Why China’s street vendor economy suddenly boomed

The long-time enemy of the proper city image

Street vending is not a newly coined word. In 2010, there were over 20 million street vendors registered, and this number could reach 35 million if unregistered ones were included.

Over the several past decades, “street vending” had always been synonym of “dirty, cheap, low quality”. It was the target of elimination in urban planning, and sometimes led to guerilla-like hide-and-seek, between strict city administrators and unrooted vendors.

The reasons for this severe, if not inhuman treatment include three layers of considerations

Firstly, the quality and authenticity of the products sold on street were not guaranteed or certified. There were often counterfeits which hurt the consumers’ rights, yet the vendors were not traceable and thus could not be held accountable after the transaction.

Secondly, the fluid public activities were threatened. Since the street vendors weren’t registered or certified, the locations of their operations were not predetermined according to city planning. In addition, some vendors made loud broadcasts about their products, which was a source of annoyance to many. These posed risks on a city’s basic function and on habitants’ daily activities.

Last but not least, litter of street vendors damaged the beauty and hygiene of the city. Since the random locations were not under the vendors’ responsibility, it was difficult to incentivize vendors to clean up before they changed location. What’s more, if the town hall was not as harsh in eradicating street vending activities, there would be more people taking their chances, putting the city order in jeopardy.

To sum up, it was a highly informal and grey economic sector where self-employed people, good-intentioned or not, bypassed the regulations and were at the mercy of passers-by and police.

The Post COVID-19 high unemployment rate provoked the sudden endorsement of street vendor economy in China

With China’s economy hurt by the COVID-19 and the GDP growth rate being uncertain, boosting employment is a natural path to revive economy. The Prime Minister Li Keqiang mentioned more than 40 times in the opening of 13^th National People’s Congress in May 22th that his priority is to promote employment.

Keqiang is particularly concerned with the bottom-of-pyramid, poor population. According to National Bureau of Statistics of China, there are about 600 million people living with a monthly disposable income of only around 1,000 RMB, equivalent of $4.2 per day. While China is reaching a comprehensive construction of a moderately prosperous society by the end of 2020, the income inequality is still a serious issue. The top 20% is accumulating fortune at the fastest pace, and the bottom 20% is barely lifted out of poverty.

Data source: National bureau of Statistics of China, Annual disposable income in China by class

With the economic slowdown, the number of unemployed urban dwellers reached a record high after years of decrease. Many lost jobs or suffered from a salary cut due to COVID-19. Not to mention, the bottom-of-pyramid population whose livelihood was threatened even more.

Data source: National bureau of Statistics of China, Rising unemployment in China

Under this context, the Civilization Office of the Central Communist Party Committee has explicitly excluded occupying the road as one of the civilized city assessments by end of May. Suddenly, everyone became interested in China’s street vendor economy and wanted to profit from it.

On Baidu index, the blue line shows the search index of “Street vendor economy”, which soared in early June. It is accompanied by the search of “new policies of street vendor economy”, as people enquire about the legitimacy of this potential opportunity.

Source: Baidu index, search of Street vendor economy skyrocketed

The business case for China’s street vendor economy

The benefits of the street vendor economy

The items sold by the street vendors are usually low-unit-priced daily necessities, such as clothes, food, beverage, fruits, electrical appliances, nothing too fancy or high tech.

The obvious value created by street vendors are therefore two-fold. On the one hand, the vendors enjoy an additional stream of income, however unpredictable. On the other hand, the habitants living in the neighborhood have an easier access to daily necessities. Street vendors, therefore, contribute to the resolution of the famous supply chain issue in fast-moving consumer goods: last mile delivery.

The deeper value created by street vendors are also two-fold. Firstly, the nominal unemployment rate will drop, meaning that the human capital is put to use. Secondly, the local consumption heavily curbed by COVID-19 will be somewhat revitalized, largely thanks to the convenience of night markets.

The Prime Minister Li Keqiang stated in a press conference of the recent National People’s Congress held in May, that there are 200 million people in China working in unofficial, self-employed mode, and that the government has to support them by lifting unnecessary limitations. He publicly praised Chengdu for creating over 100 thousand job opening by setting up 36,000 street vending stalls legally. Zhou Tianyong, Director of China Center for Strategic and Policy Studies under Northeast University of Finance and Economics, estimated that 50 million jobs could be created with the promotion of China’s street vendor economy.

The inherent drawbacks of the street vendor economy

Will street vending be effective in reviving Chinese economy?

The shortest answer is no. The Chinese economy has three major drivers: investment, exportation, consumption. The China’s street vendor economy is not in any way even comparable to them. It is, however, a mechanism to alleviate unemployment for certain cities and a way to earn the next meal for the unemployed.

A longer examination looks at whether it is a profitable business, worth giving it a try

First of all, it is not a scalable profession. The vendors are required to literally start from scratch every day in one physical spot, limiting their marketing reach. Even if the town hall allows for street vending, it only gives permission to certain streets on certain hours. Usually, the street vendors are only allowed to operate in the evenings when the public roads are least occupied and can thus serve as a night market. It is therefore difficult to build up a large customer base or a brand. Without the trust from loyal customers, the range of business street vendors can aspire to is limited, often to food and beverages, fruits, books, toys etc. .

Then, street vendors are hardly meaningfully differentiated. They are usually the retailer, not the manufacturer, so whatever they can source, others can too. As they are spared of the rent on the public roads, the entry barrier is practically non-existent. This gives rise to high and almost perfect competition and erodes profit margins for everyone.

Finally, the legal environment still poses uncertainties. The central government officials haven’t given a unanimous direction on this issue and local policy makers are still pilot testing. While there are 27 cities publicly endorsing the street vendor economy, their policies are to be unpolished and subject to change. This uncertainty prevents people from investing too much upfront. Yet without investment, it is even more difficult for the unemployed to create the much-needed differentiation to make ends meet.

At its core, street vending is an elementary business model, existing way before the advent of mobile payment and e-commerce. It is therefore fundamentally difficult for street vending to reclaim important market share away from its enhanced counterparts of retail.

A successful future of China’s street vendor economy depends on public and private collaboration

Key success factors for street vendors

As it is a basic retail business, the 4Ps in the marketing textbook can serve as a guideline. The Product has to meet the essential needs of the local community, be it food or entertainment. The Promotion techniques such as portfolio bundling or discounts have to be perceived as meaningful. The Price and Place are the key purchase criteria, so competitive sourcing plays a big part. Those key success factors cannot be ignored if people want to participate in street vendor economy.

Furthermore, street vendors have to comply to the hard and soft regulations imposed on them. They’ve lost the trust in the eyes of government’s officials in the past by being short-term oriented. Now it’s their chance to show compliance and discipline, by making it easier for the city to manage them. Being a responsible and respectful player will benefit themselves in the process.

A dependable public policy stance

An important question for the government is whether it regards China’s street vendor economy as an end in itself or only a means to an end. If the local government only regards street vending as an expedient tool to boost employment and economy, without putting in place a legal framework that protects street vendors from precariousness of the profession, the future will not be bright. If one day the economy recovers in China, the employment rate climbs up and suddenly the street vending is again the enemy of an impeccable city image, millions of street vendors could be outlawed again.

Local circumstances vary and will largely determine whether and how street vendors are endorsed

Chinese cities are too diverse in terms of economic development and strategic positioning to adopt the same measure. Beijing the capital, shouldering the responsibility of national dignity, doesn’t take kindly to the prevalence of street vendors. Shenzhen the mega-city with the highest GDP per capita, is also cautious with the adoption of street vendor economy. Shanghai, on the other hand, blends the street vendors in its famous night market, while meticulously setting the obligations and rights of the self-employed vendors.

On Weibo, China’s biggest microblogging platform, street vendor economy reached over 630 million views in just days. The highest participated topic related to it is “warmed up but not in fever”. Over 33 million netizens expressed balanced view on China’s street vendor economy, supporting the “city by city” approach.

Source: Weibo, China’s street vendor economy has 630 million views

For local decision makers, it could be an opportunity to regulate this grey sector that shadowed the China’s street vendor economy for such a long time. Several measures could be put in place. First, register all the street vendors for a better management. Second, limit the time and space for street vending activities. Third, set up quality control measures to protect the consumers and keep hygiene. Fourth, take advantage of the internet to facilitate application, registration and tax issues.

Before, the government has been very harsh on the street vendors. As local policies gradually take shape, a more nuanced management system could benefit not only the unemployed, the community, but also the human image of the government in the eyes of the public. In fact, this is exactly what the local governments are doing. A more human but clearly defined boundary has been set for a better management of street vending activities. Transparency, accountability, order, convenience and entertainment are woven harmoniously in China’s new street vendor economy.

There is a possibility for a win-win future of China’s street vendor economy, which would allow it to once again become a part of China’s nightlife.

Author: Della Wang

Learn more about Chinese consumption after COVID-19

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article China’s street vendor economy: A band-aid or permanent solution for post-COVID-19 unemployment? is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

My name is Igor Temirov, I’m an expert in developing foreign markets and for the last five years, I have been in China, helping several companies to enter the Chinese market.

