Take the less-travelled roads in China. That's the message from a recent IBM study
on how multinationals are engaging with China's mass consumer market.
The report recommends western firms steer clear of the usual top-tier
cities where the competition is fierce and the market potential is
Instead, they need to change strategies to reach China's mass
consumer market and focus on smaller, emerging cities with fast growth,
such as Fuzhou (pictured) and Hefei, which represent nearly 40% of
China's urban population.
According to the study, these emerging cities contribute up to 43%
of China's GDP, and more than 80% of them have household income levels
within the $3,000 to $6,000 mass market range, compared to only 50% of
larger top-tier cities.
Furthermore the GDP of these emerging cities is growing
significantly. For example, the top 10 emerging cities are growing at
28% per year compared to only 18% for the top 10 prosperous cities.
The study, by IBM's Institute of Business Value in Beijing in
conjunction with the Economist Intelligence Unit, goes on to look at
the the challenges facing multinationals if they expand in these new
Distribution is perhaps the biggest challenge. According to the
study, up to 42% of foreign companies' sales are still going through
three or more layers of distributors which leads to high costs and
limited understanding of their customers.
Winning in these mass markets also requires simpler products and
cheaper prices, which means businesses may need to shake up their
R&D and procurement functions.
Finally, human resources challenges, already quite significant for
multinationals, are likely to be exacerbated as western firms expand
geographically to tap into China's mass market.
The study says candidates lacking English language skills and “soft”
skills, such as communications and managerial capabilities, were the
top two reasons cited by multinational recruiters for the current
talent shortage for multinational positions.
The IBM study adds to a growing number of similar reports
recommending that foreign firms — both old and new to China — need to
look beyond Beijing and Shanghai for growth. See this EngagingChina story, for example.