,GansterjoinedTechnomicConsultants.SoonafterjoiningTechnomic,Gansterwasaskedtodirectthefirm'sinternationaloperations.ThefirmalreadyhadbeachheadsinEuropeandLatinAmericawhenStevejoined.HesetuppartnershipsinAsia,initiallyinTokyoin1982andthenHongKongin1984.

Chinawashardlyontheradarofforeignfirmsatthetime,givenitsstate-runeconomyandclosedmarket,nottomentionitslargelyimpoverishedconsumerbase.Overthecourseofthe1980s,JapanrosebutquicklystartedtofallfromeconomicgraceandgavewaytotheboomintheSoutheast.Still,ChinawasonlyjusttouchingtheperipheryofUnitedStatesandEuropeanexecutives'vision.GansterboughtouttheinternationaloperationsofTechnomicConsultantsin1986and—withestablishedoperationsinTokyo,Singapore,andHongKong—heledhisconsultingfirmintoChinainthemid-1980s,throughajointventureinGuangzhouwiththeAgricultureIndustryCommerceAssociation(AIC),whichwasaportalforsecuringaccesstoChina-based,state-ownedcompanies.ForeignactivityinChinawasfairlylimitedatthetimeandthereweremanytradeandinvestmentbarrierstoparticipatinginthelocalmarket.Givenitslackofdevelopmentandhighrisk,onlyafewbravecompanieswereattemptingtoplayinthelocalChinamarket.ThesetendedtobetheleadingglobalconsumerfirmslikeNestlé,Procter&Gamble(P&G),Coca-Cola,andUnilever—companiesalreadyentrenchedinotherAsiancountriesandwithyearsofexperienceinemergingmarkets.TechnomicusedthesepioneeringyearsinChinatobuilditsownexperienceinthemarket,aswellastoestablishconnectionsthatwouldhelptheminthefuture.Whilenotimelinewasevident,StevewasconvincedthatChinawouldeventuallyopenuptotheWest.ThiswasbasedonsignalscomingfromtheChinesegovernment,whichwasactivelyexploringreform.GanstercomparestheseearlyyearsofforeignentryintoChinatotheYukongoldrush.Duringtheseyears,foreignCEOswouldflocktoHongKong,wheretheywouldmaketheexecutivecocktailcircuitandtouttheirplanstomakeitbigonthemainland.Whentheseexecutivesreturnedhome,thetasktofulfillthesegrandioseplanswasusuallylefttoexpatmanagementoperatinginaWildWestenvironmentthatlackedruleoflawandadevelopedinfrastructure.

Further,structuraloptionstoparticipateinthelocalChinamarketwererestrictedprimarilytojointventures.LiketheprospectorslustingforYukongold,though,consumer-productcompanieshadtheireyeonmorethan1billionwallets.Theysoonfound,however,thatmostofthesewereeitherclosedorempty.Manyoftheearlyconsumer-product-basedjointventuresfailedforanumberofreasons.TheChinamarketwasstillpredominantlyunderacommand-basedeconomicsystemversusdemand-basedproduction.Also,Chineseconsumershadlittlediscretionaryincome,virtuallynoexposuretotheWest,andfewplacesotherthanstate-ownedstorestoshop.Servingasanadvisorfortheseearlyentrants,Gansterprovidedthemwithperspectiveonthemarketandtheiropportunities.Companiesmademanymistakesduetotheirimpatienceandmanycompaniesandtheiradvisorswentintothemarketwithrose-coloredglasses.“Consumershadlittletonoideawhattheywanted,soconsumerresearchwaslargelyunfruitful,”Ganstersays.Thelureofsomanyconsumerwallets,ostensiblyfilledwithcash,temptedmanyexecutivestorushthroughtheplanningprocess.Intheirmindstheyhadajointventure;nowtheysimplyneededthestructuretostartselling.Inaddition,intheseearlydays,China'sconsumerboomhadnotstartedandthedreamofChinesesuperconsumerswasalongwayoff.

Spinning in a WhirlpoolOneearlyexampleofthisleap-of-faithapproachwasWhirlpool,thevenerableAmericanwhitegoodscompany.WhirlpoolpaidahightuitioncosttoenterChina,asMarkHu,Whirlpool'spreviousAsiavicepresident,putsit:“PriortothemajoropeningofChinainthe1990s,thethreebigbuysforChineseconsumerswerebicycles,watches,andsewingmachines.Inthe1990s,thisshiftedtotelevisions,washingmachines,andrefrigerators.WhenWhirlpoolcamecallingintheearly1990s,theappliancemarketwasbooming.Sowascorporateoptimismandperhapsnaiveté.”InSeptember1995,managementannouncedthecompany'sfifthChinajoint-ventureagreementinlessthanayear,withtotalinvestmentsofmorethan$100million.ManagementcreatedWhirlpool'sT-4strategyforChina,attackingthetopfourmajordomesticappliancecategoriesallatonce:refrigerators,washingmachines,microwaveovens,andairconditioners.CommentsfromWhirlpoolexecutives,whichechoedthestatementsofmanyotherforeignfirmsatthetime,oftenincludedphraseslike,“Welookforwardtoalongandsuccessfulpartnership,buildingoneachother'ssignificantstrengths.”Whirlpool'sso-calledhoneymoonlastedjustthreeyearswiththesepartners.In1998,itpulledoutofaShenzhenair-conditioningventureandalsoexitedtherefrigeratorjointventureithadformedwithBeijingSnowflake.AsWhirlpoolmanagementhasadmitted,itboughtintotheChinacrazewithoutaclearlydefinedChinastrategyorunderstandingofhistoryandculture,andquicklyjumpedintojointventureswithoutinsightintoChineseconsumerneedsandpurchasemotivators.Thecompanyfedtheseconsumerproductsthatdidnotmeettheirneedsandweren'tcompetitivewithupstartChineseappliancemakers,suchasHaier.Formanycompanies,likeWhirlpool,itwasaforegoneconclusionthatthey“hadtobeinChina.”Andmanyoftheseotherfirmssufferedasimilarfate.

The Great Pizza Wars: In China, EverythingIs Possible, but Nothing Is EasyGansterrecallsthat,intheseearlyyears,hepreached“Observethe6Ds:duediligence,duediligence,duediligence.”TheChinesegovernmentoftenserveduppotentialpartnerstoforeignfirmsandmanagementdidnotdoitshomeworkonthem.Thegovernment'sblessingseemedenoughassurancethatallwouldbewell.Ofcourse,thiswasnotthecase.Agoodcontrastincompanyapproachesiswellrepresentedbywhatwecall“TheGreatPizzaWars.”Domino'sandPizzaHuttookverydifferentapproachestotheChinamarket,withverydifferentresults.PizzaHutanalyzedthemarket,studiedChineseattitudesandunderstandingofforeignfoodsandrestaurants,dininghabits,foodpreferences,andultimatelyhowbestto“China-fy”itsvalueproposition.Asaresult,ithasbeenChina'slargestandmostsuccessfulforeigncasualdiningchaininChinawithmorethan1,300restaurants,andit'sstillgrowing.Butisitcasualdining?Formanymiddle-classconsumers,amealatPizzaHutinChinaisstillakintofinedining.ThemenufeaturesdozensofitemsrangingfrompastaandpizzatoChinesespicyhotwings.Dinersrelaxinwellappointed,spotlessrestaurants,getalevelofservicerareinChina,andareproudtotakedates,colleagues,andfamilythereforalong,Chinesestylemeal.Chinesedinersespeciallyloveeatingtheirpersonalsizepizzaswithaknifeandfork,makingforanauthenticWesternexperience.Domino's,however,didnotobservethe6Dsandchargedaheadwithitsestablishedbusinessmodel…andfailedmiserably.Thelackofduediligenceledthecompanytoassumeitcould,andpromisedconsumersitwould,deliverwithin30minutes,inwhatisoftengridlocktrafficconditionsonmostChinesecitycenters.Itofferedonlytake-outservice,whichwasnotculturallyaccepted.Itdidnotaccountforthefamilydynamic(Whenalargepizzawasdeliveredtoanapartmentcomplex,relativesandfriendswoulddescendon

theunsuspectingdinerstogettheirshareofthepie!).Itsflavorswerenotadaptedtolocaltastes,norwasthesizeofthepizza,whichwastoolargeandcumbersometoeatwhilewalkingdownthestreet,nevermindtherefinementofeatingwithforkandknife.Plus,norestaurants.Today,Domino'shasfewerthan40restaurantsinChinaandisbasicallyirrelevant.Duediligenceisstilljustasimportant.Thoughmuchhasimprovedintermsofinformationaccess,themarketanditsplayerstendtoremainrelativelyopaque(astypifiedbythecommonoccurrenceofmultiplesetsoffinancialbooks).YouhavetosearchhardtofindwhatyouneedinordertovalidateyourstrategyinChina—and,eventhen,thelevelofuncertaintywillbehigherthanitwouldbeforaninvestmentinadevelopedcountry.

Listen to the Great OneThepaceofchangeinChina,thoughslowedfromthe1990sand2000s,isstillrapidtodaycomparedtotheWest.Bythetimeyoufigureoutthemarket,it'schanged.AshockeygreatWayneGretzkyusedtosay,“Skatewherethepuckisgoing,notwhereit'sbeen.”Procter&GambleexemplifiesthisforwardthinkinginChinathroughitsTwo-Dollar-a-Dayproject.WhileitscorebusinessinChinafocusesonthemoreaffluentconsumer,whowillspend$10forabottleofshampoo,managementislookingaheadtothesuperconsumerswhoresidedeepinthecountryside.Theseconsumerstypicallyearnlessthan$2,000ayearbuttheyalsohaveneedsanddesireswhenitcomestobeautyandhygiene.P&Ghasdevotedasignificantamountofresearchtounderstandingtheemergingsuperconsumer'swantsandlimitationsinordertodesignproductsandpricepointsthatwouldsell.Asaresult,itiscreatingbrandawarenessandloyalty.P&GisagreatcasestudyofanearlyentrantwhohadexperiencedgreatsuccessinChina,readingthetealeavesonthetransitionfromconsumerboomtosuperconsumption.TheyoffersomethingforalmosteverylevelofconsumerinChina.China'sconsumershaveboostedtheirbottomlineandprovidedastillfastgrowingmarketforitsproductstooffsetslowdownsinothermarkets.Ganstersaysthatalessonlearnedthatappliestovirtuallyallofconsumercompaniestodayistheimportanceofunderstandingyouraddressablemarket(s),whereyoucanmakemoneyandwhereyourvaluepropositionplayswell.Withmorethan1.3billionconsumerswithvastlydifferentprofiles(versustheinitialyearsunderthecommandeconomy),identifyingaddressablemarketsiscritical.“MostmarketsinChinaarebigandgrowingbutthatdoesnotmeanyourproductorservicefitswellatanacceptablepricepoint(withacceptablemargin),”hesays.“Youneedtounderstandthemainmarketsegments,theirneedsandwalletsize,andthen

designanappropriatestrategyandbusinessmodeltopenetratethem.ItisrarethatacompanycansimplytransplantitsbusinessmodeltoChina.”GansterusestheexpressionChina-fyinthisregard,andWorldKitchen(Corelle,Pyrex,andCorningWarebrands)presentsaninterestingexampleofChina-fying.IntheUnitedStates,WorldKitchensellspredominantlythroughmass-marketchannelstomiddle-incomeconsumers.Adinnerplatesellsforbetweenthreeandfourdollars.Notfinechina,forsure.However,inChina,itsconsumerprofileisverydifferent.Middle-incomeconsumersarenotthetargetandmass-marketchannelsarenotthemainoutletforitsproducts.InChina,Corelleishighend,anditsellsthroughdepartmentstoreslikeMitsukoshi,Parkson,andSogo.WorldKitchenmanagementfounditsaddressablemarketwiththesehigher-incomeconsumerswhoshopatupmarketretailestablishments.Whileinitiallydevelopingthiscoreaddressablemarket,managementiscultivatingtheevolvingmiddle-classconsumers—andmoremass-marketchannels—astheybothrapidlydevelop.

Stay the Course, Even When the Seas GetRoughAsolidandlong-termcommitmenttoChineseconsumerswillprovidestabilitywhentheinevitablestormsrollin.NotlongaftercompaniesenterChinamarket,thelustercandullonthepotofgold,whichmanagementwascountingon.InSteve'swords,itturnedintofool'sgold.Withoutastrongandundauntingcommitmentfromcompanystakeholders,itwillbedifficulttoholdthecoursethroughthesestorms.WecancompareChina'sconsumermarketevolutiontothenatureofhumandevelopment,whichprovidesaninterestingandhelpfulwaytounderstandthecontextofthemarketlandscapethatyouaredealingin,aswellastheconsumersthemselves.Intheearly,toddlerphaseofChina'sdevelopmentthemarketwasinitsformativestages,juststartingtocrawlandwalk.Rambunctious,mobile,andcaughtinariptideofemotion,toddlersareuncultivated,pedal-to-the-metalhumans.China'smarketpersonalitywasshowingsignsofitsmaintraitsbutwestillhadlittleideaofwhatChinawouldlooklikeasanadult.Youcanimaginehowdifficultitwastodevelopasoundmarketstrategythen.Asthemarketgrewandmovedintoitsadolescentyears,thechallengesinmanywaysbecamegreater.Teensoftenchangetheirinterests,clothingstyles,andgeneralidentitiesonafairlyregularbasis.Thisisbecausetheyareexploringthemselvesasindividuals.So,too,didtheChinamarketconveysimilarturbulenceasthegovernment,marketforces,andconsumersstruggledtoadjusttothemarket'sgrowingpains.Multinationalcompanieshavetodealwithsimilarissuesasparentsdowithteenagersduringthisperiod—moodswings,desireforprivacy,risktaking,andrebelliousness.IfwemonitorChina'sconsumersoverthisdevelopmentperiod,weseetremendouschange.Inthe1990s,duringthetoddleryears,

China'sconsumerswerefigurativelyspoon-fed.Disposableincomewasapaltry$500to$600ayearinthemid-1990s,andtheconceptofconsumercreditwasbasicallyunheardof.Itwasaseller'smarket.Consumersfollowedtrendsblindlywithlittleaccesstoinformation,asChinawasstillquiteclosedtotheWesternmedia.Forinstance,thereddressprevailedinthe1990sandeverywomanatthattimewaseagertohaveoneinordertobeatrendsetter.AsChinamovedintoitsteenyearsinthe2000s,therewasmuchmoreproductavailabilityandchoice,whichstartedtoconvertthemarketintooneforbuyers.Consumerswerebecomingmoresophisticated.Theystartedtocompareprice,quality,andservice.Nowadays,consumerspursueuniquenessandatailor-madeapproach.Theydon'twantthesamereddressanymore.Instead,theypreferdressesthatshowtheirindividuality.Theyalsocaremoreaboutproductqualityandsafety.Withtheincreaseindisposableincome,whichreachedlevelscloserto$1,500by2005,consumersbecamesegmentedintolayers—upperclass,middleclass,andmass.Brandsandproductsstartedtocatertothesespecificsegments.Withdisposableincomeincreasingby4×,5×,8×,and10×sincethenandwithnewconsumerscomingonline,therearefivetosixlayersthatcompaniesmuststrategizeforandaround.

Nestlé: Navigating the Teen YearsNestléfollowedtwokeyprinciplesinitsstrategy:Ittookalong-termviewandpatientlybuiltapresencethatmatchedtheevolutionaryphasesoftheChineseconsumer.Itsgoalhasbeentowinthewar,notthebattle.NestléwasanearlymoverinChina,havingopeneditsfirstsalesofficeinShanghaiin1908.In1990,seeingthedooropeningwidertothemarket,thecompanyrampedupitsactivityandstartedlocalproductionbyestablishingitsfirstfactoryinShuangcheng,HeilongjiangProvince.Itadoptedaneffectiveapproachthroughthisformula:

NestléeffectivelyChina-fieditsofferingbyadaptingproducttastesandformatstolocalpreferences.Today,Nestléhasnearly50,000employees,15partnerships,morethan30factories,andtworesearchanddevelopmentcentersinChina.Theyhaveamultitudeofproductsontheshelvesofadiversesetofchannelsandhavebecomeinmanywaysa“Chinese”brand.Theirconstantinnovation,long-terminvestment,andpatiencehavepositionedthemtobealeaderinChinaforalongtimetocome.Perhapsjustasimportantlythough,ChineseconsumershavetoldNestléwhattheywantandthecompanyhascreatedproductsjustforthem,producingbillionsofdollarsinrevenuethatwouldotherwisenotexist.Thishashadtheknock-oneffectofallowingNestlétobemoreinnovativeandaggressiveinothermarkets,becomingthelargestfoodandbeveragecompanyintheworld.Chinaisnowayoungadult,certainlymorematurebutstillsubjecttodirectionalshifts.Andlikeayoungadult,theChineseconsumerisspreadinghisorherwings,evenflyingtocitiesallovertheworld.Withdisposableincomeatmorethan50timeswhatiswasbeforeChinaopeneditsmarkets,theChinesesuperconsumerhasthemoney,thesophistication,andtheaccesstobuyanythingtheywant,almostanywheretheywant.Itwillbeinteresting,aswellas

strategicallycritical,tocloselyfollowthesesuperconsumersastheymoveintofulladulthoodandmiddleage.Overthelastthreedecades,business-growthstrategyhasevolvedintunewithChina'smaturationandthedevelopmentofthesuperconsumer.Ithasmovedfromthetendencyfordesigningcrudestrategiessimplytobeinthemarkettocreatingsophisticatedandprecisestrategiesthattargetmultipleconsumergroupswithspecificvaluepropositions.“Wepreachthemantraofstrategybeforestructurewithallofourclients,”SteveGanstersays,“OnethingthatseparatesthewinnersfromthelosersinChinaisthatthewinnersspendmoretimeandresourcesonresearchthatleadstosmartdecisionsonidealmarket,operations,producttype,launch,andgrowthstrategies,withanearlyfocusoncultureandhistory.”Thismaysoundsomewhatobvious,butmanycompaniesfocusonquicklybuildingastructurewithasee-what-sticksapproachtostrategy.AfterunderstandingthatChinaismadeupofmanymarketswithinalargermarket,wecanbroadlydefinetheChinamarketastheplacewherecompanies,afterestablishingsolidentrystrategies,establishtheiroperations.Itiswheretheirlegalentity,usuallyintheformofaWOFE(whollyforeign-ownedenterprise),FICE(foreign-investedcorporateentity),orjointventureisbased.Itiswheretheywillestablishanoffice,hireemployees,andpaytaxes.Itiswheretheymake,import,ship,store,distribute,andselltheirproductsthroughnumeroussaleschannels.Itiswherecompaniesadvertiseinmagazines,onradio,onTV,andonline;wheretheydeploypublicrelationsstrategies;andwheretheyhopeChineseconsumerswillengagewiththemdirectly.ItiswheretheyhopetosellphysicalproductstoChineseconsumersface-to-faceoronline.ButChina'ssuperconsumershavecreatedanentirelynew

demographic,anentirelynewmarket,andaneedforcompaniestoengagethemglobally,notjustwithinasetofborders.

Chapter 13The China Global DemographicAsChineseconsumershavebecomenotjustmoresophisticated,butinmanycasessupersophisticatedandafter20yearsofbuyingvirtuallyeverythingavailableinsidetheChinamarket,anewdemographichasemerged—ademographicthathashelpeddefineandexpandthereachandimpactoftheworld'ssecondcomingofthesuperconsumer:WecallittheChinaGlobalDemographicMarket(CGDM).MoreandmoreChinesehavestartedtotraveltheworldforbusiness,pleasure,andstudy(muchastheirAmericanpredecessorsdid).Infact,some200,000ChinesestudentsperyearareenrolledatAmericanuniversitiesandanother100,000peryeararestudyinginEurope.China'sgoing-globalphenomenonhasexploded.Thesestudentshavechangedthefortunesofmanyuniversitiesbypayingfulltuitionandaddingarichnessanddiversitytothestudentbody,andmanycollegesanduniversitieshavesetuprecruitingofficesinChinatoattractthesestudents.TheyarefromShanghaiandBeijing,fromChengduandChongqing,fromTaishanandTaiwan.Theyarefromeverycityandmarketcluster.Theyareinfluencedbywhattheysee,hear,taste,andexperienceabroad.TheyaretheconsumerswhotookClubMedinMaldivesfroma5percentChinesecustomerbaseto80percentinthelastfiveyears.Chinesesuperconsumersareanewglobaldemographic.Twenty-fivepercentofallluxurypurchasesgloballyaremadebyChineseconsumers,and60percentofthosetransactionstakeplaceoutsideMainlandChina.Brands,retailers,serviceproviders,andanycompanyhopingtoengageChineseconsumersmustadapttoanewreality:FocusingontheChinamarket(s)isnolongerenoughtosucceed.Insomecases,marketingandsellingyourproductsexclusivelywithinthebordersofChinaisarecipeforabjectfailure.

Tobesure,theemergenceoftheCGDMdoesnotsubstantiallydecreasetheimportanceofthemainlandregardingsales,marketing,branding,andsalessuccess,especiallyformassandmid-marketproductsandbrands.Butforpremiumandluxuryproductsorbrands,companiesmustunderstand,integrate,andliveinboththemainlandandinternationalmarkets.

The Precious Gift of TimeForabettersenseofthewaysthatsuccessfulpremiumandluxurybrandsandretailersarereshapingtheirstrategiestomaximizetheirabilitytoservetheglobalChinesesuperconsumer,let'stakeTourneau,theworld'slargestwatchretailer.ItwasafrigidFebruary2014eveningandtherewerenottoomanypeoplewalkingoutside.However,insidetheelegantfour-storyflagshipstore,IraMelnitsky,CEOofluxurywatchretailerTourneau,wasspeakingalmost-perfectMandarintonearly800Chineseconsumers,wishingthem“HappyChineseNewYear.”Asheendedhisremarks,agroupofmusicianswithgongs,taikodrums,andcymbalsstartedtoperformtheChineseliondancewithonegoldandoneredlion.MelnitskyandtheotherVIPcohostswerefeedingthelionscabbageplacedattheendofafishingpole,thusensuringgoodluck.Theatmospherewascheerful.HundredsofChineseconsumerswishedeachotherNewYear'sgreetingsinMandarin,Cantonese,orShanghai-esewhileadmiringthelatesttimepiecesfromRolex,PatekPhilippe,Cartier,Longines,andothers,inthestore.ThisscenedidnottakeplaceinHongKongorChina,butratherinNewYorkCity—notinChinatowneither,butintheheartofmidtownManhattanonMadisonAvenueand57thStreet,nexttotheflagshipstoreofNikeandacrossthestreetfromChanelandChristianDior.Whentheeventended,theguestsreceivedapartinggiftbagfromTourneau,includingacopyofitsannualcatalog,aYearoftheHorsecommemorativecoin,andaspecial-editionboxofYearoftheHorsechocolatesfromGodiva.TocapturetheChineseGlobalConsumer,Tourneau'smanagementteamunderstandsthattheyarebothtrulyglobalandhighlymobile,especiallywhentheChinesetaxonluxurywatchescanbehigherthan50percent.Thehugepricegapbetweenluxurygoods

soldinChinaandabroadhasalsoledtomassiveluxuryconsumptionoutflows.HighimportdutiesandconsumptiontaxesleviedonluxurywatcheshavepushedupthepricesinChina.Forexample,theconsumptiontaxonluxurywatchesinChinais20percentandtheimporttariffissomewherebetween11and100percent.Asaresult,themedianpriceofaCartiertankwatchis$4,409intheUnitedStatesversus$5,996inChina,a36percentdifferenceinprice.AccordingtotheresearchdonebyWorldLuxuryAssociation,duringtheChineseNewYearin2013,Chineseconsumersspentasmuchas$8.5billiononluxurygoodsabroad,upby18percentcomparedtotheyearbefore.Chineseconsumersspentthemostonluxurywatches,followedbyleathergoods,apparel,cosmetics,andperfume.Chineseluxuryconsumers,especiallymanygovernmentofficialsandprivateentrepreneurs,lovetoshowofftheirtimepieces.WevividlyrememberedoneofourmeetingsinBeijingwithsixsuccessfulchairmenofprivatecompanies.EachworeadifferentmodelofPatekPhilippe,andtheyspenthalfthemeetingtalkingabouttheirtimepieces,includingtheuniquefeaturesandwheretheypurchasedthem.AccordingtoareportbyKPMG,72percentoftravelingChineseconsumerspurchasedluxuryitemsduringtheiroverseastrips.ThisdatabodeswellforTourneau.Foundedin1900,Tourneauhasover30storesthroughoutNorthAmerica.IthasinvestedagreatdealtonurtureandcapturebothChinesetouristsanddomesticChineseconsumers.TourneauunderstandsthemotivationoftheChinesecustomer,whocomestobuyluxurybrandwatches,suchasVacheronConstantin,JaegerLeCoultre,andBlancpain,andalsoluxury-litebrands,suchasTAGHeuer,Hamilton,andTissot.Tourneauhitsbothluxuryandhigh-endconsumermarketsand,atthesametime,islearningaboutthecultureandbehaviorofChineseconsumersbysendingstafftoChinaeveryyeartomeetwithvarioustravelagenciesandgovernmentofficialsinordertofinetunetheirmarketingstrategiesandadjusttheirprojections.

Melnitskysaysthat“thenatureofourstorelocationsinmajorcitieslikeNewYork,LosAngeles,andHawaii,andevenMiami,havealwaysbeeninglamorouslocationstoservethelocalcustomersandtoattractthetouriststoshop.LiketheJapanesetouristsinthe1980s,Chinesetouristshavebecomeaveryimportantgroupofcustomersforthelastfiveyearsandwe'velearnedtoservethemculturallyandappropriately.”SomeChinesetouristsliketoshopingroups,accordingtoMelnitsky,andTourneauishiringmoreMandarin-speakingpersonneltohandlethem.“Onethingthatseemstobequiteconsistentisthattheappreciationofluxurygoodscarriesprettyevenlyamongdifferentcultures,”Melnitskysays.“FortheChinesetouristsandlocalcustomers,theappreciationforbettergoodsisveryconsistent.Itisourjobtolearnmoreabouttheculture,theirpreferenceofcreditcards,andtheimportantconceptofgifting.“OursalesprofessionalstellusthattheChineseshoppingtransactionssometimestakeadifferentpath—meaningtheywanttocontinueshopping,andsharingofproductinformation,sometimesdigitallybytakingapictureandsharingthroughWeChat.Ourvicepresidentofmarketing,RichardGellman,andourdirectorofmarketing,MelanieRudin,arebecomingexpertsinlearningaboutChinesecultureandtravelandithasbenefittedTourneauimmensely.”BeforejoiningTourneau,MelnitskywasaseniorexecutiveatLi&Fung,thehugeHongKong-basedglobalsourcingcompany.HetraveledextensivelyinChina,whichhelpedpreparehimforhiscurrentroleatTourneau.HisunderstandingofChinesecultureisvastlysuperiortoatraditionallocalbusinessexecutivewhohasn'ttraveledtoChinaorAsia,andhesaysthateducatinghisteamontheChinesemind-setandculturalnuancesiscritical.Infact,hehassentGellmanandRudintoChinaspecificallytomeetwithlocalwatchretailersandtolearnwhattheysellsoTourneaucan

remainattheforefrontofanychangesintasteandstyles.“Itisaneducationprocess,”Melnitskysays.“OurexecutivesgoeveryyearbecauseChineseconsumersareevolvingandgettingmoresophisticated.GellmanandRudincomebackandwriteuptheirfindingsandsharethemwiththeentireorganization.Thoselearningscomeintoplay,andweputthemintoourstoretraining.AswebringmorenativeChinese-speakingpeopleintoouremployment,theyalsohelpusevolvetobemoreculturallyappropriateandeffective.”Inrecentyears,however,China'seconomyhasslowedfromasupersonicsprinttoasteadilypacedrun.Atthesametime,China'spresidentXiJinpinghasstartedtocrackdownonspendingbyofficials.Luxuryhas,forofficialsatleast,becomeanewminefieldtonegotiate.InternetusersareonthelookoutforChinesegovernmentofficialswhodisplaysignsofill-gottengains.TheformerheadofShaanxiProvince'sBureauofWorkSafetywassentencedto14yearsinprisonafterbeingconvictedofcorruption,achargebroughtaboutafteraChinesenetizencirculatedmultipleimagesofhimwearingmorethan10differentluxurytimepieces,includingaVacheronConstantinworthmorethan$33,000.ThisearnedhimthenicknameBrotherWatch.Withoutquestion,certainsectorshavebeenhithardbytheantigraftcrusade,especiallythosemostassociatedwithgiftgiving,suchaspremiumspiritsandwatchbrands.Nevertheless,Tourneauhasyettofeeltheeffectsofaslowingeconomyandgovernmentanticorruptionefforts.“Ihaven'tseenanydecreaseinourstoretrafficyet,maybebecauseofoureffortsintargetingsecond-andthird-tiertouristsfromChinaandthepercentageofthosecustomersaregrowingatahealthypace,”Melnitskysays.Eveniftheanticorruptiondrivewillslowdownbusinessgift-gifting,therebyweakeningthedemandforluxurygoods,somepeoplebelievethatthiswouldonlybeatemporaryphenomenon,

asgiftgivingisdeeplyrootedinChineseculture.Infact,alargemajorityofgiftgivingisforlegitimatepersonalgiftingamongfriends.Theluxurygiftoftimeisstilloneofthebestgiftsintheworld.Melnitskyrecallsthat—longaftertheChineseconsumersfinishedtheirtransactionsattheNewYear'sevent—theystayedtoenjoytheirChineseteasandcontinuebrowsingatthelatestwatches.Theirappetitetolearnaboutnewproductsisvoraciousandshoppingisstillanovelexperience.Well-trainedstaffknownottorushtheChinesesuperconsumer.