1. How is distribution different in Hangzhou compared to Shanghai?

Good question. From one side there are a lot of similarities in these markets because in both Hangzhou and Shanghai there is a very high purchasing power in their population, it is also a city with 9 million citizens compared to 25 in Shanghai, but on the other side the number of retail chains, retail outlets, major shopping centers are definitely smaller. So, for example, if you look at the big FMCG and grocery chains like Carrefour, like Auchan, there is only one Carrefour in Hangzhou and we know that in Shanghai Carrefour is one of the leading chains. So, practically most of the Western companies first established in Shanghai, so there is the highest concentration of retails and modern shopping centers but practically 3 or 4 modern shopping centers in Hangzhou.

But on the other side, for the companies who are entering the Chinese market, it will be very difficult to establish themselves in Shanghai because you need to have a few muscles, you need to have a more well-known brand, etc. And prices in Shanghai will be higher for an office, it could be 3 to 5 times higher, salary of your people will be also higher but if you look at the quality of people, there are pretty much the same sales  managers with the same experience but they will cost you less [in Hangzhou].

2. What are the most dynamic industries in Hangzhou? (Can you please support each industry with a company example)

Basically, Hangzhou is the internet capital of China. The most prominent business here which is driving the local economy is online: this is the headquarters of Alibaba, Tmall and also headquarters of other online platforms. Five years ago, when I came to China, there were basically two main platforms, Tmall and JingDong and you had to choose between them. JingDong was in Beijing and Tmall was in Hangzhou. But at that time, so I said there would be a growth of small and new innovative companies with new ideas and this is actually what happened. So, it is happening like in the Silicon Valley where a lot of, you know, guys who are “underpinned” in their organization, they go out and they find new ideas; and Hangzhou now is the capital and the home city for many major APPs and other platforms.

3. What is your observation of the purchasing power of the people in Hangzhou compared to Shanghai?

I think we should be talking not about just people, but we have specific products that we are targeting for specific audiences. And, I was working mostly with mass products and the upper/medium-priced products, and of course the purchasing power of population in Shanghai is higher, but at the same time, there is another factor which is consumer activity, and the consumer activity when people have so many choices like in Shanghai, their activity is not so high. So, you need to do much more to impress them in Shanghai. So, you will be shocked that one of the highest sales that we experienced in China was in Chengdu. Chengdu, which has also a high concentration of people with a purchasing power but with fewer choices, they are much more willing to try and experiment with western products, where in Shanghai it happened like, 20, 30 years ago.

4. What are the benefits of setting up a company in Hangzhou over Shanghai?

When you are deciding on the entry city in the country you selected, I am normally doing an analysis of 42 factors, and I put all the factors together – they are pretty much the same for any country, so I was recently doing this exercise for the United-States, for India, … -. So, you have to go through all this: economy, logistics, purchasing power, cultural, traditional, … but there is also one interesting point which is “trend-setting cities”. So, for example, when consumers will learn about your product they need to know “where is this product from”, so they will look at the registration of your company and Hangzhou is one of those trend-setting cities in China.

The second factor is the concentration of the population. Because if you go to Shanghai you have, from one side, the see, so there are no people. And I was trying to find a city which would be deeper in the country and when you draw a circle around Hangzhou, you will have in 300 kilometers, a population base of 340 million people. So, it is much more population-based. You also need to look for a city with a good size, where you could experiment, where they have major retail chains, and this is all the factors we have in Hangzhou.

And, last year, Price Waterhouse Coopers did a study on 26 cities in China for entering the Chinese market and Hangzhou was the winner out of, I would say, 20 or 30 factors that they analyzed.

You also have to look at the logistics. For us, warehouses and proximity to major cities make a significant effect. For example, we went to other cities: we went to Chengdu, to other places and also, we searched in Shanghai the prices for the warehousing. For the warehouse services, especially if you are working online, it is much higher because Hangzhou is based on this online industry so there are multiple choices for affordable warehouses with a good system, with well-experienced people and this makes it attractive.

5. What are some of the most impressive characteristics of Hangzhou?

There is a business level and there is a people’s level. On the human or people’s level, for people who are just living in Hangzhou, it is one of the most incredible cities if you are doing sport. I don’t know any other city in the world – and I am comparing with San Francisco, with Switzerland, with Barcelona – where you can just take your bicycle and then do 30, 50, 70 kilometers just along the river with absolutely no traffic. So, it is great for sport and the second most prominent is that it is a beautiful city because it has western lakes, it has mountains, I don’t know many cities in the world, of this size, where, in the center of the city you have the famous “longjing tea”.

But on the business level, I think the main drivers in China are definitely online business. And, five years ago, when I was selecting Hangzhou, I was thinking that when you are beginning you don’t have big budgets. You need to catch the trends, the leading trends, and the leading trend is definitely online. And, you will grow with growth, with all dynamics for online business. You will have the expertise, you will have people. So, this makes it very special.

Daxue Talks is a show powered by Daxue Consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks transcript #10: Open a company near Shanghai: advantages and disadvantages is the first one to appear on Daxue Consulting - Market Research China.

The next guest on Daxue Talks is a Russian expert in developing foreign markets, Igor Temirov. In this China business vlog, we clarify all the benefits of setting up a company outside of 1-tier cities but not far from them. Specifically, this case is about Hangzhou over Shanghai.

Jump to the questions:

• 0:31 How is distribution different in Hangzhou compared to Shanghai?
• 2:30 What are the most dynamic industries in Hangzhou? (Can you please support each industry with a company example)
• 3:55 What is your observation of the purchasing power of the people in Hangzhou compared to Shanghai?
• 5:13 What are the benefits of setting up a company in Hangzhou over Shanghai?
• 8:16 What are some of the most impressive characteristics of Hangzhou?

Daxue Talks is a show powered by Daxue Consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks 10: Pros of setting up a company in Hangzhou over Shanghai is the first one to appear on Daxue Consulting - Market Research China.

Chinese middle class Overview

Urbanization of Chinese society

According to China’s National Bureau of Statistics, at the end of 2018, the permanent population of urban areas in China reached 83.137 million, an increase of 17.9 million from the end of 2017. The resident population of rural areas was 56.41 million, a decrease of 12.6 million from 2017. The urbanization rate of China (the proportion of the people living in urban areas) is 59.58%, which is 1.06 percentage points higher than that at the end of 2017. With the growth of the Chinese economy, urbanization has been expanding rapidly.

The purchasing power of Chinese middle class continues to rise

According to the 2018 Global Wealth Report, China’s contribution to global middle-class growth is the largest in the world. In terms of the absolute growth of personal assets, the United States still surpasses China and ranks first in the world. In 2017, the United States accounted for 44% of the total growth in global household financial assets, compared with 25% in China. As the world’s second-largest economy, the Chinese middle class already accounts for half of the global middle class. In 2000, only 500 million people in the world were middle-class and half lived in Japan, North America, and Western Europe. However, by the end of 2017, the number of the middle class in these industrialized countries has fallen to 1/4, while the middle class in China is half of the world. The “rich middle class” defined by Allianz is the net financial assets held by individuals between 7600 euros (about 61,200 yuan) and 45,600 euros (about 367,100 yuan). In the Allianz report, the “middle class” is defined as a personal wealth of between 7,600 euros (60,000 yuan) and 45,600 euros.

Chinese middle class behavior overview

In the inland areas and low-tier cities, the residents are relatively more conservative when making purchasing decisions compared to those who live in big cities. Whereas a common principle shared by these middle-income consumers is that they usually prioritize the quality above all other standards even when they are known to be quite brand-oriented. Since the Chinese middle class is growing across the whole nation, foreign companies will more and more be able to target inland provinces. Since the four first-tier cities are approaching a saturation phase, the growing middle class in low-tier cities are becoming more promising target consumers. The purchasing power of Chinese middle-class in first-tier and second-tier cities are considerable but on the other hand, the consumers are more sophisticated and more loyal to brands. In comparison, in lower-tier cities that are seeing rapid growth, there will be more market opportunities and untapped consumption power. At the same time, brands will face more difficulties in the distribution and logistics.  

Chinese middle class lifestyle changes

The brand trend of Chinese middle class

The Chinese middle class has a demonstrated preference for western brands. More than 70% of middle-income consumers are buying well-known international brands. But in recent years, since consumers have gained more insight into the markets, Chinese middle class lifestyle is no longer merely brand-oriented. Quality now becomes their first standard. Daxue classifies middle-income consumers into four types: progressive affluent spenders (18% of respondents), trendy-aspirers (28%), value-led buyers (26%) and conservative spenders (28%). The first two types are more likely to buy western brands, but more than 80% of the respondents claimed that quality was their first consideration. The conservative spenders even regarded well-known brands or luxuries as a waste of money for they weighed durability and quality over brand names; as a result, in certain situations, they are more inclined to buy domestic brands.

