China’s society is changing beyond all recognition. At the heart of the most sweeping social and economic transformation the world has seen is the rise of a powerful new – largely urban – middle class. China’s urban middle-class population alone, if considered as a country, is larger than the entire U.S. total population today. The pace of change has been extraordinary. As recently as 2000, only 4 percent of urban households in China were middle class; by 2012, that share had soared to over two-thirds. And by 2022, China’s middle class should number 630 million – that is, three-quarters of urban Chinese households and 45 percent of the entire population. The rise of the middle class is essentially an urban phenomenon. Average per capita urban income in China is roughly triple that in the countryside – and there are set to be 170 million new urbanites between now and 2022.
By 2022, we expect China’s middle class to be consuming goods and services valued at $3.4 trillion – 24 percent of GDP. This has enormous significance for U.S. businesses. It is imperative that companies get to know the new Chinese middle-class consumer in intimate detail.
How does this play out in terms of actual purchases? Consider, for example, that China is already the second largest digital camera market in the world after the United States, selling more units than in Japan, South Korea and Singapore combined. Or take flat-screen TVs. In 2012, 68 percent of upper middle-class households had one and sales of flat-screen TVs totaled 50 million units – more than the 42 million units sold that year in the U.S. and Canada. China is also already the largest retail market for laptop computers, with 27 million units sold in 2012 against 22 million in the U.S. in 2012. And soaring consumer product penetration is not limited to electronics. For example, laundry softener sales have grown by 20 percent annually for the past five years, exceeding the sales of both Germany and France.
These trends will accelerate over the next 10 years as the role of “upper middle class” consumers expands. Today, the mass middle class – with annual household incomes of between $9,000 and $16,000 – are dominant, accounting for 54 percent of all urban households; upper middle-class households, with incomes of $16,000 to $34,000, represent only 14 percent. By 2022, however, the upper middle class will become the new mainstream, accounting for 54 percent of all urban households and generating just under half of total Chinese private consumption.
Upper middle-class consumers are more willing than their mass middle-class brethren to pay a premium for quality products, have a high level of trust in well-known brands and can afford to spend more of their income on discretionary products and services as opposed to basic necessities such as food, clothing and shelter.
They are also much more international in their outlook and open to – and even eager for – international brands. For instance, these consumers are much more likely to travel abroad. Over the past year, one in ten of the urban upper middle class made at least one trip overseas and this share is rising rapidly. This international perspective reflects a number of factors. Upper middle-class citizens are better educated and more likely to be able to speak a foreign language – 34 percent of them have a bachelor’s degree or above and 26 percent can speak and understand English.
A second “accelerator” that businesses should note is the emergence of a new generation of middle-class consumers born after the mid-1980s. While their parents lived through many years of a shortage economy and are primarily concerned about building economic security for their families, members of what we call Generation 2, or G2, were born and raised in relative material abundance. In 2020, we expect 35 percent of all consumption in China to come from these young consumers, who will be major purchasers of leisure, personal services, travel and high-end hospitality.
A third driver to watch is the increasing consumption of services in China. The service sector is expected to account for half of China’s GDP in 2022, up from 44 percent today. This partly reflects the increasing willingness of China’s upper middle classes to spend on entertainment; leisure; care services for the elderly; security services and equipment such as burglar alarms and security cameras; and education. Consumption in these sectors is growing rapidly. Take education as an example. In 2011, 37 percent of China’s upper middle class spent an average of 25 percent more on education in 2011 than in the previous year.
China’s new middle class is transforming the economy – and transforming itself. Those U.S. businesses eager to tap this market need to be armed with detailed intelligence about China’s new consumers and work hard to keep pace with their the rapidly evolving tastes and preferences.
Dominic Barton is the Global Managing Director of McKinsey & Company. In his 27 years with the firm, Dominic has advised clients in a range of industries including banking, consumer goods, high tech and industrial.