Meet the TangsPerhapstheeasiestwaytoexplaintheChinaglobaldemographicistojoinafamily,oneatthemoresophisticatedendoftheconsumerscale,onatypicalJanuarytripabroad.Thisfamily,theTangs,areacompositeofdozensweknow,andeverythingintheirstoryisaccurateandtrueforhundredsofthousandsofChinese.Theirnewhabits,desiresanddreams,self-image,realandperceivedneeds,andspendingpatternsillustratewhymanycompaniesneedtoservetheChinamarketandtheChinaglobaldemographic.TheTangfamily:Mr.Tang,46;Mrs.Tang,44;Bo“Bobby”Tang,16;andMr.Tang'sparents,TangWei,67,andTangLaoShi,68.Mr.TangisawealthybusinessmanfromSuzhou,aboomingandbeautifulcityinJiangsuProvinceandasatelliteofShanghai.Heopenedahomedecorationmanufacturingcompanyin1998.HisbusinessgrewrapidlyashemadeproductsforAmericanandEuropeanbrands,whichhesold,throughimporters,tobigretailerslikeMacy's;Target;Bed,BathandBeyond;Carrefour;andTesco.Withinfiveyears,hehadenoughmoneytoinvestinotherbusinesses,includingpartialownershipinotherhousewaresmanufacturingcompanies.By2007,healsoownedfivecardealershipsinSuzhou,hadapartialinterestinalocalbrewery,andwasoneofthreepartnersinachainoflocalrestaurants.Hisfamilybecameaccustomedtodininginthebestrestaurants,spendingheavilyonluxurycars,fashion,accessories,andbadgebrandsthatidentifiedthemaspartofChina'snouveauriche.TheyalsobegantravelingfrequentlytoMacaoforgambling,HongKongforshopping,andThailandforbeachholidays.Mr.Tangacquiredforeigncreditcards—aswellashisChinaUnionPayCard—andbecameanelitememberoftheMarriottRewardsClubandUnitedPremier.ItwasaroundthistimethattheTangfamilyinvestedheavilyinShanghairealestateandmadeitsfirstapartmentpurchaseintheUnitedStates.In2012,Mr.Tang

becameanearlyinvestorinaBeijingmobileappandgamingstartupthatwentpublic18monthslater.Meanwhile,hehadtripledhisnumberofcardealershipsto15.Mrs.TangistheonlydaughterofaTianjinfamilythatrunsaknittingfactoryfoundedintheearly1970s.Originally,thefactorywasstateowned(herfatherwasthemanager)andmadesocks,gloves,andcapsforthePeople'sLiberationArmy.In1995,duringthefirstwaveofmassiveprivatization,herfatherwasallowedtobuythecompanyfromthestateandtakeitprivate.Soon,itwasmakingmorethan30millionpairsofsocksandglovesforexporteachyear.ShewaseducatedatagooduniversityinChina,andspentayearstudyingatNortheasternUniversityinBoston.Aftergraduation,sheworkedforatimeinthefamilybusiness,andhercontactswithforeignclientsandexperienceininternationaltradeledtoajobwithaforeignconsultingfirminShanghai.TangBowasbornin1998.Hewasdestinedtobeanonlychild,likeallofhispeers,becauseofChina'sone-childpolicy,inplacesincetheearly1980s(in2014thepolicywaslargelyrescinded).Likethegenerationbornbeforehiminthe1980sandearly1990s,theonlyChinaheknowsistheNewChina—arisingChina,awealthierChina,aChinawhereopportunitiesaboundfortalentedandhard-workingyoungpeople,aChinawhereBocouldbuildonthesuccessofhisparentsorstrikeoutonhisown.BowasbornintotheChinathatwasalsogivingbirthtotheChinadreamandtheChinesesuperconsumer.Heandhisdemographicbrothersandsistersweresooncalledlittleemperorsandlittleprincessesbecausetheirsuccessandhappinesswerethesolefocusoftheirparentsandgrandparents.Theyweredotedonandpampered.Bowenttoapremierprivatehighschoolandwasgiventhebestthingsinlife.ThefamilyfirstfliestoSeattletovisitMr.Tang'ssisterandherfamily(hisbrother-in-lawshuttlesbetweenSeattleandBeijingforhisbusinessandanotherinwhichhecoinvestedwithMr.Tang).

Theyeat,drink,andreconnect.TheyalsodiscusshowtheircousinsinTorontoaredoing.FromSeattle,theyflytoLosAngelesandspendtwodaysatDisneyland,wherealuxuryconciergeservicesetthemupwithVIPpassesandaguide.Theythenspentthreedaysataluxuryhotel,wherecelebritieshavelivedandplayedfordecades.Thisisanexperientialluxurythatmakesthemfeelgoodandwillprovidegreatfacewhentheygohome.TheyshoponRodeoDriveandacoupleofwell-knownmalls,andtheyalsospendadayatamoviestudio.FromL.A.,theyflytoBoston,wheretheywillspendthenextthreedays.TheyvisitHarvard,MIT,BostonCollege,andTuftsforBo;visitQuincyMarketforarealAmericanexperience;andtheymeetwithrealtorstofindanapartmentforBo—andoneforthefamily—ifhechoosestogotocollegeinBoston.Theyfinishwithawhale-watchingtrip.FromBoston,theyflytoNewYorkCity,wheretheyvisitColumbiaandNYUandalsomeetwiththerealtorwhohelpedMr.Tangpurchasea$3milliondollarapartmentontheUpperEastSidetwoyearsprior.TheyspendtheirdaysshoppingonMadisonandFifthAvenues.Atnight,theyeatinthebestrestaurants(fromalistoneofMr.Tang'sFudanUniversityclassmates,nowworkingonWallStreet,madeforhim).Mrs.TangbuyssomejewelryatTiffany's.TheyleaveNewYorkafterfourdaysandflytoLasVegasforthreemoredays.Tofulfilltheirdesireformoreexperientialluxury,theytakeaprivatehelicoptertouroftheGrandCanyon;theygotoashootingclubandfireoff.50calibermachineguns;andtheydrinkatexclusivenightclubs.DuringthecourseofthetriptheTangshaveengagedintheactivitiesandabsorbedtheexperiencesthattypifythecharacteristics,desires,andspendinghabitsoftheChineseglobaldemographic.

Awell-offChinesefamilywithafatherengagedininternationalbusiness.

FamilylivinginNorthAmericaand/orEurope.WidespreadconnectionsintheChinesediaspora.Engagementwithairlines,hotels,specialtyconciergecompanies,andaplethoraofotherserviceproviders.Engagementwithknownbrandsandretailerswhilediscoveringnewones.PreparationfortheirchildtobeeducatedintheUnitedStatesorEurope.LookingtoaddtotheirUSrealestateholdings.Anewunderstandingthatdoesn'tjustincludebuyingluxuryitemsbutexperiencingaluxurylifestyle.Gohomewithgreatmemoriesandmoreconsumersophistication,aswellasadesiretoengagebrandsathome,usesocialmediatotelltheirstories,andmakeplansforthenexttrip.

TheTangshavemadethemostoftheNewChina.Throughhardwork,intelligence,andtherightconnections,theywerepartofthefirstwaveofnewlywealthyconsumerswhohelpedfueltheinitialconsumerboomofthe2000s.Astheygotwealthier,traveledmore,andasmorefamiliesliketheirscametothefore,theyhelpedlaunchtheChinesesuperconsumerera.Now,theyareattheforefrontoftakingthisphenomenonglobal.“TheChinesegovernmentexpectstoissue200millionnewpassportsinthenexttenyears,”saysChristineLu,cofounderandCEOofAffinityChina,acompanyfocusedonChineseglobaltravelersseekingexclusiveexperiences.“Therearealreadyabout80–90millionChinesepassports.Chinagoingglobalhasandwillcontinuetodisruptthehospitalityindustry,globalretail,banking,realestate,education,andtheservicesectors.GlobalChineseconsumerswillhelpmakeorbreakcompaniesandindustriesinthenext5–10years.”

Chapter 14ChannelsThenumberandtypeofsaleschannelsthatbecamelegalandthenproliferated,fromroughly2000to2010,wereakeygrowthdriveroftheChineseconsumerboom.Aswehaveseen,anearlyimpedimenttothegrowthofconsumerculturewasthatitwasatfirstlimitedtoanumberofstate-ownedshops.Thiswasfollowedbyaperiodwherejointventuresprovidedamodel,butariskyandlessthanidealone,tosellproducts.Thereweretwokeystothecreationandproliferationofchannels,whichgavebirthtohyperconsumptionleadingintothe2000s:1. Governmentrules,regulations,andlawsopeningthewayforrelativelyeasyentryandestablishmentofretailentitiesandentryintoexistingsaleschannelsbyforeigncompanies.

2. Thealready-in-placefoundationoftraditionalChineseretailandsaleschannelsthatcouldbeengagedwith,builtupon,andpartneredwith.

Today,Chinaisthetopmarketintheworldfornewretailspaceconstruction,accountingformorethanhalfofglobalshoppingcenterdevelopment.ItisimportantforbrandsandretailerstounderstandallofthedistributionchannelsavailabletotheminChinaandtounderstandtheprosandconsofeach.Therearetraditionaldistributionchannelsandnewchannels.Retailsalesinsomeofthenewchannelsareexperiencingrapidgrowth.“Withtheunprecedentedpaceofurbanizationandarisingmiddleclass,thereisanincreasingdemandformodernshoppingfacilitiesinChina,”saysFrankChen,executivedirectorandheadofCBREResearchChina,acommercialandrealestateservicesfirm.WewillstartbydefiningthetraditionalchannelsofretailinChinaandthendothesameforChina'smodernandnewlydeveloped

channels.Byunderstandingeach,you'llbeabletodeterminehow,when,andwhybrandsandproductsshouldorshouldnotbesoldineach.Also,notethatwe'lldigintoe-commerceinChapter15.

Department StoresDepartmentstoreswereamongthefirstWestern-styleretailenvironmentstotakerootinChina.Notsurprisinglythough,proto-departmentstores,likemanyotherWesternideas,wereoriginallyfoundedanddevelopedinChina,asfarbackas1,000yearsago.Theybecamefixedandpermanentalternativestomonthlyorweeklymarkets,travelingfarmers,andpeddlers.Thesemultidepartmentstructureswereoftentwo,three,orevenfourstorieshigh;floorsandsectionsweredividedforsellingfooditems,Chinesemedicine,clothing,tools,andhouseholdproducts.FromacombinationofChinesehistory,tradition,andearly-Westerninfluence,departmentstoreswereandareverymuchapartofChinesecultureandconsumption.But,therearehugedifferencesbetweenChinesedepartmentstoresandWestern-styledepartmentstores.IntheWest,adepartmentstoreoffersamultitudeofbrandsindepartments.ThereisacorporateheadquartersstaffbytheC-levelexecutives,mid-levelexecutives,accountants,lawyers,buyers,merchandisers,advertisingandpublicrelationsstaff,frontandback-officepersonnel,ane-commerceteam,forecastingandreplenishmentexperts,andlogisticsandsupplychainprofessionals.Thenetworkofstoresfollowsthestrategicandpracticaldecisionsmadeatcorporate,andthereisauniformityofthestoresregardinglayout,merchandising,decoration,advertisingandcategories,brands,andstylescarried.InChina,departmentstorebusinessmodelsaredifferent.Therearebigcorporations,likeParkson,NewWorld,andOrient,whohavemultiplestoresacrossChina.AsintheWest,therearenational,regional,provincial,andmunicipalchains.Therearealsoagreatmanydepartmentstoresthataresingleentitiesorhaveonlytwoorthreelocations.ThemajordifferencebetweenWesternandChinesedepartmentstoresisthatChinesedepartmentstores,unliketheirWesterncounterparts,arenotmerchantswhohold

inventoryandpracticemerchandising;theyarelandlordswhorentoutspacetobrands.Thishasandlikelywillcontinuetobaffleandchallengesomebrands.Therealizationthatthebrandmustinessencebecomearetailerisahardmodelformanytoaccept.DepartmentstoresinChinausuallyhaveseveralfloors,eachfloorcontainingseveralcategories.Cosmeticsandbodycareonthefirstfloor;women'swearonthesecond;men'swearonthethird;babyproducts,children'swear,andtoysonthefourth.Butthefloorspaceisakintothemallmodel.Brandsrentorleaseaspaceonafloor.Theycanthendesignastoreonthefloororcanbuild-outamini-storealongtheedgesonthefloor.Brandspaythemonthlyrentaswellasapercentageofsalestothestoreowner.Theonlywaytodeliverproducttostoresisthroughnational,regional,andlocaldistributors.TherearenocorporatebuyersinChina.Brandsdonotoperateonthewholesale/retailmodelthatdominatesintheWest.Thepropertyownershavethepowertodecidewhoandwhonottoallowinthedepartmentstore,butoncealeaseissigneditisuptothebrandtodetermineitsownproductmix,deliverproduct,hiresalesstaff,merchandise,andbecomedefactoretailers.Inadditiontohighimporttariffs,paymentstodistributors,rentalcostsforfloorspace,andthepracticeofowingapercentageofsalestothepropertyowneraresomeofthereasonswhyproductsinChinacostanywherefrom30to50percentmorethaninotherpartsoftheworld.

Street-Level StoresStreet-levelstoreshaveanevenlongerhistoryinChinathandepartmentstores.TradersandpurveyorsofeverythingChineseurbandwellersneededsoldmerchandiseinstreet-levelstoresofmyriadsizesandvarietiesthroughoutChinesehistory.Today'sstand-alone,street-levelstoresareacontinuationofthislongtradition,withthedifferencebeingthenumberofforeign-ownedstores.Aswithdepartmentstores,however,therearesomekeydifferencesbetweenWesternandChinesestand-alonestores.ThemostglaringdifferenceisthatthevastmajoritymodernofChinesestores,aswellasforeign-owned,street-levelonesaresinglebrand.IfyouweretostrolldownHuaHaiZhongLu,Shanghai'sFifthAvenue,youwouldfindthehugeflagshipstoresofCoach,H&M,Uniqlo,Zara,Zegna,Sephora,andLaneCrawford.IfyoucontinuedstrollingyouwouldfindthesmallerstoresforRolex,Hublot,HarryWinston,ShanghaiTang,LiNing,andChina's(aswellastheworld's)largestjewelryretailer,ChowTaiFook.Thereareanumberofstoresincertaincategoriesthataremulti-brand.OneexampleistheShanghai#1Beddingstore,onNanjingXiLu,whereyoucanfindlocalandforeignbedroomtextileandmattressbrands.AnotherisKateZhouHandbags.ZhouhasstoresinShanghai,Beijing,andGuangzhou,andshesellsnicheluxurybrandslikeTusk,RebeccaMinkoff,andMagnesSisters.Butmultibrandretailinginstreet-levelstoresisstillinitsinfancyinChina.Stand-alonestoresinChinacanbeexpensivetosetupduetohighrentsandhighbuild-outcosts.Anotherchallengeisfindingandsecuringgoodlocations.Thisisanissuewithmallstoresaswell.Wefindthatit'swisetoengageretailrealestateexpertsforthis.Therearemanyadvantagestostreet-levelstoresinChina,althoughtheirimportanceinthemostdevelopedcitiesseemstobe

contractingabitascostgoesup,returnsarehardertoearn,ande-commercebecomesmoreimportant.Thatsaid,street-levelstoresallowbrandstobetterexpressthemselvesthroughmerchandisingandbuildcredibilitywithwaryChineseconsumers.Thereareanumberofdisadvantagesaswell.Expansionandscalingiscomplicatedandexpensive.Findingthebalancebetweenincremental,learning-basedgrowth,andmeetingincreasedmarketdemandrequiresagreatdealofstudy.Despitethechallengesthatcomewithoperatingstreet-levelstores,mostcompaniesandbrandsstillneedatleastoneflagshipstoreandanumberofsatellitestores.Chineseconsumersrespondtothebrandawarenessandcredibilitythatstoresprovide.Theywanttospendtimeinthestore,poringoverandtouchingproducts.Attheluxurylevel,thesestoresprovideforanenvironmentwherespecialservicescanberenderedforwealthycustomers—privateshoppinghours,secretrooms,andexclusivemerchandise,forexample.

MallsThefirstWestern-stylemallsstartedtoappearinBeijingintheyearsfrom1987to1991.ManywereinvestedinandbuiltbyHongKongandTaiwan-baseddeveloperswhohadyearsofexperienceoperatingmallsinthosemarkets,aswellasinotherplacesinAsia.AfterDeng'sSouthernTour,whichamongotherthingsdeclaredthatShanghaibeencouragedtoabsorbforeigninvestment,moremalldeveloperscameintoShanghai.From1995onward,mallsstartedtospreadoutfromShanghaiandBeijingtootherfirst-andsecond-tiercitiesinnorthern,eastern,andsouthernChina.Inthosedays,andevenintothe2000s,manymallstoresweremoneylosersforbrandsandretailers.Rentswerehighand,whilefoottrafficwasrobust,veryfewshoppersspentmoney.Chineseshoppersusedthemallsforafternoonoutingsandplacestosocializeorfindrespitefromextremeheatorcold.Buttheyalsogotaneducationinmodernretailandexposuretonewbrands,andtheyfoundoutwhatwaspopularintheoutsideworld.Atfirst,retailersandbrandsacceptedthattheywouldhavetoenduremoney-losingoperationsintheshorttermontheirwaytolong-termsuccess.Thisincludedtheirpresenceinmallsaswellasstreet-levelstoresanddepartmentstores.Thosethatwerewillingandabletostickitouteventuallystartedtoseehealthyreturns.Unlikedepartmentstores,themallsinChinaoperateinasimilarfashiontotheWesternmodel.Adeveloperorowneroperatesthemall,storespaceisrentedfromtheowners,whilebrandsandretailersbuildoutandoperatetheirstore.Theyarefreetooperateandpresentthemselvesastheywish,aslongastheycomplywiththemall'scommonstandards.Oneaspectthatisdifferent—althoughthisischanging,asovercapacitybecomesaproblem—isthatthemallownerreservestherighttoterminateastore'sleaseifit'snotperformingwell.Therearedifferentlevelsofmalls,frommid-market,topremium,

toluxury.Therearealsospecialtymallsthatfocusoncertaindemographics.However,mallsinChinadifferfromtheirWesterncounterpartsinanumberofways.Theseinclude:

WheremostmallsintheUnitedStatesaresingle-ortwo-storyaffairs,Chinesemallstypicallyhavefourtosixlevels.Rentsarehighestonthefirstfloorandcheapestonthetopfloor.Foottrafficdecreasessignificantlywitheachfloor.Chinesemallsusuallyfeatureawidearrayofdiningchoicesconcentratedonasinglefloor.Thesecanrangefromsnackstands,tomid-pricerestaurants,toexpensiveandwell-knownrestaurants.Astoremayberemovedfromthemallfornonperformance.Manymallshaveabasementfloorthatalsofeaturesrestaurants,butalsolarge,modern,high-endgrocerystores.

SomemallsinChinaalsonowfeaturehusbanddaycares.KnowninChineseas“laogongjicunchu”( ),whichliterallytranslatesto“husbandcloakroom,”theseroomsprovidemenwithaplacetorelax,lounge,readthepaper,checktheirphones,anddoanythingbutshop.By2010,mallswereubiquitousinalmosteverydevelopedChinesecity.Infact,by2014,thereweremaybetoomanymallsinChina,anestimated3,000and,accordingtoCBREResearchChina,therewillbemorethan4,000by2016.Overcapacityandunderuseinthelastfewyearshavebecomecommon,andtheyareworthtrackingforbrandsandretailersalike.Therolethatmallsplayforyou,andthewaysinwhichChineseconsumersshopatmalls,ischanging.HarkingbacktothesimilaritiesbetweentheAmericanDreamandtheChineseDream,maturityinChina'sconsumermarketmeansthatconsumersarespendingmoremoneyatmalls.LikeintheUnitedStatesduring

the1970sand1980s,mallshavebecomecentersofyouthculture,placesforteenstohangoutandsocialize,wheretheycanshapeandactoutwhotheyare.Mallsalsoprovideseniorcitizenswithaplacetowalk,talk,andsocialize.Apparel,footwear,andaccessoriesstillperformverywellinmalls,butmallstoresarenotmeantforeverycategoryorbrand.Youmustmeasurethischannelagainstothersbeforechoosingmallsaspartofyourretailstrategy.Wehaveseenmanyabedding,electronics,andhomedécorretailerdieonthesixthfloor.

Grocery Stores/SupermarketsIn2012,ChinaovertooktheUnitedStatesasthelargestgrocerymarketintheworld.AccordingtoIGD,afoodandbeverageindustryresearchandconsultingcompany,theChinesegrocerymarketwasworth$1trillionin2013,andIGDexpectsthemarkettobeworth$1.5trillionby2016.ThesenumbersareanastoundingexampleoftheemergenceofChina'ssuperconsumers.Remember,thiswasacountrythatjust30yearsagoissuedfood-rationcards.Littlemorethan20yearsago,theChineseconsumerspentthevastmajorityofhisorherfoodmoneybuyingdailyneedsatfreshmeatandproducemarkets.Large,Western-stylegrocerystoresemergedasachannelinthemid-2000swhenmanymalls,luxuryapartmentbuildings,andofficetowersstartedtofeaturethemintheirlowerlevels.Intheearlyyears,theywereconcentratedheavilyinthetop10markets,wheretheycateredmostlytoforeignexpatriates,thewealthy,andcuriousemergingmiddle-classconsumers.Overthepast10years,supermarketshavebecomeanincreasinglymoreimportantchannelforfast-movingconsumergoods,suchashealth,beauty,andbody-careproducts,andWesternfoodandbeveragecompanies.ManyrivaltheircounterpartsintheUnitedStatesintermsofsize,type,andnumberofproductsforsale,andmerchandisingsophistication.Forinstance,children'scerealcanbefoundonthelowestshelvesinChina.ModernChinesegrocerystoresoftenfeatureprepared-foodsections,extensivewine,beer,andliquorsections,andawidearrayoflocalandimportedfoods.Whilegrocerystoresarebecomingevermoreimportantasachannel,theystillhavearelativelylowpenetrationandmarketshareinChina.Butasurbanizationcontinues,andmorepeopleenterthemiddleclass,thepotentialforcontinuedgrowthishigh.IfdevelopmentpatternscontinueitisquitepossiblethatgrocerystoreswillbeasubiquitousinChinaas

theyareintheWest.

HypermarketsHypermarkets,orsupercenters,arecombinationsofgrocerystoresanddepartmentstores,andnowoftenhavepharmaciesandservicecenterswithinthestores.IntheWest,earlyhypermarketinnovatorsincludedFredMyer,achainbasedintheAmericanPacificNorthwest,andCarrefour,whichwasfoundedinFrancein1963.FromtheseearlybeginningsevolvedWalmart,Kmart,andTarget,whichintroducedhypermarkets,superstores,andwholesaleclubs.Theytypicallyfeaturehugefootprints—120,000to250,000squarefeet—andrelyonhigh-volume,low-marginbusinessmodels.IntheUnitedStates,hypermarketsarebeginningtolosetheirlusterasthecombinationofe-commerce,reurbanization,andspecialtyretailerstakemarketshareawayfromthem.But,likemallsanddepartmentstores,amodelthatisfadingsomewhatintheUnitedStatesandEuropehasfoundnewandvibrantlifeinChina.AsintheWest,hypermarketsareusuallylocatedoutsidecitycenterswheretheyprovideone-stopshoppingfornearbyresidents,whowilltypicallyshopthere,onaverage,onceaweek.Theyalsofeatureverylargefootprints,typically100,000squarefeet,andlargeproductselections,oftenmorethan20,000items.Hypermarkets,foreign-ownedanddomestic,alsotendtobuymostgoodsdirectlyfromfactories.ThisisanadvantagebecauseofChina'simportanceasaconsumer-productproducer.Itisalsoanadvantagewhensourcinglocalfoodandbeverageitems.Itdoes,however,presentlogisticalandcostchallengeswhenitcomestoforeign-sourcedgoods.Theyusuallyovercomethisissuebypurchasingthroughdistributors,whoalsoprovidethemwithstockingandwarehousinghelp.Hypermarketspresentforeignandlocalbrandsanopportunityforlarge-volumesales,butaswithhypermarketsintheWest,marginsaretight.

Chineseconsumersarespendingmoretimeandmoremoneyathypermarkets.ThisisespeciallytrueofChinesefamilies,wholiveintheoutersuburbsandwhoaremodelingtheirlifestyleontheAmericansuburbanwayoflife.Itisnotablethat,withtheliftingoftheone-childpolicy,hypermarketsmaybecomeanevenmoreimportantchannelforproducersandconsumersalikeinthefuture.AccordingtoPricewaterhouseCoopers(PwC),ChinawillovertaketheUnitedStatesastheworld'slargestretailmarketby2016with$4.2trillioninsales,andhypermarketsshouldleadtheway.Still,therearemanychallengesaheadforthecontinuedgrowthofhypermarketsinChina.AfternineyearsinChinaoperatingasanindependententity,BritishhypermarketTescoisfoldingitsoperationsintoajointventurewiththestate-runsupermarketoperatorChinaResourcesEnterprise.

Convenience Stores7-Eleven,thelargest,mostwell-knownchainofconveniencestoresintheUnitedStates,isnotonlyalargeandimportantsaleschannelforthousandsofcompanies—andadailypartofthelivesofmillionsofAmericans—butitanditscompetitorsintheconvenience-storemarkethavebecomeubiquitousiconsofAmericanconsumption.ConveniencestoreshavebecomeanimportantmodernsaleschannelinChinaaswell.7-ElevenopeneditsfirststoreinGuangdongProvinceinChinain1992.Itfollowedthepathofincrementalgrowth,takingcaretolearnfromthemarketoverthelongtermasaninvestmentforthefuture.ItdidnotexpandtoBeijinguntil2004,followedbyopeningsinChengduandShanghaiin2011,Qingdaoin2012,andChongqingin2013.Thevastmajorityofthestockcarriedisfoodandbeverage,butasignificantinventoryofhealth,beauty,andbody-careproductsareonofferaswell.FamilyMart,aJapanese-operatedcompany,enteredChinaaroundthesametimeas7-Elevenandhasgrownexponentiallyaswell.OtherplayersinthemarketareLawsonandMinistop.In2014,7-Elevengrewtomorethan2,000locations,FamilyMarthadnearly1,100stores,andLawsonhad400locations.ButperhapsnoconveniencestoreispoisedtohaveaslargeanimpactonChineseconsumptionasthepostoffice.Yes,youreadthatcorrectly—thepostoffice.

Not Your Father's Post OfficeItallbeganwithafrustratedAmericaninvestor,AlanClingman,CEOofChinaHorizonInvestmentGroup.ClingmanhasalonghistoryinChina.Hehadinvestedsomemoneyin2006intoasmallChinesecosmeticscompany.ThissmallcompanywassellingitsproductsthroughChinaPost,ownedbytheChinesegovernment.Throughthisexperience,ClingmanlearnedagreatdealaboutChinaPost,avaststate-ownedenterprise(SOE)thatisverymuchpartofthe800millionChineseruralresidents'everydaylife.Atfirst,Clingmanwasexcitedtoknowthathiscompanywassellingitsproductsthroughthismassivedistributionnetwork.However,helaterfoundoutthattherewasnosystemforreplenishmentordersaftertheinitialinventorywassold.HewenttotheChinaPostOfficeinShandongprovincetolearnwhatwashappening.HeaskedtheworkersatChinaPostwhytheydidnotreplacetheorderafterthemerchandisewassoldout.Theworkerstoldhim,asamatteroffact,“Wearethepostoffice.Iftheproductsarehere,wewillsellthem.Iftheyaregone,wejustgobackandsellournormaldailyproducts.Nobodytoldustoreorder.”Clingmanlearnedthat,justlikemoststate-ownedcompanyemployees,theydidnottakeinitiative;theyjustfollowedorders.Andnobodyevertrainedthemthatwhentheproductsaregettingclosetosellingout,itwouldbetimetoreordersotheircustomerswouldbehappy.ClingmanwasfrustratedthatChinaPosthadthistremendousmassivedistributionnetworkthatwouldmakeWalmartenvious,but—atthesametime—thestate-ownedentitydidnotseemtocareabouthowtobestutilizethedistributionnetworktoserveitscustomers.ThenhefoundoutthebasicpurposeofChinaPostOfficewastodistributefertilizer,seeds,andpesticidestothehundredsofmillionsoffarmerssothattheycanfarmandproduceincomefortheirfamilies.Tomakesurethefarmersaregettingtheirsupplyofagriculturalproducts,theChinesegovernmentstarteddistributing

thosechemicalproductsthroughtheChinaPost.Inordertoscalethebusinessintothevillagelevel,wheremostpeasantsliveandwork—mostoftheChinaPostofficesareincitiesandtowns—ChinaPostwenttothehundredsofthousandsofvillagegeneralconveniencestoreownersandaskedthemtojointheChinaPostsystem.Theownersuseitsbrandandbasicallybecomethefranchiseforthevillage,soChinaPostcouldhandlesalesofstamps,paymentofelectricbills,andothermailproductsandservices.Inaddition,ChinaPosttoldthemtheycouldsellfertilizersandotherfarmproductstothefarmers.AccordingtoClingman'sestimate,thereweremorethan300,000ofthesetypesofvillageconveniencestoreagentsthroughoutChina.Sometimestheywerecalledpostalstationsorfranchises,butprimarilytheyweretheextensionoftheChinaPostnetwork.ChinaPosttoldthesefranchisesthattheonlyrequirementwouldbethateverythingtheysoldmustbeboughtfromChinaPostdirectly.However,consumerdemandhasmovedmuchfasterthanChinaPostcanhandle.BecauseChinaPostlackssupply-chainexperience,thefranchisessometimesstillgoelsewheretofindtheproductstoselltothefarmers.Soeverydayremainsachallengeforthelocalvillagefranchisetofulfillcustomerdemands.ImaginehundredsofthousandsofvillagesthroughoutruralChina.Eachhasbetween2,000and15,000residentswaitingandlookingforproductstoconsumefortheirdailylives.Thedemandfaroutweighsthesupply.ChinaPostneverbuiltthesupplychaintosolvetheproblem,nordoesithavetheknowhoworwherewithal.ClingmansawtheopportunityandinitiatedmeetingswithChinaPostofficials.HebasicallytoldChinaPost“youhavethismassiveopportunityofreachingclosetoonebillionpeople.EverybodyistryingtoselltoabillionChineseruralconsumers,butnobodycanreachthem.Thisisaveryvaluableopportunity;ifwecombineourstrengthsandworktogether,wecanbuildabigbusinesstogether.”

