China Daily | Capturing China’s Middle Class Potential

By Edward Tse | China Daily Europe | Updated: 2017-08-04

Success will depend on how much and how fast companies can adapt to new realities presented by this rapidly emerging sector

The emergence of China’s middle class is one of the greatest economic stories of the 21st century and a game changer for the global markets. This phenomenon has been written about by a wide range of sources, from investment banks such as Goldman Sachs to academic think tanks like the Center for Strategic and International Studies.

In a recent article titled “How well-off is China’s middle class?”, CSIS notes that in 2002, China’s middle class was only 4 percent of its population, and by 2012 that number had climbed to 31 percent – encompassing more than 420 million people – and is expected to reach 550 million by 2022.

The enormous purchasing power of this bloc is already creating new records on various fronts: auto purchases (last year, 23.9 million cars were sold in China, compared with 17.5 million in the United States); global travel (Chinese spent over $250 billion – 213 billion euros; £191 billion – abroad); and online purchases (650 million orders totaling 17.8 billion were shipped on Alibaba’s 2016 Singles’ Day).

China’s middle class is not only growing in purchasing power, but also enhancing its purchasing mindset. They are “trading up” for lifestyle products and services, becoming increasingly sophisticated and aspiration-driven. Purchase decisions are no longer made based on brand or social status only, but also the associated lifestyle values and the desire to express individualistic pursuits and dreams.

The emergence of China’s growing middle class is not just a China story, but increasingly a global one, and this has major implications for foreign multinational companies and Chinese companies alike.

With the increasing number of Chinese outbound tourists, multinational companies have realized that their “China strategy” is no longer solely about winning over the middle class’s wallets in China, but also about capturing the overseas spending of Chinese consumers abroad. Whether it’s offering Chinese digital payment solutions like Alipay or WeChat Pay in a Parisian boutique, or directly selling products from their global product portfolio through cross-border e-commerce, companies are facing massive shifts in the new consumer landscape.

source: Baidu

As consumption power grows in China, attempts by foreign and domestic companies to tap into the middle class’s demands seem to be mixed. Players that once believed themselves to be unassailable titans in their respective markets often find their positions increasingly tenuous. They are unable to fully acknowledge the new dynamics and strategic implications of the middle class and the overarching China context.

Many multinational companies tend to copy and paste their global strategy to China, believing models that worked in other markets can translate equally well to the China market. Companies that were successful in winning previous generations of Chinese consumers often fail to understand the differences between the older consumer generations and the new middle class, as well as the underlying drivers of demand.

China’s middle class is not only growing in purchasing power but also enhancing its purchasing midset

This lack of an understanding of the China context and an awareness of the need to adapt locally puts these companies at serious risk. On the other hand, companies such as Nike and Starbucks have found great success in China because they are able to tailor their products and their brand communications in a way that reverberates with China’s middle class. Starbucks’ brand in China has come to represent the sophistication and worldliness that China’s middle class craves, while Nike has become a symbol of China’s middle class’s desire for health and well-being. These companies are not merely selling products, but selling aspirational values and dreams.

China’s middle class is dynamic and rapidly evolving. Several drivers of middle class behavior stand out: technology, communication and geographic diversity.

Technology has become highly prevalent in China, from mobile internet to artificial intelligence. Chinese consumers are more digitally connected than any other country today, not just in information gathering but also in transactions, entertainment and communications. These elements will not only continue to shape new demand patterns, they will also enable new capabilities for suppliers to offer more personalized products and service offerings that address the demands of the Chinese middle class.

Increased communication is taking place with the benefits of the proliferation of smartphones and mobile internet. Consumers are now forming online communities and sharing information to different degrees of separation. The emergence of new social platforms has created new forms of online key opinion leaders and online celebrities, who have become new brand advocates and customer contact points between brands and consumers. Social media have become a ubiquitous mechanism for interactive and open communications with consumers.

