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The Past, Present & Future of Consumerism in China – Interview with Karl Gerth (Part I & II)

In order to understand the future trajectory of China’s domestic consumer market, it’s important to gain an understanding of the historical context of consumerism in China. Karl Gerth is a professor at the University of Oxford who teaches modern Chinese history with an emphasis on consumer culture. He brings a truly unique perspective combining both a deep understanding of contemporary Chinese history with actionable business insight for the present day and beyond.

Part I:

Joel Backaler: In your new book, As China Goes, So Goes the World: How Chinese Consumers are Transforming Everything, one of the questions you aim to answer is, “what are the implications for China and the world of hundreds of millions of Chinese people adopting Western lifestyles?” Can you please highlight the most significant implications?

Karl Gerth: There is, of course, no single positive or negative implication of Chinese consumerism.  Rather than focus on the good or bad implications, I think it is more helpful to think of them as wide-ranging, interconnected, and often both good and bad.

Take automobiles.  A few decades ago few Chinese owned cars; now China has surpassed the US as the world’s largest car market.  This is good news for any number of reasons.  Who would begrudge tens of millions of Chinese the opportunity to enjoy some of the same things that we do?  And thanks to Chinese consumers multinationals such as GM, which now sells more cars in China than the US, rely heavily on China for their profits.  You might say many who have invested in the stock market have already been benefiting from Chinese consumerism.

But there are many more implications.  China has vast ambitions to create its own national brands of everything, including automobiles.  It wants to move up the value-added chain and create a regulatory environment to promote Chinese brands.  The strategy has successes.  Already some two million Chinese work in their auto industry, including Chinese manufacturers such as Geely, which just bought Volvo.  Like the US with its recent “cash for clunkers” program, in China it has become a national economic necessity to promote car ownership.  We’ll see how Detroit handles China doing for cars what it did for plastic deck chairs and so many other consumer goods: make them so inexpensive they become ubiquitous.  If Americans cannot name a Chinese car brand yet, I suspect they soon will.  And, of course, we’ll also see how well the planet can handle the extra carbon emissions and the intensifying competition for oil.

Joel Backaler: So what you are saying is that in China as elsewhere consumerism begets more consumerism?

Karl Gerth.  Yes, the most significant implication of Chinese adopting Western lifestyles is that, in doing so, China, like the US and EU countries before it, is deeply committing its economy and society to consumerism.  China is increasingly implementing policies designed to get its citizen-consumers to consume more and more, regardless of the implications.  The spread of consumerism in China will accelerate some opportunities for companies such as GM, Yum! Brands, McDonalds and Starbucks but it will also continue to create serious global challenges.  Once you have millions of people working in the car industry and once you have built the largest roadway network in the world, there is no simple road back to bicycles.  The same can be said of so many other aspects of Western consumer lifestyles: once Chinese are accustomed to things such as fast food and indoor plumbing, it’s hard for them to go back.  Likewise, it’s hard for politicians whose credibility and promotions are riding on hitting economic growth targets.  This deepening commitment to consumerism is creating a stream of opportunities and a tidal wave of new global challenges.

Joel Backaler: In As China Goes, you argue that deliberate government policies aimed at reducing the country’s overreliance on exports is transforming China from a country of scarcity and frugality to one in which the consumer ethos rules.  In your opinion, when will Chinese consumers, who are traditionally thought of as savers, be renowned for their spending?

Karl Gerth:  The consumer ethos clearly rules now for many tens of millions and yet remains irrelevant for hundreds of millions.  For many decades to come, China will remain both a spectacularly poor country and enviably rich country.

There is plenty of evidence that tens of millions already have become more free-spending than frugal.  This certainly applies at the top end, where the Chinese luxury market is quickly becoming the world’s largest, leading to the success of LVMH, Richemont and Pernod Ricard.  This is already having worldwide repercussions not only for the bottom lines of luxury brands but also in areas such as tourism.  Major shopping streets such as Bond Street in London and Fifth Avenue in New York are already heavily dependent on Chinese tourist spending.

We can expect much more.  Encouraging consumerism is, after all, the new party line.  Chinese have new opportunities to borrow and reverse the country’s culture of saving, creating what is known in popular parlance, as mortgage slaves, car slaves, and a new class of young big spenders that has become known as the “tapped-out-by-the-end-of-the-month class.”  There are plenty of other policies designed to get Chinese to spend more, for instance, by giving civil servants pay raises, raising personal income tax exemptions, abolishing agricultural taxes, and allowing the Chinese currency to appreciate (within limits).