In2008,afteralongseriesofdiscussionsandmeetingswithofficials,ClingmanandhisteameventuallyconvincedChinaPosttoformajointventure,calledChinaPostOfficePostMartstores.Creatingajointventurewithoneofthecountry'slargeststate-ownedenterprisesisnoeasytaskandmanylargeandsuccessfulFortunecompanieshavefailedmiserably.HowdidClingmandoit?“Firstandforemost,youneedtounderstandwhatChinaPostwantstogetoutofthisjointventurebusiness,”Clingmansays.ChinaPosttoldhimthatitisitsmissiontoimprovethelivesofChineseinruralareas.Further,theChinesegovernmentwantstostimulatedomesticconsumptionandincreaseitsothatChinawillbelessdependentonexport,whichisoneofthemainprioritiesofthetwelfthFive-YearPlan.TheChinaHorizonCEOfurtherexplainedtotheChinaPostofficialsthatifitcollaboratedwithChinaHorizon,itcouldachieveallofitsgoals—namely,improvingruralpeoples'livesbybringingthembetterproductswithhigh-qualitysupply-chainmanagement;makingsuretheproductsaregenuineandsafebyadheringtoahigherstandard;bringingruralconsumerslowerpricesandmorevariety;and,aboveall,betterservicewithjust-in-timefulfillment.ChinaPostowns50percentofthisnewsuccessfulentityratherthanitspreviousmodel,whichwastoown100percentofabusinessthatwasnotworkingproperly.Obviously,eventhoughChinaPostOfficelikedtheconcept,asastate-ownedenterprise,ithadtoopentheopportunityforalternativecompaniestocompete,andithadtodoagreatdealofanalysestoevaluatethebusinessconceptbeforemakingadecision.Finally,aftermanyroundsofdiscussionsandnegotiations,ChinaHorizonInvestmentGroupsignedamastercontractwithChinaPostinApril2010.Thecontractcameafterathree-yearpilotprogramduringwhichmorethan6,000franchisedstoresand98directlyownedruralsupermarketsweresetup—underthePostMartbrand—intowns

andvillagesinShandong,Jiangxi,andHenanProvinces.ZhangRonglin,vice-presidentofChinaPost,saysthatexpandingretaildistributioninruralareasisawin–winforbusinessesandfarmers.“Withtheretailexpertiseofforeigninvestors,moreruralresidentswillhavethesameavailabilityandservicesofgroceriesandsupermarketsaspeoplelivinginthecities,”henotes.Withanaverageshoppingarearangingfrom2,000to3,500squarefeet,theruralPostMartsupermarketswillstockmorethan1,000separateitemsincludingfruit,cookingoils,andothernecessities.WangXiuli,aprofessorattheBusinessSchooloftheUniversityofInternationalBusinessandEconomicsinBeijing,saidthedealrepresentsanexcellentbusinessopportunityasforeignretailcompaniestapintoaneglectedmarketwithsome200millionruralhouseholdsconsistingof800millionruralresidents.“Theruralmarketisvastwithahugepotentialforincreasedconsumerspending,asmoremigrantworkerssendtheirmoneyhome,”Wangsays.With1.3billionpeopleinChina,theoverwhelmingmajorityofAmericanandforeignmultinationalshavefocusedonthe500millioncitydwellers,sincetheyhavehigherincomesandmanyofthemliveinfirst-andsecond-tiercitieslikeShanghai,Beijing,Guangzhou,Suzhou,andShenzhen.They'vepaidlittleornoattentiontothe800millionruralresidentswholiveinsmallvillages.Thesevillageshaverisingincomeandpeoplewhohavereachedthelower-middle-classstatus,whichmeanstheynowhaveaspirationstopurchaseforeignbrandsandbetterproductsfortheirfamiliesandchildren.Yettheseresidentslackaccesstomostofthebig-boxretailerslikeWalmartorCarrefour,asinfrastructuremakesitchallengingforthesemajorretailerstodeliverproductstoreachtheseresidents.Besides,theyaretoosmallamarkettojustify

buildingalargestore(Applewillnotsetupastoreinthesevillagesintheforeseeablefuture).ButChinaHorizonInvestmentGrouphasleveragedthetrustandreachoftheChinaPostOffice,andtogethertheyhavetheabilitytoreachandservethesehundredsofmillionsofwillingandeagerconsumers.“Wehavemoreinsight,data,andresearchontheruralChineseconsumersthananyonebecauseofthisjointventurewithChinaPost,andtodaywehavemorethan2,000employees,”Clingmansays.“AlreadyChinaPostunderstandsthatChinaHorizon—asaprivatecompany—knowshowtoservetheprivatecustomersbetterthanastate-ownedenterprise,andthiscombineswithourexpertiseonsupplychainandourmanagementtalent.”Last-miledistribution,evenformajore-commerceplayerslikeAlibabaandTaobao,isoneofthebiggestchallengesofsellingandservingChina's800millionruralcustomers.“Some88percentoftheproductsnowsoldinPostMartarefoodrelated,butthatwillchangeaswebringinmoreproducts,”Clingmansays.“OurChinaPostMartstorescarryone-thirdinternationalbrandslikeCokeandColgate,theotherone-thirdarelocalChinesebrandslikeMengniu,andthelastthirdareourownprivatelabelproducts.“Andtheproductssoldintheruralcityarehighlylocalizedandseasonal,soweareattunedtothelocalconsumers'need.ChinaHorizonalreadyinvested$60millioninthisjointventureandwillbeinvestinganother$160millioninthefuture.”ClingmancitesChinaPost'sphysicalnetworkasthejointventure'sbiggestadvantage.“ThiswasaveryprofitablebusinessevenbeforeweestablishedPostMart.ChinaPostisthe190thmostprofitablecompanyintheworldwithmorethan$4billionofprofits,versusourUSPostalServicelosingmorethan$5billionlastyear.Inthenextthreeyearswewillexpandto10moreprovinces,andinfiveyearswewill

planforanIPOinoneoftheChinastockexchanges.“TheincomesoftheChineseruralconsumersarerisingfast.Forexample,inoneregionoftheHenanProvince,theannualfamilyincomegrewfrom$5,000to$12,000from2007to2012.Imaginethepossibilitiesofsupplyingthemallkindsofmerchandiseandproducts.Forexample,oneoftheonlinepharmaciesinChinawantstomakePostMarttheirdrop-offpointfortheircustomers'prescriptionorders.Andwearefastbecomingthemasterofthelastmileserviceevenforlargee-tailersandretailers.”ChinaHorizon,alongwithChinaPost,hascreated160,000potentialretailoutletsand,whencompletedafewyearsfromnow,itwillbecomethelargestretailnetworkinruralChina.Walmartneedstowatchout;itmightnotbetheworld'slargestretailerforlong.LessonsLearned

China'ssuperconsumersareeverywhereandexistatallincomelevels.Youneedtolookbeyondthefirst-andsecond-tiercities.Understandyourjoint-venturepartner'smotives,leveragetheirstrengths,andcombinetoserveyourendcustomerswell.SometimestheChinesestate-ownedenterprisesaremorecreativethanprivatelyownedcompanies—beonthelookoutforthem,beopen-minded,andfindyourbestChinapartner.

Lifestyle StoresInChina,aspeoplehavetransformedfromconsumerstosuperconsumers,theyareincreasinglymakingpurchasingdecisionsbasedonthetraditionalappealofbadgebrandsthataugmentfacethroughconspicuousconsumption.Increasinglysophisticatedconsumerswhoarenolongercontenttofollowtheherdarefuelingchange;theywanttomarktheirindividualityandurbanity.Somemanifestationsofthischangeinclude:

Notbuyingthemostexpensivecar,butonethatmakesastylestatement.Seekingoutnichebrands.Therapidgrowthoffast-fashionretailers.Increasedpurchasesofhomedécor.Increasedpurchasesofhomeluxuryitems.Thedesireforself-expressionthroughbrandexperienceandaestheticandnotjustvalue,reliability,andbling.

Theincreasingprominenceofthelifestylestoreasachannelspeakstothesenewdesires.Retailers,brands,andmanufacturersmustbeincreasinglysavvyintheirresponsestoconsumerdesiresbyrethinkingthepotentialofthischannel.LifestylestoresandbrandsthatoriginatedintheWesthaverealizedtheupsidetoextendingtheirbrandsinChinaintoproductsforwhichtheywerenotinitiallyknown.RalphLauren,forinstance,wasanearlymoverinlifestyle.Itpresenteditsbrand'srootednessintheworldofWhiteAnglo-SaxonProtestantwealthandlifestyle,andthenexpandedfromappareltohomedécor,jewelry,fragrances,andshoes.Interestingly,somebrandsinChinaareenteringandsucceedingwithlifestylearchetypesandexemplarsthatdonotyetexistinChinaonanyscale.Vansisagoodexample.Thereislittleskating

androllerbladingcultureinChina,butChineseyouthhaverespondedtotheCalifornialifestyleandtheskaterlook.

Specialty RetailersSpecialtyretailersarealsogrowinginimportanceasamodernchannel—andformanyofthesamereasonslifestylestoresandbrandingaresucceeding.ThereareanumberofsuccessfuldomesticspecialtystoresoperatinginChina.SuningandGome,bothelectronicssellers,areconsistentlyamongChina'stopfiveretailers.ForeigncompaniesoperatingspecialtyretailstoresinChinahavehadmixedresultstodate.Nike,Converse,andLiNingaregiantsinthesportsapparelandlifestylemarket,andSephorahasmetwithsuccess.Conversely,HomeDepotandBestBuyfailedandretreatedfromthemarket.

Multibrand RetailWhilemultibrandretailinghastraditionallybeenawastelandinChina,thisisstartingtochange.AsChineseconsumerscontinuetotravelandshopabroad,andastheyspendmoretimeandmoneyshoppingonline,theyareincreasinglymorecomfortablewithandenjoyingtheconvenienceofmultibrandshopping.In2014,LaneCrawford,theHongKong-basedwomen'sapparelchain,expandedfurtherintoChina.ThevenerableFrenchdepartmentstore,GalleriesLafayette(GL),alsoopenedaflagshipstoreinBeijinginpartnershipwithHongKongcompanyI.T.ThismarkedthereturntoChinaforGLafteropeningitsfirststorein1995andthenclosingitin1996.ItsreturnillustrateshowmuchChinahaschangedoverthepast15yearsandtheimprovedprospectsformultibrandretailinginChina.ChinesesuperconsumershavefastopenedupopportunitiesforthelikesofNordstrom,GL,andotherstoexpandbeyondtheirUSandEuropeanbasesandcouldchangethewaylargescale,multibrandretailinggrowsinthenext10years.

Chapter 15E-commerce and the Rise of AlibabaQ:WhatisthemostcommonlyspokenlanguageontheInternet?A:IfyouansweredEnglish,youwouldbewrong.TheanswerisMandarinChineseanditssisterlanguagesanddialects.

PerhapsnochannelmoretypifiestheriseandinfluenceofChina'ssuperconsumersthanthemassivescale,desirefor,andmoneyspentone-commerce—includinge-retail,e-wholesale,anddigitalinformationandentertainmentproducts.Thisismainlyduetothefactthattheriseofretail,consumption,andbrandawarenessinChinahasbeenalmostconcurrentwiththedigitaldisruptionofretailandcommerceingeneralglobally.AswithmanyotherdevelopmentsinChina,thelackofalegacyinfrastructuremeantthatChinesee-commercecoulddeveloponamostlyblankslatewithoutneedingtoteardowntheoldinordertomakewayforthenew.Otherexamplesincludetheubiquity,speed,reliability,andlowcostofChina'smobilephonesectorortheabilitytobuild60,000milesofnewhighwaywithouthavingtorepairorreplacetheold.WhileChinawassloweroutofthegateindevelopinge-commerceasakeysaleschannelforconsumergoods,ithasnotonlycaughtupfast,butinmanywayshassurpassedtheUnitedStatesasthelargestandmostimportante-commercemarketintheworld.Thenumbersaresostaggeringandthedailyincrease(yes,daily)ofonlineshoppersissorapidthatwemustacknowledgethat,fromthetimewefinishwritingthischaptertothetimewegotoprint,andthentothetimeyoubuyandreadthisbook(approximatelyfivemonths),therecouldbeanother50millionChineseshoppingonlineifcurrenttrendshold.Aswegotoprint,thereareapproximately600millionChinesecitizenswithregularaccesstotheInternet.In2014,accordingto

ForresterResearch,aleadingtechnologyresearchandconsultingfirmbasedintheUnitedStates,bytheendof2014therewillbemorethan350millionactiveonlineshoppersinChina,spending$294billion—andthatnumbermayriseto600millionspendingmorethan$600billionby2017.Toputthosenumbersinperspective:TheUnitedStatesisthethirdmostpopulouscountryonearth(afterChinaandIndia)at320millionpeople,yetChinahasmoreonlineshopperstodaythanAmericahaspeople.Changesinbusiness,technology,andcultureinChinahappenindogyears.WhatoftentakesfivetosevenyearstohappeninmoredevelopedmarketswillusuallyhappeninayearorlessinChina.Thisisespeciallytrueofe-commerce.

AlibabaYoucannottalkaboute-commerceinChinawithoutfirsttalkingaboutAlibaba.Foundedin1999byformerEnglishteacherJackMa,Alibabastartedlifeasabusiness-to-businessplatform.ItwasessentiallyaplacewherethousandsofChinesemanufacturerscouldadvertisetheirwaresandprovidecontactdetailsforforeignbuyers.Itwastheperfectcompanyandideaforitsera,asthecompanywasfoundedjustpriortoChinajoiningtheWorldTradeOrganization,andhundredsofthousandsofcompanieswenttoChinalookingtomakeandbuymanufacturedproducts.Thesemakersandbuyersfoundavirtualmeetingplace.Alibabainsomewayswastheearliestconfluenceofthreeofthebiggestbusinessstoriesofthe90s:theriseofChina,theriseofe-commerce,andaworldshrunkbymodernsupplychains.Whereoncethetwice-yearlyCantonFairtradeandmanufacturingshowinGuangzhouwastheonlyplacetofindpartnersandmakedeals,Alibabaquicklyemergedasa24/7,year-roundCantonFair.Japan'sSoftbankinvested$20millionearlyandYahoo!laterboughthalfthecompany(itnowowns22percentafterasell-back).Aswegotoprint,Alibabahasfiledforitsinitialpublicoffering(IPO)intheUnitedStates,whichisscheduledforAugust8,2014.Itispossiblethat,bythetimeyouarereadingthis,AlibabawillhavebecomeoneofthelargesttechIPOs,ifnotthelargestIPOinhistory.Itisestimatedtheofferingwillraise$10to$15billion.AnditisquitepossiblethatnumberwillbedwarfedcomeIPOday.Today,thedollarvalueofitemssoldthroughthethreebiggeste-commercecompaniesintheworldonadollarvalueofgoodssoldperyear,accordingtoAlibaba'sIPOfilingareasfollows:Alibaba($248billion),Amazon($100billion),andeBay($76billion).AlibabahassoldtwiceAmazon'stotalandthreetimeseBay'stotal—andthereareanother600millionChinesewhodon'tevenusetheInternetregularly,yet.Howdidastart-up,business-to-businesscompany,foundedin

Hangzhou,becomeoneofthedecade'smosttalkedaboutandeagerlyanticipatedIPOs?Itmoveditsfocustoe-commerce.Alibaba2.0againbecametheperfectcompanyforitstimeinChina.WhenChina'sinitialconsumerboomstartedgainingsteaminthemid-tolate2000s,e-commerceplayedarelativelyinsignificantrole.Chineseconsumerswerefocusedonbricksandmortarstoreswheretheycouldsee,touch,experience,andhaggleoverthepricesoftheproductstheywanted.WheneBay,Amazon,andotherWesterne-commercecompaniesenteredChinaduringthisperiod,Chinesecompanies,andAlibabamorethananyother,tooknoticeofthepotentialofe-commerceinChina.TherehasbeenalotwrittenanddiscussedaboutwhyeBayandotherWesterncompaniesneverfoundamajormarketinChina.WearenotheretoarguewhetheritwasacaseofbaddecisionsandlackofunderstandingorinternalChinesemechanismsthatmadeitdifficultforthemtodobusiness.PerhapsthebestsummaryofthecasecamefromJackMahimselfwhenhesaid,“eBayisasharkintheocean.WeareacrocodileintheYangtzeRiver.Ifwefightintheocean,wewilllose.Butifwefightintheriver,wewillwin.”Inotherwords,AlibabacouldadoptthefoundationalideasandtechnologicalinfrastructuresofWesterne-commerce,butitsnaturaladvantagelayinbeingChinese,thinkingChinese,andservingChinese.Throughacombinationofe-commercetailoredfortheChinesemindset,culture,language,andpurchasemotivators,alongwithlegitimatetechnologicaladvancesandtheabandonmentoftheplayingfieldbyforeigncompetitors—Alibababecamenotonlythebiggeste-commerceplayerinChina,butalsotheworld.ThecompanytodayisAmazon,eBay,Etsy,DigitalMall,andPayPalallrolledintoone.Alibabanowplaysapartinnearly80percentofallonlinepurchasesinChina.TaoBao,foundedin2003,isthecompany'sconsumer-to-consumermarketplacewheremillionsofChineseselltoeachothereveryday.AgreatTaoBaoinnovation

wastointroduceAliWangWang,whichallowsbuyersandsellerstotalkandnegotiateinrealtimethroughinstantmessaging.ThisfeatureresultedfromunderstandingtheimportanceoftrustandpersonalrelationshipsinChinesecommercialinteractions(asopposedtothepurelytransactionalandcommerciale-commercemodelsoftheWest).Tmall,createdin2010,isthecompany'sbusiness-to-consumerplatform.ItistheplacewheredomesticandforeignbrandsselltheirproductsdirectlytoChineseconsumers.Therearecurrentlymorethan75,000brandsand60,000merchantsonTmall.ConsumerscanfindeverythingfromToryBurchhandbags,toCresttoothpaste,topartsforlocallyproducedCherryautomobiles.EverythingonTaoBaoandTmallcanbepaidforusingAliPay,thePayPal-likeescrowservice.Alibabahasalsobranchedoutintocloudcomputing,streamingmedia,andventurecapital.ButfornowitisthemostimportantnameinChinesee-commerce,embraced,loved,andusedbynearly300millionconsumers.WiththeIPO,thecompanyisalsosettingitssightsonforeignexpansion;thecompanyhaslauncheditsfirstUSventure—11Main.com—aplatformthatwillallowsmallmerchantsandartisanstoselltheirproductstoawideraudience.Regardless,brands,retailers,andanyonehopingtoengageChineseconsumersmustutilize,insomeform,Alibabaanditsmultipleplatforms—justasktheNationalFootballLeague.

NFL Footballs “Sold Out”TheNationalFootballLeague(NFL)isAmerica'smostpopularsportsleague.Comprising32franchisesthatcompeteeachyeartowintheSuperBowl,theworld'sbiggestannualsportingevent,theNFLhasdevelopedthemodelforthesuccessfulmodernsportsleague.Thisincludesextensiverevenuesharing,competitiveexcellence,strongfranchisesacrosstheboard,andnationaldistribution.TheNFListheindustryleaderonawiderangeoffronts.ButtheNationalBasketballAssociation(NBA)hasbeentherealsuccessstoryforUS-basedsportsleaguesinChina.NBAbasketballisthesecondmostpopularteamsportinChinaaftersoccer.TheNBAinvestedearlyandheavilyinunderstandingChinese,andtheNFLwouldliketotakeapagefromtheNBAplaybookbyexpandingitsinfluencetoChina.Andtodemonstrateitslong-termcommitmenttoChina,whilesignifyingasignificantmilestoneintheNFL'scontinuingefforttopromoteitsgameworldwide,theleagueestablishedNFLChinainOctober2007.InChina,theNFLaimstodevelopandgrowitsfanbasebyincreasingfanpassionforthegamethroughstrategiccooperationwithnationalandregionalmediapartners.Marketingeffortsfocusonflag-footballdevelopmentandfan-outreachevents,aswellasastrongsocialmediapresence.TodaytheNFLhasmorethan3millionavidfansinChina.However,inacountrywith1.3billionpeople,thatisatinynumber—notnearlylargeenoughtojustifyplayinganNFLgameinChina.Bycomparison,NBAChinahasmorethan1millionfansandmorethan60millionfollowersonsocialmediasiteslikeSinaandTencent,accordingtoDavidShoemaker,CEOofNBAChina.Evenwithsuchatinyfanbase,NFLChinahasdeployedoneofourChinarulesforsuccess:TakeajabattheChinasuperconsumerandlandarighthookthroughe-commerce.NFLChinapartnerswithmorethan25regionalTVbroadcastersanddigitalmediaoutletsacrossChinatoairweeklygames,

highlights,andotherNFLcontent.Additionally,NFLChinafocusesongrassrootsdevelopmentoffootballthroughtheUniversityFlagFootballLeague,withteamscompetingfrom36universitiesacrossBeijing,Shanghai,andGuangzhou.In2013,theNFLestablishedNFLhomefieldsinthosecities.ThisbroughttogetheranumberofelementsthatfansappreciateintheUnitedStates,suchasafulldayoffootball,aswellascommunityengagementthatincludeslivefootballgames,interactivegames,trainingclinics,food,drinks,andappearancesbyNFLplayersandcheerleaders.Butstill,howcantheNFLselltotheChinasuperconsumerwhenthereisvirtuallynobrandrecognition?Herecomestherighthook!Amazon.comisnotthelargeste-commercecompanyintheworld,Alibabais.Bysomemeasures,AlibabaTmall.com,Alibaba'sbusiness-toconsumerunit,hasgrowntobecomeoneof,ifnotthemost,importante-commerceplatformsintheworld.WhyshouldtheNFLcareaboutChinesesuperconsumersandTmall.com,whenitisdoingsowellinAmerica?Because,accordingtoarecentstudypublishedbyFocusMoneymagazine,Chineseconsumersshoponline8.4timeseachmonth,comparedto5.2timesintheUnitedStates,4.3timesinGreatBritain,2.9timesinGermany,2.8timesintheNetherlands,2.6timesinFrance,and2.3timesinSwitzerland.November11,2014,wasChina's“singles-day”shoppingfestivalandAlibabaalonegeneratedmorethan$5.1billioninrevenue…inoneday,morethanthetotalonlinesalesintheUnitedStatesonBlackFridayandCyberMondaycombined.EnterFrankLavin,whohopestobuildthelonger,widerbridgeAmericanandEuropeancompaniesneedinorderaccessandsucceedinChinesee-commerce.Laviniswellqualifiedforthejobofbridgebuilder.HeservedasUSambassadortoSingapore;ledtradenegotiationswithChinawhileworkingattheUSDepartmentofCommerce;heldseniorpostsintheAsianofficesofBankofAmericaandCitibank;andworkedatthepublic-relationsgiant

Edelman.Inotherwords,FrankisamasterofGuanxi(goodrelationships).Leveraginghiscontacts,LavinraisedseveralmilliondollarsinangelmoneyandestablishedExportNow,anOhio-andShanghai-basedcompany,with30employees,providingturnkeysolutionsforAmericancompaniesonTmall.com.WhenNFLChinaapproachedFranktosetupitsstoreonTmall.com,ithadnoideawhethertherewouldbedemand.Unlikemoreestablishedproductsandbrandcategories,itisdifficulttoconductresearchinordertogaugedemandforNFL-licensedproducts.ItisabitliketryingtopredictdemandforStarbucks'coffeein1980,whenChinawasstillstrictlyatea-drinkingnation.Spendinghundredsofthousandsofdollarsforafeasibilitystudywouldnotworkinthissituation.LavinsuggestedthattheNFLsendthesmallestpossibleshipmentofNFLfootballstoChinaasatest.SotheNFLsentasinglepalletofsixdozenfootballs.Thecostofshippingall72footballswaslessthanaplanetickettoBeijing.Thismarkettestwasextremelyinexpensivetoconduct.Theideawasthatevenaverysmalldemandwouldbesignificantconsideringthemarket'soverallsize.Thefootballssoldoutinlessthanthreeminutes.ButExportNowstillcouldn'tmeasurehowbigthemarketreallywas.SoNFLChinathensentalargershipmentof288footballs.Andagain,theyquicklysoldout.Encouragedbythedemand,theNFLhasbuiltafulle-commercestore,whichwentliveinOctober2013.

Why E-commerce?Thevalueofe-commercethroughTmall.comisthelowcostandthefactthatabrandcanmoveincrementallyandscaleupwhenitseesapositivedemand.Andbecauseofthelow-coststructurecomparedtoopeninganactualofficeandhiringfull-timeemployees,thedownsideissmall.Injustafewyears,ExportNowhasbuiltmorethan110brandedstorefrontsshopsonitsTmall.comstore,whichshowcasesonlyAmericanproducts.ArecentstudybyBostonConsultingGroupindicatesthatmorethanhalfofallChineseconsumerspreferAmericanproductstoChineseproducts.BecauseChinesesuperconsumerswillpaymoreforAmerican-madeproducts,notonlydobrandsnothavetosacrificetheirprofitmargins,theycanalsooftenchargeapremiumpricefortheirproducts.AnothercompanytakingadvantageoftheExportNowplatformisTotes.HeadquarteredinCincinnati,TotesIsotonerCorporationmakesumbrellas,gloves,rainwear,rubberovershoes,andotherweather-relatedaccessories.InJune2013,ExportNowsetuptheTotesonlinestore,whichsellsafulllineofcompanyproductsandcomplementsthebrand'sexistingpresenceintraditionalretailchannelsthroughoutChina.“TheincreasingpopularityofourproductsinretailmarketsinChinapromptedustolookforawaytoexpandourcapabilitytoreachmoreconsumersinthesecond-largesteconomyintheworld,”saidDouglasGernert,chiefexecutiveofficeroftheTotesIsotonerCorporation.“ExportNowprovidedanonlinemarketingsolutionthatisperfectforourneeds,andweexpectthenewonlinestoretobeakeycontributortoourongoinggrowthinthisimportantvenueforus.”LavinaddsthatChineseonlineshoppersarehungryforgreateraccesstohigh-qualityconsumerbrandslikeTotes.“Thisvast,profitable,andlargelyuntappedmarketplaceisripefor

companiesseekingnewopportunitiestogrowtheirglobalsalesandexpandthereachoftheirproducts,”hesays.WhileAlibabamaybethebiggeste-commerceplayerinChina,theyarehardlyalone.JD.com,formerly360buy.com,isafiercerival,holding17percentmarketshare.Theyhaveshiftedfocustothem-commerce(mobilecommerce)market.MobileisthepreferredmethodtoaccesstheInternetinChinatodayandmoreandmorepurchasesarebeingconductedthroughthephone.JDisexpectedtogopublicsoonaswell,andtheyarerumoredtobeworkingonanAmazon/Facebook-typehybrid.Therearechallengestoutilizinge-commercechannelsinChina,andtheymustbedealtwithandplannedforwellinadvanceofenteringthemarketplace.Forbrandsandretailersthesechallengesinclude:

Fiercecompetitionandacrowdedmarketplace.Confusionaboutwhatplatformsareavailableandbestsuitedtotheirneeds.Findingtherightmixofthird-partyplatforms,ownedandoperatede-commerceplatforms,andconsumer-generatedcommerce.AssumingyoucanenterandsucceedinChinawithane-commerce-onlyplan.Supplychaininfrastructure,especiallywarehousing,e-fulfillment,cross-countryshipping,andlast-miledelivery.Controllingintellectualproperty(IP),parallelimports,andgray-marketissues.

Thislastchallengeisparticularlydifficultandsometimescostly,bothintermsofrevenueslostandbrandidentityerosion.ChinalawexpertDanHarris,authoroftheinfluentialandaward-winningChinaLawBlog,says,“CompanieswhoaresellinginChinaneedtomakeregistrationoftheirtrademarks,copyrights,

andotherintellectualpropertytheirfirstpriority.”Hecontinues,“Chinaisafirst-to-filecountry,notfirsttouse,sowhetheryouaresellingormakingsomethinginChina,withoutup-frontIPduediligenceandaction,itisnotamatterofifyouwillgetinfringedupon,butwhen.Thedangerisexponentiallyworseonline.OurlawyersspendagoodchunkoftheirtimetryingtoremedyIPinfringementsgeneratedthoughe-commerce,butmanycompaniesarelearningthatspendingonpreventionischeaperthanspendingonremedies,”saidHarris.Let'sbeclear,explicit,andblunt:IfyouputyourproductsupforsaleonlineinChinaandyouhavenotregisteredyourtrademarks,copyrights,andallotherIPinChina,Younolongerownit.Someoneelsedoes.Whataretheybuying?TryingtotrackwhatChineseconsumersbuythemostonlineissimilartotryingtokeepanaccurateandup-to-datelistontheirpreferredtraveldestinations;inotherwords,verydifficult.Thatsaid,whileparticularbrandsorproductsboughtcanshiftquickly,themajorcategoriesboughtare,fornow,fairlystable.Theseinclude:

ApparelandfashionaccessoriesHouseholditemsPersonalcareandhealthcareproductsSportsandrecreationproductsConsumerelectronics

Interestingly,whileChina'se-commercespendingandluxuryspendingarebothoutsized,onlyatinyproportion,lessthan5percent,ofluxurypurchasesaremadeonline.Thishasalottodowiththepercentageofluxuryitemsboughtoffshore,butconcernsaboutfakes,theexperienceofluxuryshoppingintheofflineworld,andthedesiretotouchandfeeltheworkmanshipofluxuryitemsalsoplaymajorroles.ItwillbeuptoChina'se-commerce

platformsandbrandstoworktogethertomakethetwointersectmoreinthefuture.Today,marketplaceslikeTaoBao,Tmall,JD.com,Xiu.com,andothersaccountforthemajorityofe-tailsalesinChina,withahandfulofkeycategoriesdominatingtheproductmix.Additionally,themajorityofsalesarestillmadethroughPCs,laptops,andtablets.Butthetrendlinesareclear:mobilewillbethedominanttechnologyfore-commerce;joint-venturesitesforhypermarkets,likeWalmartandCarrefour,willgrow;morecompanieswillmixtheirownChina-basede-commerce,tabletcommerce,andmobilecommercesiteswithplatformsandothermultibrandretailchannels,asthedepartmentstoreLaneCrawforddid.Asthepost-culturalrevolutiongenerationoffirst-timecapitalists,entrepreneurs,merchants,andconsumerspassthereinsofbusinessleadershiptothegenerationborninthe1980sand1990s—manyofwhomhavebeeneducatedoverseasbutreturnedhomefortheopportunitytotakeoverorcreatetheirownbusinesses—thepaceofinnovationandgrowthattheintersectionoftechnologyandcommercewillbefurtherenergized,andanInternetwithChinesecharacteristicswillbecomemoreinfluentialonaglobalbasis.Inacountrywheredigitaldisruptionislessdisruptionandmorenativeenvironmentand—inaChinathatwasabletoskipoverseveraltwentieth-centuryretailmodels—thedigitalconsumptionofproducts,services,andentertainmentbyChineseconsumerswillfurthertheneedforforeignanddomesticChinesecompaniestounderstandandcatertotheChinamarket,aswellastheChinaglobaldemographic.ThegrowthofChinesee-tail,combinedwiththecontinuedgrowthofbusiness-to-businessandwholesaledigitalcommerceinChina,willhaveaprofoundeffectonthewaybrands,retailers,informationtechnologycompanies,web-propertydevelopers,

supplychainserviceproviders,aswellasresearchandconsultingfirmsdobusinessoverthenext10years.But,aswithanythingelseinChina,thewinnersandloserswillmostoftenbeseparatedbywhobestunderstandsChinesehistory,culture,language,andmind-setalongwiththedesiresandprerogativesoftheChinesegovernment.

Chapter 16Supply Chains to Satisfy China's SuperConsumersChina'ssuperconsumersofferbusinessesanenormouseconomicopportunityonthemainland,inGreaterChina,overseas,andonline,butastheChinaPostexampleinthepreviouschapterillustrates,italsopresentsoneofthemostdifficultchallengesforsupplychains.Wecan'tsaythistoooftenortooemphatically—thecompanieswhosucceedwithChineseconsumersarethecompanieswhomastertheirglobal,China,regional,andlocalsupplychains.Formorethan25years,supplychain,inChina,meantmanufacturingproductsandexportingthemtoothercountries.TheChineseconsumerwasanafterthought,ifathoughtatall,asthecountryliveduptoitsreputationasthefactoryoftheworld.ButallofthishaschangedsinceChinaemergedasthelargestconsumermarketintheworld.AstheChineseconsumercontinuestogrowmoresophisticated,supplychainswillneedtomatch(andevenexceed)thisrateofchangeandfocusonend-to-endoperationsinthesamemannerasthemostsuccessfulglobalcompanies.Retailandconsumerproductoperationsdrivenbye-commercearetransformingrapidly,andChinaisnoexception.Howcansupplychainsimprovetomeetthishugenewchallenge?TompkinsInternationalisaglobalsupply-chainconsultingfirm,basedinRaleigh,NorthCarolina.ThecompanyhasitsAsianheadquartersinShanghai.TherearetwodivisionsintheShanghaioffice,themarketstrategyandimplementationpractice,whichMichaelleads,andthesupply-chainpracticegroup.Tompkinshashelpedshapetheglobalsupply-chainindustryoverthepast35yearsandwasanearlyentrantinprovidingsupply-chainstrategiesandimplementationforforeignanddomesticcompaniesinChina.

AccordingtoJimTompkins,CEOofTompkinsInternational,“CompaniessellingtoChineseconsumersontheMainland,inGreaterChina,andintheWestmustnowconsidertheirapproachtoallsixmegaprocessesofthesupplychain.Thisisespeciallytrueine-fulfillment,asChinahasbecomethelargeste-commercemarketintheworld.”