The new generation of Chinese middle class consumers is becoming more geographically diverse. In the past, wealth and consumption were virtually limited to first-tier cities such as Beijing, Shanghai and Shenzhen, and some second-tier cities located mainly on China’s east coast. The current middle class can be found increasingly throughout China, from the traditional centers of wealth on the east coast to the lower-tier cities of China’s interior, even extending to the rural areas experiencing pseudo-gentrification due to the Chinese government’s New Rural movement.

Business-to-consumer companies that want to be successful in China need to go back to the fundamentals of their strategy and examine three key elements for connecting with the new Chinese consumers in the digital age: “Segment of One”, communities and interactivity.

source: Baidu

With technology enablers, instead of segmenting product-markets using a finite number of segments, companies can increasingly identify consumers on an individual basishence “Segment of One” – and build connectivity with the middle class consumers on an individual level.

On the other hand, China’s middle class consumers are also gravitating toward communities, often through virtual means, where they are able to express their own aspirational goals and lifestyles with other individuals that share the same desires. Jiang Xiao Bai, a young local brand of baijiu (traditional Chinese white spirit) was able to successfully win over Chinese millennials by building a community around the lifestyle that Jiang Xiao Bai depicts, which speaks directly to the dreams, desires and hopes of China’s millennials.

Online word-of-mouth has become a critical element of the Chinese middle class’s purchasing journey as they look to others’ assessments to supplement their own decisions. In addition, the new Chinese consumers are also asking for two-way communications with the companies. They want their views and input to be heard and to be taken into account by the companies so the companies can adjust their product or service offerings on a frequent and consistent basis.

From smartphones to international hospitality, the swiftly evolving Chinese middle class will bring major opportunities for domestic and foreign companies alike. The scale, speed and intensity of this phenomenon are overwhelming. However, the demand patterns of these consumers are evolving rapidly and their behavior will require companies to undertake a drastically different approach from past efforts.

To what extent companies can capture the rightful potential of China’s middle class is a function of how much and how fast companies are able to adapt to the new realities. Surely, some of them will succeed, but many of them won’t.

Edward Tse is founder and CEO, Gao Feng Advisory Co, a global strategy and management consulting company with roots in China. He is also author of China’s Disruptors.


Why Foreign Companies’ M&As in China Have A Mixed Record?

By Edward Tse

China with its massive population and growing purchasing power has become a critical market for many foreign multinational corporations (MNCs). Over the years, different growth models have been adopted. Some have chosen to build their China presence organically while others have formed joint ventures with Chinese companies, or a hybrid approach. Some other MNCs decided to acquire local companies to accelerate their growth in China. Most of these acquisitions were with local privately-owned enterprises (POEs) because of simpler ownership structure compared to state-owned enterprises (SOEs).

Unfortunately, many of these acquisitions resulted in foreign MNCs and local companies getting a nasty shock. MNCs’ record of acquisitions of local companies is at best mixed, and in many cases, complete failure. Management of these MNCs have a go-to list of excuses for why these M&A deals failed (of course after the fact), with the target of the blame always being their acquired local companies. Often they claim these local companies are dishonest, cooking their books to make them look more profitable than they actually are, or that the eagerness to expand into the China market led to shoddy due diligence work that would have discovered these issues beforehand. Of course, in a number of cases this indeed was the truth and some of the falsifications were serious. However, these reasons do not fully explain all the cases that didn’t work out. (By the way, not all of the “local companies” accused of these improper behaviors were “Chinese”. Some of these companies were actually started and owned by foreign entrepreneurs. However, in the remainder of this article, let’s just call these companies “local Chinese companies” for sake of simplicity.)

Source: Baidu

In taking on acquisitions as a growth strategy for China, foreign MNCs normally assume integration of the local companies’ operations into the MNCs’ own operations to be an imperative. In fact, these MNCs’ management believe that integration is the best way for them to “add value” to the local operations because of their more superior management know-how and that synergies can be created via better economies of scope and scale – indeed a very common practice for MNCs in their M&As in many parts of the world. So why not doing the same in China? In order to ensure a smooth transition, the MNCs would typically offer financial incentives to senior managers of the local companies – often the founder himself or herself – to stay, at least for a certain period of time, until “integration is complete.”