Chinese consumers contribute to around 30% of the global luxury consumption, and domestically, the middle-class consumers account for 70% of the luxury market. The top listed items they have been purchasing are handbags, clothing, jewelry, shoes, and cosmetics. The high luxury spending by those Chinese middle class consumers is mainly to indicate their social status. Yet, surprisingly, these consumers are relatively younger than those in western countries, with an age range of 18 to 35 years old. In high-tier cities, luxury consumers are less likely to stay loyal to one brand and they tend to shift their taste from one to another, following the current trend. If foreign luxury brands want to maintain the loyalty of Chinese consumers, they can not only rely on their brand names; instead, it is more important that they appeal to the consumers’ changing tastes and the current fashion. One positive note is that there are far fewer domestic luxury brands to compete with; therefore, foreign luxury brands enjoy a higher reputation among the consumers. Moreover, driven by the growth of the middle class in low-tier cities, foreign luxury brands are expected to gain a considerable number of new consumers in the following years.

Chinese middle class leisure spending

Most of the Chinese middle class will spend their leisure time on entertainment, dining out and traveling. As Chinese middle-income consumers are quite family-oriented, they spend lots of time with their family and close friends. This also means they usually prefer dining out in groups, especially for family and friend’s gathering. After dinner, they normally won’t go directly home but go somewhere else to prolong the reunion, such as seeing a movie, singing karaoke, or playing cards. This is one major reason why the catering industry and the entertainment industry are seeing great increases in total consumption. In the higher-tier cities, Chinese middle class consumers nowadays do not consume for simple entertainment; instead, Chinese middle class lifestyle often centered on the pursuit of health and balance. New forms of entertainment such as yoga, tea ceremonies, art, etc. are increasingly popular among Chinese middle class.

Traveling is another prominent leisure consumption among the Chinese middle class. The top three destinations in 2019 are Thailand, Hong Kong, and Japan. Although Asia still occupies more than half of the destination locations, the Americas and Europe have been enjoying a swelling expansion in the market share. To most middle-income consumers, traveling has become a light luxury recreation product.

The inclination to a healthier lifestyle

With high work pressure and the occurrence of sub-health problems, the middle class is keenly aware of the importance of a healthy lifestyle and most of them have already adapted to healthier life habits, including their purchasing choices. Concepts of food consumption are putting more emphasis on healthy diets so brands concerned with green food are more likely to be trusted and adopted by consumers. Although Chinese citizens are more concerned with their healthcare than ever before, the healthcare market in China is still under-served. The aging population and rising rates of chronic disease are calling for a more developed Chinese healthcare system. Therefore, the current situation leaves many opportunities for foreign companies to fill this market gap.

E-commerce and Social Media

The high adoption rate of computers and smartphones among the Chinese middle class has accelerated the growth of E-commerce and M-commerce.

During the “shopping carnival” on Nov.11th (China’s Single Day)  Alibaba witnessed the rise of the new Chinese middle class (the generation after the 80s and 90s). “2018 China Mobile Internet Spring Report” shows that as of March 2018, Taobao’s monthly per capita usage reached 93.4 times, and the usage time was more than 290 minutes, which was significantly higher than the same period of last year, and the user’s stickiness was further enhanced.

Although members from first to third-tier cities account for most of the online consumption, the consumption power underlying the lower-tier cities cannot be neglected. With careful management of the great market opportunities on Taobao, Uniqlo, and other companies successfully expanded their business in many low-tier cities. And this was not the only case. With Jingdong, Mogujie, Dianping, and many other emerging online retailers or mobile applications entering the E-commerce and M-commerce, the overall online consumption has been rising at an exponential rate. While shopping online, the middle-income consumers still prioritize quality over price and brand but imported products account for 25% of their total online consumption.

Social media has an overwhelming influence on Chinese netizens. Companies are recommended to use social media in China to promote on a large scale. But online promotion has advantages and disadvantages. More than 60% of the middle class are viewing comments and recommendations on Weibo, WeChat, and other popular platforms. Most of them are women with high consumption motives and are susceptible to other people’s opinions on the products they are not acquainted with. Once you capitalize on social media to promote your products, the high exposure and miscellaneous feedback will, on one hand, bring you more potential customers, but on the other hand, these comments may form a biased image of your products. Knowing what appeals to your potential customers and knowing what caters to the trend, the online promotion will be a powerful tool.

Case study: Mobile Application – Xiaohongshu

Xiaohongshu – the social commerce application based off recommendations 

Xiaohongshu, an online shopping and social commerce platform in mainland China, was established in June 2013, which claims to have 200 million users as of January 2019. In the Xiaohongshu community, users and celebrities can share product reviews and travel destinations.

The success of Xiaohongshu and its influence on the influence the consumption of Chinese middle class

In January 2019, the number of registered users of Xiaohongshu exceeded 200 million, and the daily activity exceeded 10 million. It is the largest community e-commerce platform in the world.

Most of Xiaohongshu users are under 30 years old, 40% are users under 24 years old, and 30% are  24-30.

In terms of the distribution of purchasing power of Chinese Xiaohongshu users, the middle and middle-high consumers accounted for a large proportion, but the proportion of low-middle consumers increased rapidly.

Xiaohongshu, was originally a platform for Haitao and Haitao experience sharing, and has since accumulated many high-income and older Haitao target users. It can be seen from the distribution of provinces that the users of Xiaohongshu are mostly concentrated in the more developed coastal provinces. Compared with the second and third-tier cities, the number of Xiaohongshu users in the first-tier cities is the highest, accounting for 40.94%.

Above all, the Chinese middle class is has great consumption power which is an opportunity for foreign companies to consider into their China market strategy. China’s middle class is sophisticated and value-oriented. Additionally more and more of the inland Chinese population are joining the middle class, which creates opportunity for foreign brands to expand deeper into China.

Make the new economic China Paradigm positive leverage for your business

Listen in China Paradigm in iTunes

This article The changing landscape of the Chinese middle class | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

English teachers in China are very much in demand as language schools struggle to keep up with the growing English education consumption. Just over the period of a year, from 2016 to 2017, there was a 298% growth from 123.6 billion RMB to 489.7 billion RMB in the English Education market in China. English consumption is especially growing in tier 1 cities with Shanghai, Beijing, Shenzhen and Guangzhou driving the market with the largest populations and GDPs in China. This is with an English penetration rate of 65%. This means that more than half of the citizens in these cities in 2017 received extra foreign education outside of school with 86.5% of this learning being focused on the English language. Further, China’s English education market size is estimated to reach almost double of the figures in 2017, reaching 947 billion RMB in 2019.

Demand higher than the number of English teachers in the Chinese market

There are an estimated 100,000 English teachers needed in China which are expected to increase further over the next few years. This consumption of English is important as English class is compulsory in China’s primary schools from their third year for a period of four years, middle school for a period of six years as well as in the first two years of university. This adds up to more than 2,000 hours studying English which is more than any other course. As a result, 60% of English teachers in Primary schools in China teach more than 50 students in one class and 90% of middle schools teach more than 40 students. This need to learn English has to lead to a large quantity of kindergarten and private schools now offering to teach English to young children in China. This is in order to start English education as early as possible as parents seek the best teachers in order for their children to begin school more competitively. Further, the slowing down economy has increased the need for children to get the best education in order to get jobs. Consequently, many places hiring English teachers are raising salaries, offering more benefits and following regulations in order to lure teachers away from Japan and South Korea to cater to this demand.

Requirements for teaching English in China: Chinese parents as drivers of English language

Parents are very particular about their children’s English teachers in China as they look for highly skilled and experienced tutors and value their children’s view of their teachers. North American Teachers are particularly in demand from Chinese parents. This is as parents believe that North Americans have good pronunciation and lively teaching method styles which will help keep their children engaged. Moreover, many parents hope their children will study in the US or Canada in the future.

Further, the nationality of the teacher, that is, whether or not they are from a popular English speaking country is important to parents. This is as the type of English teacher they can afford is an indicator of social status. Consequently, hiring a foreigner is a privilege and gives them social status recognition from their peers. As a result, even though a skilled Chinese native is perfectly capable of teaching English, parents still prefer foreigners due to the social implications it has for them. Moreover, parents sometimes prefer an English teacher from a popular country, where English is their second language, such as Russia, over non-popular countries. As such, whilst parents place substantial weight on teachers’ skills and experience, along with their child’s opinion of the teacher, there is also a significant focus on the teacher’s nationality which is viewed as indicative of quality and social status.

English education consumption in China: What education expenditure Chinese parents are willing to bear

With parents as the drivers of demand, they are very willing to spend a substantial amount of money on their children in order to allow them a better future. This is evident as 13 billion RMB is spent by Chinese parents yearly for education outside of school as a whole. As a result, a large amount of household income for families is spent on language classes for their children. This is evident as 73% of parents surveyed revealed that they spent at least 10,000 RMB, that is 1,580 US dollars, on English classes per year. As the Chinese market, consumer segmentation is currently shifting from adults to young children as parents are spending more on their children’s education instead of their own.