Supply Chain MegaprocessesTompkinscontinues,“Tosucceed,supplychainsinChinawillneedtomovefromaprimaryfocusonmanufacturingandexportingtoawholenewdefinitionthatencompassesthemegaprocessesofplan—buy—make—store—distribute—sell.”Ifacompanydealswithproducts,itmusthavecapabilitiesforplan—buy—make—store—distribute—sell,whetheritperformstheseprocessesinhouseoroutsourcestoselectedserviceproviders.Further,itneedsbasiccapabilitiesforsupport,suchasinformationtechnology,back-officefunctions,HR,sales,andmarketing.Investingmoretimeandenergyintosupply-chainstrategywillensurethatyourbusinessmodelwilladapttothechangingroleofChinafromfactoryfloortoboomingglobalmarketplace.Therealkeyforsupplychainswillbenotonlyproducinggoodproducts,butmovingtheseproductsquicklythroughthemegaprocesseswhilehavingvisibility,beingabletoforecastdemand,andensuringproductreplenishmentandfulfillment.Thebestexamplewecanprovideforsuccessthroughsupply-chainstrategyinChinaistheItalianmen'sluxuryapparelcompany,ErmenegildoZegna.ZegnaenteredChinaalmost25yearsago.ThecompanywaspatientinitsapproachtosuccessinChina.Itopenedstoresslowly,tookincrementalstepsinformedbythenatureandneedsofthemarket,andinvestedheavilyinbrandidentity.Ofcourse,providingthebest-qualitymaterials,products,andsuperbserviceundergirdedallofthis.TheZegnasuitbecameanearlymarkerofsuccessforChinesemen.AlthoughZegnahadbeensuccessfulinChinaformanyyears,itwasthroughrethinkingitssupplychainstrategy,infrastructure,anddeploymentthatitbecamethebest-sellingmen'sluxuryapparelbrandinChina.Zegnafocusedonreducinginventory,increasingsell-through,andboostingthebottomlinethroughsupplychain.Byapplyingscience,analytics,andbestpracticesacrossallsixmegaprocesses—

andfusingthatwiththeartofunderstandingthedifferencesinChinesemarketclusters,climates,andtastes—infewerthanthreeyearsZegnagrewrevenuefivefold.ThisbringsupageneralpointforestablishedandnewbrandsandretailersinChina.Itisnolongerenoughtonotonlyshowup,orbesmart,buttohaveane-fulfillment,warehouse,planning,transportation,andreplenishmentprogramthatseparatesyoufromyourcompetition.ThefollowingisabreakdownofhowtherightunderstandingandimplementationofasupplychainwillleadtosuccesswithChineseconsumers.

PlanMultiplepathsexisttoestablish,design,andexecutetheflowofgoods,information,cash,andworkacrosssupplychains,fromsupplierstocustomers.MarketsandcustomerswithinChinacanbedifferentfromtheWesternworld,buttheproductplanningprocessmustbesimilartoreachthenewest,savviestconsumers.Theprimarypurposeofsupply-chainplanningisthesynchronizationofsupplywithdemand.Supply-chainplanningattheoperationalleveladdresses:

Howtoforecastdemandforyourproducts.Howtomeetthisdemand.Howtobestsupplytheproductstotherightplace,attherighttime,andattherightprice.Howtodoallthisinthemostcost-effectivemanner.

ThetotaldeliveredcostofanyproducttoanycustomerinChinamustbecompetitivewithotherproductsources.Supply-chainplanningalsoprovidesfortherightstrategies.Decisionsonoutsourcinglogisticsservicesarebasictothestrategy,asaredecisionsaboutthedesignofthelogisticsnetwork.Inaddition,supply-chainplanningaddressesimportanttangentialissuessuchastaxes.Theflowandstorageofgoods,aswellasthelocationsoffacilities,aremajordeterminantsofChinesetaxes.

BuyPoorproductquality,erraticsupply,andahighertotalcostofownershiparesomeofthefrustrationstraditionallyexperiencedwithinsupplychainsinChina.Toensurethatyourcompanyisequippedtosucceedforthelongterm,considertheseguidingquestions:

Whatisyourstrategyforsourcing,purchasing,supplierrelationshipmanagement,andprocurementIT?Whatprocessesareneededtoexecutethisstrategy?WhattalentinyourorganizationisastuteenoughaboutChinatoexecuteyourstrategy?Whattypeoftechnologycurrentlysupportstheoperations,andisitrobustenoughforChinaoperations?Whatperformancemeasurementmetricsdoyouusetoensuresuccess?

MakeThisisthemegaprocessthathasbeenmostassociatedwithChinainthepastfewdecades.ManufacturingwithinAsiacanprovideacompetitiveedgeinpricing,quality,andoverallcostofdoingbusiness.Butunlessyoufollowtherightstrategicprocesses,yoursavingscouldbecomeliabilities.Itisadvisabletotakeamacro-levelevaluationofthetrendsandinfluencesthatwillaffectyourcompany'scurrentandfuturemanufacturingdecisionsinAsia.ThisismoreimportantthaneverascompaniesshiftfrommakinginChinaforexportto“ChinaforChina”manufacturing.Conductaninternalauditofgoals,capabilities,anddesiredresultsforyourcompany'smanufacturingandsourcingplans.Inaddition,planexternalauditstoidentifyissueswithcurrentsuppliersandtopinpointpotentialnewsuppliers.Facilities,management,processes,QCstandards,andworkersshouldallbevetted.Negotiatethemostadvantageoustermsforprice,payment,andstandardsregardingcontracts,purchaseorders,andshipping.ThisapplieswhetheryouaremakingproductsinChina,inyourhomecountry,orinathird-partycountry.China'ssuperconsumershavecreatedanenvironmentwherethedecisionofwheretomake(China,theUnitedStates,Europe,Mexico,SouthAmerica,orsomecombination)isnotasclear-cutasitusedtobe.Forexample,somecompanieswehaveworkedwithhavebeenhighonmovingproductiontoMexicotosaveonperunitcosts,onlytohaveusshowthemthattheirsecond-largestmarketintwoyearswillbeChinaandtheywillneedtoshipgoodsback,orthattheirrawmaterialsandcomponentsupplychainsarestillinChinaandthosewillneedtobeshippedtoMexico.

DistributeNoprocessinyourChinasupplychainismoreimportantthanthephysicalmovementofproductsfromtheirpointoforigintopointofconsumption.Atthesametime,nocountrywiththislargeofaconsumermarketfacessuchsubstantialtransportationissues.China'sdistributioninfrastructureisstillrelativelyundeveloped,andmodern,Westernbestpracticesandfacilitiesarejustnowbecomingprominent.Leadingcompanies,likeZegna,haveshiftedfocustodemand-drivensupplychainsthatdelivertherightproductsontime,intherightquantities,attherightprice.Determiningandimplementingtheoptimalinternationalcommercialterms(incoterms),complyingwithglobaltradepoliciesandregulations,assessingandmanagingrisks,andanalyzingcost/servicetrade-offsforeachtransportmodecanmeanthedifferencebetweensuccessandfailure.Eventhebest-plannedtransportationstrategymustbemanagedcloselytoensurethatwhatissupposedtohappenactuallyhappens.Performancemonitoring,fromreceiptofapurchaseorderthroughtoshipmentdelivery,requiresend-to-endvisibility.TherapidgrowthofChina'sretailandconsumer-goodsmarketspresentscompanieswithahostofsupply-chainchallenges,especiallythosecompaniesseekingtoevolveintomanagersoftheirowndistributionnetworks,capableoffuelingorganicgrowthinAsia.Itiscriticaltoimplementdistributioncentersthataremoresophisticated,flexible,designedforgrowth,andcostconscious.Thereisnootherwaytomeetever-changingcustomerdemands.

SellAsupplychain'sprimarypurposeistomeet(andevenexpand)customerdemandforacompany'sproductsinacost-effectivemanner.ThisisjustastrueinChinaasanywhereelse,asconsumersincreasinglyseekqualityproductsatcompetitiveprices.Post-salesserviceforcertainproductsisanobviousinclusioninyourChinasupplychains,butonethatmanycompaniesleaveoutandthenhavetocatchupon,afterdamagetothebrandduetopoorservicehasalreadyhappened.Effectivecustomerservicealsoinvolvesproductpositioning,fulfillment,andevenin-storeactivitiesforretail.SuperconsumersinChinaexpectmoreandwillnotbesatisfiedwithoutservicelevelsthatfocusontheirneeds.Designingdemand-drivensupplychainswithinChinaisjustasimportantasintheWest;thedifferenceisinknowingthecustomersandtheirpreferences—alongwithhavingacustomerprogramthatdesignatesordering,buying,andreceivingproductserviceaspointsofsatisfaction.

Aligning Strategy, Structure, andImplementationPlanningandexecutingallthesupply-chainmegaprocesses(plan—buy—make—store—distribute—sell)meansinvolvingsuppliersallthewaythroughtotheendcustomers.Alignmentbringstogethersupply-chainstrategies,processes,people,andtechnologies,aswellasfacilitydesignsandmaterialhandlingintegrations.Let'slookateachpart—strategy,structure,andimplementation—anditsfunctionwithinamodernChineseconsumerproductsupplychain.1. StrategyBusinessstrategydefinescurrentandfutureproductsthatthecompanysells,theChinamarketsinwhichtheysell,andthevalueproposition,whypeoplebuyfromthem.Operationsstrategydefinestheoperationalcapabilitiesandoperatingmodelthatthecompanyneeds.Intoday'scomplexChinafewinitiativesareimplementedeffectivelyormeetexpectations,sincetheyarenotstructuredtoaddresstheentiretyofthebusinessobjectives.CompaniesinChinamustensuretheiroperations'strategyiswelldefined,isinperfectalignmentwiththebusinessstrategy,andhasgainedconsensusonthepathforwardaswellastheprioritiestobeachieved.

2. StructureThesearetheend-to-endsupplychainprocessesandcapabilitiesrequiredtoaccomplishgoalsandobjectivesdefinedbytheoperationsstrategy.Operationalcapabilitiesdependontherightpolicies,aswellasthewaysthattheoperatingmodelleveragespeople,processes,andtechnology.Today,itisnotalwaysaboutoptimizingcostsinthesupplychain,butalsotohavethepolicies,processes,andinfrastructurethatmeetthecostobjectives(totalcosttoserve)andsupporttheservicegoalsthatwilldrivesales.Thesepolicies,processes,and

infrastructurecanbedramaticallydifferentinChinaandwerecommendacompleterethink,ratherthantryingtoforceyourcurrentmodelintoChina.

3. ImplementationThisisdefinedashowwellallsupply-chaincomponentsfunctiontoachieveacceptancewithintheday-to-dayoperationsofthecompanyandhowwelltheymeetperformancetargets.EffectiveprogramandprojectmanagementarecriticalsuccessfactorsinChina,justastheyarearoundtheworld.Experiencemanagingandcoordinatingmanyinternalandexternalorganizations,addressingtheorganizationalchangerequired,andachievingprojectobjectivesontimeandunderbudgetarecapabilitiesthatdefineasuccessfulsupply-chainimplementationteam.Overall,alignmentofoperationswithstrategiesenhancesbusinessperformanceandbridgesthegapbetweenplanningandexecution.

Chapter 17SegmentationItisnotourdifferencesthatdivideus.Itisourinabilitytorecognize,accept,andcelebratethosedifferences.—AudreLorde

AfterdefiningtheChinesesuperconsumer—andcomingtounderstandthefactthatthereisbothaChinamarketandaChinaGlobalDemographicMarket—itisimportantthatwefurtherdefineChineseconsumersbywayofsegmentation.Howcanyoupossiblyknowwhichofthemorethan1billionconsumersarepotentiallyyours?

Surveying ChinaWhenitcomestostudyingandanalyzingthedemographictapestrythatistheChinasuperconsumer,theglobalconsultingfirmMcKinsey&Companysetsthestandard.IthasbeenconductingannualconsumersurveysinChinasince2005,withmorethan60,000peopleinover60Chinesecitiesinterviewedsofar.SurveyinginChinaisnotaneasytask,duetoitsvastgeography,butMcKinseyhasgainedtremendousinsightsonChineseconsumers'incomegrowth,shiftingspendingpatterns,andrisingexpectations,andtheyaredifferentfromtheirAmericancounterparts.Thesesurveysprovideabetterunderstandingofthedifferentconsumersegmentsandhowthey'vegrown.GordonOrrhasbeenthechairmanofAsiaforMcKinseysince1996andheisresponsibleforMcKinsey'sclientservicesintheregion.OrropenedMcKinsey'sofficeinBeijingandledMcKinsey'sGreaterChinapracticeformanyyears.Inaddition,hehasledMcKinsey'sstrategyandtechnologypracticesinAsia.OrrhasservedonMcKinsey'sglobalboardofdirectorssince2003andhasbeenwithMcKinseysince1986.HeworkswithleadingAsiancompanies,mainlyinNorthAsia,onlargetransformationalprogramsthatcombineperspectivesfromstrategy,operations,leadership,andtechnology.Currently,heleadsMcKinsey'sresearchthatfocusesontheglobalizationofAsianenterprises,andhesitsontheboardoftheMcKinseyTechnologyInstitute,thefirm'sthinktankonlong-termtechnologytrends.HespoketousatlengthaboutChina'ssuperconsumersandsegmentation.“ThenatureofChineseconsumersischangingveryrapidly,andtheoutdatedconceptoflumpingallChineseconsumersintoonebucketthatislookingforlow-costeverythingisdyingveryfast,”Orrexplains.“AsignificantsegmentofChineseconsumersarevaluedriven.However,thenewmainstreamChineseconsumers—thosewhohaveincomelevelsfrom$15,000to$30,000peryear—havebecomethesweetspotofChineseconsumptionandtheydo

thingsdifferently.Tostart,theyshoplessfrequentlybutspendlargeramounts.Theyaremoresophisticatedandtheyarewillingtotradeuptogetwhattheywant.TheyarealsoincrediblyshapedbywhattheyreadontheInternet.And,increasingly,theybuyontheInternetaswell.”Orradds:“ThisgenerationofChineseconsumersisgrowingupwiththeInternetandcloseto20percentmaketheirpurchasesontheirmobilephones.Whentheyseetheproductsinretailstorestheywanttoseeiftheycanbuythemcheaperonline.TheyarelookingforinformationandpricingcomparisonsontheInternet.Intheluxurysector,Chineseconsumersalreadyaccountfor27percentofworldwidepurchases.Itwillgrowto34percentby2015.”AccordingtoOrr,McKinsey'sinsightprovidesawindowintowhatChineseconsumptionwilllooklikefiveyearsfromnow.SophisticationistakingholdwithremarkablespeedamongmoreseasonedChineseluxuryconsumers,thosewhohavebeenbuyingluxuryforsometime.AswenotedinChapter16,theseChineseconsumersincreasinglytendtoshunflashyproductsinfavorofproductswithunderstatedstyles.TodistinguishthemselvesfromtraditionalnewChinesebuyers,theyliketodiscoversmallerandnichebrands,ever-moreluxuriousitems,orrareone-of-a-kindofferings.Atthesametime,thereiscontinuedgrowthinthenumberofconsumerswhohaveonlyrecentlyreachedincomelevelsatwhichdesignerlabelsareaffordable.Thesenewentrantstotheluxurymarkettendtopurchaseproductsthatclearlydisplaytheirnewfoundstatus,oftenfrombrandsthatarewidelyrecognizable.Withbothgroupsgrowingrapidly,themarketisdiversifyingandluxury-goodsmakersfacemorecomplicatedchoicesabouttailoringtheirproductstothevarioussegmentsofChineseconsumers.ChangesinChineseconsumers'economicprofileswillcontinuetobethemostimportanttrendshapingtheconsumerlandscape.The

Chinesearecertainlygettingricherfaster.Per-capitadisposableincomeofurbanconsumerswillreachapproximately$8,000;itwas$4,000in2010.ThatnumberisclosetothecurrentstandardoflivinginSouthKorea,butstillfarfromthatintheUnitedStates(approximately$35,000)andJapan(approximately$26,000).Orr'steamatMcKinseyhasalsofoundthatthegreatmajorityofChinesepopulation,atpresent,consistsofvalueconsumers(thoselivinginhouseholdswithannualdisposableincomebetween$6,000and$16,000,whichisjustaboutenoughtocovertheirbasicneeds).Mainstreamconsumers(relativelywealthyhouseholdswithannualdisposableincomebetween$16,000and$34,000)formaverysmallgroupbycomparison(lessthan14millionsuchhouseholds,representingonly6percentoftheurbanpopulation).Asmallergroupofaffluentconsumers,whosehouseholdincomeexceeds$34,000,compriseonly2percentoftheurbanpopulation,or4.26millionhouseholds;still,thatisalmost15millionpeople.Untilnow,thesedivergenceshavepresentedmultinationalcompaniesoperatinginChinaachoice:Eithertargetmainstreamandaffluentconsumersexclusively,orextendtheirbrandstoservevalueconsumers.Thosethattookthefirstcourseweremoreorlessabletomaintainthebusinessmodeltheyappliedinotherpartsoftheworldwithoutneedingtoreengineertheirproducts.Butinsodoing,theywerelimitedtoatargetmarketof18millionhouseholds.Companiesthatchosetoservethevaluecategoryhavehadamuchbiggermarketinwhichtoplay(184millionhouseholds),buttheirproductshavehadtobecheaperandtheyhavehadtoadapttheirbusinessmodels.Asaresult,profitabilityhasbeenlower.“Thissituationischanging,”Orrsays.“Becausethewealthofsomanyconsumersisrisingsorapidly,manyvalueconsumerswillhavejoinedthemainstreamby2020.Mainstreamconsumerswillthenaccountfor51percentoftheurbanpopulation.Althoughtheir

absolutelevelofwealthwillstillbequitelowcomparedwiththatofconsumersindevelopedcountries,thisgroup—comprising167millionhouseholdsorcloseto400millionpeople—willbecomethestandardsettersforconsumptionwiththeabilitytoaffordfamilycarsandsmallluxuryitems.Americancompaniescanrespondbyintroducingbetter-qualityproductstoavastgroupofnewconsumers,differentiatingthemselvesfromcompetitorsandearninghigherprofits.”Headdsthat“valueconsumers,reducedto36percentofurbanhouseholdsin2020from82percentin2010,willstillrepresentanenormousmarketforcheaperproducts:116millionhouseholdsor307millionconsumers.Affluentconsumerswillremainaneliteminority,makinguponly6percentoftheChinesepopulationin2020.Butthat6percentwilltranslateintoabout21millionaffluenthouseholds,or60millionaffluentconsumers.”OrralsodiscouragesthecommonpracticeofgroupingChineseconsumersintotiersbasedontherelativeprosperityanddevelopmentofparticularcities.Instead,hesuggestsmappingChina'smarketintodifferentclusters.“TheChinaclustering,inmyopinion,iscounterintuitive,whenyoutrytomarkettoChineseconsumers,”Orrsays.“MostcompaniesgotoChinabysegmentingtheirproductsintotier-1ortier-2ortier-3cities.WebelievemanaginggrowthinChinausingclusterscanhelpbetterleverageeconomiesofscaleandprioritizeinitiativesmoreeffectively.”McKinseydividesChinainto22cityclusters,whichrepresent92percentofChina'surbanGDPin2015,cover611cities,andaccountfor86percentofthepopulation.Ifyoumarkettosixorsevenconnectedcities,itwouldbefarmoreeffectivethantomarkettodifferenttiersofcitiesinChina.“Therearemorethingsincommonamongthoseclustersthanvariouscitiesinthesametier,soitwouldbebotheasyandmoreeffectivetotargetthemaccordingly,”Orrsays.“Thebenefitsof

usingclustersaresignificantcostsavingsacrosscitieswithinthesameclusteraswellasthebrandhaloeffectthroughsharedmediaacrosscommonregionsandthroughexposurewherepeoplemayworkortravelbutdon'tlive.Besides,distributionandsales-forceefficiencywouldbeeasiertomanageinneighboringcitiesinthecluster.Lastbutnotleast,therewillbesuperiorsupply-chainefficienciesdrivenbygeographicproximity.”InsixofChina's22cityclusters—Shanghai,Nanjing,Changchun-Harbin,LiaoCentralSouth,andChongqing—20percentofthepopulationwillbeovertheageof65by2020.Butinfiveotherclusters—Guangzhou,Shenzhen,Nanning,Kunming,andFuzhou-Xiamen—themajoritywillbeunder34.Severalreasonsaccountforthis:Someclustershaveattractedlargenumbersofyoungmigrantslookingforwhatismainlylabor-intensivework;othersarepoorer,solifeexpectancyislower;andinsomeregions,theone-childpolicywasnotstrictlyenforced.Orrbelievesthatthegradualagingofthepopulationincertainclusters,likeShanghai,willbecomeanincreasinglycriticalcomponentinformulatinganeffectivemarketingstrategy.“TheseniormarketisnotmaturetodayinChina,”Orrsays.“MostpeopleinChinaovertheageof55experiencedtheharshconditionsoftheCulturalRevolutioninthelate1960sandearly1970s.Notsurprisingly,theydonotspendfrivolously.Amongresidentsoftier-onecities,55-to65-year-oldresidentsallocatehalfoftheirexpendituretofoodandlittletodiscretionarycategories.Only7percentoftheirspendinggoestowardapparel,forexample.Incomparison,thosewhoare10yearsyoungerspendonly38percentonfoodbut13percentonapparel.”Orraddsthat“consumersurveyshaverevealedthatalthoughtoday'solderconsumersbehaveverydifferentlyfromyoungerpeople,today's45-to54-year-olds—theoldergenerationcome2020—demonstratespendingpatternssimilartothoseof34-to45-year-olds(whoallocate34percentoftheirspendingtofoodand14

percenttoapparel).Thisimpliesthatcompanieswillhavetorethinktheirnotionofolderconsumers.”China'sagingdemographicmeansthat,asashareofthetotalpopulation,therewillbe5percentmorepeopleabovetheageof65in2020thantherearetoday.Thatisanadditional126.5millionChineseseniorcitizens,clearlyanimportantconsumersegment.Butwhatisequallyimportantisthewayinwhichthespendingpatternsofolderpeoplein2020willdifferfromthoseofolderpeoplenow.ThepronouncedvariationsshowninMcKinsey'ssurvey—wherebyolderpeopleweremoreinclinedtosaveandlesswillingtospendondiscretionaryitemssuchastravel,leisure,andniceclothes—arelikelytobemuchlessapparentin2020.WhileOrr'sobservationpointstoamorerobustspendingcultureastheChinasuperconsumerpopulationagesandbecomeswealthier,thewayheorshegoesaboutmakingpurchaseswillnotchangeverymuch.Pragmatism,includingtheemphasisonvalue,quality,andintenseproductresearch,isdeeplyingrainedintheChinesemind-setandisheretostay.

A Most Discerning ConsumerBeforedecidingwhattheymightbuy,mostChineseconsumersallocateabudget,evaluatethefeaturesandworthwhilebenefits,andthentheyhuntdownthebestbargains.Impulsepurchasesarenotcommon(28percentofpeopleadmittobuyingonimpulse,comparedwith49percentintheUnitedKingdom).TheseattitudesandbehaviorsareinfluencedbytraditionalConfucianvalues,andtheyaredeeplyrootedintheChinesemind-set.Wedonotseeaforthcomingshiftinattitudestowardsspending.Certainly,consumptionwillrisestronglyinlinewithrapidincomegrowth,andsavingsratesmaywellfall.Intheend,though,theChinesewillremainsmartshoppersbecausetheyarewillingtospendtimeresearchingpurchases.Further,withpricecomparisonseasiertomakeontheInternet,theymaybecomesmarterstill.Forexample,today,48percentofChineseconsumersseekvalueformoneyasoneoftheirtopfiveconsiderationswhenpurchasingamobilephone,comparedwith20percentin2009.NotonlywilltheChinesesuperconsumercontinuetoperformseriousduediligence,butheorshewillhavemoretoolswithwhichtowork—andthein-storepointofsalewilllikelyexperiencesomedecline.Inthepastdecade,theChinesehaveembracedmodernretailformats,treatingshoppingasaformofentertainmentfortheentirefamilyratherthanjustanecessity.Thenextdecadewillexposemanynewconsumerstotheexperience,especiallymigrantworkersandresidentsofsmallercities.Tripstomallswilllosetheirnovelty,partlybecauseotherleisureactivitieswillbeonoffer,owingtogovernmenteffortstoboosttheentertainmentindustryandprivateconsumption.Noveltyvalueinshoppingwilllieinsteadwithe-commerce.Fast-changinglifestylesindenselypopulatedcitiesarestrengtheningshoppers'demandsforconvenience.Increasingly,e-commercewillsatisfythatdemand.AccordingtoMcKinsey,by2020,14to15percentofretailsaleswilltakeplaceonlineand,incertaincategoriessuchasconsumer

electronics,thatratiocouldbeashighas30to40percent.Forgroceries,thecurrentfigureoflessthan1percentcouldmoveclosertothecurrentlevelofabout10percentintheUnitedStates.Rapiddevelopmentofshoppingapplicationsonmobiledevices,onlinepaymentsystems,andlogisticsinfrastructurewillfuelthegrowthofe-commercebyenhancingconvenienceandsecurity.TheChinesecouldbecomeamongthemostsophisticatedonlineshoppersintheworld.Aswehavehighlighted,ChinaandChineseconsumersarenotmonolithsthatsharethesameneeds,levelsofsophistication,spendinghabits,priorities,andresources.Sowhomexactlyarewetalkingabout?Agoodplacetostartisage.AsOrrnotes,Chinesesuperconsumersarestillyoung—insomecases,veryyoung—relativetoothermarkets.Forexample,theaverageluxuryconsumerinChinais39yearsoldasopposedto59yearsoldintheUnitedStates.WehaveseenluxurycompaniesenterChinaandfailbecausetheywereaddressingtheirtraditional49to69demographicwheninrealitytheirpotentialcustomerswere29to49yearsold.Theywerenotadvertisingintherightmedia,theyunderestimatedtheimportanceofsocialmedia,andtheydidnotunderstandtheimportanceofpeer-to-peerendorsement.Insomecaseswehaveseenthattheirentiremessagingstrategyandappealweregearedtowardagenerationthathadlittleinterestinthebrand.

Chapter 18MarketingHalfthemoneyIspendonadvertisingiswasted;thetroubleis,Idon'tknowwhichhalf.—JohnWanamaker

WhenthefirsttelevisionadsforautomobilesstartingappearingonChinaCentralTelevision(CCTV)inthe1980s,atypicaladwouldconsistofapictureofacar,superimposedonabluebackground,andsomewhitecopythatwouldtypicallyread:“WearenowsellingToyota(orVolkswagen).Ifyouareinterested,pleasecallthisphonenumber.”Untilthelate1980sandearly1990s,billboardsinChinesecitieswerealmostexclusivelythedomainofthePartyandincludedslogans,news,andinspiration.Printwastheexclusivedomainofstate-ownednewspapers,journals,andproto-magazineswithnophysicalorideologicalroomforadvertisingconsumerproducts.Radio,liketelevision,wasstateownedandalsoofflimitstoadvertisers.Todaythingscouldnotbemoredifferent.Advertising-supportedmediaofeverykindhaveexplodedandproliferatedineverycornerofChinaoverthepast15years.TherearethousandsofTVstations,tensofthousandsofradiostationsandprograms,thousandsofnewspapersandmagazines,brand-toutingbillboardsoneverycorner,and,morerecently,electronicdisplaysofeveryshapeandsizeeverywhere,fromtaxistoelevatorstothesidesofbuildings.ThisistosaynothingoftheInternetanditstensofmillionsofpointsofcontactwithconsumers.AccordingtoScottMarkman,CEOofTheMonogramGroup,aChicago/Shanghaiadvertisingandmarketingfirmthatfor10yearshasbeenactivelyandsuccessfullyhelpingChineseandAmericancompaniessellonbothsidesoftheocean,thedevelopmentofabroadanddeepmedialandscapeinChinaoverthepast20years

hasbeeninstrumentalincreatingandinformingthetastesofChina'sconsumers.Thecircular-feedbackloop,whereconsumptionfuelsmediaandadvertising,andmediaandadvertisingfeedconsumption,hasbeenoneofmodernChina'shallmarks.CompanieshopingtoconnectwithandengageChineseconsumersmustclearlyunderstandthechannelsformarketinginChinaandalsohowtousethosechannelstocreateemotionalandpersonalconnections.Chineseconsumersareverybrand-awarebutnotverybrand-loyal,justastheyareveryprice-awarebutalso,inmanycases,notprice-sensitive.HereweprovideanoverviewofmarketingtoChineseconsumers,thechannelsthatareavailable,andsomeexamplesofcompaniesandbrandsthathavesucceeded(orfailed)inmarketingtoChineseconsumersonalocal,national,andglobalbasis.

Consumer Impulses and DesiresInmanywaysChina'ssuperconsumershaveadoptedthegotta-have-itmind-setasmoreconsumers(especiallythoseunder50)comeintodiscretionaryincomeandevengenerationalwealth.ManyChinesecitizenshavebeenaskingthemselves:“WhyshouldIfollowtheculturaltraditionofsacrificeandmodestmeans,whenIcanaffordaconsumerandbrandlifestylethatIseemanyofmyfriendspursuingaswell?”“HowcanIacquireinstantstatus?”“HowdoIletothersknowwhoIam?”Markmancontinues,“Thisfirstplayedoutamongwealthyentrepreneursandtheirfamiliesinpurchasingluxurygoods,withaloveofbadgebrandsduringtheconsumerboomyearsofthe2000s.WeseethisinthedesiretodriveaPorsche,wearaPradapurse,ororderaRemyMartinXOcognacinabar.”Markmanadds:“ThissamephenomenonistricklingdowntoChinesedomesticbrandsaswellnow.AsChina'scollectiveconfidenceandself-imagerisesandasmoreChinesebrandsacquireworldwidedistribution,sowilltheperceptionthatstatusandprestigecanbeacquiredwithproductsfromChinesebrands.”

Lenovo's Approach: The Best of BothWorldsIfmoreChinesedogravitatetowardhome-grownbrands,itwillundoubtedlyputpressureoninternationalbrandstodevelopdesigns,features,andpricingstrategiestailoredtothetastesofChineseconsumerstoretaintheirmarketshare,aswellasincreasetheirmarketingspendacrossallmediainChina,butespeciallydigital.It'salreadyhappeninginthepersonalcomputermarket,whereLenovo—aChinesecompany—hasleverageditssuccessathometobecomeadominantbrandontheglobalstage.Thishas,inturn,createdevenmoreofahaloathome,especiallywithupmarketconsumers.BecauseLenovoisaChinesecompany,itsintuitiveandhighlynuancedunderstandingoftheChinesemind-setisnotsurprising.Butit'sstillinstructive.Thegiantpersonalcomputer,tablet,andphonemakerisaprimeexampleofsuccessfullyblendingthebestChineseandWesternmarketingpracticesinordertosucceedwithChineseconsumers—byshapingitsproducts,messaging,omnichannelmarketingapproach,andCRMtoidentify,inspire,andengagecustomersacrosstheincomespectrum.Bydoingthisacrossmarketclustersandgeography,andbyofferingawiderangeofproductsandmultiplepricepoints,Lenovohasleveragedthesuper-consumerboomtobecomeaglobalplayerinconsumertechnology.AnotherkeytotheirsuccesshasbeentheirearlyapproachtotheChinaGlobalDemographicandtheirabilitytoreachChineseconsumersintheUnitedStates,Europe,andelsewhereinadditiontothe“ChinaMarket.”WithheadquartersinBeijingandintheheartoftheResearchTriangleinMorrisville,NorthCarolina—andwitharesearchcenterinSingapore—Lenovohasrisentothetopofthepersonalcomputerheapinarelativelyshortperiodoftime.

