Click below to listen to this week’s Alicast podcast with Adam Najberg and investor Jeffrey Towson. A full transcript follows.

FULL TRANSCRIPT

ALICAST: WHAT YOU NEED TO KNOW ABOUT CHINESE CONSUMERS
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Adam: Time now for Alicast, a deep dive into innovative and emerging trends in e-commerce, online payments, and digital entertainment. Brought to you by Alibaba Group will offer insights about Chinese consumers and brands doing business in China. We’ll delve into global online retail, cloud computing, big data, and other must know topics and issues in and around one of China’s largest companies.

I’m Adam Najberg.

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Adam: It may surprise some listeners but by a number of different measures, China passed the United States as the world’s largest retail market last year. The world’s most populous country has a middle class that’s bigger than the entire US population. And a McKinsey report says it’ll grow to about double that size over the next several years.

The middle class in China is tech-savvy. They have new smartphones, they like to shop, and have the money to do it. It’s important to understand Chinese consumers. Who are they? What do they want? How do they view the world? And more importantly, if you step back, what do the rising numbers and ever-growing buying power mean for China’s economy and the rest of the world?

Fortunately, we have an expert with us to answer those questions and more. Joining Alicast today is the esteemed Jeffrey Towson. Jeff’s an investor and consultant, has been for over 20 years. He’s developed over $25 billion of projects in real estate, hotels, banks, insurance, healthcare, consumer products, retail, technology, petrol chemicals, and energy and infrastructure.

He’s a best-selling author, a professor, and managing partner of Towson Capital, a niche investment and consulting company focused on healthcare and consumer facing businesses in the US and Asia. Most importantly, he’s a China expert. And he’s spent a lot of time thinking about the Chinese consumer, and what will happen with the rise of the Chinese consumer and Chinese consumption overall in the coming years. Jeff, so pleased you could come on Alicast. Welcome.

Jeff: Great, thank you. It’s a pleasure to be here.

Adam: Well, you call it in some of your speaking engagements, China 2025, where you detail how China and Asia are gonna be transformed by rising Chinese consumers. Tell us more, what is it all about?

Jeff: I think, what I started to look at was just how dramatic China has changed in just the last five years. And probably within that, the biggest story has been the rise, the emergence of Chinese consumers who went from something nobody talked about in 2010, they’re in the news every day now.

They are impacting tourism in Paris, avocado sales, real estate prices in Toronto. They’re heading over, and this is just in the last five years. So, I wanted to sort of project forward, and say, look we’re just at the start of this. Let’s look a little bit further down the road, and so sort of started looking at 2025.

What is this group gonna look like? What is China gonna look like? What is interaction with the rest of the world gonna look like? There’s a great Bill Gates quote that, people tend to overestimate what they can accomplish in a year, but underestimate what they can accomplish in 10 years.

So it’s kind of with that sort of time horizon, which Jack Ma talks about a 10-year horizon as well in a lot of his plans. So, in terms of China 2025, I would just say, think about three numbers. There’s a ton you could talk about, but think about three numbers.

Number one is 1 billion urban dwellers. There about 600 million, 700 million Chinese living in cities now. They’re still moving in from the countryside. This process is still happening. In the next seven or eight years, they’re gonna add about another 300 million more. We’ll hit about 1 billion people living in Chinese cities at about 2025.

And that will be 400 cities. This urban population is a big deal. So, think 1 billion. A second number to think about is 250 middle class families. Spending in China and most places, it’s not per capita. It really happens at the household level. People save for their children’s education.

They buy healthcare together. They take care of their parents, their grandparents. So, it’s really these families that you wanna think about. And in 2025, there’ll be 250 million of the families which gets you a lot more total people. That’s gonna be the big unit of spending. And then the third one to think about is 75 million Chinese graduates of college and post graduate.

We’ve never seen this many people with this type of higher education before. Engineers, scientists, industrial engineers, graphic designers, animators. We’re seeing a huge educated population emerging. And that’s gonna play out in a lot of industries. So, I’d say those are kind of the big three numbers to think about.

Adam: So, 1 billion, 250 million, and 75 million were the three numbers we should bear in mind. Jeff, could you help us draw a picture of a Chinese consumer. Is there one picture? Or how do you separate out the different kinds of consumers and how important are different age groups, like millennials, or different sexes, men and women, to building out the retail market in China?

Jeff: Right, this is where my work is really fun, because 10years ago, eight years ago you could write these general China books, and you could talk about Chinese consumers. But they have exploded in complexity. You have to be very granular now. And it’s much more complex.

One it’s large, and two, it’s much more complex than you might find in the United States. Cuz you’re not dealing with a developed economy with people at a certain level of income. You have everything from very sophisticated global travelers who live in Beijing and Shanghai to very rural farm people.

A friend of mine says, when you get on a train in Beijing and leave the city, you basically can go back in time hour by hour. You can go from dealing with health conditions like diabetes and obesity, which are kind of wealthy country diseases. You can go all the way back and have the black plague which still does exist in China.