This is as parents mainly only need to learn English due to professional requirements of their job which necessitates them improving their English skills or their want to learn English in order to reach new career goals or improve their personal life. Other reasons may include an aim to become a Chinese teacher, for a promotion, the improvement of skills for future career development, for the improvement of social status, for business travel or a long-term transfer abroad or for personal comfort when traveling abroad. However, many adults in these categories do not have or have few family expenses and are likely single unless they are studying for necessity. This is as families main concern is on their children’s education in order to give them the best start in life. Further, this trend can be seen in that ESL (English as a Second Language) schools were first created to teach English to adults, but as demand has shifted towards children, educators and schools have adapted their teaching methods and systems accordingly.

Segmentation of English education in the Chinese market

Within China, there are two kinds of channels, that is schools and companies. Schools are broken up into international schools, public schools and universities where companies are separated into offline and online. This is with foreign English teachers mainly working in international schools and English training companies.

Chinese English training market: Main players

There are 0.3 billion consumers in the Chinese English training market and more than 50,000 English training institutions. As English language providers enjoy this robust demand, there is still a need to stay competitive. This is evident with providers such as Alo7 leveraging their knowledge in order to help regional companies who are competitive in their teaching content but who lack large tech departments. This company specializes in AI for computerized adaptive assessment testing and aids companies who want to get ahead of rival language providers. Another way of staying competitive, however, is the range of offerings a company has in terms of the ages classes are open to and class groupings. This is with many organizations choosing to focus on young children but who also may provide services to adults who need to improve their English.

An international school targeting children is Children’s Tales International Kindergarten which aims its programs at 2 to 6-year-old children in classes of 20 to 25 students depending on the level of the child. The school uses assistant teachers from English speaking countries with teaching experience in Kindergarten in their home country and teaching English as a second language. The school is located in Beijing and Chengdu and its’ focus on children is a major selling point with it being so in demand.

In terms of Private language schools in China, there are three main companies that do English tutoring. The first of which is Wall Street English which conducts one-to-one lessons or small classes in person, online, at home or at the private school itself. The company hires foreign teachers from native speaking countries and with 70 schools across 11 cities, the international organization is famous for English Teaching. In comparison, Shanghai Bell Language school hires native teachers from the UK and operates in Shanghai and Beijing with English Language school headquarters in the UK. Learning Education School also hires native English speakers from English speaking countries with a focus on children from ages 3 to 16.

In regards to online language schools, there are two main companies that teach English in the Chinese market. These are Itutorgroup and Landmark Education. Itutorgroup hires foreign teachers from native speaking countries and is able to provide its services online throughout China. Its teaching structure consists of small classes or one-to-one lessons for adults. Comparatively, Landmark Education hires native speakers of the English Language that are preferably fluent in Chinese in order to project its services all across China to children.

The truth about teaching English in China: Regulations for foreigners applying for English teaching jobs

Official regulations for foreigners applying for English teaching jobs in China are set out by the State Administration of Foreign Experts Affairs. This body requires that English teachers in China be between the age of 18 and 60 with a bachelor degree or above. Further, at least two years of experience is needed along with teaching English as a Second Language certificate with 100 to 120 hours of teaching experience. Additionally, if an applicant is a non-native English speaker, they need a bachelor degree with an English major or a master of education.

Teach English in China: Parents preferences in practice

Recruiters and organizations of teaching schools care very much about what parents want as they drive the demand. Therefore, factors such as teaching skills and experience, qualification certificates and teachers’ countries of origin that is whether they are from a native English speaking country, preferably a popular one, is very important to organizations. Additionally, organizations prefer those under 50 years old and those from the UK, Canada, Australia, New Zealand and the US.

Foreign English teachers recruitment across various channels in China

In China, the more popular the school, the more difficult the recruitment is. This is especially in order to comply with parental expectations about the education their children will receive. As a result, for English native teachers from less popular countries in China, finding a job in a prestigious international school can be difficult. This is as international schools have a very selective screening process for recruitment, starting with the nationality of teachers which can be a determining factor for parents in choosing schools. As such, companies are trying to make themselves more attractive employers in order to gain the more desired teachers. This is even in spite of organizations needing official qualifications from the government to employ foreign English teachers in China which can be difficult depending on the region.

[Source: The table is developed by Daxue Consulting research team]

Moreover, language schools in the Private education sector in China are also highly motivated to continuously improve in order to charge higher tuition fees and attract high-quality students. This is with most private schools using student information and human resource systems in order to track student progress and to recruit and train teachers. For less popular countries, in particular, the best channel for English tutors is private language schools, where conditions are good and recruitment is based on certificates and experience, or international schools from smaller cities such as tier 2 or 3, where competition is less important. Further, universities and private language schools have higher criteria when recruiting foreign English teachers in China but with less preference towards nationality.

Online channels are also growing rapidly with Online English training companies attracting 1.8 billion RMB of investment in 2017. There are three companies that claim that they have more than 10,000 foreign English tutors, which are Tutorabc, 51talk and Dada. By running their business online, it allows these companies to extend their business across China instead of concentrating on singular specific areas.

Case study: Barbados

Barbados is an example of a place that has limited popularity and awareness within China. The Chinese population who look it up are mostly looking for basic information about Barbados such as finding out more about the country or looking up terms which have something to do with the country. There are 605 average daily requests with the searches coming from mostly tier 1 cities who want to learn about other countries. These search terms, however, are only limited to the country itself and tourism, not the native English speakers themselves who can teach their children. Further, in terms of this awareness, Barbados is in the middle range of smaller English speaking countries. This is only limited to the country itself and tourism, not the native English speakers themselves who can teach their children. Therefore, in order to aid teachers coming from Barbados, experience and qualifications of tutors must be clearly highlighted as well as the English history of the country.

Further, there is a phenomenon in the Chinese market called the group effect. This effect has lead to Chinese parents accepting tutors from Russia and the Philippines and has a positive influence on any nationality. For it to be enacted, an influx of a single nationality is needed in order to develop awareness among parents. Therefore, if a company wanted to enter the Chinese market with teachers from Barbados, a large concentration of Barbados teachers would be needed to gain acceptance from Chinese parents. This is as awareness is needed by the Chinese community in order to establish the county’s popularity. This is needed before parents will decide whether or not they want to use their services based on the social implications it can have for them.

Clearly, however, famous English speaking countries have larger search requests when compared to smaller English speaking countries. This is seen through the ranking of Baidu, the Chinese search engine equivalent of Google, which ranked the requests for English-speaking countries in the past 6 months. Not surprisingly the US was at the top, followed by the UK, Australia, Antigua and Barbuda, Bahamas, Dominican Republic and Saint Lucia.

Opportunities for teaching organizations of popular and non-popular countries in China

The Chinese English Training Market is far from saturation- the high demand for English teachers from English native countries is a good opportunity for many countries whether or not they are popular. This combined with the economic growth in China has driven consumption of education. More expensive foreign English tutors are becoming more affordable for Chinese parents and adult students. Teaching English to children has become a flourishing market, as education comes first in many households to ensure children have professional success. Therefore, staffing agencies that can provide and gather English teachers to existing Chinese English teaching institutions, expanding an overseas language group or even starting an English teaching school are expected to be profitable with the current demand for education.

Further, the group effect as mentioned can be beneficial to any nationality if done correctly. This is evident as the influx of English teachers from Russia and the Philippines has made those teachers acceptable to parents and are sometimes preferable to Chinese teachers. Those wanting to enter the market, should target and send tutors to cities such as Shanghai, Beijing and Chengdu with a large group of teachers concentrated in these areas. This is in order to increase the awareness of the nationality of these tutors and their qualifications among the Chinese. Further, targeting private schools or international schools in smaller cities with less competition or aiming at places with an emphasis on qualifications and experience over nationality. Additionally, working with private language schools with high recognition and that have a network within different cities such as Wall Street English would be a good driver to gain trust among the Chinese population. Most importantly, an organization needs to develop an awareness of the nationality of teachers to be entering and as such collaborating with other industries will help spread awareness and knowledge of an English teacher’s skills and proficiencies.  This, however, depends on what positioning an organization wants to enter at and as such advice is suggested before embarking in China.

Author: Jessica Farrell 

Daxue Consulting can advise, build, deploy and maintain Business Intelligence Solutions for your business intelligence China.

Business Intelligence China helps you extract the most value from the vast amount of the data your company produces. It also offers you the possibility to aggregate data relevant to your business that lives outside your business (stock market data, weather forecast, social website trends, etc.), giving you unique insights to outsmart your competition and help you to improve your operations.

This article Shortage of English teachers in China: Opportunities for foreign organizations and teachers | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

China is ranked among the top three countries with the most cats and dogs with the total number of pet owners equalling 73.55 million in 2016. Among this number, 33.9 million were dog owners and 22.58 million owned cats. This clearly shows a preference for dogs among the Chinese population with 46% of pet owners owning dogs in comparison to 31% owning cats and only 23% owning other animals as pets. China’s pet industry alone has gone through significant but stable growth as it rose from 14 billion RMB in 2010 to 134 billion RMB in 2017. Of this, online pet sales themselves account for more than half of China’s pet food market at 51.8% according to which in conjunction with Pet Fair Asia run one of the largest pet trade shows in China. This popularity shows the growing interest in pets, with the partnership running their 7^th annual Pet Food Forum in China this year attracting petfood professionals from China, Southeast Asia and other countries, who were seeking insights and information about the Chinese market. As the popularity of owning pets increases, the pet food market in China is further expected to rise by 27% from 2017 to totaling 170.8 billion RMB by the end of 2018 which is a 17% increase from the growth rate of the previous year.