From the local Chinese entrepreneurs’ standpoint, many of these acquisitions also didn’t realize their original expectations, but for different reasons. They were led to believe that under the wing of the MNCs who claim to be far more sophisticated and professional than the local enterprises, their own companies would have a better chance to continue to sustain, their brand would continue to grow, and that their companies would become a “long-lasting company”, or ji ye chang qing in Chinese. As the “integration” proceeds, many of these entrepreneurs begin to discover problems, the most common and biggest one being that foreign companies don’t really understand how to operate in China (lao wai bu liao jie) and how the original senior management are either forced out or leave of their volition after seeing that they are no longer welcomed or no longer “belong” there.

Like every situation in life, there are pearls of truth found in different perspectives of the same story. Both sides have their valid arguments, but the one-sided views often miss the overall picture. Based on what I saw through my consulting work in China, I would however suggest that the biggest contributor of these issues is the differences in behavioral approaches and norms between the parties involved. I believe there are four key reasons: 1. mismatch of expectations, 2. holistic philosophy vs. bits and pieces philosophy, 3. differences in rhythm and speed, and 4. decision making systems. (See Exhibit 1)
Exhibit 1:

MNCs vs. Local Chinese Companies

Mismatch of Expectations (top line vs. bottom line)
Foreign MNCs typically care for both top and bottom line growth. This is business 101. Most of these companies have been in operations for decades, if not for over a century. It’s only natural that they look for both top line and bottom line performance. In fact, that’s why many of them chose to enter the China market in the first place. After all, China is a high-growth market compared to more mature markets. The fact that many of the foreign companies, especially the larger ones, are publicly-listed makes the case of profitable growth even more compelling because the management of these companies need to be responsible to the capital markets. This can be very different for Chinese companies, at least for some of them, especially when China’s economy was growing at high speeds and opportunities seemed to have presented themselves left and right. For many Chinese entrepreneurs, their first priority was to grow, or to “land grab”; so top line growth was often more important than bottom line growth. Of course, this strategy wouldn’t work forever. But for a certain period of time, it was the go-to strategy for many Chinese entrepreneurs. Clearly, this divergence in points of view often led to difference in strategy, level, pace of investment, and if not properly handled, mistrust. Of course, the laws of gravity also apply in China. And companies, regardless of their ownership, need to be profitable. However, for some of the companies during certain periods of time, their priorities could be different.

Holistic Philosophy vs. Bits and Pieces Philosophy
Many foreign MNCs have built excellence by function across geographies over long periods of time. These global functional capabilities became the backbone of these companies’ well-being. And, they naturally desire to apply these capabilities across all geographies in the world. China wouldn’t be an exception. To this end, many MNC executives become specialists in their own right. They are very good at what they specialize in, but as a result, they are often less aware of areas beyond (or the “broader context”) and the often need for making necessary trade-offs. On the other hand, given that the Chinese owner/CEO often builds their company in a rather short period of time in an environment that is often ambiguous, imperfect and fast-changing, and filled with a large range of stakeholders, they frequently need to make tradeoffs across many dimensions and their solutions are commonly an optimization of numerous factors facing various constraints. So, when someone with a single-dimensional view looking for consistent, global standards and someone who has always been juggling different considerations across multiple dimensions in an evolving, imperfect environment have to work together, they would inevitably run into conflicts. These conflicts, if not properly managed, could lead to frustrations and mis-trust.

In their eagerness to “help”, many MNCs would assign some of their own people to fill in key management positions to “assist” the Chinese entrepreneurs. These people would typically be Mandarin speakers, either ethnic Chinese or non-Chinese who’ve been in China for some time. The MNCs often assume that “since these people were trained in my system and they know China, they must be able to help.” Unfortunately, that turned out to be not always the case. From the Chinese entrepreneurs’ standpoint, these people while technically sound, often lack the ability to see beyond their narrow specialty and to understand broader implications of a holistic perspective of the business. So, these attempts often ended up with mixed records at best.

