One Country, Many Markets – McKinsey’s Alternative Method of Analyzing Chinese Consumers

Posted by Joel

(http://static.guim.co.uk/sys-images/Guardian/Pix/pictures/2009/7/28/1248782959908/Shopping-Crowd-in-Hangzho-013.jpg)

Back when I first started studying Chinese and traveling to China, my friends and colleagues thought I was crazy. While they were impressed that I was able to gain fluency in a language so different from English, but to them it just seemed more logical to study a “practical” language like Spanish or French. Around the same time as I was learning to differentiate the four tones of Mandarin and cramping my hand writing characters over and over, Western multinationals grew aware of the tremendous opportunity the China market presented. The dream of tapping into a market of 1.3 billion consumers led CEOs to empower China heads to achieve growth at all costs even if operating at a loss.

Fast forward to November 2009. People no longer look at me like I’m crazy when I say I speak Mandarin. Those same companies have shifted their focus as well. Due to pressure from the financial crisis, MNCs in China are not just expected to grow, they’re under pressure to achieve profitable growth. Thus, companies can no longer assume the existence of a homogenous “China market” and monolithic block of 1.3 billion consumers, adopting a one-size-fits-all strategy. They are forced to recognize the fact that while China is one country, it is comprised of distinct regions, cultures, dialects, and consumer preferences. Just like my Chinese vocabulary expanded over the years, so has that of the executives charged with leading growth in China. In addition to “Beijing,” “Shanghai,” and “Guangdong,” they are learning to pronounce new cities such as “Hefei,” “Yantai,” and “Changzhutan.” They have finally come to the conclusion that a handful of forward-thinking MNCs reached a while back: there is no such thing as a “one China strategy.” As McKinsey fittingly titled their 2009 Annual Chinese Consumer Study – “One China, Many Markets.”

So, if you can’t consider China’s market at the country level, then what is the most appropriate way to divide up China? At the provincial level? At the city-tier level?

McKinsey’s answer to this question is: Neither. McKinsey suggests an alternative approach, which they call a “Cluster Map.” They divided China into twenty-two city clusters, defined as “groups of cities that are developing around one or two large hub cities.” The twenty-two clusters are broken down by size with Kunming and Taiyuan classified as “Small clusters,” Xiamen-Fuzhou and Chengdu classified as “Large clusters” and Shenzhen and Hangzhou classified as “Mega clusters.”

What does all of this “clustering” accomplish from a China business strategy perspective? First, in terms of industry composition, clusters develop around certain industries. The report cites Shanghai’s automotive industry as an example. Due to SAIC and GM’s successful joint venture, a developed network of automotive parts suppliers has emerged in the suburbs and cities nearby. Additionally, McKinsey found that clusters offer a more accurate depiction of consumer preferences as income differences across city tiers decrease.

I think the city cluster analysis is an innovative way of approaching China market strategy. That said, I am still not convinced it is the best approach or that a best approach exists at all. The key takeaway from my perspective is that the days of looking at “The China Market” are over. Companies are scrambling to find a more tailored approach to be successful in China’s many markets, adopting multiple strategies to gain access to their portion of the coveted 1.3 billion consumers.

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