Areas with the most downpour

There has been an increase of income which is continually rising with the fast urbanization of China and the rising middle class. Shanghai has the most registered pets in China at 12.4% with Beijing following at 11.2% and Guangdong also at 10.1%. Further, the cities of Shanghai, Beijing, Guangzhou, Tianjin and Chengdu are all where pet raising is the most popular. This due to the higher disposable incomes of these cities playing a critical role in making pet raising more popular. The rising standard of living has made consumer spending steadily increase. This is specifically seen in relation to pets, with each dog or cat being estimated to cost their owner 5,016 RMB on average in 2018, a 15% increase from 2017. Further, the coastal border of China occupies the majority of pets in China, accounting for 54% of the registered pets throughout China.

Among these, however, are two larger groupings of owners. Firstly, those who are in the older demographic. This is with 61% of people 65 years old and above owning a pet. This age group takes good care of their pet and it typically keeps them company in their older age. Comparatively, those who are younger, around the age of 20 to 30 years, in the emerging urban middle class, own a pet partly due to recent social trends. This younger group pampers and takes good care of their pet due to their affection towards it. However, a well looked after pet also conveys social status and affluence. This is as it illustrates the owners’ disposable income, in that they can not only own and look after a pet but that they can spend money beyond the pet’s basic needs.

Weather leading to an increase in demand for trustworthy and premium products inside the Chinese pet industry

Issues with food safety have encouraged Chinese people to have a deeper look at their food consumption and buy more imported products. This greater concentration on health has applied to both themselves as consumers and their pets as pet wellbeing has become increasingly more important. This is apparent as pets are treated more like family members as they fulfill the emotional needs of their owners. Additionally, pets have become part of a more stylish lifestyle in more urban areas. The increased interest in the wellbeing of pets has to lead to larger expenditure as an industry, as owners try and improve the living standard of their pets. This is evident as, in 2017, pet food was found to be the highest cost at 34%, with pet medical treatment following at 23% and pet products at 16%. This importantly shows the care with which food is chosen, especially as owners go out of their way to buy specialized pet food to ensure the welfare of their pets.

This caution is especially important as unregulated packaging practices have caused pet deaths as a result of illegal food products. Chinese authorities have been struggling to stop the distribution of tainted products in recent years, therefore making quality, safety and reputation top considerations when making purchasing decisions. Previously, open bags were used to package pet food, but as safety concerns increase this has given way to more premium packaging. As a result, today more premium pouches and cans have been produced in order to package and identify safer food. There is also a tendency to utilize plastic packaging as it is viewed as more trustworthy and convenient.

The pet food on offer and who is selling it on the Chinese market

As stated, due to the increasing interest in the well-being of pets and their contribution to social status, Chinese people are now willing to spend more on their pets. This was illustrated in 2015 where 43% of the pet food market was made up of pet supplements, snacks and other types of foods as opposed to just pet meals themselves. Comparatively, in 2005 this figure was 27%. This shows significant growth within a 10-year period, with snacks and supplements for pets increasing from just over a quarter to almost half of the pet food market in China.

In terms of the food itself, that is the categories of dry, wet and treats, this varies between both cats and dogs. Whilst dry food is significantly higher as a whole, wet food is the second most popular for cats whereas treats are the second most popular for dogs. Moreover, between 2015 and 2016 there was a slight decrease for both animals in regards to dry food. There was, however, for cats a very slight increase in the sales share of both wet food and treats by 2% whilst treats for dogs only increased by 1%. Whilst there is little growth between the two years, both wet food and treats almost take up a quarter of sales share amongst both cats and dogs which accounts for a significant amount of sales within the pet food market in China as a whole. This, further, illustrates the increasing importance of these categories year by year especially as owners spend more on their pets and look for newer and more specialized products.

Additionally, there is growth in the sales share of grain-free pet food. This kind of pet food occupied a considerable market share in 2015 within the United States, however as a market, grain-free pet food is only just starting to burgeon in many other countries. In China particularly, grain-free pet food currently is a niche market with a very limited number of rivals. As a result, this market is currently thought of as a ‘blue ocean market’ where pet food providers can explore. Despite the lack of competitors, however, grain-free pet food has seen an increase in sale share by 158% year on year in China.

The trade war’s affect on the Chinese market

Temporary difficulties and a pause in trade relations between the United States and China is freeing up space in the pet food market in China and opening up opportunities for other countries. This is evident as last year China was reported to have exported $148 million worth of pet food to the United States but to only have imported $6.5 million worth in return. Further, this trade war has made importing pet food from the United States tougher after May this year with tighter customs inspections between the two countries. Things have heated up with it being reported that Washington tariffs have been placed on more than $250 billion Chinese goods and Beijing blocking a huge corporate takeover and making things difficult for imported cars from the United States. This stands off between countries is unlikely to last forever, however, with the pet food industry potentially being an area for compromise between the two as said by Robert B. Zoellick, a former United States trade representative in an interview in Beijing. For the moment though, this current standstill provides a fantastic opportunity for those wanting to enter the Chinese market as pet owners search for alternative quality food sources for their pets.

Dog market in China: the top dogs

Within the pet food market in China, there are three foreign companies that possess 70% of the market share. These are Effem Food which is part of Mars Company which holds 26% of the market, Nestlé Purina PetCare holding 21% and Royal Canin which also holds 21%.

The Mars Company is the largest pet food manufacturer in the world and currently dominates this market space with the two major brands Pedigree and Whiskas. As a brand, it has wide distribution connections throughout China. It also maintains a broad product portfolio with which it sells pet food at a variety of package sizes and prices.

Comparatively, Nestlé Purina PetCare also holds considerable market share. The brand is growing rapidly across China but it is not currently as mature within the market as Effem Food is. The company itself is particularly good at communicating with consumers professionally, however, and also locating new market opportunities through research and development.

In comparison, Royal Canin, whilst it holds the same market share as Nestle & Purina, has a different target audience. This is as the brand differentiates itself by producing high-end pet food aiming towards a more affluent demographic in China. This brand takes advantage of the premiumization trends in China currently and seeks to help pet owners find the most suitable food for their pets whatever the breed, age or size by producing a wide range of products. The company also runs a consumer loyalty program called the Royal Club which is aimed at building and maintaining consumer loyalty.

In contrast, local players including Bridge Pet Care, Ronsy Pet Food, Sanpo and Care Pet among others have a heavy presence but only make up 30% of the market. These brands only have a lower end to mid-priced focus but are trying to narrow the gap between them and the predominate international brands in the market. This imbalance is not only due to the accumulation of rich experience in manufacturing pet food that western companies possess. Nor is it just due to their widespread sales networks in China. This success can also be credited to the effort put forth by international players to keep developing new products. This development extends to focusing on widening their product portfolio and knowledge in order to cater to the ever-changing needs of consumers. Mergers and acquisitions are undertaken as these players attach great importance to improving their product offerings and production facilities, thus strengthening their competitiveness in China’s market.

Locations for pet food production in China

The main geographical areas for pet food production are on the East Coast of China. This is due to the close proximity of raw materials which allow local businesses to run a more convenient and cost-effective operation. The top ingredients for the production of dog food are beef, grains and chicken. Whereas in contrast, chicken, ocean fish and chicken fat are the top ingredients for cat food. To produce these ingredients, however, different areas are better for particular ingredients. A large supply of corn and wheat in Beijing, Tianjing and the Hebei province make the production of dry food easier. Comparatively, the Shandong province is an agricultural area which produces broilers, that is chicken that is bred and raised especially for meat production. As such, pet snack manufacturers who need these materials, typically settle around this area. Local producers of dry and wet food, however, place their smaller factories in Jiangsu, Zhejiang and Shanghai.

Recent regulation for pet food production in Mainland China

With the recent development of the pet food industry in China, the government this year has introduced stricter regulation for the production and importation of pet food. This is in order to improve food safety. These regulations now require producers to acquire a production license for those locally producing cat or dog food. These regulations particularly apply to those producing either pet compound food or pet food additive premixes. Pet compound food is categorized based on its ability to meet the nutritional needs of the pet, whereas pet food additive premixes are labeled based on their capacity to provide additional needs for pets by including benefits such as vitamins. A third category was also created, for snack pet food which does not necessarily provide any nutritional benefits but is given as a treat or reward to pets. However, a license is not needed by manufacturers to produce these.