Of course, there are serious concerns about inequality.  China appears to be on its way from being one of the world’s most equal to one of the world’s most unequal societies.  Aside the political and social justice issues, this inequality may mean that the long-desired massive Chinese middle class may never emerge.  But, then again, maybe this problem is not unique to China.  Noble-prize winning economists such as Paul Krugman say the US is quickly losing its own middle class.  China may just skip the middle, or middle class, stage and go directly to solidifying a two-tiered society.

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PART II:

Joel Backaler: In your previous book, China Made: Consumer Culture and the Creation of the Nation, you argue that Chinese consumerism and economic nationalism developed simultaneously. What are the implications for contemporary China? Many western multinational companies operating in China have begun to express frustration due to increasing protectionist measures. General Electric’s CEO Jeffrey Immelt recently made a public statement of the sorts. Do you feel that this protectionist sentiment is primarily at the government level, or do you believe that Chinese consumers are also looking to buy China-made products? How do you think this type of favorable policy will impact western multinational consumer packaged goods and retail companies in China?

Karl Gerth: It’s complicated. Before considering China, contemplate how these same issues relate to America or most other countries. As in other countries, the Chinese government sees itself as in the business of promoting Chinese business. A hundred years ago, China struggled to catch up as a global manufacturing superpower. Mission accomplished. Now the Chinese recognize that in the post-industrial reign of service economies, their country needs to become a branding superpower. Chinese government and business leaders view domestic ownership of global brands and intellectual property as symbolic of national wealth and power, the economic equivalent of hosting the Olympics but much more permanent. These efforts to promote Chinese businesses and brands are even more pronounced when done on behalf of massive state-owned enterprises like China Mobile, which has the world’s most mobile phone subscribers.

And it’s not just government policy to promote Chinese products. Chinese consumers often want to “buy Chinese.” For over a hundred years, they have periodically had radical equivalents of the Buy American campaigns we sometimes see in the U.S. (you may recall that in the mid-1990s even Wal-Mart launched such a campaign). So, yes, that sentiment exists in China, too. But the same consumers who support Buy Chinese campaigns don’t necessarily buy Chinese themselves, especially when imports are seen as safer, less expensive, or more fashionable. A few years ago during one of the periodic anti-Japanese protests, it was easy to spot protesters armed with Japanese brand phones and cameras. Navigating these obvious but subtle policy and consumer contradictions may be the toughest aspect of marketing in China.

Joel Backaler: What do you feel western consumer packaged goods companies selling to China’s mass market should consider in their branding? Should they try to localize their brand perception in the Chinese marketplace or stay “western” in their messaging?

Karl Gerth: Both. They should localize and stay “western.” Depending on the constantly changing circumstances, each has its advantages.

Of course, they need to localize while continuing to play to their strengths, especially around issues of quality, safety, and leading technology. But such positive associations with “western” and Japanese products are not fixed. Indeed, I think the government-efforts to promote Chinese brands have had some success in weaning Chinese consumers from an automatic preference for international brands. This can be seen in the growing popular indignation of Chinese consumers toward foreign companies. China’s aspiring and middle-class consumers increasingly declare that multinationals selling in China take market access for granted, cut corners on safety and quality, ignore Chinese laws, and dump their low-end products there. A sentiment popularly held about Japanese companies, for instance, is that they sell their highest-quality products in European and American markets, their second-best domestically, and their lowest-grade in developing markets such as China. One woman I interviewed, for instance, insisted that Japan sends China mobile phones that couldn’t make it in Japan.

It’s worth noting that the reverse occurs, too. Chinese brands want both to appear modern/western/cosmopolitan and Chinese/traditional/patriotic, depending on circumstances. Chinese companies want to convince consumers they are buying the best but also that they are doing the right thing for China. This is especially the case during upsurges in patriotic sentiment, say, surrounding the Olympics or following a perceived international insult. Perhaps the best strategy is to keep an eye on Chinese competitors and to triangulate accordingly.

Joel Backaler: Looking ahead at the next 30 years, what are your predictions for the top three changes in the consumer preferences of China’s mass market?

Karl Gerth: The major influences to consumer preferences will depend on how China handles three critical issues: climate change, an aging population, and intellectual property rights.

It’s easy to imagine green products and services becoming more popular either directly as a consequence of growing environmental awareness or indirectly as a consequence of government policies such as tougher fuel efficiency standards, tax rebates for energy-efficient appliances, and so on. Similarly, we’ll see a reverse of the “little emperor” situation of the past three decades, where four grandparents and two parents spoiled one child. Now those same children will struggle to support their parents and grandparents. But I think the most interesting issue to watch will be whether China can and does do more to protect intellectual property rights, which are not only the foundation of corporate research and development but also of brand stability. After all, why bother building brands if someone’s just going to sell much less expensive knockoffs?

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