LiuChuanzhifoundedLenovoinBeijingin1984—itwasoriginallycalledLegend—andwasincorporatedinHongKongin1988.Afteraninitialattempttoimporttelevisionsfailed,thecompanystartedtoconductquality-controlchecksforPCbuyers.Thebreakthrough,whichwouldsetthecompanyonthepathtobecomingacomputermanufacturer,wasitsdevelopmentofacircuitboardforIBM-compatiblePCssotheycouldprocessChinesecharacters.ThecompanybecamepubliclylistedinHongKongin1994,raising$30millionincapital.Asecondlistingof50millionshares,in2000,raisedanadditional$200million.Lenovoearnedareputationforproducinghigh-qualitycomputerproducts,forbeingwellmanaged,andforcomprehensive,transparentreportingandcompliance.By2004,LenovowasthetopproducerofcomputersinChina.In2005,LenovosurprisedthebusinessandtechnologyworldswhenitpurchasedIBM'spersonalcomputerdivisionfor$1.25billionand$500millioninassumeddebt.Investors,financialpros,andconsumersalikewereleftscratchingtheirheads.“WhoandwhatisaLenovo?”theyasked.“HowdidaChinesecompanysucceedinbuyingarguablyoneofthemostimportantandvenerablenamesincomputing?”“WhatdoesthisdealtellusabouttheriseofChina?”Almostovernight,theIBMdealgaveLenovoglobalcredibility,accesstonumerousforeignmarkets,andownershipofIBM'sflagshipproduct,theThinkPad.(NottomentionIBM'smarketing,sales,technology,andbestpractices.)LiuChuanzhinotednotlongafterthedealthathiscompanybenefitedinthreewaysfromtheIBMacquisition.“WegottheThinkPadbrand,IBM'smoreadvancedPCmanufacturingtechnology,andthecompany'sinternationalresources,suchasitsglobalsaleschannelsandoperationteams.Thesethreeelementshaveshoredupoursalesrevenueinthepastseveralyears.”WespokeatlengthwithBrionTingler,Lenovo'sdirectorofglobal

media,abouttheimpactofChina'ssuperconsumersonthecompany'ssuccess.“OurapproachinChinaistoappealtotwomarkets—matureandemerging,withmanylevelsinbothcamps—verydifferently,”Tinglersays.“Forinstance,we'rebrandingforthematuretechnologyconsumermarketasaninternationalbrand.ThelogoisinEnglish,thetaglineisinEnglish,orwithsometranslation.Inthematuremarkets,wearecompetingagainstAppleandSamsungandtrendtowardhigherpricepoints.Wearepositionedasaglobalbrand.“Inemergingrural,smallcity,andvillagemarkets,wefocusheavilyondistributionandchanneldevelopment.Ourlogos,ads,andcollateralarealmostexclusivelyinChineseandwearepositionedasaChinesecompany.Thebrandingandpitcharemorefocusedonproductbenefits,value,andreliability,whereasthepitchinthematuremarketsismorefocusedontheemotional,thebrandconnection,andcustomerrelationships.”Tinglernotes,however,thatsince2009thebrandingandmessaginghavebecomemoreunified—butsignificantdifferencesinapproachremainbetweendevelopedanddevelopingChina.LenovohasfollowedauniquepathamongChineseconsumerproductbrandsandcompanies.Itstartedasanearlyexperimentunderthegovernment'snewattitudeofexperimentationwithandtoleranceforprivatebusinessownership,raisedcapitalthroughapubliclisting,andthenbecameadominantdomesticbrand.WiththeIBMPCpurchaseitbuiltaglobalbrandandreturnedtoChinaasahometownhero.Havingaccomplishedallofthis,thecompanyresetitsthinkingonoperationsandsalesinChinaaswellasglobally.Lenovoincrementallyextendeditsproductofferings,segmenteditsmarketingandservices,andsuccessfullyintegratedbestpracticesfromtheUnitedStates,China,andSingaporesothatitcouldbecomeadominantplayeracrosscategoriesinChinaandaglobal

forcetobereckonedwith.Anexampleofthebrandunificationandtheshiftinpositioningthecompanyisthe2014launchofitsnewtablet,theYoga2.Thehigh-endtabletisacutting-edgepieceoftechnologywithabreakthrough18-hourbatterylife,tabletandlaptopfeatures,andasuper-resolutionscreen.ThecompanyhiredAshtonKutcher,theAmericanTVandmoviestar,asnotonlyacelebrityendorserbutasaproductengineer.Kutcherisanaccomplishedinvestor,social-mediapioneer,andtechnologist.TheproductlaunchedwithaglitzyeventinLosAngeleswhereKutchersharedthestagewiththeLenovoCEO.Whentheeventended,theyimmediatelyflewtoBeijingandlaunchedtheproductwithanotherhigh-profileevent.Cutting-edgetechnology,Western-stylehypeandpomp,massivemediacoverage,andcelebrityinvolvementallhelpedfurtherestablishLenovoasaglobalbrandinthemindsofChineseconsumers.AlargepartofthesuccessthatLenovohashadinsellinghigher-endtechnologyproductsinChinaisthefactthatconsumers,bywayoftheaforementionedapproachtomarketing,feelgoodaboutusingtheirLenovotabletsorphonesatthesametableastheirfriendsusingiPadsandSamsungG4s—theyfeelandbelievethatLenovoproductshavethesamecachetandappealastheotherleadingproductsandbrands.Tingleraddsthat,“whilesuccesshascomethroughgreatproducts,marketing,value,andreliability,Lenovo'sgrowthisalsobecausemature-marketChineseconsumersarebecomingabitmorelikeWesternconsumers.”“Theyaresophisticated,discerning,brandconscious,andyoung,”Tinglersays.“Wearemarketingheavilyto18-to24-year-oldsinChinaandabroadbecausetheyhavethespendingpower,influence,andfuturepotentialtobelifelongLenovoloyalists.”InotherwordsLenovoischangingtheperceptionofwhata

ChinesetechnologybrandisandChina'smatureconsumermarketisdictatingwhatLenovoneedstobe.ButLenovo'ssuccesswiththematuremarketisonlyhalfthestory.Itsunderstandingoftheculture,needs,mindsets,demographics,purchasingpower,andtastesofemergingChinaconsumers—ruralbuyersinparticular—isthefoundationfortheotherhalfofthestory.“DistributionandchanneldominancearekeystosuccessinthedevelopingandruralareasofChina.Butequallyimportantisunderstandingtheneeds,pricesensitivity,andserviceneeds,”Tinglernotes.“Wealreadyhave20,000outletsinChinaandourstatedgoalistohaveaLenovotouchpointwithin50milesofeveryvillageandtowninChina.Manyofouremerging-marketcustomersaremakingtheirfirstPC,tablet,orphonepurchase.Forthemguidance,support,andserviceareparamount.”OneoftheygreatmarketingcoupsoftheSuperConsumererawasLenovo's“RedComputer.”Theyproducedalarge,almostthrowbackPCspecificallyfortheruralmarketandmorespecificallyforthe“firstcomputer/weddingmarket.”Thecompany'scommitmenttoresearch,tolocalinsightandtoALLofChina'sconsumerspaidoff.Lenovofoundthatfirst-timecomputerusersinruralareaslikedtoshowoftheircomputerasapieceoffurniture,notasuper-thinnotebookhiddenunderapieceofpaperonthedesk.Theyalsorealizedtherewasgreatfaceforboththegiversandreceiversofa“wedding”PC.TheresultingproductwasabigPC,inabigredandgoldbox(weddingcolors)thatwasmarketedtobrides,grooms,friends,andfamilywhowouldnotonlygiveoneasagiftbutwhowouldwanttheirownaswell.Itwasabestseller.Marketing,branding,service,CRM,andopen-mindednessresultedinLenovowinningtheopeningbattleinthefightfortheruralcomputeruser.“Ournetworkofstoresandservicecenters,aswellascustomersupport,arecompetitiveadvantagesforLenovo.”Tingler'sclaimsringtrue.Ourresearchinthecategoryshowsthat

theseconsumerswillnotbuyDellorHewlett-Packardcomputersbecausethereisnolocalretailoutlet—orverysmalloneswheretheydoexist—littletonomaintenance,parts,orrepairservices;andthereisverylittleimpactthroughmarketing.LenovounderstoodbeforemostcompaniesthattheChinesesuperconsumerlivesinvillagesaswellasShanghaihigh-rises.Heorsheonlyneededtobelistenedto,understood,communicatedwith,andservicedinhisorherownway.Whatofthefuture?LenovoknowsthatthenumberofPCssoldinthematureChinamarketswilltailoffinthecomingyears,butitspushtodominanceintablets,phones,andotherproductsmorethanmakesupforthatloss.Conversely,newcomputerbuyerswillfuelexponentialgrowthinPCsandlaptopsintheemergingChinesemarkets.ChineseconsumersarefuelingthegrowthofLenovo.ThebrandisubiquitousinChinaandisgainingvisibilityaroundtheworld.ThepoweroftheChinesesuperconsumerisshapingLenovo,andLenovo'sapproachtomarketingisshapingChina'sconsumersandtheconsumertechnologymarketinChina.

From East to West to Wei EastJustasLenovoparlayeditseastern/Westerncachetinordertoappealtomature-marketChineseconsumers,awomanfromWuhan,thesteamyandspicyprovincialcapitalofHubeiprovinceincentralChina,didthesamethingonherwaytobuildingadominantbrandinskincare.Ifyoudon'tknowthenameWeiBrianorherbrand,WeiEast,thatmeansyouhaven'twatchedmuchofthesecond-largesthomeshoppingchannelinAmerica,HomeShoppingNetwork(HSN).WeiisacelebrityhostandsellerofskincareproductsforthelargesttraditionalChinesemedicine–basedskincarelineintheUnitedStates.MillionsofwomenhavereliedonWeiEast'sknowledgeofthepowerofChineseherbstohelpmaintaintheirskin'svitalityandyouthfulappearancesince2005,andWei'srecordsaleofmorethan1milliondollars'worthofproductswithin20minutesremainsunbroken.Sincesheturnednineyearsold,WeihasbeenfascinatedwithChineseherbsandtheirhealingpower.Athermother'sside,shelookedonandlearned—raptwithinterest—observingnature'sabilitytocurecommonhumanailments.Withnaturaltreatmentsandbeautysecretsthathavebeenpasseddownfrommothertodaughterformorethan4,000years,peopleeverywherehavecometorelyonthemedicinalvaluesofnaturaleasternremedies.WeicontinuedtostudyherbalmedicineintoadulthoodunderthetutelageoftwoofChina'smostrenownedandrespecteddoctors.ThenshewenttoAmericatopursueherdegreeinengineering,apopularsubjectamongChinesestudents,butquicklyfoundthatherinterestdidn'treallylieinengineering,andshedecidedtopursuesomethingsheloved—beauty—andcombineditwithherknowledgeofChineseandWesternscience.Collaboratingwithanumberoftopchemists,shecreatedtheWeiEastfamilyofproducts.

LikesomeotherChinese-Americanimmigrants,Weihasastrongaccent.Shealsohadnomediatraining,andmanyHSNexecutiveswereskepticalthatshewouldbeabletogoonTVandconvinceAmericanstopurchaseskincareproductswithfunny-soundingChineseherbalingredientssuchasredpeonyroot,Tibetanchrysanthemum,Reishimushroom,andpomegranatepeel.Butherpassionandauthenticitycamethroughonthescreen.“LikemostChinesepeople,IbelieveinfaithandIremembertellingmyChinesefriendswhenIwasinChinathatIsawmyselfsellingonTVinAmerica,”Weirecalls.“Myfriendswouldquestionme,‘WhywouldtheAmericansbelieveyou?’andIsimplysaid‘Idon'tknow.’”Weitoldusthatwhenshewasyoung,herfathersharedwithherastorythatstuckinhermind.“HetoldmetherewasaveryfamousChineseGeneralnamedChenYiandhelovedwritingpoems,”sherecalls.“Sowhenhewasinfrontofhispoetfriends,hewouldalwaystellthem‘IamaGeneral.’However,whenhewaswithhismilitaryfriends,hewouldalwaystellthem‘Iamapoet.’”WhenWeifirststartedsellingbeautyproductsinAmerica,ChinahadnotyetreachedeconomicprominenceandmostAmericansstillthoughtbeautyandskincareproductscameexclusivelyfromParisorelsewhereinEurope,notfromChina.ButWeiknewChineseherbsandheruniquevaluepropositionresonatedwithanAmericanaudience.Inashorttime,WeiEastbecameoneofthebest-sellingskincareproductsontheHSNnetwork.ItwasWei'sAmericanchemistwhoinsistedthatshegoonTVinsteadofanAmericanspokesperson.Weirecallshersaying,“Youaretherealdeal,youknoweverythingabouttheproducts,andyoushouldgoonandsell.”Wei'saccent—initiallythoughttobealiability—gavehercredibilityandbroughttheordersrushingin.Sheaskedheraudience,“What

makesyoubuymyproducts?IsitwhatIsaidabouttheproducts?”Theaudiencetoldherthatitwasnottheproductknowledge,butthewayshecommunicatedit.Shespokefromherheartandwithauthenticity,andeventhoughtheviewersmightnothavealwaysunderstoodthewordsshetriedtoarticulate,theyunderstoodwhatshemeant.WeiEast'ssalesvolumeeventuallyreached$30millionperyear.Mostpeoplewouldbesatisfiedwiththat.ButWeisawopportunitiestointroduceChineseherbsbeyondHSN,soshecreatedanotherluxurylineofproductscalledWeiBeautyandstartedtosellthoseinspaproductchainstores,suchasSpaceNK,HongKong'sJoyceBeauty,andSephorainNorthAmerica.However,Weineverforgotwhatherfathertoldheryearsago:“YoumustdosomethingforChinaandhelpChinesewomenbecomemorebeautiful.”Chinahadfastbecometheworld'sbiggestmarketfortopskincareandcosmeticbrands,suchasLancôme,L'Oréal,andEstéeLauder,andWeisensedthetimingwasperfectforhertogoback.TheChinesebusinesswomanhasbecomeapowerhousedemographicinherownright.InFortune'slatestlistofthe50MostPowerfulWomen,DongMingzhu,chairandpresidentofGREEElectricAppliances,isranked42nd.Shejoinedthecompanyasasalespersonin1990andhelpedgrowtheair-conditioningmakerintoa$16billionworldwideapplianceleader.At49,youhaveZhangXin,CEOofSohoChina,whoin2013becameco-ownerofManhattan'sGMbuilding,oncetheworld'smostexpensivecommercialbuilding.Duringthenext10years,successfulChinesewomenarelikelytospendalotmoremoneyonbeautyandskincareproducts.AccordingtoresearchconductedbytheBostonConsultingGroup,Chinesewomen'searningswillgrowfrom$1.3trillionin2010to$4trillionby2020,upfrom$680millionin2005and$350millionin2000.Thatismorethanatenfoldincreasein20years.

Moreover,sevenofthe13richestwomenintheworldareChinese,andfourofthewealthiestareyoungerthan50.SinceWeiwasapioneerinTVsales,shewasabletonegotiateadealtopitchherproductsonHunanTV,currentlyChina'ssecond-most-watchedchannel.Andinlessthanayear,Weihasgeneratedthetotalrevenuevolumethatittookher10yearstoamassinAmerica.RememberwhatwesaidaboutChinayearsbeinglikedogyears?ShestilllivesinPhiladelphiaandgoestoChinathreetimesayeartoappearontelevision.Therestofthetime,shesellsthroughasurrogate.BorninChina,WeiwenttoAmericatorealizeherAmericanDream.NowshegoesbacktoChinatorealizeherChineseDream.LikeLenovo,WeiwentfromEasttoWest,andnowWeiEastagain.

Baby BoomPaulZhaoisoneofthemosthardworking,smartest,andluckiestbusinessmeninChinatoday.Hehasworkedhardateveryjobhehaseverhad,andwassmartenoughtoturnhardwork,opportunity,andexperienceintooneofChina'sfastestgrowingconsumerbrands,andheisluckybecausetheChinesegovernmentrecentlymadeamajordecisiononsocialpolicythatcoulddoubleortriplehisbusinessinthenextfewyears.ZhaoisthefounderandCEOofO.C.T.Mami,thelargestretailerandbrandofmaternitywearinChina.Thecompanyhasmorethan900retailoutletsand1,600pointsofsaleacrossChinaandhasbecomethemostpopularbrandandretailerinitscategory.ThissuccesswasbynomeansasurethingwhenZhaoandhiswife,Wenhong,foundedthecompanyin1997.Infactthematernity-wearcategoryinChinawasvirtuallynonexistentthen.Zhaocreatedthecategoryandthenbrilliantlybuiltacompanythatwoulddominateit.PaulZhaois45yearsoldandgraduatedfromNanjingUniversityin1991.Hestartedworkatastate-ownedcompany,theEastChinaDesignandEnergyCompanyfortheEnvironment.LikesomanyofChina'ssuccessfulbusinesspeople,hestudiedandworkedasanengineer.HeconcentratedonhowtoimproveChina'senvironmentbydesigningearth-friendlywatermachinery.After18monthsherealizedhispassionandfuturewerenotinenvironmentalengineering.Hesoughtoutanewopportunityandinshortorderfoundone.HewashiredbyaTaiwanesespecialtyapparelmakertohelpthemwiththeiroperationsinMainlandChina.In1993,mostoftheforeign-runcompaniesinChinawereeitherinvestedbyorownedbycompaniesfromGreaterChina,includingTaiwanandHongKong.ManyChineseentrepreneursgottheirstartswithsuchcompaniesandwereabletotradetheirknowledgeofthemainland

forexperienceinhowtostartandrunafactory.Zhaowastypicalinthisway.Thecompanyspecializedinuniformsandapparelforoverseasinstitutionalbuyers,suchasfiredepartments,policeforces,military,hospitals,andothers.Alsotypicalofthisperiodwasthesecondwaveofforeignbuyers,beyondthebigmultinationals,whocametoChinainever-increasingnumberstosourceandmaketheirgoods,especiallyintoys,homewares,andapparel.Zhaogainedimmenseexperienceinhowtooperateandmanageanapparelfactory.Thejobalsoaffordedhimtheopportunitytotraveloverseas,toEurope,theMiddleEast,andelsewhere.ThiswasatimewhenitwasstillverydifficultforanyonetotravelforbusinessoutsideofChina.Withrareexceptions,theonlycitizensallowedtoleaveChinawereofficials,selectbusinesspeople,andstudents.ThisopportunitygaveZhaoanotheradvantage.Hewasabletoobserveandlearnfirsthandhowforeigncompaniesoperatedtheirbusinessesatalllevels,howtheydistributedandsoldtheirgoods,and,mostimportantly,howtheymarketedtheirgoods.TheforcesofglobalizationandtheaffirmationthatChina'sReformandOpeningmovementwaspermanentcreatedanopportunityforanambitiousandeducatedmantobuildsomethingfromthegroundup.Zhao'snextmovewastogetintoapartnershipwithacompanythatmadebrasforexport.Thiswashisentryintotheworldofwomen'swear.Afterlearninghowtomake,move,market,andsellapparel—andwiththedreamofstartinghisownbusiness—ZhaomovedtoHangzhou,thebeautifulcitynexttotheWestLakeonChina'seastcoast,aboutthreehoursdrivesouthofShanghaiinZhejiangProvince.Zhaosawthatcompetitionwasintenseinthewomen'sandmen's

apparelmarketsforexport.Healsosawthatitwaslargelyalow-price,low-value-add,low-marginbusinessandwantedtofindanunexploitedniche.HisexperienceinthebrabusinessledtohisideathattherewasafutureinmaternitywearinChina—abusinesshefeltheknewwellandthatwouldprovidehighmargins.Hediscoveredthat,in1996,therewasonlyoneTaiwanesecompanyinChinathatproducedmaternitywearforexport,andnocompanyofnotemakingitfordomesticconsumption.Zhaowasconvincedthatthiswashisidealniche.Hebeganafactorythatmadematernityclothesforexport,buthisrealgoalallalongwastocreateadomesticbrandforChina.In1997O.C.T.Mamiwasfounded.Thename,somewhatunwieldyinEnglish,wasderivedinatypicallyChineseway.InChinaapregnancyisconsideredtobetenmonths.Octoberisthetenthmonthoftheyear,thus,O.C.T.Mami.Thecompanyproducedhigh-qualityproductsmadeofexcellentmaterials,andimportantly,producedoriginaldesigns.Theyfoundalmostimmediatesuccesswithexports.Flushwithsuccess,cash,andtheartist'szealtocreate,Zhaoputhisplanforalocalbrandintomotion.Itwouldbeabrandthatwouldfeaturecolorful,modern,andfashionablematernitywearforChina,themostpopulousandbaby-producingnationonEarth.Chinesewomenwerebecomingevermorefashionconsciousby2000.Themiddleclasswasgrowingandawealthyclassofentrepreneurs,merchants,factoryowners,andbusinesspeopleofallstripesbecamewellestablished.ThesecondwaveofChineseconsumerswithdisposableincomewasbeingborn.BynomeansatthistimewasthereanythingresemblingalargeandsophisticatedconsumerclassinChina,nevermindasuperconsumer.ButtherewasenoughofaconsumerclasslookingforamoreWesternlookandlifestylethatopportunitieswerepresentingthemselvesforpeoplelikePaulZhaoandbusinesseslikeO.C.T.Mami.

Thebigproblem,though,wasthattherewasnomarketordesireformaternitywearinChinaatthetime.Undeterred,ZhaoopenedthefirstO.C.T.MamistoreinHangzhouin1997.HechoseHangzhoubecauseitwasacenterofproductionforfashion,becauseitwasahigh-octanecommercialcity,andbecauseitwasoneofChina'searliestcentersofconsumerism.Healsowantedtokeepproductionandretailincloseproximity,sothathecouldreacttofeedbackandchangesintastequicklyandmoveproductfromdesign,tofactoryfloor,tostoreshelfinweeksratherthanmonths.Thestorewasanalmostimmediatehit.Withinfivemonthsasecondlocationopenedanditalsosucceeded.ThecompanyconcentratedondesignsthatweremodeledonWesternonesbuttailoredtolocaltastes.TheyalsoensuredthatcutsandsizeswerespecifictothesizesandshapesofChinesewomenandperhapsmostimportantlyofall,theyaggressivelyandsmartlymarketedthebrand.ZhaoknewthatinChina,brandiseverything.Thebrandspoketotheaspirationofmiddle-classlivingandappreciationforthefinerthingsinlife.Thestoresweresmall,personal,andweresoakedintheO.C.T.Mami-brandmessage.Zhaorelatesastoryabouthowpatience,understandingtheculture,andindulgenceplayedapartinthefirststore'ssuccess.“Atfirstwomenwerebringingtheirtailorsinandhavingthemcopythedesignsondisplay.Thetailorswerechargingthewomenabout100RMBforcustomwear.Wesawthishappeningandallowedit.Thetailorscouldnotproducethegarmentscorrectly.Wewerecharging150RMBandthegarmentwasperfect.Slowlyweconvincedthemthatweweretheexpertsinmaternitywearandwecouldmakethemlookgreatatagreatprice.Thiswasahugestepforwardforus.”AnotherkeyinsightthatZhaoandhisteamhadwasthat,aswehavecoveredpreviously,Chinaisnotonemonolithicmarket;rather,itisaclusterofmarketsdifferentiatedbycustom,culture,climate,bodysize,andsoon.Headjustedhismarketingand

productmixtomatchthemarkets.Zhao'snextmovewastostartdistributingthebrandindepartmentstores.“InChinaeverycityhasdifferentdepartmentstoresanddistributionchannels,unlikethefewverybigretailersintheUnitedStates.Wehadtoworkveryhardtobuildrelationshipswithallofthemtogetourproductsplacedinthiskeysaleschannel,”saidZhao.EverywhereZhaowent,though,hewasaskedtoprovidehongbao,orunder-the-tablepaymentstogetthebrandinthestores.Zhaowantedtoplayitcleanandrefused.Thismadegrowthdifficult.Sofrom2004to2005hegothisMBAwithaconcentrationinmarketing,andin2006hemadebrandingandmarketingthekeydriversofcompanygrowth.HeengagedamajorTaiwaneseadvertisingagencyandstartedrunningcommercialsonCCTV.BythistimecashflowwasfalteringandsoZhaowastakingabigriskbyadvertisingonTV.ThisalsoledZhaotoseekoutinnovativewaystomarketandadvertisethebrand.O.C.T.Mamiwasanearlyadopterinutilizingsocialmediaanddigitaladvertising.Thecompanywasalsoanearlyentrantintothestillnascente-commercemarketin2007to2008.By2012thecompanywasnotonlyoneofthemostsophisticatedusersofdigitaladvertisingandcommerceinChina,butalsocouldbeconsideredoneofthemostsophisticatedintheworld.Thecompanyinstalledfull-body,digitalmagicmirrorsthatallowedmommies-to-betoseehoweverythingthestoresellswouldlookonthem.Themirrorsdigitallymapthecustomer'sbodyandthen,withthewaveofahand,shecanscrollthroughallthesizesandstyles.Thecompanyalsoputafeatureontheirwebsitethatallowsyoutouploadyourpictureandthenpickacelebritypicture.Afterclickingenter,theprogramcreatesanimageofwhatababyproducedbytheuserandthecelebritywouldlooklike.

Also,inanodtotheimportanceofeducatingconsumerstobuildmarketsandmarketshare,O.C.T.Mamistartedanonlineclassfornewmothersthatcouldbetakenontheirwebsite.Theyalsoemployedaseriesofcelebrityspokespeople,whichisperhapsevenmoreeffectiveandimportantinChinathaninothermarkets.ThecompanyshowedawillingnesstolearnfromandspendmoneyonaWesternscaleforanintegrated-marketingapproach.Thecombinationofunderstandingtheculture,language,mind-set,educationalneeds,andpurchasemotivators,combinedwiththesmartuseoftechnologyandWestern-stylemarketing,hasmadeO.C.T.Miamiacategorygiant.ThecompanyshowedsuchsophisticationandgrowththatSequoiaCapital,thevenerableandhugelysuccessfulCaliforniaventurecapitalfirm,investedinthecompanyin2011,furtherboostingitslong-termprospects.WhenweintroducedPaulZhao,wementionedhewasoneofthesmartest,mosthardworking,andluckiestbusinessmeninChina.Ithinkwehaveclearlydemonstratedhissmartsandhardwork,butlucky?IsthereanyotherbusinessownerinChinatodayyouwouldratherbethantheownerofthecountry'sleadingmaternitywearcompanywhen,inJanuary2014,theChinesegovernmentrescindeditsone-childpolicy?Forthefirsttimein30yearsChinesecouplescanhavetwoorthreebabies—atraditionalChinesefamilyunit.Yes,inChinaluckandgovernmentpolicychangefastandareintegraltosuccessasmuchasgoodresearch,smarts,andhardwork.

Brand Advertising in ChinaBrandadvertisinginChina—whetherintelevision,print,billboards,oranyothermassmedia—hasfundamentaldifferencesfromtheequivalentweseeintheWest.ScottMarkmanexplains,“Westernbrandsarebuiltonafoundationofstrategythatcreatesdifferentiationandadeepembedinthememoryoftheconsumer,whileatthesametimecommunicatingavaluepropositionwithbenefits.Positioningiskey,asareinnovationandoriginality,insellingtotargetedconsumersegmentsoversaturatedwithoptions.”Hecontinues:“Brandsleverageemotionalinsightsintothosespecifictargetsegments:‘Howwillthisproductmakemefeel?’‘DoesitaddressaneedorwantIcan'tgetelsewhere?’‘Doesitvalidatemyself-image?’Toaddressthesedesires,brandadvertisingusesimagesandwordsgroundedinideasthatspeaktothemindaswellastheheart.And,formanybrands,theymayhavesegmentsthatdon'tconvenientlyoverlap,sofiguringoutaunifiedbrandstrategycanbechallenging.”SuccessfulWesternbrandsunderstandthatoncetheywintheheartoftheconsumer,theconsumerwillrewardthebrandwithloyaltyandmaystaywithitforyears.It'sthereasonthattheconceptoflifetimecustomervaluedrivesmanyWesternmarketers'decisionmaking.WeaskedMarkmanhowthisdiffersinChinaandhesaid,“InChina,theartandscienceofmarketsegmentationtakesabackseattochasingagiganticoverallmarket.Thisisn'ttosaythatChinesebrandsdon'tunderstandtowhomtheyareselling,butratherthattheproductsandtheadsthatpromotethemaredevelopedwithamind-setof‘Ihaveagreatproducttosell.Howbigisouropportunity?’and‘HowmanyeyeballscanIgetinfrontof?’”IntheWestthecreativeforbrandadvertisingmostlyrevolves

aroundtheindividual'svalues.WhenitcomestodevelopingcreativeforproductsinChina,though,thefundamentalmotivationforbrandsistoattachculturalvalues—suchasharmonyandhappiness—tothebrand,whilesignalingthatthebrandmeetsWesternstandardsofqualityandprestige.Themessageisthis:Theproductisculturallycopaceticandwillalsoletyouleadthelifeyoudesire.Markmanalsosaysthat“inChinaweproduceadsinallmediums,featuringalotofglitzysurfaceveneer,butveryfew‘bigideas’becausetheunderlyingassumptionbyChineseconsumersisiftheTVspot'sproductionvaluesareshinyandsparkly,andthebrandisfamous,thentheproductmustbegood.”Chineseadsoftencontainbrightcolors,lotsofanimationandglitz,andsmilingmodelsleadingatrendylife.Butusuallythereisverylittlecopy.Furthermore,thespotsareoftenseeninelevatorbanksandbigpublicvenueswithnosoundso,naturally,imagerulesandthegoalistomesmerizetheviewer.ThisapproachissimilarwithbothChineseandWesternbrands,whoseadsarepreparedbytheChinaofficesofglobalagencieswithcreativethatisperhapsmoreideadriven,butstillfollowsthemodelthatworksinthelocalmarket.