Distribution channels for China’s cats and canines

In terms of distribution, 80% of pet food retail channels in the market were made up of specialized retailers in 2015. This can be compared to West Europe where the majority of their retail channels were occupied by mass merchants. In China, however, mass merchants only make up 20% of the market and include channels such as discount stores, supermarkets, hypermarkets and grocery stores. In contrast, specialized retailers include pet shops, pet supermarkets, veterinary clinics, DIY and garden centers, online pet specialty stores, farm and feed agricultural shops and veterinary clinics.

From 2014 to 2015, supermarket sales dropped by 15% as sales in pet stores grew by 4%. This is as pet owners want professional advice when buying food for their pets. This further illustrates the care taken into consideration when looking after pets and the increased concern shown by the Chinese population in regards to the welfare of their pets. Moreover, offline pet food shopping exceeded online shopping by 6% in 2015 as consumers seek out advice in person. This is also done not just in pet stores but also veterinary clinics as consumers look for quality and more professional advice. However, offline shopping in the future is likely to decrease due to the rapid increase in the internet penetration rate. This is also evident as distribution channels are also preferring online methods with 74% of distribution being online and only 26% being offline.

The demographics of consumers are also determinative in the way they purchase pet food. A survey conducted by Flanders Investment & Trade found that the older demographic is used to buying food in supermarkets and pet stores. As a result, they prefer to purchase products in person from traditional stores. This, however, is a problem for smaller local businesses as physical stores usually require a slotting fee, which is only affordable to large Chinese or international pet food brands. Comparatively, the younger generation tends to be more computer savvy and prefer to order pet food online as it is cheaper and more convenient. Therefore, this younger demographic drives the increased demand for online resources. This is especially evident as pet apps and forums rise in popularity in China. The most popular apps and forums being Smellme, Yourpet, Liuliu, Boqii and Fdog. Further, as China’s middle-class population blooms, the average age of pet owners now squarely overlaps the country’s more tech-savvy youthful demographic. This change in consumption habits and population provides opportunities for foreign brands to capitalize on. This is especially as the internet penetration rate increases and professional advice is wanted by pet owners.

An ideal time for foreign brands to enter the Chinese pet market

There is a demand for foreign brands and their reputation and quality. These international players are dominating the market currently with their product development strategies and extensive experience in manufacturing pet food. Therefore, Chinese consumers are more willing to trust and buy products from these brands. This is especially in light of food safety concerns arising from issues in local production thereby making consumers view foreign products as safer. This is view aids foreign brands in entering the market as there is an opportunity to emphasize their experience, trustworthiness and knowledge. Further, the premium product demand, and the growing disposable income available to the rising urban consumer middle class provide opportunities for brands who wish to enter the Chinese market and sell a very wide or specific range of high-quality products.

Expenditure on pets is also expected to significantly grow. Although 16.4% of Chinese pet owners spent 1000 RMB on their pets monthly in 2016, 49.5% of expenditure is only at 101 to 500 RMB with 25% of expenditure being 501 to 1000 RMB. The lower average monthly expenditure is expected to grow as disposable income does provide plenty of opportunities for brands to enter the market. This is especially evident as cats and dogs are seen as status symbols, and as pet raising remains a trend among those in the emerging middle class. Moreover, the growing care of Chinese consumers about the wellbeing of their pets and their inclusion as a family is likely to keep contributing to the increasing expenditure in the pet food industry.

Further, it is clear that the Chinese pet market industry has a lot of growth ahead as a whole. Whilst China is among the top three countries with the most cats and dogs, it has a very small amount of animals in proportion to its population. This is evident as in 2016 it was reported that the United States had 143.99 million dogs and cats with a population of 325.66 million ending up with 1 pet dog or cat per 2.26 people. In comparison, China had 80.50 million dogs and cats and a population of 1,386.10 million resulting in 1 pet dog or cat per 17.22 people. Further, the United States has 1.33 pet dogs or cats per household in comparison to China only having 0.17 per household. The significant difference between the two countries is also exemplified in the substantial difference of the penetration rate. In the United States, dog and cat-owning families account for 44.2% of the population surpassing China by almost 40%. This considerable gap indicates that China’s pet market is far from saturated providing lots of opportunity, for not just those specializing in the pet food, but also for the pet industry as a whole to brands wanting to enter the market.

Author: Jessica Farrell 

Focus groups, consumer roundtables, and workshops are ones of the most executed methodologies by Daxue Consulting to collect these first-hand consumer insights.

Daxue Consulting leverages focus groups in Mainland China and Hong Kong to gain information about Chinese consumers’ feelings, opinions, and perceptions. The following analysis aims at mapping attitudes, motivations and decision criteria of Chinese consumers.

This article Pet food market in China: the forecast is expecting Chinese pet food expenditure to get heavier is the first one to appear on Daxue Consulting - Market Research China.

China, since 2013, has been working on implementing the concept of Smart Cities and creating ecosystems aiming at position the domestic high-tech industries as world leaders. Smart city is using advanced digital solutions and IoT (Internet of Things) to implement data-driven urban strategies. For the Chinese authorities, this strong focus and incentives on the development of smart city in China has 2 key objectives:

• Allow the emergence of high-tech driven domestic markets and companies
• Make the targeted city more energy-efficient and livable, and therefore answer numerous key challenges posed by the urbanization in China (traffic, energy-supply, air quality, etc).

The concept of smart city has been introduced by IBM in 2010. Almost every country in the world are developing their smart cities now, including New York, Boston, Turin, Moscow, Seoul, Shanghai and Buenos Aires. The first version of Smart Cities in China has focused on building the infrastructure, implementing technology and collecting data from users and gaining insights. The evolution of Smart Cities 2.0 has now led the focus on strong digitization of urban equipment, 3Ds, data processing and user-centered designs. This Smart Cities 2.0 evolution has leveraged the joint effort from government and corporations to considerably upgrade and accelerate the smart city development in China.

China has created the foundation for a world-leading smart city development program

China Academy of Information and Communication Technology has released data showing that, until 2016, China had 542 pilot cities under smart city development. The actual number of smart cities in China is 386, containing all the provincial and sub-provincial cities, prefecture-level cities and county-level cities.

74% of prefecture-level cities and 32% of the county-level cities are categorized as Smart Cities in China. Most of the Smart Cities are located near the coastal areas, especially eastern side. The reason behind this geographical difference is the economy. With better economy, the government has more investment funds, and businesses have more access and economic power to create technology advancement. The population in eastern areas is also more confronted to new models of consumption and lifestyle and the market acceptance is therefore higher, including the acceptance for Smart City.

(The general development situation of Smart Cities in China, Graph and data gathered from International Telecommunications Union.)

According to Forbes’s World’s Smart Cities ranking report, New York tops the chart, follows by London and Paris. Tokyo ranks at 4^th and was the highest-ranking city of Asia, followed by Singapore which ranks at 6^th. Shanghai, on the other hand, ranks only 57^th in the chart. Indeed, China is still in the early development phase comparing to the West’s Smart Cities, but the government investments are increasing each year and the smart city pilots have outnumbered the West.

Therefore, in spite of lower current performance, China has now reached a leadership role in developing smart cities due to having a more supportive environment, comprehensive digital connections, massive data collections and better user design.

How does China maintain a supportive environment for building Smart City programs

China has a better environment for building smart cities thanks to its

• solid economic growth,
• government policy support and
• advanced technology development.

In terms of economic growth, China has achieved GDP growth of more than 5% for over a decade, while the West has suffered from economy failure including the financial crisis in 2008. Thus, the economic development in the west cannot aid in the vast and rapid development of smart cities. While China, with massive amount of economy growth, has the ability to invest in different areas simultaneously.

Over the years, China has issued several policies to emphasize the importance of building Smart Cities. The Ministry of Housing and Urban-Rural Development has announced China’s first list of pilot Smart Cities in 2013. Later, the government has also released several announcements to oversee the development of Smart cities, including speeding up the implementation, promoting the sustainable development and setting new urbanization plan for 2014-2020. The issue of these policies has testified China’s ambition and determination to implement Smart Cities strategy and work on urbanization programs tackling all the current issues of Chinese top-tier cities. Also, China will increase its investment on Smart City project every year, forecasting number from 375.2 billion yuan in 2017 to 1234.1 billion yuan in 2021.

(The smart city investment forecast in China, Graph made by Daxue Consulting, data gathered from Zhiyan Consulting Group)

Also, China has launched multi-dimensional technology development plans including the Internet Plus (互联网+). Internet Plus (互联网+) is a new development category of Smart City 2.0 It imply to integrate Internet-based technology with traditional industries to drive the economy growth into different forms. Industries vary from government to real estate, from finance to entertainment. The government supervises the technology movement and policy implementation from top down and aims to provide more choices for citizens. For the recent 7 years, the number of China’s internet users has been increasing from 0.564 billion in 2012 to 0.727 billion in 2018. With this sizable increase, China has huge potential in fastening the development of Smart Cities.

China’s comprehensive IoT applications connects citizens’ lives

China now has built comprehensive digital ecosystems in the targeted cities and collected massive data from users in every second. The digital constructions in the cities will include the implementation of RFID (Radio Frequency Identification) sensors, complete wireless connectivity, full-scale electronic payments, and cloud-based software services.