Differences in Rhythm and Speed
Compared to foreign MNCs, Chinese POEs typically are far speedier, more agile and more adaptive. Foreign MNCs are much more focused on checks and balances, and deliberations which makes them slower. Many Chinese POEs are quite willing to quickly build a good enough product or business model, throw that into the market, and let the market tell them what they need to improve and adapt. This is of course risky, and unacceptable, if the product hinges on quality, safety and security. However, in cases of new business models, the willingness of the market to accept imperfect business models can actually be pretty high, especially in the first trials. But consumers do appreciate companies whose business models or products cater to their needs and utilize fast feedback cycles to improve their offerings to the consumers’ taste. In these situations, Chinese POEs tend to have an upper hand over more established foreign MNCs. So when these two different speeds and rhythms come in contact with each other, incompatibility naturally occurs.

Decision Making Process
Many Chinese POEs came into existence in less than couple of decades and many of them were able to achieve lots of growth piggybacking off China’s fast pace of economic growth. Many are still run by the owner who typically grew the company from nothing to its current size. These organizations are typically concentrated to the one person or a small group of senior executives with the founder/owner still calling the shots. In this structure, the organization is very top down and often hierarchical. While there are people who by title are leading various functions such as marketing, logistics, sales, or R&D, more often than not, they are merely carrying out orders from the most senior person(s). In a way, the founder/chairman/CEO in reality is the synthesizer of information and the decision-maker for all decisions affecting the company, no matter how large or small. Decisions often come from the top of the pyramid with the rest of the management simply there to execute. On the other hand, foreign MNCs, especially large ones, are organized with clearly defined roles and responsibilities throughout the chain of command. In a local POE, a senior VP of Marketing’s role is likely to execute the vision and strategy developed by the most senior person in the company. In an MNC, an individual with the same title will be actually responsible for the marketing strategy.

Source: Baidu

So, what should foreign companies do as they consider M&As in China? Clearly, one needs to do the basic homework well. Rigorous due diligence is a must. But for all those cases where the conducted due diligence did not identify the problems that were later discovered, that by itself is its own problem. For sure, these companies would have hired management consulting firms or auditing companies (and I am sure these are world-renowned brands) to do the due diligence and yet they couldn’t uncover some of the most basic yet critical problems. The reason behind this issue is that it really requires someone who understands the nitty gritty of businesses in China to do a proper and thorough job. This sort of capabilities is still rare in the professional firms in China especially those who are not headquartered in China.

Foreign MNCs shouldn’t assume that “integration” is the only way to capture the value of their acquisitions in China. At least, not “integration as fast as possible.” While in some cases integration may make sense, in many other cases, it may not. It depends on the contextual factors I mentioned above and the severity of the gaps in behavior and perspectives between the two sides. Due diligence should not only cover the “data” per se but also the culture, behavior and beliefs. This won’t be easy especially for many foreign MNCs. They tend to assign their M&A team from global HQ to carry out these tasks. While these people are usually technically sound and experienced with many deals under their belt, they often lack the experience and sensitivity needed to understand the softer, often unspoken, elements especially in a culture and context that are very different and can be overwhelming. Almost certainly, they don’t fully understand nor appreciate the China context. Over-eagerness in creating value often backfires as well as simple notions such as shared services, while a proven approach for realizing value in M&A deals in many parts of the world, may or may not achieve the same level of impact in China due to China’s complicity and diversity in labor rates, local regulations and requirements, as well as availability of competent human capital in key functions.

Fundamentally, MNCs need to fully evaluate the tradeoff between immediate integration or keeping companies separated or a gradual migration from separation to integration, and the speed and intensity associated with the process. Immediate and full-scale integration, which is often MNCs’ incoming assumption, may or may not actually yield the best result. Sometimes overzealous attempts at integration could result in loss opportunities for the MNCs to learn from the Chinese companies on how better to run businesses in China. For example, some Chinese companies are good at keeping their costs at manageable levels, while foreign MNCs tend to somewhat “gold-plate” things. For some local companies, their relationship with their distributors is often more win-win and intimate, while their foreign MNC counterparts can be more transactional.