Going Native—Tory Burch, Gossip Girl, andMade-for-China TVThegrowthofbroadcastmediahasalsocreatedopportunitiesforbrandsthatunderstandtheChinesemind-setandthenformrelationshipswithconsumers.LarryNamer,theHollywoodproducerwhofoundedE!EntertainmentTelevision,hasbeenadrivingforceinthismediaexplosion.NamerandveteranTVexecutiveLarryPompadurfoundedMetanDevelopmentin2009.MetanisaUScompany,ledbyAmericanexecutivesandstaffedbyChinesenationals,thatproducesoriginalprogrammingforChina.“IwasamazedathowmuchyoungerthepeoplewithmoneywereinChina.TheaverageChanelbuyerthereis20yearsyoungerthanintheWest,”saysMr.Namer.“TheseareyoungpeoplewhowatchWesternshowsandbuyWesternproducts,andincreasinglywatchtheirTVontheInternet.Wesawanopportunitytoputthatalltogether.”Allofthecompany'semployees—inChinaandtheUnitedStates—arenativeChinesewhoattendedradio,TV,andfilmprogramsatAmericanuniversities.Forproductionandfilming,MetanpartnerswithMeitianMeYou,aChineseproductioncompany.Metanhasbeenaboonforbrandsandproductsassociatedwithitsshows.Advertising,inparticular,isexpensive,highlyfragmented,andhardtomeasureinChina.Therearemorethan2,000TVstationsinChinaandithasoneofthelargestnewspaperindustriesintheworld,afast-growingmovieindustry,andisnowhometonearly600millionInternetuserswhochat,blog,shop,argue,andwatchTVshowsandmoviesonmillionsofwebsites.YoungergenerationsofChinesehaveshiftedtheirTVandmovie-viewinghabitsonlineinrecordnumbers.“Thereareabout400millionpeoplewhonowwatchTVontheInternetinChina,mostlyontheirlaptops,andtherearemorethan

100WesternTVshowslicensedbygiantvideositeslikeYoukuTudouthatareverypopular,”Namersays.IncreasinglythoseshowsareimpactingtheproductsthatChineseconsumerschoosetobuy.OneexampleisToryBurch.WhenChinesewomenwentonlineandstartedtowatchGossipGirl(theNewYork–basedshowthatfollowedthefortunesoffourwealthyyoungwomen),theysawthecharacterswearingToryBurchhandbags.Almostovernight,ToryBurchbagsbecameamust-haveitemforyoungadultsinChina.Everyonewastalkingaboutthebrandandsalesspiked.ToryBurchofficiallyenteredChinain2011,twoyearsaftertheirbagsbecameaculturalicon.This,andothersimilarexamples,demonstratetheimpactofpopularcultureasabrandbuilderandpurchasemotivatorinChina.SeeingthegrowthofInternetTVviewing,inadditiontothebillionpeoplewhowatchbroadcastTV(andtheimpactthatqualityprogramscouldhaveforbrandsfeaturedontherightshows),MetansetouttocreateoriginalprogrammingforChineseaudiences—programmingthatwouldmeldtheloveofWesternshowsandhigh-productionvalueswithcontentthatwasof,by,andforChina.Metan'sfirsthit—andstilloneofitsmostpopularInternetandTVshows—isHelloHollywood!Theshowisamixofgossip,news,andentertainmentandisfullofglamorousimagesofcelebrities,Californialiving,andthebrandsandretailersthatclothe,feed,house,andentertaintheHollywoodelite.Itairson45stationsinChinaandsixintheUnitedStates,anditaveragesmorethan10millionviewers.Anadditional11millionviewitontheInternet.Fromthissuccess,thecompanybeganproductionoforiginalTVseriesfortheInternet.ThefirstwasPlanetHomebuddies(nowcalledModernLife),asitcomaboutyoung,urban,white-collarworkerswholiveathome,whichiscommoninChina.Itwentliveonthefourbiggestwebportals(YoukuTudou,iQiyi,PPTV,andSina),rankingseventhonTudou,witharecord3millionviewersin

thefirstweekafterthefirstepisodewasreleased.ThencameReturntoDaFuTsun,acomedy-dramaseriesdevelopedbyNamer.AfterfindingearlysuccessinBeijingandsellinghiscompany,afatherdecidestomovehisfamilybacktotheruralvillageofDaFuTsun( )inordertorelearnthemeaningoffamilyvaluesandcommunity.TheseriesisshownonlineandonCCTV-8andattractsacombined14millionviewers.Toputtheseviewernumbersinperspective,popularcableshowsintheUnitedStatesattract2to5millionviewersperweek.TheseriesfinaleofBreakingBaddrew10.3million.Metan'sbusinessmodelissimpleandeffective.InthecaseofshowsforbroadcastTV,thestationsbuytheshowsandthenselladvertisingaroundthem.InthecaseofInternetshows,theportalspayMetantolicensetheshow.Then,bothsidesselladvertisingaroundit.Bothmodelsutilizeproductintegration—theinsertionofproducts,brands,andretailersintotheshow.Therearethreelevelsatwhichabrandcanparticipate:1. Theproductisfeaturedinthebackgroundorforeground.2. Theproductisusedbythecharacters.3. Theproductisessentialtotheplotandcandriveanepisodeora

season.UsuallyMetangetsthefirstanchorbrandorproductin.Afterthat,itlicensestheshowandbothcompaniesseekotherbrandsandproductsforintegration.Competitionforshowshasgrownfiercebetweenrivalportalsandmostdemandexclusivity.Thisincreasesthevalueofqualityshows.Additionally,piratesitesareonthedeclinebecausetheportalsarepayinglargesumsforcontentandhaveconvincedthegovernmenttocrackdown.Bacardi,LavazzaCoffee,andLeeJeanshaveallbeenplacedonPlanetHomebuddies,withnoticeableresults.Infact,Bacardiwasactuallyaplotdriver.Oneofthemaincharacterswantedtobecome

abartenderandlivethehighlifeinShanghai,soheattendedaneight-weekcourseattheBacardiSchoolofBartending.Namerhascreatedawin–win–winsituationforallinvolved.Theaudiencegetsthekindofcontentitloves;thestationsandportalsgetbigtrafficandgreatrevenues;brandsreachtargetaudienceswithmeasurableeffectsonbrandawareness,popularity,andsales.MetanDevelopmentmakesmoneydoingwhatitdoesbest:creatingengagingandrelevantentertainmentthatisbothpopularandprofitable.

The Role of Social Media in Marketing:United States versus ChinaInrecentyears,marketingtrendsintheUnitedStateshaveshifteddramaticallytowardsocialmediaandawayfromtraditionalformsofmediasuchasbroadcast,print,andoutdoors.Thetwindynamicsofinformationsharinganddirectconsumerresponsetobrands(evenauthorcontent)haveenabledAmericanconsumerstobecomeactiveparticipantsintheirrelationshipstothebrandstheyadmire.Thishascreatedapermanentchangeintheapproachthatmarketerstakeinservingtheneedsofconsumers.Brandscannolongermerelytalkatconsumers,interruptingtheirlivesinaone-waytransmissionofpersuasivearguments.Theyneedtoapproachmarketingcommunicationsasarunningdialogue,wheretheymustlistenasmuchastheyspeak.Theymustalsobemindfuloftheinfluencethatasingleconsumerhasonmanyothers,throughreviewsandcomments.Buthowdidtheideaofsocialmediaasacommunicationsplatformdevelop?Whatweretheculturalassumptionsthatledtothecreationofbloggingsoftware,social-networkingsites,photo-sharingsites,political-actionsites(suchaschange.org),andsoon?Mostlikely,itwasrootedintheAmericanidealsofindividualism,self-expression,andfreedomofspeech.AsAmericans,welovetofindasoapboxtostandonandvoiceouropinion.We'realsobroughtupinaneducationalsystembuiltupontheSocraticexchangeofideasandthequestioningofauthority.Ourvaluescelebratethiswayofthinking,andwefindoutletsforitinallwalksoflife.Itremainsthefoundationforinnovationandforourentrepreneurialspirit.Thatbeingthecase,istheconstructuponwhichsocialmediahappenssimilarinChina—wherepoliticsareauthoritarian,informationiscontrolled,individualismnotasprominent,andthe

culturalframeworkisorientedtowardsthemasses?Theanswerisyesandno.PriortotheadventofsocialmediainChina,therewaslittle,ifany,opportunityforself-expressionamongeverydaycitizens.Formany,thiswasakintolearninghowtorideabike,andoncetheygotthehangof140-characterburstsofcommentary,theydiscoveredtheylikedit.Andso,SinaWeibo(ahybridofTwitterandFacebook)becamearagingsuccess,helpedbyofficialprohibitionofTwitterandFacebookinChina.ButlikeallmediainChinaitiscloselymonitored,andtherearetopicsthatarecensoredorblocked.NowcomesWeChat,acellphoneapplicationdevelopedbyTencentinChinaandfirstreleasedinJanuary2011.LikeWhatsAppandInstagram,itsprimarypurposeistoenableeasyinformationandlife-momentsharingwithfriendsandfansthroughtheuser'smobilephone.Italsohasbecomearagingsuccess,with600millionregisteredusersinChinaandaroundtheworld(mostlyChineselivingabroad).Notsurprisingly,asWeChatusagehassoared,sohasWeibousagecorrespondinglydeclined.And,asWeChathassmartlyaddedarangeoffeaturesandfunctionality,itseemsasthoughmanyChinesepreferusingsocial-mediatoolstoservemorepersonal,gratifyingpurposes,suchas:

Connectingwithfriendsandsharinginformation.Accomplishingmoreandcentralizingtasks.Participatingintrendyactivities.Showingsupportforthebrandstheyfavor.Payingforproducts.

The Power of WechatSohowdoyouengageChinesesuperconsumersifyouareinNewYorkandnotinBeijing?ObviouslyifyouarealargeluxuryretailerlikeLouisVuittonorChanel,theanswerissimple—justopenaflagshipstoreonFifthAvenueandonHuaHaiLuandtheywillcometoyou.Butwhatifyou'reaprofessionalwhosellsaprofessionalservice?InMarch2014,EmmaHaodiscoveredChina'spopularsocialmediaandmessagingapp,WeChat,andshegainednotorietyclosingtworealestatetransactionsvaluedatmorethan$13millionusingtheapp.UnlikemostWeChatusers,whousetheservicetoswapmessages,postpictures,andsharepersonalupdates,EmmaHao—aManhattan-basedagentattheglobalreal-estatebrokerageDouglasElliman—receivedanunsolicitedmessageonWeChatfromaChinesechairman,whowantedtoknowmoreaboutaluxuryresidentialbuildinginManhattancalledBaccaratResidence,whichwasdesignedbythewell-knownarchitectTonyIngrao.HaoleftamessagewiththeChineseentrepreneuronWeChat,andaftervisitingtheBaccaratsalescenter,shesentherpicturesofthecondo'sluxuriousamenities.Thenextday,afterspeakingwiththewomanbyphone,Haoclosedtwodeals:a$10.25millionthree-bedroomapartmentonthethirty-ninthfloorandaone-bedroomunitonthetwenty-firstfloorforapproximately$3million.Itseemedlikeastrokeoflucktodo$13millionintransactionsonaChinesesocialmediatool,buttherealstory—likemostothersuccessstories—requiresalittlemoreexplanation.BorninBeijing,EmmaHaoworkedasajournalistintheMinistryofConstructionandgotaB.A.inChineseliterature.ShethenwenttotheUniversityofBrightonintheU.K.,gother

MBA,andimmigratedtotheUnitedStates.SeeingthenumberofChinesepeopletraveling,working,studying,andbuyingpropertyabroad,sheenteredtherealestatebusiness.Inthebeginningitwaschallenging,butEmmastartedtorentapartmentstoChinesestudentswhowerestudyingatNewYorkUniversity,PaceUniversity,orColumbia.Thesestudentsdidnothavemuchofabudgetandtheycouldonlyaffordapartmentsintherangeof$600to$800permonth.Knowingthatitwouldbeimpracticaltofindanyapartmentsinthepricerange,Emmatriedtolookforcreativesolutionstoservetheseclients.SheeventuallyfoundapartmentsonRooseveltIsland—asmallislandconnectedtoManhattanbyacable-carservice—thatofferedbigpromotionsforitsapartmentsinordertoattracttenantstothisnewlydevelopedarea.“IwasprobablyoneofthefirstChineserealestateagentstodiscoverRooseveltIslandastheyweregivingawaythreemonthsoffreerentandafreeMetroCard(thecardforNewYorkCitysubwayriders)ifyousignedaone-yearlease,”Haosays.“Iwastaking30to40ChinesestudentswithmetoRooseveltIslandtohelpthemfindinexpensiveapartmentsclosetoManhattanandtheirschools.”Besideshelpingthestudentsfindapartments,Emmahelpedmanyopenbankaccounts,sincesomespokelittleEnglish.Thislaidthefoundationforrelationshipswiththesestudents,whowereoftenthesolechildrenofwealthyChinesesuperconsumers.EmmaalsousesWeChattocommunicatewiththeirparentsandexplaintothemwhatsheisdoingtohelptheirchildren.Thisisausefullesson.YoucanbuildtrustingrelationshipswithChinesesuperconsumersbyhelpingtheirchildren.Inotherwords:Dogoodtodowell.OneofWeChat'suniquefeaturesisthehold-and-talkfunction,whichworkslikeawalkie-talkie.Haohasusedit,combined

withherexcellentwritingskills,toproduceadailyWeChatjournalwithpictures.Shealsowritesaboutthedifferencesbetweenshort-termrentaltargetsandlong-terminvestments.Finally,Haohasmadeitapracticetotakeselfiesinfrontofapartmentmirrorsinordertoensurethatpeopleknowshe'sactuallybeeninsidetheapartment.ChinesestudentshavestartedtobringmoreparentsintoHao'sWeChatgroup,andsomeparentsfeelasthoughthey'vebecomepersonalfriendswithHao.Aswe'veexplained,relationshipsarethemostvaluablecurrencywhenmarketingtoChinesesuperconsumers.TherealestatepurchasingprocessisdramaticallydifferentinChina,soHaohasfurtherdifferentiatedherselffromotherrealestateagentsbysettingupdedicatedWeChatgroupsthatincludeherself,thebuyer,andattorneysinordertohelpnavigatethepurchasingprocess.“Ihelpthemmaketheirdocumentsmatchtherequirementsofthecondoboard,”Haosays.“Forexample,whenbuyinganapartmentinChina,theywon'tneedyourW2taxreturnsomostChinesedonotevenknowhowtoprovetheirincome.Iwouldsuggesttothemtotalktotheirhumanresourcesdepartmentsandissuealetterstatingtheirincomeasaproofofincome.“IalsoexplaintotheChinesebuyersthatthelengthyprocessofboardapprovalisdesignedtoprotectyouandothertenants.”Forthepasttwoyears,Emmaestimatesshe'scompletedsevenrealestatetransactionsviatheapp.“NomatterhowprospectiveChineseclientsfirstcontactedme,wealmostalwaysendupusingWeChatatsomepoint,”shesays.“Chinesetodayhavealotofcashandtheyliketobuyrealestatewiththatcash,withoutborrowing.Oncetheytrustyou,theywillgiveyoualltheirreferralssincewehavebecome

friends.[Buildingtrust]takesalongertimethanwithothergroups,buttheydon'tshoparoundanymore.MyAmericanbuyerscontinuetoshoparoundevenafterwedidbusiness.”

SowhattomakeofthesebroadtrendsandtheirimplicationsforChineseconsumerbehavior?Probablythatit'ssafer,morecomfortable,andpleasurableforChinesetoparticipateinawaythatalignswithChinesesocietalvaluesandstayswithinsafeboundaries.Inaverysimplisticview,WeChatisfunctionalandhappy;Weiboisopen-endedbutflirtswithtrouble.ThebigtakeawayformarketersregardingsocialmediainChinaisthatitagaincomesbacktohistoryandculture.Morethananyothercultureintheworld,Chinesepeoplemakepurchasingdecisionsbasedonpeerinputandrecommendationsfromtrustingfriendsandfamily.SocialmediahasdevelopedintothemostimportantmarketingchannelinChinabecauseitprovidestheplatformforpeerrecommendations,relationshipbuilding,andpersonalexpressioninanenvironmentwhereexpressionislimited.

PromotionsCoupondesignandloyaltyprogramsaremuchmoresophisticatedinChinathanintheUnitedStates.Dr.BaohongSun,aprofessorofmarketingattheprestigiousCheungKongGraduateSchoolofBusiness(CKSB),notesthatthereare10waystoofferandpromotecouponsinChina,includingloyaltypoints,couponsforalternateproducts,couponsforsisterbusinesses,orcouponsforsomethingforfree.Shenotesthatnomatterthemedia,promotionsareveryeffective,toapoint.“InChinesesocietyeverythingissubjecttonegotiation,sopromotionsallowforongoingnegotiationofpriceandvalue,”saidDr.Sun.Butthereisalimit.Overpromotioncanweakenabrand.Chineseconsumersarealwayslookingforinformationandcluesaboutabrand'squality,andpriceisakeysignal.Ifabrandofferstoomanydiscountsitwillrevisetheconsumer'simpressionofthebrand'squalitydownward.Dr.Sunadds,“Youalsoneedtobecarefulaboutwhatkindofproductsyouofferpromotionson.Fast-movingconsumerproducts,liketoiletpaper,don'tneedpromotions.Butspecialtyproducts,whereabrandistryingtobuildacceptanceandmarketshare—saystrawberriesandyogurt—canbenefitfrompromotions.”Anotherdownside:Iftheproperbalanceisnotfound,thepromotionwillproduceaspikeinsalesintheshortterm,buttherewillbeaprolongeddipafterwardsbecauseconsumersmaydelaythenextpurchaseastheywaitforthenextpromotion.Offeringmanytypesofpromotionscanmitigatethis,notjustdeepdiscounts.InreviewsomekeystomarketinginChinainclude:

TheChinamedialandscapeishuge—thereforeitiscrucialtounderstandthestrengthsandweaknessesofeachchanneland

tofocusyouradvertisingonthosethatwillprovideyouwiththebestROI.“National”campaignsarevirtuallyimpossible.China'ssuperconsumersareeverywhereinChinaandexistatallspendinglevels.Spendingisnolongerconfinedtothe400millioncoastalinhabitants.Tailoryourproductsandservicescorrectlyandyoucanwinacrossdemographicandgeographiclines.Peerrecommendationsandgroupacceptancearekeytobrandbuilding—socialmediaisthemostimportanttoolinyourbelttobuildgrouployaltyandconsensus.MarketingneedstobefocusedonamixoftheChinesesocialculturedynamicalongwithpersonalaspirations.Bigideastakeabackseattopromotingculturalvaluesandindividualaspirations.Culturallyattunedmarketingcanhelpcreatemarketsfornewproductcategories.

Chapter 19The Chinese Luxury and Premium MarketChineseconsumersnowaccountfor27percentofallgloballuxuryproductpurchases.Thinkaboutthat,oneoutoffourluxuryhandbags,watches,cars,jewelry,andpiecesofapparelsoldwindupinthehands,closets,andgaragesofChinesesuperconsumers.LuxurypurchaseswereearlydriversoftheChineseconsumerboom.ThefirstconsumersinChinawhocouldaffordforeigngoodswerethefirstwaveofnewlywealthyentrepreneurs,merchants,factoryowners,andmegabusinessmanagers—and,asidefromafewfast-movingconsumergoods(FMCG)companies,thefirstforeignretailandconsumerproductplayersinChinawereluxurycompanies.TheluxurycategorystillisandwillremainaconsumergrowthenginefortheChineseeconomyandforlocalandforeignbrandsandretailersalike.Overthepast10years,manyEuropeanandAmericanluxurycompanieshavebeenbuoyed,enriched,and,insomecases,savedbyChineseluxuryconsumers,especiallyafterthecrashof2008.CompanieslikeLVMH,Prada,andothers,whosawthebottomfalloutintheUnitedStatesandEurope,remainedprofitableorbecamemoreprofitableduetotheirChinabusiness.WhileluxuryconsumersinChinawereonceaverysmall,verywealthy,andhard-to-measureelite,luxuryspendingnowincludesawiderangeofconsumersacrossclass,income,andregionallines.ItisalsocriticaltonotethatwhileChineseconsumersaccountformorethanonequarterofallluxurypurchasesglobally,60percentofthosepurchasesaremadeoutsideofMainlandChina,includingHongKong,Paris,NewYork,LosAngeles,LasVegas,Sydney,Tokyo,London,andotherglobalcities.Thisharkensbacktotheimportanceofall(butespeciallyluxury)companiestounderstandthenatureandnuancesoftheChina

globaldemographic.Here,wewillcoverafewimportanttopicsregardingtheluxurymarketandChina.1. WhoareChina'snewluxuryconsumers?2. ThetraitsofsuccessfulluxurybrandsinChina.3. ThemythsandrealitiesofChina'sluxurydownturn.4. Thegrowthofexperientialluxury.Chineseluxuryconsumerscangenerallybecategorizedintothreegroups(withstressongenerallybecausedrillingdownonsubgroups,marketcharacteristics,consumerdemographics,andtherightfitforyourbrandrequiresalotofinvestmentandhardwork).

The Nouveau Riche: Pebble Beach orNothingTheChinesenouveauricheacquiredtheirvastwealthoverthepasttwodecades.Theyandtheirfamiliespurchaseluxurygoodswithinthemainlandandabroad.Theywerethefirstbuyers,andhavesincebecomethemostexperienced,sophisticated,andwelltraveledofChina'sconsumers.Theyincludethebusiness,technology,industrial,andpoliticalelite,andtheyaregenerallynotparticularlysensitivetoprice.ThemajorityofChina'snouveauricheresideinfirst-tothird-tiercities.ChristineLuisthefounderandCEOofAffinityChina,aspecialtytravelandluxuryconsultingandservicesfirm,whichhasgivenherafirsthandperspectiveoftheChineseluxuryconsumer'sevolutionfromadesireforthingstoacravingformoments.“TheverywealthiestandmostsophisticatedinChinadonotwanttobetreatedliketargetsbybrands,”Lusays.“Theyaresmart,theyknowifyouarethinking,‘Oh,herecomesawhale,let'slandhim.’Thosedaysareoverforthiselitegroup.Thatmayworkwithothercategoriesofluxurybuyers,butnottheultra-elite.Theydonotwanttobetreatedlikenumbers.”Lufurtherexplainsthat,“whattheydowantareuniqueprestigeexperiences—anyonewithmoneycanbuya$50,000watch.Theyalreadyknowandbuybest-of-classbrands.“Theywantcourtsideseatsatbasketballgames,invitationstomovieopeningsandimportantparties,tobuyavineyard,notjusttodrinkwinefromone.”Luprovidesananecdotethatdrivesthispointhome.“Wehadaclientwhowasagolffanatic.Hehadafavoritegolferandafavoritegolfcourse,PebbleBeachinCalifornia.WhilehebuilthisfortuneandinfluenceinChinaonusingrelationshipsandsocialcapitalinrelationtohistalents,thatsocialcapitalmeantnothingintheUnitedStates.”

Withafewkeyphonecalls,LuarrangedforhimtoplayaroundatPebbleBeachwithhisfavoritePGAgolfer.“Yes,itcosthimmoney,$75,000,buthegotasingularexperiencethatmoneyalonecouldnotbuyandthroughtherelationshipwiththegolferhewasintroducedtoseveralAmericanbusinesspeoplewhoheendedupcuttingdealswithdowntheline,”Lusays.Lumakesagreatpointhere.Yes,hetookhisfamilytoCalifornia—andspentatluxuryhotels,retailers,andrestaurants—buttheexperiencesandconnectionsthathecouldnotbuyonhisownwerethekeystothetrip.

The Gifting GroupConsumersinthisgroupgenerallybuyluxurygoodsonamassscalewithinMainlandChinaandincreasinglyfromabroadforgifting(mainlyforbusinessorgovernment-relatedpurposes).Theyarenotalwayssensitivetopricedifferencesbecausetheircorporationswillcovercosts.Andifitispurelyaperson-to-persongift,theimpressionandsocialcapitalgainedaremoreimportantthantheprices.Thatsaid,thereisahugedemandforluxuryandpremiumproductsboughtintheUnitedStatesandEuropethataresentorcarriedbacktoChinaforgiftingpurposes.ThekeymarketopportunitywiththisgroupisthatgiftingisaningrainedpartofChineseculture,anditisanimportantwaytobuildandmaintainrelationshipsandnetworks.

China's Engine: The New Middle ClassSeeks Quality and ValueByfarthebiggestcohortsinpopulationandpotentialaretheChinesemiddle-classconsumers,whoarebrandconsciousbutnotalwaysbrandloyal,andwhoarepriceconsciousbutnotalwayspricesensitive.Theyoftenworkandresideinfirst-orsecond-tiercities,butareincreasinglyhailingfromthird-andfourth-tiercities.Theseareamongthenewestluxurybuyersandtheproducts,pricepoints,anddesignsthatappealtothemaremoreakintowhatthenouveaurichewerebuyingfiveor10yearsago.Productquality,prestige,andtheappealofbadgebrandsareimportanttothem.Oneluxurybrandthathasbeenabletofindasweetspotinmiddle-classChinaisBrooksBrothers.Theclothier'swell-establishedpositioningasamakerofreasonablyaffordable,butexceptionallycraftedclothingisaslamdunkinamarketplacethatprioritizesfunctionalityandquality.Threeyearsago,AndyLewbecamemanagingdirectorofAsiaPacificatBrooksBrothers.HewasalreadylivinginShanghaiandworkingforanotherItalianready-wearfashioncompany.Withmorethan200yearsofhistory,BrooksBrothersisoneoftheoldestAmerican-heritagefashioncompanies.“ItisinherentintheChineseDNAtowanttolearnandtheyhaveaninsatiableappetiteforlearningaboutproducts,”Lewsays.“ThespeedinwhichtheylearnwhatIcallsophisticationoffashionsenseorindependentfashionsenseisveryquick.Youwillseethatyoungerpeopleareveryaggressive.TheydressinwhatIcallJapanesestreetfashion,andthereisalsotheurbanprofessionalwhowearssuits,shirts,ties,andsportjackets.”Headds:“TheevolutionthatIseeisthattheyaregraduallymovingawayfrombiglogos.Nowtheyhavetheirownsenseofstyle,mostlysensibilityfashion,oramorerefinedfashioninaway.Fromthebeginning,BrooksBrothershasalwaysfocusedonprice-

valueandwewereneveraflashy,big-logobrandlikesomeothertopluxurybrandsinChina.”Some40percentofBrooksBrothers'storesareinChina'sfirst-tiercities,althougheverycompanydefinesfirst-tierdifferently.“ForBrooksBrothers—besidesShanghai,Beijing,andShenzhen—Chengduisalsoafirst-tiercityforus,becauseitisthewindowtoWesternChina.ItfallsverywellunderChina'sgo-weststrategy,”Lewsays.“ShenyangandXi'anareconsideredstrongsecond-tiercitiesinChina.”BrooksBrothershasalsoeffectivelytakenadvantageofitsAmericanmanufacturingbaseinaculturethathascometoassociateMadeinAmericawithstatusanddesirability.“WeareoneoftheveryfewbrandsthatarestillmanufacturinginAmerica,”Lewsays.“AsanAmerican-heritagebrand,wehaveoursuitfactoriesinMassachusetts,tiefactoriesinNewYorkCityandLongIslandCity,andourshirtfactoryisinNorthCarolina.Very,veryfewofourcompetitorscanmakethisclaim.ItisverychallengingbecausemostofourcompetitorsaresourcedinAsiaandChina,butIknowChinesecustomerslovetobuyproductsmadeinAmericaversusmadeinChina.”ThisleadsustoanimportantdevelopmentamongChineseconsumers.Thatistherapidprogressandimportanceoftheaffordableluxurysector.Astheeconomymaturesandgrowthslowssomewhat,andasconsumersbecomemoreinterestedinlifestylethanpurestatussymbols,affordableluxurybrandsarepositionedformassivegrowth.

Affordable Luxury: A Tiffany's Tie Clip andan Entry-Level BMWAfewyearsago,theconceptof“affordableoraccessibleluxury”asamarketmoverinChinawaslittlemorethanadotonthehorizon.Today,thesituationcouldn'tbemoredifferent.Affordableluxurybrands(andtraditionalluxurybrandsthathaveexpandedintotheaffordableluxurysector)haveseensignificantgrowthmarkedbyrapidandprofitableretailexpansion,increasede-commercesales,aloyalfollowingofnewmiddle-classcustomers,andrenewedinterestandsalesfromolder,wealthierlegacycustomers.Somebrandssellonlyintheluxuryspace,neverdiscountingandnevermarketinglower-pricedorstarterproducts.Butothergloballuxurybrandsofferproductsinallthreeluxurycategories(ultra,premium,andaffordableluxury).Forinstance,youcanbuya$40,000,$80,000or$160,000BMW;atTiffany's,youcanspend$80,000onaring,$5,000onanecklace,or$200onatieclip.Inmanycases,luxurybrandsdevelopseparateaccessibleluxurylines,establishingtheirownbrandidentitiesintheglobalmarketplace.EmporioArmani,whichearlierthisyearopenedawatchandjewelrystoreinHongKong,ispoisedforaleaptothemainland.Historically,establishedEuropeanlabelssellingpremiumandultra-luxuryproductstowell-heeledChineseconsumershavedominatedtheluxurysegmentinChina.Butwithurban,professionalincomerangingfrom$15,000to$100,000peryearinfirst-andsecond-tiercitieslikeShanghaiandSuzhou,andurbanper-capitadisposableincomearound$4,000to$6,000peryear,alargenewgroupofmiddle-classconsumers(some300millionofthem)areemergingwhoseekluxuryandaccessible-luxuryproducts.Theriseoftheaffordable-luxurysectorhascoincidedwith,andinpartbeenfueledby,anincreasinginterestinAmericanbrandssuchasCoach,MichaelKors,andKateSpade,whichareexpandingonthemainland.Americanbrandsinotherlifestylecategoriesare

succeedingaswell,andarehelpingblazethetrailfortheapparel,footwear,andaccessorysectors.ButaccessibleluxurygrowthisbynomeanslimitedtoUSbrands.H&M,Zara,andlocalfavoriteShanghaiTangaresucceedingaswell.ThissectorhasbecomeakeygrowthdriverfortheChinaluxurymarket,yetthereisstillsomeconfusiononthepartofbrandsandretailersaboutwhatdefinesaccessibleluxuryinChina,whothekeyconsumersare,whattrendsaredrivinggrowthinthesegment,andwhatstrategiesareworking.HereisabreakdownofsomeofthetrendsastheyrelatetotheChineseconsumer'smaturationprocessandtheemergenceofthethreecategoriesofluxury:ultra,premium,andaffordableluxury.

BeenThere,DoneThat.Thereisasophisticatedcohortofwealthylegacyluxuryconsumerswhoarelookingtoexpandtheirpurchasingoptions.Theseconsumersareopentoexperimentingwithnewbrands,newstyles,andexpandedofferingsfromtrustedluxurybrands—evenatlowerpricepoints.Theywanttobeleadersandtrendsetters,notfollowers,andtheirdiscoveriesintheaccessible-luxurysectoraddressthisinterest.TeachMe.Anewcohortofmiddle-classluxuryconsumersisseekingguidanceonhowtocreateapersonallifestyle.Theseconsumersarelookingtodothisthroughamixofaccessible-luxuryandluxurypurchases—a$2,000handbag,forinstance,accessorizedwithamoremodest,accessible-luxuryscarforshoes.ThePioneers.OutboundChinatravelhasexplodedoverthepasttwoyears.Chinesetravelersareprojectedtotake150millionoutboundtripsby2020,makingthemtheworld'smostprolifictravelers.Thesebusinessandpleasuretravelers—aswellasstudentsstudyingabroad—areexposedtobrandsthey'veneverseeninChina,orthathavelowprofilesthere.Andwhenthesetravelersreturn,theyseekthesebrands.They'veknown

LouisVuittonforyears,butabroadtheymaydiscoversuchaccessibleluxurybrandsasC-WonderorBelstaff.HomeSweetHome.Atransformationfromhousetohome/sanctuaryisfuelingsalesinluxuryaudio,furniture,artwork,décor,andupscalehardware.Accessible-luxuryandluxurybrandshaveanopportunitytoseizeonthisnewfounddesireforinsideaswellasoutsideluxury.Delorme,theFrenchbeddingcompany,isaheadofthecurveinthismarket,andBang&OlufsenismakingamajornewinvestmentandexpansioninChina.Alsoofnote:RalphLaurenwillbeopeninglifestylefloors,sellinghomedécor,withintheirstoresinmajorshoppingmalls,suchasShanghai'sPlaza66.YouthMovement.China'syoungconsumersarestyleconsciousandlifestyleconscious.Thosewholiveathome,subsidizedbyfamily,canspendupwardsof80to150percentoftheirincomeonconsumerproducts.Theyseeaccessibleluxurygoodsassignifiersofstatus,individuality,andlifestyleorientation.Ifyoucansellthema$500bagnow,asfamilywealthincreasesyoumaywellsellthema$5,000bagafewyearsdowntheroad.TheRed,White,andBlue.WeforeseeacontinuallygrowinginterestamongChineseconsumersinAmericanbrandsandretailers,Americanstyle,andAmericanaspirationalliving.TheclassicEuropean,ultra,andluxurylabelswillcontinuetogrowandprosper,butnowthereisroomformoreplayersatthetable.