With the help of the booming e-commerce and overall smartphone penetration, China’s smart city has been developing faster than ever. The application of RFID sensors is everywhere, from scanning the QR code to enjoy bicycle sharing, taking the subway to making an order by scanning the code provided on the table in a restaurant, from personal usage, business usage to social usage. It is almost inevitable for citizens to scan numerous codes and digitizing their daily activities. While on the other hand, it is not the case in the West, the RFID sensors mainly apply to security system, business supply chain management, technology development studies and so on.

(Citizens can use smartphone’s Alipay, WeChat Pay and Apple pay to take the subway by scanning the QR code. Photo from Shanghai Metro (上海地铁). Photo Credit: Daxue Consulting.)

Chinese ecosystems are nurturing and maturing smart wireless applications in urbanized areas

The widespread use and implementation of wireless connectivity is especially significant, including Wireless Local Area Network (WLAN), providing connection to high-speed internet and Bluetooth technology for content sharing and streaming. The state of development of wireless connectivity in China and the West are similar, but the application of this technology varies with huge difference.

For instance, benefiting from the high-speed wireless connectivity and popularity of smartphone usage, China has achieved a full-scale electronic payment system. Apart from using the traditional banking services or cash, people use Alipay, WeChat, Apple pay or online banking system to pay their bills or purchase products.

(Alipay and WeChat QR code on the dining table, order food and pay by scanning the QR code. Photo from Laoma Rice-Flour Noodles (老妈米线). A Chinese noodles restaurant located in Shanghai. Photo Credit: Daxue Consulting.)

When you ask a random person on street, there are huge probabilities that he or she will not have any cash or credit cards on hand, since what he or she uses is only a smartphone. According to Analysys.cn, China’s third party mobile payment transaction volume has been increasing to 37727.45 billion yuan in the 2017’s fourth quarter, the sequential growth rate has reached to 27.91%. The huge amount of transaction volume shows the popularity of mobile payment, and the rapid development of smart cities in China.

(The third party mobile payment transaction volume of 2016 Quarter 4 to 2017 Quarter 4 in China, Graph made by Daxue Consulting and data gathered from Analysys.cn.)

However, in the West, the mobile payment development is not as advanced as China’s, the transaction volume is smaller and people still mainly use traditional banking system and cash to make day-to-day payments.

Another element significantly involved in the Smart City development is the cloud-based software services. Alibaba recently has teamed up with the city Macau to transform the idea of Smart City by using cloud services. The cloud-based software will be used to collect user data in areas such as healthcare, security, institutional operations, transportations and more. Along with Alibaba, other Chinese business conglomerates have been strategizing to take over the new market by using cloud computing. Huawei and Ping an Insurance launched strategic cooperation agreement in February 2018 to promote resources and complementary advantages integrations. Ping an Insurance can use Huawei’s technology and its cloud system to implement its Smart City application, to install user information and to collect user data. The usage of cloud-based software services is also widely accepting in the West, as for instance Apple provides iCloud platform and services for personal and business usage.

By using these latest technologies, China’s growing IoT software pool collected massive data to depict personal profiles and make prototypes to achieve better user satisfaction.

China aim to achieve collective intelligence by using City-as-a-platform

“City-as-a-platform” is a new partnership platform provided to citizens, business and government to share information. Using the data collected by digital applications, the new Smart City has put citizens in the center of everything. It is said to have led China to make significant progress in smart transportation, smart healthcare and smart governance.

For example, in smart transportation, users have various options for methods of transportation and payment methods. The key players include Didi (滴滴出行), Shengzhou (神舟专车) for cars, OFO and Mobike for shared-bikes and Metro services, bus services for public transportation. Citizens can choose their own preferences and create own partnerships with businesses and governments. By tracking the transportation traffic every day, the transportation department can allocate their resources, arrange subway and bus shifts according to traffic. People will have more subway shifts when there are massive traffic jams on the ground, in the night, the shifts can be reduced when there are less people using the public transportation. This smart transportation can benefit not only citizens but also the government, citizens can have more time and less loss in experiencing traffic jams, the government can also have an efficient transportation system and a more stable city environment.

Smart city also includes smart healthcare, as appointments can be online, or overall with less and less human services. Doctors can access patient profile and prescript medications information on the hospital cloud system. Patients can go straight to the pharmacy to get his medicine, which has already been prepared at the moment when doctor prescript medications. In the end, the patients can make payments using the card, Alipay or WeChat pay. This smart healthcare also provides new ways for doctors to engage with patients through websites. A Beijing patient can get treatment from a Shanghai doctor in one minute online. Also, the enormous patient profiles in the cloud system can be a quicker way for doctors to access data to cross-reference diseases, thus helping medical development.

China’s Smart City market is booming with the constituent help from government, businesses and citizens

Smart City has been only a concept in the earlier 2000s, but with the help of advancing technology, the concept began to be transferred into reality. China, over the years, has built a supportive environment for the development of the Smart City by using the Top-down approach. With the government’s leading, businesses and citizens joined the evolution to offer constituent effort. Now, China has maintained a comprehensive digital construction and collected massive data from the users. Those data in turn has given users better Smart City experience and more choices. China now has outnumbered the rest of the world in smart cities pilots, it will continue using the “city-as-a-platform” to shift the role of the government from doing by itself to enable citizens participate in making decisions, to align business with smart city goals to innovate and create more IoT software to increase the market size, to offer citizens opportunities as designers of the future.

Daxue Consulting can provide data report and strategic positioning for international brands aiming at integrating solution in Chinese smart ecosystems

Daxue Consulting has developed an extensive experience and network among the Chinese smart city ecosystems and related industries, including projects in data processing systems, connectivity offer monetization, and smart lighting and urbanization models. Our team can answer your need of information and leverage our knowledge of the market to provide key strategic insights on your implementation in China. Contact us for more information and set up a call with one of our senior research directors.

This article How China is taking the lead on the smart city implementation? is the first one to appear on Daxue Consulting - Market Research China.

International brands in China and the Double 11

The British Boxing Day and the American Black Friday were considered are the stars of the e-commerce sales events worldwide but it seems China stole the limelight from the western countries when it comes to e-commerce the biggest sales of an e-commerce with the “Double 11”, the annual Chinese online shopping festival.

Within the very first twenty minutes of November 11^th this year, Chinese online buyers had already bought for an amount of 1 billion dollars’ worth of goods.  The Chinese online shopping festival may only have started a few years ago but already shows an impressive retail organization that is breaking e-commerce sales records each year.

The event is also a proof that Chinese millennials’ opinions are decisive when it comes to the next trends of the e-commerce market. Mobile was another force driving the sales this year with 46% of Alibaba’s transactions going through mobile. Western brands are willing to share the profits generated by the Double 11 and are adjusting their strategies to this event. Here is what they need to understand to have successful sales on the 11^th of November next year.

Breaking Global Sales Records

The “Double 11” online shopping festival in China has the largest amount of sales worldwide. The Alibaba group already announced the amount of sales their sites reached this year:  more than 9 billion dollars were spent for the 24h that lasted the festival. This amount is a 63% increase in the sales compared to 2013. So that, the Double 11 is setting and breaking the global sales records. Despite its size, the Chinese event is however unknown in most western countries.

Alibaba rules the whole event

The shopping festival originates from the celebration of the Single’s Day which takes place on 11 November. On this special date young and single Chinese are throwing events to meet new people, in the hope of meeting their future partner. In 2009, Alibaba started to offer huge discounts on the same day on its platforms Taobao and Tmall which is why the even has now become so popular among the young Chinese. In 2014, Alibaba‘s sales should hit 420 billion dollars which places the group within the leaders positions of online retail worldwide. The Group is breaking records even when it comes to its IPO at the New York stock exchange in September this year. The IPO indeed reached 168 billion dollars, and was the sign that the group was ready to launch its international strategy.

This is also why Tmall has signed a lot of partnerships with global brands. Chinese consumers can now buy foreign brands directly on Tmall, such as Costco and Tesla Motors who set up their stores on the platform earlier this year. Tesla adapted its strategy of retail for the Double 11 event and started to sell its Model S on Tmall platform from October 20. The cars however sold really easily and even went out of stock before the 11^th of November.

Alibaba’s most aggressive competitor on this market is the American group Amazon who chose to launch their new website on the Double 11’s date. Thus allowing Chinese online shoppers to buy genuine American products from US brands. The American e-commerce giant also allowed its Chinese costumers to have access to reviews of the products made by American and a 3 to 10 days delivery service.

The reasons of Double 11’s Success

Sales via mobile reached 42.6% on this year’s festival. Shopping via mobile has become even more convenient than through the computer. Chinese who are enjoying a 90% mobile penetration in their country are therefore changing their way of shopping from e-commerce to m-commerce. M-commerce is perfect for rural regions of China who do not have stable wired connections.

Online shopping in China is also becoming more and more social, with online retailers partnering with social networks. JD.com, launched the “social shopping” trend  via  its partnership with the Tencent group which owns WeChat and QQ. Online shoppers can now easily go from one platform to another.

