To understand China’s biggest growth areas, visit a 4th tier city

11 Oct 2007|LiAnne Yu

Shanghai is a dazzling city, no doubt about it. I’ve heard it described as Manhattan on steroids. But when it comes to really understanding the vast majority of China’s emerging economy consumers, I would recommend getting out of the first tier cities like Shanghai and Beijing, and visiting a 2nd, 3rd and even 4th tier city. The “tier system” in China is based on both population and average income. First tier city residents tend to make more money and live lifestyles associated with the rising middle class. But even when we get down to the 4th tier cities, we’re not talking about sleepy little towns with only one mom and pop store. In fact, China has over 160 cities with populations of 1 million or more (compare that with the US, which only has 9). These are vibrant, rapidly developing places that represent China’s future prosperity.

While 3rd and 4th tier cities like Shaoxing (a three hour drive from Shanghai), Luohe (in Henan province), Dujiangyan (in Sichuan province), and Xintai (in Shandong province) may not enjoy much press, it is in these places where we can observe some of the most drastic changes in Chinese lifestyles over the last few decades. Here are a few things I observed during a recent trip to China’s smaller cities:

From rural to urban in one generation
Residents of these cities usually come from peasant backgrounds. Their parents were typically illiterate, and they themselves may have had few opportunities for education. They have known poverty and sometimes starvation. They view their current lifestyles as drastically improved over what their parents experienced. As a consequence, they don’t take anything for granted. One family I visited even kept the very first tv they were able to afford, even though it was broken, because it reminded them of how hard they had to work to get to where they are today.

Aspirations for middle class lifestyles
Even though they may live far away from Shanghai or Beijing, television and internet access provide images of what “middle class” lifestyles should look like (complete with IKEA furniture and frequent trips to McDonald’s). Parents believe that they won’t necessarily be able to achieve these things themselves, but they have aspirations that their children will achieve such lifestyles. How parents prepare their children for the future represents a huge opportunity for developing products and services geared towards education and growth.

Local brands dominate…for now
While Starbucks, Gucci, and Nike stores abound throughout Shanghai and other 1st tier cities, the downtown areas of the 3rd and 4th tier cities feature mainly local brands. When these smaller city residents are asked about their favorite electronics brands, they don’t mention Sony or HP as much as they gravitate towards Haier and Lenovo. When asked about their favorite sports brands, LiNing has the edge over Nike. And when it comes to soft drinks, it’s Wahaha cola, and not Coke, that fills their refrigerators. Nonetheless, 3rd and 4th tier residents’ curiosity about foreign brands is rising as they have more disposable income to spend, and as their knowledge of how 1st tier city residents live increases.

How residents of China’s smaller cities are experiencing China’s consumer revolution represent important opportunity areas for companies whose desire is to eventually enter the whole China market. I know it’s tempting to stay in Shanghai as it’s such a dynamic and exciting city (with some of the best food and shopping in the world), but I urge you to take some time in China’s smaller cities next time you visit.

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