Friday, September 10, 2010

A Nation of Cautious Consumers

Too many people, including Chinese leaders, concede that China invests too much but consumes too little. Today, it invests nearly half its GDP, but consumes 35 percent - the lowest share for any robust economy of comparable size. China's household income and consumption have fallen by 16 and 11 percentage points over the last decade. It's truly an unprecedented situation, unknown and unfathomed by mankind. But while it is low in percentage terms, consumer expenditure is sprinting closer to $2 trillion-nobody can sneeze at that number. India's economy suffers from no such conundrum. It's classically- almost boringly-balanced, with nearly 58 per cent of GDP getting consumed by ordinary Indians. There's no question that India's large consumption base gives the economy a far more stable foundation.

Size, though, is one facet, while psychology and evolution of consumer habits is just as important. Clues to these behavioural quirks are buried in the first eight decades of the twentieth century. From the early 1900s to 1949, China was convulsed by wars and civil strife. Later, Mao's Cultural Revolution obliterated even a vestige of consumerism in Chinese society. As against this, democratic India swerved towards socialism. Mercifully, private enterprise was only muzzled, not effaced. It continued to coexist, suppressed by taxes and licences. Through all this, private property remained an 'inalienable right'. So a genuinely 'mixed up' economy emerged, where multinational brands like Lux soaps, Cadbury chocolates, Coca-Cola beverages and Intercontinental hotels survived. Even more ironically, a starving consumer economy managed to nurture some world-class business practices in advertising and brand building.

That's how the two countries were poised at the beginning of their economic renaissance. The Chinese consumer was trapped in a long grey tunnel of abstinence, while the Indian consumer was half-trapped, half-free, one hand tied behind his back, the other reaching out to touch and feel some ten-years-out-of-vogue products and brands. Except that even ten-year-old western goodies were pretty standout compared to China's consumer moonscape. So quite the predictable explosion of pent-up desires occurred when Deng Xiaoping threw China open to gleaming western brands.

The behavioural graph of urban Chinese consumers is a textbook spike of rapidly gratifying desires. To begin with, there are a large number of these consumers; nearly 600 million live in urban areas, out of a total population of 1.3 billion. As China allowed private ownership, a humongous amount of state-owned housing stock was transferred into individual hands. That was the first wave of household wealth creation; as property prices increased sharply, the 'wealth effect'

But urban Chinese consumers betray an uneven attitude towards brands to this day. They are willing to splurge on luxury products which can conspicuously be 'shown off' to peers and neighbours. However, for household items which cannot be 'shown off', or which have a 'commodity-like' appeal, brands are ignored. In the early flush of consumerism, foreign brands were preferred, but later on, local brands got in the game, provided their quality and snob value was visible.

Now the challenge before China is to pull its consumer revolution up by several notches. China needs to change the structure of its economy. It should now make services more attractive than manufacturing, by jacking up prices of energy, water, electricity, land and capital. More businesses should be privatized (unfortunately, the exact opposite is happening). The hukou system should be relaxed, allowing rural migrants to take their families to permanently settle in cities-but the government has only pledged to 'study' the problem and 'push for urbanization in an active and steady manner'. Not willing to take risks, Chinese consumers have stashed nearly $ 4 trillion in bank deposits. A massive social safety net that covers the Chinese during unemployment, illness and early death can persuade the Chinese to open up their wallets.

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