Double 11 has been created by young and single Chinese for young and single Chinese. The event is therefore driven by China’s younger generation, the millennials. There are 485 million of them, and according to GWI 69% of these millennials already made at least one online purchase. If brands want to know the future trends of the e-commerce market, they should therefore pay attention to the mobile technologies and social platforms innovations and more importantly follow the trends that appeal to millennials.

Double 11 sales are driven by Chinese brands

Chinese brands know the local local market better than any foreign brand.  They are moreover used to the prices war of the Chinese market and are not afraid to offer really significant discounts on the Double 11 festival.  This explains why the top 10 brands by sales on TMall this year were Chinese. The smartphones manufacturer Xiaomi was at the top rank.

Double 11 aims beyond China

Online shopping festival such as the Double 11 will emerge in all major markets and regions of the world. Brands need to develop strategies in order to be prepared to gain market shares on those kinds of events.

Alibaba’s success into creating the Double 11 online shopping festival in China is too impressive for foreign retailers to ignore. This is why brands will have to take part in such kind of events.

To go further:

Branding strategy in China

How to better understand the Chinese e-commerce market ?

Advertising your e-commerce website in China

iResearch’s data on the Chinese e-commerce market

This article International brands in China and the Double 11 is the first one to appear on Daxue Consulting - Market Research China.

Fat Camp is an experienced weight loss camp, of which objective is to lose weight while having fun. In order to give a comprehensive report of the Fat Camp market in Shanghai and help an international fat camp company enter into the market, I would like to divide the current case into three parts: market size estimation, major competition analysis and marketing strategies.

Market size in Shanghai

To begin with, I would like to research the total market size in Shanghai, which is the population of obese children. According to market reports published by Shanghai Consumer Council (see here and here), there are 1.5 million local children in Shanghai aging from 3 to 15 years old in 2013, among which 17.8% are suffering obesity. For the non-local children in Shanghai (without Shanghai registered permanent residence), their population is around 0.5 million and 12% of them are suffering obesity. Therefore, the total number of obese children in Shanghai should be 0.327 million in 2013. However, from that figure it can be subtracted 0.126 million, because children aging from 3 to 7 years old are too young to attend fat camp. Hence, the real market size for fat camp is approximately 0.2 million. Moreover, there is an upward trend of the obesity, which means the market size in Shanghai is expending and the market will grow 3% annually.

Table 1 The total number of obese children in Shanghai 2013

Major competition analysis for fat camp market in Shanghai

Your major competitors come from 5 aspects, which are losing weight at home, local fat camps, traditional trainings, hospitals and academic & artistic courses. Firstly, we assume that 40% of the obese children will lose weight at home or remain indifferent about their weight, and that is 80,000 children in total.

Secondly, local fat camps in Shanghai, such as Dream Fitness Camp and E-Body Weight Loss Camp, have been developing rapidly and they have invested huge capitals in establishing complete facilities. Taking E-Body as an example, it has a training field over 2000 acres which includes a four-star hotel, various sports fields and so on. For this part, we assume that there are 20 main fat camps in Shanghai and each of them has 300 children, which is 6,000 in total.

Thirdly, traditional sports centers and summer sports courses, such as swimming courses, basketballs courses and table tennis courses will also remain popular and a certain proportion of parents will choose this way to help their children lose weight. For this part, we estimate that 20% of the obese children will lose weight through traditional trainings, and that is 40,000 children in total.

Fourthly, besides the above two competitors, parents may send their obese kids to hospitals to lose weight. For the weight-losing hospitals, Shanghai Hongci Hospital, Shanghai Hongkang Hospital and Shanghai Forte Large Children’s Hospital enjoy a decent reputation among customers. From market report perspective, only a small proportion of parents will adopt this method, because medicines more or less would bring side effects to children. Therefore, there are only 5% of children who will go to hospitals to lose weight, and that is 10,000 in total.

Finally, parents may be more interested in cultivating their children’s academic performance and artistic skills, for which they would send their children to other courses instead of losing weight, even if their children are suffering obesity. For this part, market report assume that 10% of the obese children will attend other course and that is 20,000 in total. In general, the major competition comes from five aspects and occupies about 75% of the market, which means that 25% of the market still remains blank. Moreover, for the local fat camps, they only account for 3% of the market. Hence, fat camps still have a great potential in Shanghai and will soon expand their market share if under proper strategies.

Marketing strategies for a fat camp in Shanghai

At last, for the purpose of promoting your fat camp in Shanghai, marketing strategies under the theoretical framework of “four P” can be proposed.

First of all, it is the pricing strategy. Because obesity will not only affect children’s physical heath, and will also exert a negative influence to their mental development, parents are willing to pay for your fat camp services at a high price. Moreover, according to the report mentioned above, the overweight children are usually from wealthy families because their parents can afford expensive snacks and beverages. Therefore, it is strongly recommend to adopting the price-based costing strategy. Based on market research, the charging standard of the local fat camps in Shanghai is between 7,000 RMB to 9,000RMB for a month. For the hospital treatment and academic & artistic courses, they are charging at a price slightly below fat camps. Although traditional training is much cheaper, it needs a long cycle to reach the desired effects. Hence, if our fat camp is able to help children lose weight while teaches a love for an active, healthy lifestyle, service can be priced at 8,000 RMB per month. Considering that you are the new comer in the fat camp market in Shanghai and in order to attract more customers, it would be wise to set a price at the same level with the local fat camps while providing better services.

Second, it is the product strategy, which is also your weight-losing service. Unlike the local fat camps, you can add new elements into our camping activities, such as specialized one-on-one attention which are not often offered in fat camp market in Shanghai. In addition, we can also teach children how to ride a bike and how to fish, which are more magnetic to kids. Furthermore, you can also plus academics and artistic courses into our fat camp in order to satisfy parents’ expectation.

Finally, it is the promotion strategies. In order to attract customers, a 90% discount can be given to those who sign up your activities together. Moreover, it is advised to advertise your fat camps on TV when parents are watching it, and also pass out leaflets to parents at school.

More about fat camp market in Shanghai: market report in Shanghai / The Telegraph

This article Market report of Fat Camp market in Shanghai is the first one to appear on Daxue Consulting - Market Research China.

Incorporating local flavors

In 1990, Pizza Hut set up its first restaurant in China. And now it has more than 500 restaurants in more than 100 Chinese cities. There is no doubt that it has become the largest pizza restaurant chain in China. There are six Pizza Hut restaurants in Wuhan, and they are all very successful. Due to the foreign nature of pizza to inland Chinese citizens, Pizza Hut combined this foreign food with Wuhan’s local flavors to broaden its market, but at the same time, avoided completely assimilating to the local cuisine. From the year 2008, Pizza Hut formulated a strategy to change its menu every half year to cater to a variety of preferences. Every 6 months the chain offered more than 25% new researched foods. Instead of sticking to just pizza, the chain also began offering many other kinds of food such as cooked cereals, spaghetti, steak and soup. As a Wuhan local, I really know the importance of food to the community. By offering deals like family sets, Pizza Hut caters to the emphasis residents of Wuhan place on food. The six Pizza Huts in Wuhan are located near business districts with few competitors to optimize accessibility and competitiveness.

Low prices rule all

Steak restaurants are not difficult to spot in Wuhan, however, among the many foreign steak restaurants, Goyard is the most famous. Goyard is a French restaurant that offers haute cuisine. The restaurant provides an elegant atmosphere, delicious food, authentic French red wine and top-notch service. As a Wuhan local, I sometimes find articles introducing Goyard, but like most of the locals, I shrink back once I see the price. Another popular steak restaurant is Houcaller, a Chinese local brand. This restaurant offers western food but the managing philosophy fits better with Chinese culture. Though it canot offer the atmosphere of Goyard, it has its own unique characteristics. For example, the restaurant offers free fruit for all customers and after paying the bill, customers receive a discount coupon that can be used on their next visit.

Adapting to customer preferences

McDonald’s entered the Chinese market in the year 1990. Now it has 72 restaurants in Wuhan now. I think McDonald’s has a fantastic operation philosophy. At the beginning, McDonald’s mainly targeted customers who did not have much time and wanted food on the go, but later, it found out that its customers in Wuhan had a slower pace of life than its average customers. So they changed their managing philosophy to target children. It began offering family meals so parents could bring their children and enjoy a meal together. McDonald’s brand mission is to be its customers’ favorite place to eat and enjoy top-notch quality, service, cleanliness and value (QSC&V). With competition becoming fiercer, McDonald’s realized that it had to adapt to the constantly changing public demand. McDonald’s adjusts their food prices constantly and understands its customers. It recently launched an affordable set meal to satisfy most middle to low income customers. This combined with its numerous advertisements throughout the city has allowed McDonalds to succeed in Wuhan.

Daxue Research China

Sources:

• Wuhan
• Forbes

Pictures:

• Pizza Hut
• McDonalds

This article Market research: Foreign restaurants in Wuhan is the first one to appear on Daxue Consulting - Market Research China.