Making the decision on integration or not correctly, and the manner of how, requires senior executives who can see the forest beyond the trees within the China context and increasingly, the role of China in the rest of the world, as well as being able to align the China realities with the expectation of the global headquarter. This capability does not always exist in MNCs but when it does, it’s a rare asset to have and to cherish.

About the authors
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company. A pioneer in China’s management consulting industry, Dr. Tse built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas. He is the author of over 200 articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).

观察者网 | 谢祖墀:王兴和梁建章别多元化了 其实还有第三条路

【文/ 谢祖墀】








到了90年代初期,美国两位著名的管理学者加里•哈默尔(Gary Hamel)和普拉哈拉德(C.K. Prahalad)提出了核心竞争力理论(Core Competence),基本上否定了多元化集团式经营方式,认为成功的企业都是应该按照其核心竞争力所处的领域去经营。










多元化和专业化之外 其实还有第三条路










价值创造也不再仅仅只是线性的价值链(Value Chain),而是立体的、多维的价值网(Value Net);横向的、跨业务的机会越来越多,企业可通过投资、创新和孵化等多种手段激发行业间机会,我们称之为“跨界激活”。


1. 对于会影响“我的业务”的未来,我知不知道未来将会是什么?这个“未来”应至少是未来的三至五年。我有没有兴趣和方法去尽量了解影响我的重要趋势和拐点将出现在什么地方?这需要企业家建立强力的“远见”(Foresight), 而不单只是看到过去的“后见之明”(Hindsight)。

2. 我的企业的核心能力究竟是什么?企业家必须对于自己企业的核心能力有深刻和客观的剖析,不能过于自大或过于自卑。核心能力除了管理能力还包括核心资源,如资金和人力资本。

3. 识别未来的机会是什么?未来的机会有多大?发展速度和形式将会如何?要争取到未来的机会,我们能力的差距有多大?

4. 决定是否“跳跃”捕捉这样的机会?跳跃成功的概率有多少?同时,这种跳跃对于竞争格局的影响是如何的,如果我们的竞争对手同时在跳跃呢?新的竞争格局又是什么?新的竞争格局对我们的影响是什么?

5. 假如我们决定要“跳跃”了,在跳跃过程中,我们如何弥补能力差距?哪些是靠我们自身能力提升去弥补差距的?哪些能力差距是我们要通过第三方或是建立生态系统去弥补的?

6. 在考虑要不要跳和跳到哪里时,我要经营业务的范围宽度与我能力的带宽(Capability Bandwidth)是否匹配?




今天许多人都很羡慕亚马逊的业绩表现,它增长的很快,估值不断上扬,更有分析者预测贝索斯将会超越比尔•盖茨成为世界首富。但多少人理解贝索斯所推崇的“对客户的疯狂热爱”(Customer Obsession )的信条呢?


“对客户的疯狂热爱”是建立于企业对客户需求的深入理解和主动管理。以目前大数据和其他科技的能力,企业是可以做到以个别客户为最低识别单位的,我们称此为“个体的市场细分”(Segment of One)。


从组织形态方面,越来越多的企业需要向外延伸,通过建立生态系统来补充自身的不足,而生态系统亦即横向的组织形态(Horizontal Organization )。








谢祖墀博士(Dr. Edward Tse)是高风管理咨询公司(Gao Feng Advisory Company)的创始人兼首席执行官。中国管理咨询业的先行者。过去的20年里,他创立并领导了两大国际管理咨询公司在大中华区的业务。外界评价他为“中国的全球领先商业战略家”和 “谢博士之于中国企业界就如大前研一之于日本企业界”。他曾为数以百计的公司(总部设在中国及其它地区)咨询过所有关键战略和管理方面的业务,涉及中国的各个方面和中国在全球的地位。他还为中国政府在战略、国有企业改革和中国企业走出国门等方面做过咨询。他已发表200多篇文章并出版了4本书,其中包括于国际获奖的《中国战略》和《创业家精神》。谢博士获得了加州大学伯克利分校工程学博士、MBA以及麻省理工学院的工程学学士、硕士。