LookingatwhichinternationalbrandsaregrowingandexpandinginChinaandwherethedemographicsareheaded,thereisnodoubtthataccessibleluxuryisnowakeymarketdriverinChina.ItisintheexpansionofCoach,MichaelKors,andadozenotherAmericancompaniesreportingprofitsfromChina—aswellasEuropeanluxurycompaniesofferingnewproductlevelsandlifestylestores—thatweseetheproof.Astheyexperimentwiththeirownpersonal

brands,images,andstyles,Chineseconsumerswantaffordableluxuryaswellastraditionalluxuryandultra-luxuryproducts.Companiesthatspendthetimeandresourcestounderstandtheopportunity,toestablishtherightinfrastructure—productmix,pricingmodels,andbrandpositioning—maywellfindthattheaccessibleluxurysectorisadriverofsuccessinmainlandmarkets.

China's Luxury Downturn: Myths andRealities

(chīkŭ)means“eatbitterness.”ForcenturiesChinesepeoplehaveusedthistermtoteachandremindthemselvesandtheirchildrenthatitisimportanttoendurehardship,todevelopathickskin,andtokeepperseveringnomatterhowmanyobstaclesstandintheway.Ultimatelyonewillgetthroughtoughtimesandsucceed.LuxurycompaniescurrentlyoperatinginChina,andthoseconsideringmarketentry,arelookingbackon2013–2014asaperiodwheregrowthinthepremiumluxurymarketslowed.Thingswereespeciallyhardforcompaniesthatdependongifting(animportantculturalandbusinesspracticeinChina)andforhigh-endrestaurantsandbeveragepurveyors.WehavepreachedchikuasacorporatephilosophytothehundredsofcompaniesthatwehaveworkedwithonenteringandgrowinginChinaoverthepast12yearsandweadviseluxurybrandstointernalizeitnowaswell.Whilethereisanoveralldownturn,markedbysteeperdropsinsomecategoriesthanothers,andmarkedbyupticksinothers,theoveralltrajectoryoftheluxuryindustry—likethatoftheoverallconsumermarketinChina—stillpointsup.Sostaythecourse;therearestillmanyopportunitiestosucceedinChina.Nevertheless,herearesomeofthefactorsthathavedrivenluxurypurchasegrowthonthemainlanddownfrom7to15percenttoabout2percent,overthepastfewyears.1. PresidentXiJinpingisintentonmakingahugedentintheendemiccorruptioninChinesepoliticsandbusiness.Luxuryitemsaresometimesusedasaformofcurrencyforfavorsandguanxi(reciprocalrelationships).OnewayBeijingisenforcingitsanticorruptionedictsisbycrackingdownongiftgiving,governmentgroupbuying,andconspicuousconsumption.Thegovernmentseesluxurybuyingasanoutcomeofofficialsreceivinghongbao(payoffs,bribes).Allofthisiscausingsome

wealthyChineseprivatecitizensandpublicemployeestothinktwiceaboutbuyingandwearing$50,000watchesand$10,000suitsanddrinking$1,000bottlesofBaijuatnightlybanquets.

2. ThedesireforandincreasedsalesofaccessibleluxurybrandshasbeenakeygrowthdriverinChina'sluxurymarket.Thistrendisalsofuelingadesireamongthenouveauricheaswellasemergingmiddle-classluxuryconsumersforthecasualluxuryofAmericanbrandsandlifestyleliving.Asaresult,therehasbeenaneffectonthesalesoftop-tierluxuryproducts,buttherehasalsobeenanupside.BrandslikeCoach,MichaelKors,andToryBurcharethrivinginChina.

3. ChineseluxuryspendingonthemainlandisdowninpartbecauseChineseglobalconsumerpurchasesareupintherestoftheworld.Almost60percentofallluxurypurchasesmadebyChinesecitizenstakeplaceoutsidethemainland.

4. Chineseluxuryconsumersareturningincreasinglytowardspendingtheirampledisposableincomeonlifestyle/experientialpurchasesinadditiontopuresocial-statusproducts.

DaveGross,anexpertinChineseluxury,travel,andhospitality,alsopointsoutthat“theintensecompetitionamongestablishedandnewentrantstotheChineseluxurymarket”hasaffectedgrowthforestablishedbrandsandthat“thegrowthofe-commercehasdrivenpricesandvaluedownformanyofthepreviouslyhighlydesirablebrands.”OnlinesalesofbrandslikeGucciandPradahaveincreasedandarenotalwayssoldthroughbrand-sanctionedplatforms.Thishasmadesomeluxurycompaniesnervous.SomeareconsideringslowingtheirChinagrowthandothersareevenconsideringpullingoutaltogether.Sidelining,shrinking,oravoidingChinaisahugemistakeforluxurycompanies.Thisslowdownistemporary;Chinaisandwillremainthemostimportantluxurymarketintheworld.

HerearesomekeyreasonsforluxurybrandstocontinueinvestinginChinaasalong-termgrowthmarketandnottomakeimpulsiveshort-termdecisions.

After30yearsofexponentialeconomicgrowthanddevelopment,China'seconomyisslowing,butthisisslowingfrom10percentto6or7percent.Growthisstillrobustandluxurypurchaseswillcontinuetoincreasewiththeeconomy'sexpansion.Urbanizationandtheever-enlargingmiddleandupperclassesarefuelingfurthergrowthforthebestthingsinlife—whilefirst-tiercitiesandregionshavebeensaturated,thenewgrowthwillcomefromthesecond,third,fourth,andfifthtiers,whereapotential300millionnewluxurybuyersreside.CurrenteventsandgovernmentpolicyarealwaysfluidinChina.Whenthedifferencesbetweenlegitimateandillegitimatepurchasesaresortedout“thistooshallpass.”Theaccessibleluxurymarketwillcontinuetogrowandprosper.

SageBrennan,cofounderofconsultancyChinaLuxuryAdvisors,andanexpertinChineseluxurybrandingandretail,saysthat“nothinghasreallychanged,therearealwaysupsanddownsintheChinamarket.Thisisadown,buttheconsumerisstillspending;theyjustmightnotbespendingwherethebrandisinvesting.”Brennanalsonotesthat“growthopportunitiesoverthelastfewyears[that]havecomefromemergingconsumersremainadeepandlonglastingtrend—alongwithoverseasspending.Brandsneedtofocusontheserealities.”Therearesomekeystrategiesluxurybrandscanimplementtoprosperinatemporarydownturnthatwillalsohavelong-termpositivebenefits:

Investinidentifying,attracting,serving,andretainingtheglobalChinesetraveler.Withmorethan100millionChinese

peopletravelingabroadinthenextcoupleofyears,andalmost60percentofChineseluxurypurchasestakingplaceoutsidethemainland,luxurybrandsmustfollowTourneau'slead(seeChapter13)andinvestintheglobalandlifestyledesiresandneedsofChineseluxuryconsumers.Integratedomestic,global,andChinaoperationsmoreclosely.Investinmorerobuste-commerceandsocialmediastrategiesinsidetheChinamarket.Rethinkproductlines,pricepoints,andmerchandising.FocusonALLlevelsofluxuryconsumers,presentandemerging.

Grossalsosays“brandsmustbettermanageaglobalinventoryandsalessystemthatunderstandshowChineseapproachluxurypurchasing.TheChinesecustomerisnowglobal.Thesoonerthosecompaniesunderstandthisthebetter.Inmostcases,Chinaisaseparateprofitcenter,competingwithotherregionsforthesamecustomer.Thus,theydonotsharedataacrossnationalborders.”Thepremiumluxurymarkethasdefinitelyslowed,butitwillpickupagainsoon.Itmaygrowevenfasteroverthenext10yearsbecauseoftheestablishedluxury-demographiccohortsandthefactthat300to400millionpotentialnewbuyersarecomingonline.LuxurybrandsandretailersneedtocontinuetoinvestinChina,buttheyalsoneedtoadjusttheirstrategiesforbothshort-andlong-termgrowth.Inotherwords,luxurycompaniesmusteatbitternessnowandembracethepromiseofasweetdessert.

Chapter 20Travel and TourismCertainly,travelismorethantheseeingofsights;itisachangethatgoeson,deepandpermanent,intheideasofliving.—MaryRitterBeard

IfyouareinthebusinessofservingtouristsandbusinesstravelersandyoudonothaveacomprehensiveplaninplaceorbeingexecutedtoserveChinesetravelers,youmaynotbeinbusinessmuchlonger.PaulBiederman,aprofessoroftravelandtourismatNewYorkUniversityandaformerhigh-rankingTWAexecutive,providesagoodintroductiontothewayinwhichChina'ssuperconsumersarechangingthefaceofglobaltravelandhospitality:“Withthelargestpopulationonearth,arapidlyexpandingmiddleclass,andrelaxedgovernmentrestrictionsonoverseastravel,itwasinevitablethatChinawouldbecomethe800-poundgorillaintheinternationaltravelmarket.“Thatexpectationbecamerealityin2012when,accordingtoUN/WTOstatistics,Chinabecametheworld'sleaderinbothnumbersofoutboundtravelersandtotaloverseasexpenditures.Sincethen,China'spositivemarginshaveonlywidened.TheUnitedStates,oncetheworld'sleaderinbothcategories,isanever-distantsecond.In2014,China'soutboundnumbersandspendingwereexpectedtoreach110million.What'ssoauspiciousaboutChina'svolumeofoutboundtourismisthatonly11countriesintheworldhavepopulationsaslarge.“Tourismrepresentsthetypeofspendingthatcomesnaturallytomiddle-classconsumersalongwithothercomponents,likecomfortablehousing,afamily,andperhapsanauto—allstaplesofthekindoflifestyleenjoyedindevelopedanddevelopingcountriesalike.ForChina,inparticular,apent-updemandhasbolsteredrecenttravelconsumption.Thiswasfueledbytheauthoritiesonly

graduallywithdrawingtheirreluctancetoallowChina'sconsumption-crazedandcuriouscitizenstotraveloutsidethecountry'sboundaries.Presently,ordinaryChineseareallowedtovisit150countrieswhereonlyarelativehandfulofforeigndestinationswereaccessibleadecadeago.”AspreviouslydiscussedintheChinaglobaldemographicandluxurychapters,itisobviousthatoutboundtravelinChinaisbecomingevermoreimportanttowhere,how,why,andonwhatChineseconsumersspend.ButitisworthexaminingtheimpactthatChinesetravelers,bothoutboundandwithinChina,arehavingonretailers,brands,hotels,airlines,specialty-servicecompanies,cities,states,andentirecountries.RoyGraff,anexpertinChinesetravel,tourism,andthefutureofChinesetravel,provideduswiththegraphbelow(Figure20.1).LikesomanyotheraspectsofChina'sdevelopmentoverthepast30years,therateofgrowthinthenumberofChineseoutboundtravelersisalmosthardtobelieve.Therewerefewerthan10millionChineseoutboundtravelersin2001.By2010itwasmorethan50million,andin2014thenumbergrewto100million.Withintwoyears,weexpecttosee200millionoutboundChinesetravelers.

Figure20.1OutboundChineseTravelers(Millions)It'snowonderthatChinesebusinesstravelersandtouristsarefastbecomingthemostsoughtafterandinfluentialintheworld.Thirtyyearsago,traveloutsideofChinawashighlyrestricted,limitedtostructuredbusinessdelegations,high-levelpoliticians,andafewselectstate-owned-companyexecutives.Itwasn'tuntilthelate1970sandearly1980swhenthestatebegantoletasmallnumberofpeopletostudyabroad.Inallthreecases,thegoalwastobetterunderstandhowtheoutsideworldfunctionedandtolearnhowtoimplementOpeningandReform.RoyGraffexplainsthat“Outboundtravel,eveninmodestnumbers,didnotbegininearnestuntilthemid-1990s.ItisworthrememberingthatthehandoverofHongKong,fromtheU.K.backtoChina,didnotoccuruntil1997andwasthereforeofflimitstomainlanders.In2013,accordingtotheHongKongtourismcommission,thereweremorethan40millionarrivalsfromthemainland,accountingfor75percentofallforeignarrivalstothecity;58percentofthosewereone-dayvisits.”HongKonghasbecomeanimportantdestinationformainlanderswhowanttobuyeverythingfromhandbags,jewelry,andfood,to

healthandbeautyproducts.ChinesevisitorsalsogotoHongKongtoexperienceadifferent,moreWesternandpan-Asianlifestyle.Itisasmuchaholidaydestinationasshoppingmecca.Graffrecallshowdifferentthingswereevenpriortotheearly2000s.“WhenIstartedsellingtravelproductsandservicesinChinain1998itwasalmostexclusivelyfocusedonbusinessandpoliticaldelegations.”Untilthemid-2000s,mostoutboundleisuretravelbyChinesetookplaceintheformofveryregimentedgrouptours.Graffexplainsthatmosttravelershadverysmallbudgetsandevenlessexperienceintravelso“theyreliedonbigstate-ownedtravelwholesalersorforeigntravelcompanieswhooperatedoutofHongKong(itwasillegalfortravelagentstooperateinChina)whotooktheirbudget,andslottedthemintoalargegroup.“Theywouldtypicallydo10daysinEuropeortheUnitedStates,quicklymovingfromcitytocity,onthebus,offthebus,onthebus,andoffthebus,”Graffrecalls.“Theystayedincheaphotels,ateevencheaperChinesefood,andmostlytookpicturesatkeyculturalsites.”In2002GraffandhiscompanybeganfocusingonFITs(fullyindependenttravelers),andoverthepast10yearshehashelpededucateChinesetravelers,travelcompanies,andforeignbusinessesonthebenefitsandexecutionofindependenttravel.WiththegrowthofChina'sconsumerboomandthebirthofChina'ssuperconsumers,alongwithgovernmentpoliciesthatallowedmoreindependentandfreetravel,FITs—liketheTangfamilyfromChapter13—havebecomethenorm.Chinesetravelersarepoisedtobecomethemostnumerousintheworldby2015andtheyalreadyspendmorepercapita,pertripthananyothernationality—closeto$7,000pertrip.ThemeansbywhichandreasonswhytheChinesetravelhavealsochanged.Grouptoursareanever-shrinkingpartoftheequation.

Theyarestillimportantforfirst-timeorinexperiencedtravelerstocertaincountries,buteventhesetourshavechanged.Accommodations,itineraries,andfoodarenowhigherend.Concurrently,thetradeandbusinessdelegationtravelmodelhaslostitsimportance.Yes,thosemodelsstillexist—andyes,someofthemprovideusefulvenuesforChineseandforeignbusinesspeopletointeract—but,moreandmore,Chinesebusinesspeopletravelontheirownscheduleandmoney,andwiththeirownagenda.TravelisnowhighonthelistofwaysinwhichChinesepeopleexpresstheirChineseDream.Theywanttoseetheworldaswellaslearnaboutandinteractwithothercultures—tobeabletospendtheirhard-earnedmoneyonnotjustgoodsbutexperiences.Keymotivatorsforoutboundtravelin2014include:

Business:Chinesebusinesspeopleandbusinessesaregrowingevermoreconfidentabouttheirplaceintheworld,andasChinaGoingGlobalaccelerates(theprocessbywhichChinesecompaniesexpandinternationallyinordertogetpubliclylisted,buylandandassets,investinnewbusinesses,selltheirbrands,andbuycompanies),sodothenumberofindividualsandsmallgroupsofindividualsconductingbusinesstravel.Shopping:Chinesetouristsandbusinesspeoplestilllovetoshopabroad.Pricesabroadareanywherefrom30to60percentlowerthaninChinaandthedesiretoshopandsavemoneyisstillstrong.LifestyleExperience:Chinesetravelers,morethanever,wanttoexperienceotherculturesandlifestyles.Chinesetravelersnolongerexclusivelystayincheaphotelsandeatcheapfoodsotheycanfocusonshopping.Thehotels,therestaurants,andtheculturalaspectsoftravelareandwillcontinuetobebigmotivators.Environment:Thisreferstoboththenaturalandemotional

environmentsinChina.Peopleworkveryhard,longhoursandhaveto,asonefriendputit,“constantlythinkinsixlayers,”addingthat,“whenItravel,Icanthinkinonelayerandrelax.”Additionally,manybigChinesecitieshavehighlypollutedairandwater,andtherearemajorconcernsaboutfoodsafety.Travelisatemporaryreleasefromtheseworries.Education:AsmoreChinesestudyabroad,andastheirparentsstayemotionallyclosetothem,foreignvacationsandbusinesstripsarebuiltaroundspendingtimewithoffspring.RealEstateandInvestments:ManyChinesewithmoneybelievethattheyhavelimitedoptionstospendandparktheirwealthinChina.Thishasgivenrisetoaboominoverseasrealestateandbusinessinvestmentbywealthyandnear-wealthyChinese.Manytraveltopurchase,workon,andenjoytheserealestateandbusinessinvestments.

Take a Walk on Boardwalk—Pass Go,Collect $200 (Thousand!)Thelastreasonisnotsomethingmanyhaveyetconsideredasatravelmotivator.PaulSalo,anAmericanexpatriateinChinawithacolorfulhistory—includingmakingandlosingfortunes,sellingartasadestituteonthestreetsofChina,andbeingkidnappedatgunpoint—finallyfoundlong-termsuccesssellingforeignrealestatetoChinesefamiliesandinvestors.SaloHomeshasseenitsbusinessskyrocketoverthepastfiveyearsand,accordingtoSalo,thereasonsare“theneedanddesiretoparkliquidassetsinforeignrealestate,increasedtravelleadingtobetterawarenessoftheglobalpropertymarket,andfamilieslookingtolivebi-nationallives.”Hepredicts,“Inthenextfiveyears,travel—influencedbythedesiretopurchaseandthesatisfactioninusingrealestateabroad—willtriple.”KevinBrownofSotheby'shas25yearsofexperiencesellingpropertyinNewYork,butinthelastfewyearshehasbecomesomethingofa“Mr.China”forManhattanrealestate.HenotesthatChineseconsumersarethenumber-oneforeignrealestatebuyersinNewYorkCity,LosAngeles,Hawaii,andtheGoldCoastofLongIsland.“Byfarandaway,theChinesearethefastest-growingdemographicweserve.”Hispractice,oneofthetopfiveinManhattan,reportsthat35percentoftheirsalesaremadetoChinesebuyers,comparedtoamere5percentjustfiveyearsago.Thatishowsuperconsumerschangeindustries,demographics,andcompanyfortunes.Regardlessofmotivation,itisbeyondargumentthatChinesetravelerswillbethemostnumerous,influential,andamongtheworld'shighest-spendingtravelersoverthenextfiveyears.Youneedtomakethemamajorpartofyourfuture,orbeleftbehindbythosewhodo.Whowillbenefitfromunderstandinghowtoidentify,attract,

serve,andretainChinesetravelers?Countries(smallandlarge)whofocusonChinesetravelers.CitiesandstateswhosetourismboardsactivelyengageChina.Retailers.Luxurybrands.Consumerproductcompanies.Luxuryserviceandexperienceproviders.Hotels.Foodandbeveragecompanies.Sportsfranchises.Airlines.Resorts.

SowhereareChinesetravelersgoing?Wehaveconductedourownresearchandporedovertheresearchofdozensofothertravelagencies,onlinetravelsites,consultancies,industrygroups,andothers.Whilewehopedtoprovideatop-10,-20,or-30listofdestinationsfortravelandbusiness,wefoundthatitwouldbeimpossible.Thereareeasily50differentcredibletop-20listsfor2014.Therewasahugevariationindatacollected,themethodsofcollection,thedifferentialsbetweenmostvisited,mostdesired,Asiaversusnon-Asiatrips,andperceptionsregardingwhatcountsasaforeigntripornot.Thereisalsothefactthatthetopdestinationlistschangeoftenbasedoncurrenttrends,politics,businessenvironment,andinvestmentopportunities.Forinstance,18monthsago,Japanwasanonfactor,butbecauseofaweakyenandaninterestinJapanithasbecomeatop-fivedestinationonmanylists.Wecan,howeverprovideyoualistofdestinationsincomposite

form.ThesearetheplacesChinesetravelersaregoing,lovegoingto,andwanttogoto.Itiswheretheyarespendingmoney,experiencingothercultures,relaxing,andengaginginbusiness.Asia–Oceania

HongKong:Easyaccess,uniquelifestyle,realestate,business,andshoppingalldraw.Taiwan:Closertiesthananytimesince1949,Mandarinspeaking,cosmopolitan,andadifferentkindofChineseculture.Sydney/Australia:Sun,beaches,businessopportunities,andeducationalopportunitieshavemadeAustraliaakeydestination.Maldives:BecameatopdestinationafterwordofmouthofhowChinesetouristsarecateredtospread.Japan:DisregardingpoliticaltensionswithChina,Japan'sstandardofliving,shopping,technology,andbusinessopportunitiespropelittoatopspot.

EuropeParis:Feedsintothedesireforculture,history,luxury,andshopping.Rome:FormanyofthesamereasonsthatParisisadraw.London:LondonwasslowtorealizethepotentialofChinesetravelersbutiscatchingup.Heritage,history,andBurberryhaveimprovedLondon'sranking.

NorthAmericaNewYorkCity:FarandawaythetopdestinationinNorthAmericaforallofthesamereasonsAmericansandforeignersalikeloveit.Shopping,fastpace,luxury,landmarks,history,media,andpopculture.LasVegas:WhileMacaoisstillthetopgamblingdestination

fortheChinese,LasVegasdrawsforitsshows,proximitytotheGrandCanyon,shopping,andtheappealoftheWesternlife.LosAngeles:ForthesamereasonseveryonelovesL.A.—sunshine,beaches,celebrities,andluxury.

UpandComersDubai:Chinesetouristsandbusinesstravelershavediscoveredthedesertplayground.ThereissomethingtotheideathatitisShanghai,LasVegas,andHongKongrolledintoone.Bali:Acombinationofresorts,areputationforsafety,naturalbeauty,andcleanairappeal.Phuket:SeeBali.

AsSageBrennanputsit,“BrandsshouldtakeadvantageofChineseconsumers'newfoundobsessionwithtraveltocommunicateandshowcasetheirbrandheritageandcultureinwaysthatarenotpossibleinChina.Chineseconsumersarehungrytolearnandexperiencehistoryandheritageandunderstandbrandqualityandworkmanship.UtilizetheseassetstogiveyourcustomersatrulyuniqueexperiencethattheycannotgetinChina.Theywillloveyourbrandallthemoreforit,andrewardyouwithhigherspendingacrosstheglobe.”Thisistrueofanyoftheproductsandservicesmentionedabove.TotrulybenefitfromtheChinesetravelboom,youmuststrategizearoundthreekeyimperatives:1. TherearemanylevelsofexperienceandsophisticationamongChinesetravelers.Thereisnoone-size-fits-allapproach.Peoplewhohavebeentravelingforbusinessandpleasurefor10years,newertravelerswithtwoyearsofexperienceandadaughteratNYU,andoneofthetensofmillionsmakingtheirfirsttripshavedifferentdesiresandneeds.Figureoutwhereyoufitamongthemandtailoryourbi-nationalapproachtotherightsegment(s).

2. Chinesetravelersarepeople.ChristineLusays,“Somewherealongtheway,inthelastfiveyears,brandsandcompaniesthatserveChinesetravelersandconsumerswentfromnotknowingtheyexisttotreatingthemlikewalkingdollarsigns.MyChinesefriendsnoticeit.Theworstthingyoucandoistreatthemthisway;theyknowwhatyouareupto.”

3. Experiencesmatter.Settingandexperiencearemoreimportantthanever.Whetheryouaresellingcouturedress,aluxurysuite,orafinemeal,knowthatexperiencebeyondthematerialmatters.

The Truth about China's Rude TouristsTherewasalotoftalkinthemediain2013and2014aboutrudeChinesetourists.InsomewaysthereisaparalleltotheAmericansuperconsumerofthe1950sand1960s,who—whenhebegantotravelabroad—developedareputationastheuglyAmerican,theloud,garish-clothes-wearingstereotypewhowasviewedbylocalstheworldoverasculturally,gastronomically,andlinguisticallybarbaric.Recentexamples,whichhavesparkedafirestormofcommentaryinbothChineseandWesternmedia,includeagroupofsnorkelerswhocaughtandateendangeredseacreaturesofftheParacelIslands;visitorstoNorthKoreawhothrewcandyatNorthKoreanchildrenasiftheywerefeedingducks;swimmerswhotookpictureswithadyingdolphin;andateenageboyfromNanjingwhoscratchedgraffitiona3,000-year-oldrelicwhiletouringEgyptwithhisparents.Inresponse,ChineseofficialsaremakingaconcertedefforttoimprovethebehaviorofChinesetravelersabroad.Infact,theyhaveissuedalistofguidelinesthatinclude“nospitting,cuttinglines,ortakingyourshoesandsocksoffinpublic.”VicePremierWangYanghasstatedthat“improvingthecivilizedqualityofthecitizens”isnecessaryfor“buildingagoodimage”forthecountry.Likemanycommentators,wearenotconvincedthatChinesetravelersonthewholebehaveworsethanothergroupswhenabroad.WeYanks,alongwithourGermanandEnglishfriends,havelongsufferedpoorreputations—somewhatdeserved—aspoortravelers.QuestionsoverwhethertheactionsthattheChinesegovernmentisaddressingareactuallyawidespreadproblemhavealreadybeendiscussedatlength,tonoavail.Tous,there

isadeeperlessontobelearnedfromthestory—oneinwhichbrands,retailers,andserviceprovidersfromaroundtheworldcancapitalize.Thelessonis:Whilethemedialikestosensationalizeafewisolatedincidentsofbadbehavior,thereareobviouslyfarmoreChinesetravelersinterestedinlearninghowtohavethemostsophisticatedexperiencetheycanfind.Withtensofmillionsofnewlywealthytravelersleavingthecountryeveryyear,companieshavetheopportunitytoexposeChina'snewworldcitizenstolocalfoods,beverages,fashion,hospitality,andexperiencestheymaynothavehad.ItisimportanttorememberthatmanyoftheseChinesebusinessandpleasuretravelershavelittleornoexperienceininternationaltravel.Thismayleadtoculturalmisunderstandings,butitisalsoanopportunityforluxurycompaniestoplayavitalroleineducatingtravelersaboutthebesttheirbrandshavetooffer.

AnytraveleriscuriousabouttheworldandwantstoseeandfeeltheplacestheyhaveseenonTV,online,andatthemovies.AccordingtoUNstatistics,Chinesetravelersparticularlywanttospendalotofmoneywhiledoingit:In2005,theUNsaid,“Chinarankedseventhininternationaltourismexpenditure,andhassincesuccessivelyovertakenItaly,Japan,France,andtheUnitedKingdom.”By2012,“Chinaleapedtofirstplace,surpassingbothtopspenderGermanyandsecond-largestspendertheUnitedStates(bothcloseto$84billionin2012).”Chinesetravelersfromtheemergingmiddle,upper,andwealthyclassesarestillverymuchinaphaseofdevelopmentwheretheyareseekinginstructionandcuesonhowtobuildtheirsenseofidentityandtheirpersonalbrands,withtastesinformedbyamixofChineseandWesterncultures,aesthetics,andlifestyles.ConspicuousconsumptionamongChinesetouristsisincreasingly

losinggroundtoanewdesireforsophisticatedtravelexperiences.Theseconsumerscertainlydon'tfitthestereotypeoftheChinesetouristlinedupoutsidealuxurygoodsstore—rather,theywanttoimparttootherstheirnewlyfoundsophisticationbythewinestheydrink,thenewfoodstheyhavetried,thehotelsandresortstheystayat,thenichebrandstheywear,andthespecialexperiencesinwhichtheyhaveengaged.Withcloseto60percentofChineseluxurypurchasestakingplaceoutsidethemainland,smartluxurycompaniescanandshouldtaketheopportunitytoeducateChineseconsumersonhowtobuildanidentitythroughtheirexperiencesinforeigntravel.Bydoingso,theyretainbrandloyaltywhenthetravelersreturnhome.Someexamplesinclude:

ThecosmeticsretailerwhoholdsaspecialprivateeventforChineseluxurytravelersinordertoeducatethemonproducts,looks,howtoshopsmartlyforcosmeticsaroundtheworld,andhowtheycankeepupthelookathomebyobtainingthesameproductlocally.ThehotelthatholdsspecialeventsorprovidesChinesetravelerswithpre-orin-tripcollateralmaterialonfood,wine,andlocalattractions,whilesubtlyincludinglive-,look-,andact-like-a-localmessagingintotheirprograms.TheseextratouchesmaybethedecidingfactorforChinesetravelerschoosingonefive-starlocationoveranother,bothdomesticallyandabroad.Thehigh-endfishingandwildlifeexcursioncompanyinAlaskathatgivesChineseconsumersasenseofplaceandcustombyprovidinggeneralandculture-specificlessonsaboutthelocalecologyandlandscape(inadditiontoprovidingaluxurylodge,greatmeals,andsuperbfishing).

Chinesetravelerscarrythesameneedsanddesiresontheroadastheyhaveathome.Companiescanbuildtheirbrand,sellproductsandservices,andretaincustomersbytappingintotheseneedsanddesires.And,atthesametime,theycanroundoutthetravel

experiencewithalifeexperienceandaneducationinglobalsophistication.

PerhapsnofacetofthecurrentpowerofChinesesuperconsumersismorerepresentativeofthewholethanthetravelandtourismexplosion.Thereisnothingmoreexpressiveofmiddle-classsuccessandluxurylivingthantravel.China'ssuperconsumersareexhibitingtheirtastes,sophistication,spendingpower,adoptionofthebestoftheWest,andtheirultimateChinesenessthroughtravel.Alloftheindustries,companies,andnationsthatstandtobenefitfromChinesemassconsumptionfindthesebenefitsattheirdoorstepwhenChinatravels.Consumerproducts,gifts,realestate,education,fashion,foodandbeverage,hotels,airlines,amusementparks.Businessdeals,relationshipbuilding,selfexpression,absorbingculture.AssertingthestrengthandwealthofChina.AllofthisisexpressedontheroadandisaresultofwhatishappeninginChinaproper.TheChinamarketandtheChinaglobaldemographichavecoupledandgivenbirthtotheChinesesuperconsumer.Thequestionforyou,yourbrand,yourcompany,yourfutureis:HowcanIhelpChinagrow,boostmybottomline,helpmycompanyandcountryprofit,anddogoodwhiledoingwell?Ifyoudon'thaveaplan,youneedone,andifyouhaveoneyoumustrevisititoften.Chinesesuperconsumershavechangedtheworldandwillcontinuetochangetheworld.You,yourbrand,yourcompanymustplan,adapt,improvise,andovercomethechallengespresentedbythesefactstostayrelevantandsucceedinthenext20yearsandbeyond.

Chapter 21Chinese Super Consumers Changing theWorldChangeisthelawoflife.Andthosewholookonlytothepastorpresentarecertaintomissthefuture.—JohnF.Kennedy

AmericansuperconsumerschangedAmericaandtheworldinthesecondhalfofthetwentiethcentury.ThesamethingishappeninginChinatoday,inwaysbothsubtleandprofound,andanyonewhoislookingtotheworld'slargestcountryasapotentialmarketforgoodsandservicesneedstobeawareofthemassiveshiftsthatarehappeningthere.Atthebeginningofthisbook,wewrotethatitisn'tahow-toguidefordoingbusinessinChina.Rather,ourrealgoalistoprovidesomecontextforwhatmightwellbethemostimportanteconomicdevelopmentgoingonintheworldtoday.