You can have cholera. You can see people living in huts. So, you have this massive spectrum of lifestyle, of income, of sophistication. And that’s part of it, the complexity is unbelievable now. So, I mean, I look at a lot of granular things. I look at seniors, about 180 million seniors in China.
Moms, Chinese moms are a very important demographic. There’s more Chinese moms than people that live in the United States. When you hear things about food safety, food scandals, pollution, those are more often than are almost always Chinese mothers worried about their kids. They’re really China moms’ stories.

I’ll give you a couple more. Sports consumers, by every measure I can see, Chinese fans of soccer or whatever are the most enthusiastic fans on the planet, more than Germany, more than Brazil, more than the UK. What else, Inland consumers, China’s big backyard. If you go west, suddenly you’re in these huge expansive plains.

Those consumers are very, very different. And you can just sort of go bucket by bucket. Young consumers, millennials are a big deal. That’s probably where 30 or 40% of the growth in spending is gonna come from. So you just go bucket by bucket. And they’re all over the map.

Adam: So when you look at those buckets, what are the buckets? You just mentioned one of them at least, but which buckets in particular are the ones that are really going to explode in China, the ones that we have to take notice of globally?

Jeff: I mean, it depends where you are.

Let’s say you’re a Chinese retailer, maybe selling air conditioners, you’re a hire or something, a Walmart. Those companies right now are focusing on a lot of third tier cities. They’re going inland. They’re already in Shanghai, they’re already in Beijing. So, for them, the focus is where is the next growth?

And so they’re tending to go inland, you’ll see that story all the time. But if you’re an in vitro fertilization clinic in Los Angeles, these relatively small companies are getting inundated with Chinese families flying in. Suddenly in a couple of years 20, 30, 40% of their clients are now Chinese flying in.

If you’re selling homes in Pasadena, that’s a different demographic. So, it kinda depends on what you are looking at, but sort of the mainland growth story is tending to push out into the more rural areas. The international story tends to be more of the middle and upper class that is sort of going global for the first time.
Five, six years ago, you didn’t really hear about Chinese tourists. Now you got 110, 120 million per year. Remember, two or three years ago, the majority of those people were leaving the country for the first time. So, it really depends on where you’re looking, but those tend to be, I think, the simplest buckets to think about.

Adam: Is travel one of the big lifestyle upgrades that you talk about in your presentations? What kind of global ripple effects can we expect to see?

Jeff: I mean if you look at the most common words you’ll hear when you start talking about China consumer business is this word of upgrades.

Venture capitalists talk about this all the time. It’s all about upgrades. Folson talks about this all the time when they buy various cruise ships or whatever. They’re always talking about upgrades.

Jeff: And really, I mean, the word I like is take-off points. There’s a really interesting phenomenon where the middle class, that 250 million families, their wealth keeps increasing. And as it increases, they hit certain price points where suddenly things that they’ve probably seen their whole lives suddenly become affordable for the first time. And when that happens, the numbers just pop. The sales go through the roof. Suddenly, everyone can afford an iPhone. And iPhones sales in China just jump off the charts.

Jeff: Now as that wave passes, the growth slows and it’s more normal growth. So, car sales today in China, let’s say, they’re growing at 4 to 5%. That’s fairly normal for China’s overall development. But SUV sales are up in the 10 to 20%, cuz they’re still in that take-off point.

So, you always look for when the wave hits certain things. Now the middle class can afford almost to buy a second home outside of China. So, that’s an issue. Now they can take vacations to Europe for the first time, which they typically couldn’t before. So that’s kind of the thing you look for.

Now they can afford avocados and fresh groceries, which they couldn’t before. And so, sales of stuff out of Australia go through the roof. So that’s kind of a good number to think about.

Adam: In your presentations, you also refer to disruptive digital Chinese consumers. What do you mean, and disruptive to what, or whom?

Jeff: What is really fascinating, this is kind of what I’m kind of working on right now, is this idea that we’re seeing this huge digital disruption happening. Now we’re seeing it in a lot of places in the world, it’s not just China. Although I think in some respects, it’s happening faster in China.

We don’t see mobile payments happening anywhere like we do in China. But the difference with China is, this disruptive wave, let’s say for retail, is happening before the main traditional industry was actually finished being built. E-commerce, Alibaba obviously, is coming through and changing everything about retail, but the main retail infrastructure of China really hasn’t been built out yet.

There might be a big Walmart or a big Carrefour store, but when you start going out of the top tier cities, you’re still seeing a lot of small little mom and pop type shops. That’s different than what Amazon is doing in the United States where it’s hitting shopping malls and more established.

Assets haven’t been built in China. So that disruption is really quite powerful. Hollywood is another example, like Alibaba Pictures, Tencent Pictures. These sort of data-driven entertainment companies, sort of like Netflix and Amazon. They’re hitting the traditional studio business, but the traditional studio business and cinema business in China hasn’t really been built yet.

I mean, it’s only halfway there. It’s like Netflix came on the scene before Warner Brothers really got going. So that sort of disruption is really interesting to watch.