The Microsoft MiracleLet'slookatwhatthisalllookslikeintherealworld.AlotofWesternpunditshavewrittenoffMicrosoftasyesterday'snews,butinChinatheworld'slargestsoftwarecompany(still)hasbeenabletoaccomplishwhatfewothercompanieshave—anditallcomesbacktoMicrosoft'sabilitytoidentify,reach,andselltosuperconsumers.OfallthemajorAmericanInternetplayers—Google,Facebook,Twitter,Amazon.com,Apple,andMicrosoft—itisMicrosoftthathasmanagedtomosteffectivelyovercomespecifichurdlesandintegrateitselfintothefabricofChina'sInternetandhigh-techinfrastructure.Specifically,Microsofthasdeftlynavigatedboththegovernment'ssignificantpresenceinChinesehigh-techaswellastheChinesesuperconsumer'sambivalencetosoftwareasapoint-of-saleunitpurchase.Dr.ZhangYaqin,chairmanofMicrosoftAsiaPacificResearchandDevelopment,isaworld-renownedexpertindigitalimagingandaudio,datacompressionandvideo,multimediacommunications,andInternettechnologies.Aholderof60Americanpatents,hejoinedMicrosoftin1999andhasbeenintegraltothecompany'ssuccessinChina.“BackwhenIjoinedMicrosoft15yearsago,Chinawasacountrywiththepotentialtobecomethenumber-onebuyerinmanycategories,”Dr.Zhangsays.“TodayChinaisthenumber-onemarketforpersonalcomputers,thelargestwirelessphonemarket,thelargestautomotivemarket,andisnumberoneortwoformanyotherproducts.Soduringthelast15yearsthepotentialhasbecomereality.”ButChina'sriseastheworld'stoptechnologymarkethasnotincludedsoftware.Dr.Zhangexplainswhy:“FortheITmarket,Chinaisveryconsumer-driven,”continuedDr.Zhang.“IntheUnitedStates,itis,firstandforemost,enterprise-drivenandthen

consumers.InChina,itisveryconsumer-centricwithbothPCandmobile,anditisnotlikelytochangeinthefuture.”AccordingtoDr.Zhang,aproductlikesoftware,whichaconsumercannotseeortouch,doesnotpenetrateaChinesemind-setthatvaluesvisibleprestige,visualbeauty,andobviouscraftsmanship.Untilrecently,software'stangiblemanifestationcameintheformadisk,andtheChineseconsumersimplycouldnotjustifypayinghundredsorthousandsofdollarsforinvisiblecode.Also,itsvalueasintellectualpropertywasnotonthegovernment'sradar—thusitsambivalencetowardpiracy—althoughthishasstartedtochange.Chineseconsumersaremuchmoreopentotheideaofpayingforsoftwareasacloud-basedsubscriptionservice(SaaS),muchthesamewaytheywouldpurchasemagazines.AlibabaandTencent(China'slargestInternetcompanies)arebothbasedontheSaaSmodelandMicrosofthasbeenanearlymover,aswell.“TheChineseconsumerhaschangedthedynamicsofthesoftwareindustryinChina,”Dr.Zhangsays.“IntheUnitedStates,softwarehasbeenamultibilliondollarindustrywithapplicationslikeMicrosoftOfficeandlaterwiththeadventoftheInternet,software-as-a-service(SAAS)hasbecomeverypopularandthereforecompaniesusesoftware-as-a-servicefromtheInternetcloud.Chinahasleapfroggedthesoftwareproductindustryandrightintothesoftware-as-a-serviceindustry.”Headdsthat,“Chinesegamingcompaniesactuallymakemoneyfromsellingvirtualgoods,ads,andsubscriptions.InAmerica,consumerswillpay50dollarstobuyasoftwaregameinabox,CD,orcartridge.InChina,manyofthegamesarefreebutyoupayfortheusageortheyaresubsidizedbytheadvertisers.Peoplepayforthecomputerhardware,insomecasesmoreexpensivethanintheUnitedStates,andtheywillpayforthesoftwareasaservicetouseit,justnotforthesoftwareproducts.”Inlate2012,MicrosoftbecamethefirstmajorU.S.providerto

launchapubliccloudinChina.Itdidsobylicensingthetechnicalknow-howandrightstorunShanghai'smunicipalgovernmentinordertoofferOffice365.WindowsAzurebegantorolloutinChinain2013throughChinesepartner21VianetGroup,alarge,carrier-neutral,Internetdata-servicesprovider.Forrester,anAmericanmarketresearchcompany,predictsthatChina'spubliccloudmarketvolumewillreach$3.8billionby2020.Dr.ZhangalsoemphasizesMicrosoftChina'sroleinhelpingstart-upcompaniesbyleveragingitscloudservices.IthasevensetupfloorsinbuildingsinBeijingandShanghaiforstart-upsthatuseWindowsAzureastheiraccelerators.“Sofarwehavehostedatleast40companiesthatdon'tneedtospendresourcesoninfrastructureorhardware,”Dr.Zhangsays.“Theyareusingourcloudserviceswithoutbuyinganycomputerservers.Theygraduateinsixmonthsandmanyofthembecomesuccessfulbecausewehavehelpedthemlowertheircostsandincreasethespeedofoperations.”AnothermajormilestoneforMicrosoftChinaistherecentliftingofthegovernment'sbanonsalesofMicrosoft'sXBoxOne(andallothergamingplatforms)gamingconsole.Chinaistheworld'stopvideo-gamingmarket,butthecountryimplementedabanonvideogameconsolesin2000afterthegovernmentcitedconcernsaboutharmfuleffectsthatviolentvideogamesmighthaveonthecountry'syouth.Themeasure'srelaxationwillallowforeign-investedenterprisestoshiptheirproductsintothecountryfromfactoriesinShanghai'snewfree-tradezone(openedin2014).Sony,Microsoft,andNintendowillhaveanopportunitytostakeaclaiminthispotentiallymassivemarket.MicrosoftChinaisthefirstforeigncompanytoopenupinShanghai'sFreeTradeZone.ItinvestedinajointventurewiththeChineseTVcompanyBesTV,asubsidiaryofShanghaiMediaGroup,witha$237millioninvestment.ThekeytoMicrosoft'ssuccesshasbeenDr.Zhang'sdiligenteffort

tostudyandunderstandthenuancesofChineseconsumersandgovernmentstructure,andthemanydifferentwaystheybothimpactbusiness.“TheChinesegovernmentismuchmoreinvolvedandplaysamoreactiverolewithbusinessthanmostothergovernments,soyouhavetofullyunderstandclearlytheirpoliciesandtheirnationalpriorities,”Dr.Zhangsays.“IstudyallthedocumentsandpoliciesfromtheNationalPeople'sCongress,andIpaycloseattentiontothemacropoliciesandhowtheyrelatetoourindustry.”Headds,“Ifyouwanttosucceed,youneedtoalignyourprioritieswiththegovernmentpoliciestocreateawin–win.InChina,MicrosoftisaChinesecompanyandthatiscriticaltooursuccesshere.Formostforeignmultinationals,theytendtogointotwoextremes.OneextremeistheypaylittleornoattentiontotheChinesegovernmentandtheysimplytransplanttheirsystemsandbusinessmodelstoChinawithoutanymodificationsandthinkitwillworkaccordingly.“InmostcasestheyfailedbecauseyoujustcouldnotdothatwithoutadaptingsufficientlytoChinesecultureandpolicies.Theotherextremeistheypaytoomuchattentiontothegovernment—theyspenttoomuchtimeandresourcesonlocalgovernmentandcentralgovernment—sotheybecomesoreceptiveandcomplianttotheChinesegovernmentthattheyarenotpayingenoughattentiontothemarket.Chinaisactuallyverymarket-driven,soyoumustpayattentiontotheconsumers;soitisadelicatebalance.Attheendoftheday,thebusinesscannotjustdependongovernment,soyoucannotsay,‘Iknowthemayororthegovernorsowell,mybusinesswilldowell.’”Herewehavetocometoapointnotpreviouslymentionedinthisbook,butonethatmustalsobeaguidingprincipleforallcompaniessellingtoChina'ssuperconsumers.Thatis:ThepoliciesandregulationsinChina,aswellastheintimatebondbetweenbusinessandgovernment,areattheheartofthesuper-consumerrevolution.Thegovernmentsettheframeworkforaconsumption

economy,andisworkingdailytoincreaseconsumptionasapercentageofGDP.Yourgoals,aims,strategies,andplansmustalignwiththehopesanddreamsoftheChinesegovernmentasmuchasthehopesanddreamsofChineseconsumers.TheChinadreambelongstotheChinesepeoplebutisbeingmidwifedbythecentralgovernment.ThestoryofAmway,theUS-based,direct-sellingpioneerandmarketleader,tellsthetale.TheyestablishedoperationsinChinain1995,basedontheirUSmodelofdirectselling,buta1998governmentbanondirectsellinginChinaconfinedthecompanytosellingthroughstores,whichwasantitheticaltotheirbusinessmodelandtheyhadnoexperienceinit.EssentiallyAmwayseemedtobedeadinthewaterinChina.Afteryearsofnegotiationsandrelationshipbuilding,andcompromisewithnumerousgovernmentagenciesandofficials,ChinalooseneditsrulesondirectsellingandallowedAmwaytooperateonafusionstore-based/direct-salesmodel,andsoonafterAmwayrelaunched.In2008,ChinabecameAmway'snumber-oneglobalmarketandrevenuegenerator.RecognizingthemarketopportunitypresentedbyChina'ssuperconsumers,studyingtheirneedsandwants,engagingthemdirectly,andworkingwiththegovernmentledtoAmway'ssuccessandisagoodmodelforalmostanybusinesshopingtosucceedinChina.

A Final Word about China's SuperConsumersSomerefertothepast30yearsastheChineseMiracle.Thatisareductiveandpatronizingview.TheriseofChina,whilenotinevitable,hasnotbeenamiracle;rather,itwastheresultofhardwork,bravedecisions,constantdebate,experimentation,andself-examination.Ithaditsfoundationsinthousandsofyearsofaccomplishments;itwasgoodstrategicplanningfollowedby(mostly)goodexecution.Chinadidnotsomuchbecomeaworldchangerasmuchasitreemergedasone.TheproductioneconomyhelpedurbanizeandenrichhundredsofmillionsofChinesecitizens,andtheconsumptioneconomyischangingasmany,ifnotmore,livesinChina.EquallyimportantisthatsuperconsumersarenotonlychangingChina,butchangingtheworld.LiketheexplosionofAmericanconsumptioninthepast,therearepositivechangesandnegativechanges,therearewinnersandlosers,andthereiseverymultitudeofreality,implication,andpotentialforgoodorbadinChina'sconsumerboomastherewasinAmerica'sandEurope's.WhiletherearemostcertainlysomebadeffectsfromtheriseoftheChinesesuperconsumer,webelievethattheoverallresultispositiveforbothChinaandtheworld.WehaveaddressedmostofthesepositiveeffectsandthewaysinwhichtheyarechangingChinesepeople,businesses,andthecountryingeneral,butitisworthlookingatafewmacrochangesandtheopportunitiesandchallengesahead.Wehavelongheldasourguidingprincipletodogoodwhiledoingwell,aswelive,dobusiness,andworkwithandamongtheChinesepeople.Itisjustasimportanttoensurethatyouareimprovingpeople'slivesandtheplacestheyliveasitistomakeaprofit,anddoingtheformer,especiallyinChina,canleadtothelatter.Thisisanimportantpointtorememberforitsaltruisticaswellascommercialimplications.

ThebigvitaminandsupplementcompanyNBTYisaprimeexample.Chineseconsumershaveaninsatiabledesireforsafe,foreignmadevitaminsandsupplements.NBTYhasbroughtmorethan300productstoChinathatprovidehealthyandsafeenhancementstoChineseconsumers'diet.AsaresultChinahasbecomethecompany'snumber-twowholesalemarketintheworld.IntheUnitedStates,NBTYsupportsmanylocalcharities.ConsistentwithNBTY'scorporategivingphilosophy,NBTYandChinaSoongChingLingFoundation(CSCLF)havejointlysetupthe“CSCLF-NBTYChildrenCareFund,”whichwillmakeamultimillionRMBdonationwithinfiveyearstoimprovethenutritionofpreschoolchildreninChina'seasternandWesternareas.“SupportingtheChinaSoongChingLingFoundationisveryconsistentwiththeNBTYbrandandwhatwewanttoberecognizedfor,andwewanttobeinvolvedwithanorganizationthatisveryinfluentialandhasaverypositivereputation.ThatisthecorporateimagewewanttoprojecttoChinaandChineseconsumers,”saidJeffreyNagel,chiefexecutive.Wehaveworkedformorethan20yearstobuildnotonlybridgesbetweenforeignandChinesecompaniesandexecutives,buttobuildcultural,linguistic,andpersonaltiesbetweenChinaandtherestoftheworld.Partofthatprocessnowincludesunderstandingthegood,thebad,andtheuglyrealitiesthatChina'ssuperconsumershavecreatedinordertoensurethefuturegrowthandcomfortofChinaandtheforeignanddomesticcompanieswhohavebenefitedandseektocontinuebenefitingfromChinesemassconsumption.Opportunitiesandchallengesarefoundinallthree.China'ssuperconsumershavechangedtheworldweliveinandwillcontinuetodosointhecomingyearsanddecades.ThelargestandmostimportantconsumerclasssincepostwarAmericawillplayanimportantpartinhowbrandsareestablishedandmarketed,howretailisconducted,howweuseandbenefitfromtechnology,andwhattheglobalbusinessandcommercial

landscapeofthetwenty-firstcenturywilllooklike.WethinkitwilllookverymuchliketheChinesewomanwedescribedstartingherdayintheShanghaiStarbucks.Thequestionyouhavetoaskyourselfis:WillIbenefitfromorbeavictimoftheChinesesuperconsumerboom?

WehopeyoufoundmanyanswersandthesparkforyoutoaskmorequestionsinregardtowhoChinesesuperconsumersare;howtheythink;whatisimportanttothem,andwhat,where,when,andhowtheybuy.Inpartingweofferyoualistofactionsyoucantakeintheshort,middle,andlongtermstostart,expand,andimproveyourengagementwithChineseconsumers.ItisimportantthatyouhavenumerouspeopleanddepartmentsworkingwithinyourorganizationaswellaskeyexpertsoutsideofitworkingtogethertosetandexecuteyourChineseconsumerstrategy.Theseareagoodstart.ShortTerm:

ImmerseyourselffurtherintheinformationthatwillcontinuetoenhanceyourunderstandingofChinesehistory,culture,language,andmind-settobetterunderstandChineseconsumers,purchasemotivators,andthelandscapeyouareoperatingin.AbsorbasmuchcurrentandtopicalinformationandnewsaboutChinaasyoucan.Inamarketthatchangesandgrowsthisfast,today'srealitiesandassumptionsaretomorrow'sfailuresifyouarenotcareful.IfyouareplanningtostartengagingortocontinueengagingChineseconsumers,repeatthedailymantrasof:“strategy

beforestructure”and“duediligence,duediligence,duediligence.”

ShorttoMidTerm:RememberthatChinaisnotamonolith—itisacontinental-sizecountrywith1/6ofhumanitylivinginsideitsborders.Makecontinental-sizedplansforoperations,sales,marketing,anddelivery.RememberthatChina'ssuperconsumersarenoweverywhereinChina.Youcanjustaseasilysucceedselling$3tubesoftoothpasteinthehinterlandsasyoucanselling$900smartphonesinthecapitals.Usetheabovetwopointstodeployinsideandoutsideresourcesthatwillprovidetheresearch,strategy,abilitytoexecute,andabilitytoadjust.RememberthatthereisnowaChinaglobaldemographicaswellasaChinamarket(s).Integrateyourservices,infrastructure,brandexperience,marketing,andsalestocaptureChinesewheretheyAREspending,notwhereyouwantorthinktheyarespending.DevelopaPlanAandaPlanBfore-commerce,socialmedia,anddigitalengagement,especiallyonmobileplatformsasthisiswhereengagement,peerrecommendations,andsalesareincreasing.

LongTerm:Buildalong-term,heartfelt,andsincererelationshipwithChineseconsumers.Theyarenotmovingdollarsigns;theyarenotWesternersbecausetheycarryiPhonesanddriveBMWs;theywillseethroughyoursurfaceveneerifyoudonotoffersubstanceandthepromiseofamutuallybeneficialengagement.Cultivaterelationshipswiththenewgenerationofbusiness

leaders,academics,politicalleaders,andentrepreneursinsideandoutsideChina.Theyarethegenerationoftheone-childpolicyandtheyarewelleducated,sophisticated,Englishspeaking,andambitious.Aligningyourbusinessinterestsandpurchasingdesiresiscritical.RemembertheaverageluxuryconsumerinChinais39asopposedto59intheWest.Bepatient.Business,branding,andsellinginChinahappenonChinatime,notyours.Imagineifyouwokeuponedayandsuddenlytherewere20,50,100Chinesebrandsandretailersliningthemainshoppingstreetofyourtownorcity.Howmanywouldyouhaveaninstantdesiretoengagewith?Howmanywouldyoutrust?Howmanywouldyouchooseoverthelocalbrandsyouhavebeenbuyingfromfor10,20,30years?Bepatientagain.ItcantakeuptotwoyearstogetaproperreadonhowyouaredoinginChinaandwiththeChinaglobaldemographicand3-5yearstobetrulyprofitable.InChinapatienceisnotjustavirtue,butTHEvirtue.

Index

AAdvertisingAffinityChinaAffluentconsumersAffordable-luxurysectorAgeofDiscoveryAgeofExplorationAgingpopulationAgricultureAgricultureIndustryCommerceAssociation(AIC)AlcoholconsumptionAlibabaAliPayAliWangWangAmazonAmericanbrandsAmericanCenturyAmericanDreamAmericanproducts,preferenceforAmericans,individualismofAmsterdam:TheStoryoftheWorld'sMostLiberalCity(Shorto)AmwayAncestorworship

Annan,KofiAnticorruptiondrivesApparelAppleAppliancemarketAsia,asChinesetraveldestinationAudiAustralia

BBaccardiBadgebrandsBaliBang&OlufsonBarry,MaxBaskin-RobbinsBaudelaire,CharlesBDAChinaBeard,MaryRitterBeddingBeerBeijing:

GalleriesLafayetteinLenovoinaspartofCoastalChinaretailoutletsin7-Elevenin

BeijingOlympicsBeijingSnowflakeBelstaffBestBuyBesTVBiederman,Paul

BillboardsBillionairesBMWBohaiBayBostonConsultingGroupBrands:

inbroadcastmediaindepartmentstoresandtravel

BrandadvertisingBrandhaloeffectBrennan,SageBrian,WeiBRICSnationsBritishEmpireBroadcastmediaBrooksBrothersBrown,KevinBuddhismBush,GeorgeW.Businessculture,Chinesevs.WesternapproachestoBusinessstrategyBusinesstravelBuying,insupplychain

CCandlesCantonSeealsoGuangzhouCantonFairCarcultureCarmosky,JanetCarownershipCarrefourCastro,FidelCBREResearchChinaCGDM(ChinaGlobalDemographicMarket)ChanelChangchun-HarbinChangzhouChannelsSeealsoe-commerce

ChinaPost/PostMartconveniencestoresdepartmentstoresgrocerystoresandsupermarketshypermarketslifestylestoresmallsmultibrandretailspecialtyretailers

street-levelstoresChen,FrankChengduChenYiCheungKongGraduateSchoolofBusiness(CKSB)ChiangKaiShekChikuChina:

contradictionsinmodernashistoricalsuperpowerlearningaboutasmarketpopulationofasself-containedempireuniquequalityofgrowthin

ChinaCentralTelevision(CCTV)TheChinaDream(LiuMingfu)“China-fy,”ChinaGlobalDemographicChinaGlobalDemographicMarket(CGDM)ChinaHorizonInvestmentGroupChinaLawBlogChinaLuxuryAdvisorsChinaPost

ChinaResourcesEnterpriseChineseculture

andChinesemindsetimportanceoffamiliaritywith

ChineseDream“TheChineseDream,”ChineselanguageChineseMiracleChongqingChopardChowTaiFookCityclustersCivilWarClingman,AlanCloudcomputingCoachCoastalChinaCoca-ColaCoffeeColdWarColgate-PalmoliveCollectivizationColorsColumbus,Christopher

CommunistsCommunistPartyConfucianismConfuciusConspicuousconsumptionConsumerboomConsumercultureConsumerismConveniencestoresConverseCopyrightsCorelleCorningWareCorruptionCosmeticsCost,totaldeliveredCrusadesCubaCulturalRevolutionCulture,seeChinesecultureC-Wonder

DDalianDaoismDecollectivizationDelormeDengXiaopingDepartmentstoresDetroit,MichiganDigitalMallDiscretionaryincomeDisposableincomeDistribution,andsupplychainDistributionchannels,seeChannelsDomino'sDongguanDongMingzhuDubaiDutchEastIndiaCompany

EEastandWestDesignsEastChinaDesignandEnergyCompanyfortheEnvironmentEBayE-commerceSeealsoAlibabaEdelmanEducationaltravelE!EntertainmentTelevisionEisenhower,DwightD.Elliman,DouglasEmporioArmaniEmpressDowagerEnglishlanguageenofootwearEntertainment,shoppingasEnvironmentalconcernsErmenegildoZegnaEstéeLauderEtsyEurope,asChinesetraveldestinationEuropeanDreamEuropeansExportNow

FFacebookFamilyMartFastmovingconsumergoods(FMCG)FederalInterstateHighwaySystemFICEs(foreigninvestedcorporateentities)FirstEmperorFirstglobalizationFITs(fullyindependenttravelers)Five-YearPlan(FYP)FMCG,seeFastmovingconsumergoodsFocusMoneymagazineFord,HenryForeigninvestedcorporateentities(FICEs)ForeignrealestatebuyersFormosa,seeTaiwanForresterResearchFortuneFourModernizationsFredMyerFreedomFreeTradeZone(Shanghai)FujianprovinceFullyindependenttravelers(FITs)

FuzhouFuzhou-XiamenFYP(Five-YearPlan)

GGalleriesLafayetteGandhi,MohandasGangofFourGanster,SteveGates,BillGellman,RichardGeneralMotors(GM)GenghisKhanGeorgeIII,KingGermanyGernert,DouglasG.I.BillGiftsGifting,luxuryGiordanoGlobalization:

andChinaGlobalDemographicfirst

Globalization1.0Globalization2.0GM(GeneralMotors)GMBuilding(NewYork)Gome

GoogleGossipGirlGotta-have-itmindsetGovermentrulesandregulationsGraff,RoyGreatDepressionGreaterChinaGreatLeapForward“TheGreatPizzaWars,”GREEElectricAppliancesGreekEmpireGretzky,WayneGrocerystoresGross,DaveGroupdynamicsGuangdongprovinceGuangxu,PrinceGuangzhou

ascityclusterandcolonialexploitationaspartofCoastalChinaPostMartin

GuanxiGucci

HHäagenDazsHaierHaloeffect,brandHanDynastyHanethnicgroupHangzhouHao,EmmaHarmoniousSocietyHarris,DanHarryWinstonHartmann,ReneeHeilongjiangProvinceHeinekenHelloHollywood!(televisionshow)HenanprovinceHersheyHierarchiesHirohito,EmperorHistory,ChineseH&MHollywoodHomeDepotHomeShoppingNetwork(HSN)

HomonymsHongbaoHongKong:

andcolonialexploitationEmporioArmaniinLenovoinaspartofCoastalChinaandShenzhenTechnomicConsultantsinastouristdestination

HSN(HomeShoppingNetwork)Hu,MarkHuaGuofengHuaHaiZhongLuHubeiprovinceHublotHuizhouHunanTVHusbanddaycaresHypermarkets

IIBMIGDImplementation,supplychainImpulsebuyingIndiaIndividualismIndustrializationIngrao,TonyInitialpublicofferings(IPOs)InnerChinaInsidertradingIntellectualproperty(IP)InternetInterstateHighwaySystemInventions,ChineseIPOs(initialpublicofferings)iQiyi

JJapanJD.comJerryMaguire(film)JiangQingJiangsuprovinceJiangxiprovinceJiangZeminJointventuresJoyceBeauty

KKateSpadeKateZhouHandbagsKennedy,JohnF.KFCKmartKMPGKoreaKraftKublaiKhanKunmingKuomintangParty(KMT)Kutcher,Ashton

LLancômeLandreformLaneCrawfordLasVegas,NevadaLavazzaCoffeeLavin,FrankLawsonLee,AnnLeeJeansLenovoLew,AndyLiaoCentralSouthLifestyleexperience,travelasLifestylestoresLi&FungLiNingLiteracyLiuChuanzhiLiuMingfuLondon,EnglandLonginesL'OréalLosAngeles,California

LouisVuittonLu,ChristineLuxurygoodsandbrands

affordable-luxurysectorandcorruptiondownturninexpansionofandgiftinggroupandmiddle-classconsumersandnouveauricheTourneauandtravel

LVMH

MMa,JackMacaoMcCartney,LordGeorgeMcDonald'sMcGregor,JamesMcKinsey&CompanyMcKinseyTechnologyInstituteMagnesSistersMainstreamconsumersMakeupMaldivesMallsManchuriaMandarinChineseMandarins(civilservants)ManufacturingMaoismMaoZedongMarketclustersMarketing

andbrandadvertisingandconsumerimpulses/desiresbyLenovo

andmadeforChinaTVbyO.C.T.MamiviapromotionsviasocialmediabyWeiEast

MarketsegmentationMarkman,ScottMarx,KarlMarxismMaternitywearMaurizi,CynthiaMaxim'sMedicine,traditionalMegaprocesses,supplychainMeijiRestorationMeitanMeYouMelnitsky,IraMetanDevelopmentMexicoMichaelKorsMicrosoftMiddleclass

Americancreationof

andluxurymarketMiddleKingdomMindset,ChineseMingDynastyMinistopMobilepurchasesModernLifeMongolsMongoliaTheMonogramGroupMorris,IanMorrison,VanMultibrandingMultibrandretailMusicalinstruments

NNagel,JeffreyNamer,LarryNanjingNanningNationalBasketballAssociation(NBA)NationalFootballLeague(NFL)NationalistgovernmentNationalistsNBA(NationalBasketballAssociation)NBTYNestléNetworksNewChinaNewWorldNewYorkCityNFL(NationalFootballLeague)NikeNikeChina99ReformsNingboNintendoNomadsNordstrom

NorthAmerica,asChinesetraveldestinationNouveauricheNoveltyvalue

OOceania,asChinesetraveldestinationO.C.T.MamiOffice365(software)OgilvyandMatherOlympicgamesOmegaOneBillionCustomers(McGregor)OnlineshoppingSeealsoe-commerceOpeningandReformOperationsstrategyOpiumOpiumWarOrient(corporation)Orr,GordonOutboundChina

PParis,FranceParksonPatekPhillipPatiencePayPalPearlRiverDeltaPeerrecommendationsPeople'sRepublic,foundingandearlydaysofPepsiPer-capitadisposableincomePersonalcomputermarketP&G,seeProcter&GamblePizzaHutPlanetHomebuddies(Internettelevisionseries)Planning,supplychainPollutionPolo,MaffeoPolo,MarcoPolo,NiccoloPompadur,LarryPorschePorts(brand)PostMart

PPTVPradaPricewaterhouseCoopersProblemsolvingProclamation13(StateCouncil)Procter&Gamble(P&G)PromotionsPyrex

QQianlongQingdaoQingDynasty

RRalphLaurenRealestate,foreignRebeccaMinkoff“RedComputer,”ReformandOpeningRelationships,cultivatingRenaissanceReturneesReturntoDaFuTsun(televisionshow)RoaringTwentiesRolexRomanEmpireRome,ItalyRooseveltIslandRudeChinesetouristsRudin,MelanieRussia,Soviet,seeSovietUnionRusso-Japanesewar

SSaleschannels,seeChannelsSalo,PaulSaloHomes“ScientificDevelopment,”SegmentationSelf-confidenceSelf-expressionSelf-imageSelling,insupplychainSeniormarketSephoraSequoiaCapital7-ElevenSEZs(specialeconomiczones)ShaanxiprovinceShandongprovinceShanghai:

ascityclusterandcolonialexploitationandDeng'sSouthernTourasfirst-tiercityHuaHaiZhongLuinMicrosoftin

aspartofCoastalChinaas“PearloftheOrient,”PostMartinretailoutletsinSephorain7-EleveninTompkinsInternationalin

Shanghai#1BeddingstoreShanghaiMediaGroupShanghaiPlaza66(shoppingmall)ShanghaiTangShenyangShenzhen:

ascityclusterHongKonginvestmentinmultinationalsandaspartofCoastalChinaretailoutletsinWhirlpoolin

Shopping:asentertainmentandtravel

Shorto,RussellShuangcheng

SilkRoadSilkRoadEraSinaWeiboSkincareproductsSlogansSocialismwithChineseCharacteristicsSocialmedia,marketingviaSOEs(state-ownedenterprises)SoftbankSoftwareSohoChinaSongDynastySonySophisticatedconsumersSotheby'sSouthernTourSovietUnionSpaceNKSpecialAdministrativeRegion,seeHongKongSpecialeconomiczones(SEZs)SpecialtyretailersStarbucksStateCouncilState-ownedenterprises(SOEs)

State-ownedshopsStayingthecourseStrategy,operationsStreet-levelstoresStructure,supplychainSubscription-as-a-service(SaaS)SunBaohongSuningSunYatSenSuperconsumption:

AmericanglobalizationoforiginsofChinese

SupermarketsSupplychains

andalignmentofstrategy/structure/implementationandbuyinganddistributionandmanufacturingmegaprocessesinandplanningandselling

SurplusLaborValueSuzhou

Sydney,Australia

TT-4strategy(Whirlpool)TAGHeuerTaipingRebellionTaiwanTangDynasty“Tang”familyTaoBaoTargetTechnologymarketTechnomicConsultantsTencentTheThreeRepresents360buy.comThriftThunderbirdSchoolTiangshanearthquakeTianjinTibetTier-onecitiesTier-twocitiesTiffany'sTingler,BrionTmall

“Toddler”consumers“Togetrichisglorious,”TompkinsAsiaTompkinsInternationalTompkins,JimTonyBurchTotaldeliveredcostTotesIsotonerCorporationTourneauTradeTrademarksTradesociety,ChinaasTraditionalmedicineTransportationTravelandtourism

andbrandsandChinaGlobalDemographicdestinationsforandforeignrealestatebuyersincreaseinkeymotivatorsforrudeChinesetouristsstrategizingtipsfor

TreatyPorts

Tudou/YoukuTuskTVstations21VianetGroupTwitterTwo-Dollar-a-Dayproject(Procter&Gamble)

U“UglyAmerican,”UnileverUniqloUnitedKingdomUnitedStates:

andAmericanCenturyChinaasviewedbyasChinesetraveldestinationpopulationof

UniversityFlagFootballLeagueUrban,PopeUrbanizationU.S.ChinaPartnersU.S.PostalService

VValueconsumersValuesystems,Chinesevs.American/WesternVans(brand)VideogamesVitaminsandsupplements

WWalmartWanamaker,JohnWangXiuliWarofResistanceWeChatWeiEastWenxhoiWhatAmericaCanLearnfromChina(Lee)WhirlpoolWenzhouWhollyforeignownedenterprises(WOFEs)WhytheWestRules—forNow(Morris)WindowsAzureWineWOFEs(whollyforeignownedenterprises)Women:

fashion-consciousricheststatusof

WorldKitchenWorldTradeOrganization(WTO)WorldWarIIWuhan

Wuxi

XXanaduXBoxOneXiamenXi'anXiJinpingXinhairevolutionXinjiangXiu.com

YYahoo!YangLiuYangtzeRiver“YanWu,”YellowRiverYoga2tabletYuanDynastyYum!brands

ZZakkour,HalZakkour,MichaelZaraZegnaZhangRonglinZhangXinZhangYaqinZhao,PaulZhaoWenhongZhejiangprovinceZhengHeZhouEnlaiZhuDiZhuRongji

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