And I think the number one area that’s being hit is retail. It’s, I wanna say, devastating, but yeah, it’s massive, the impact.

Adam: If I can just follow up on that. I’m not changing gears here, but I’m curious. Because we keep talking about yes, there are different buckets, but we keep talking about the Chinese consumer. So that a lot of listeners in the Western world will understand, how are Chinese consumers different from US consumers, for example?

Jeff: Yeah, I mean, it’s all over the map. Let’s say we’re talking about, I mean the biggest different is online. Everything has happened and not online, mobile. Everything’s happening on a smartphone now. Your average American, let’s say, pays for things without cash which would be credit card, debit card, gift card, let’s say an average of 20 to 30 times per month, for all non-cash types of payments.
Your average Chinese pays with a cell phone, a mobile payment over 50 times per month alone.

I mean, everybody has switched to their phones. All the Internet browsing is online. All the music streaming and listening is mobile phones. I mean, the shift onto mobile has been dramatic. We used to talk about online consumers. We don’t really talk about that. All consumers are online now. I mean, It’s just everybody. So that would be kind of a difference. If we look at something, say, like Chinese moms, they’re gonna be different than, let’s say, American moms, I’m an American.

It is very common for a Chinese mother to control the family spending to a far greater degree. And there was a MasterCard study in 2010, and they asked Chinese moms, do you control the spending for the whole family? And 75% of moms said, yes. I mean, to the point where sometimes they will just give the husband a budget to live off of.

Adam: They have never lived in my house.

Jeff: [LAUGH] Right, I mean, you will actually see that phenomenon in other countries that often the mother will control all of the household spending for food and the kid and whatever. It’s just more in China.

Adam: Right, right.

Jeff: And her sensitivity to things is gonna be far greater cuz one, they probably only have one child.

The pollution risks, the health risks, the food safety risk, those things are all greater, okay? China is a more dangerous place to live than Sweden. So, it’s sort of a lot that stuff is just heightened. So, they tend to be a very powerful, and they also tend to spend for the children, the husband, and the grandparents, who they often take care of. So, they’re kinda these super consumers. So, you see lots of differences like that.

Adam: What about the expectations? Of course, every consumer brand hopes, or retailers hope, they’re going online to buy something. But what’s different about what an American consumer expects online and a Chinese consumer expects online?

Jeff: Yeah, I mean, that’s hard to generalize about. Chinese webpages, they look very different. Everything looks different, right? The Chinese Internet is different. It’s a different animal. The number one language of the Internet globally is Chinese now. It passed English several years ago.

Most people outside of China probably have never used WeChat. They’ve probably never used Tmall. They’re not watching their videos and playing their online games. Online sports, basically video games online, is a $7 billion industry in China now. I mean, that’s approaching Hollywood’s revenue from cinema releases. So it’s just all over the map. Meitu, which is a really fascinating company. It’s a photo app, you take a picture of yourself on your phone, and you can make yourself look better, different. You can make your skin a different color, you can make your eyes bigger, make you thin, your chin narrower. Chinese women went crazy for this app, and in a matter of a couple years, 400 million Chinese women downloaded and used this app. There’s nothing like it in the US or Europe as far as I know. It’s just a different animal, I think.

Adam: What is it that the Chinese companies like Alibaba, like Tencent and others understand about the consumers that makes them so successful in what they do?

Jeff: Yeah, this one’s hard to generalize about. You’ll hear generalizations like this that Chinese companies don’t plan as much, they just do stuff and see what works and then improve. There’s often like much less of a strategy development or a product development period in China versus the United States. People just do stuff, and then you iterate. I don’t really find that to be the, I mean, that is true, I think. But what I really just look at is management quality. You just have a really good Internet entrepreneurs now in China. A guy like Jack Ma of Alibaba, I mean, he is really just coming in to the top of of his game.

He has been a serial entrepreneur since what, 1998, about 20 years. I mean, he’s like Steve Jobs circa 1997 now. He’s just coming into his prime. A guy like him, a lot of these companies. There’s a whole sea of really seasoned entrepreneurs in the Internet space in China, and venture capitalists.
And they are very good at moving quick and adjusting and reiterating. I think they’re just really getting their speed, their stride right now. A company like Tencent, a company like that can blow the doors off a company like Facebook. Tencent releases a groundbreaking, entirely new product about every 18 months.

There was WeChat, nobody saw that coming. They did online gaming, they did QQ messenger. I mean, they’ve come up with some entirely new play, a little bit like Google. Google’s similar, they keep coming up with new stuff. So I mean, I tend to point more than anything else to management quality.

Adam: Look, Jeffrey, what I appreciate about you is, you’re not just an academic, but you’re a guy who puts his money where his mouth is. You’re an investor. So, you kind of bring both sides of it, the case studies, and the life experience. I could speak to you all day. We’re out of time for now. I’d like to have you back in Alicast in the future. And I just wanna say thank you for being here, and sharing the wisdom.

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Adam: You’ve been listening to Alicast, a regular podcast from the Alibaba Group. Thanks for tuning in, I’m Adam Najberg.

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