NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, October 14, 2005

Five years ago General Motors Corp. () offered just a handful of car models in China — mostly large, high-end Buicks costing around $40,000. That limited selection worked in a market dominated by fleet sales to government offices and enterprises: What these customers wanted were large sedans for hauling big shots. “We were targeting institutional buyers, who were our big market back then,” says Kevin Wale, president of GM China.

Fast-forward to the present, and it’s hard to believe GM is the same company. The auto maker now offers a fast-expanding range of models in China, each aimed at a specific customer segment. For China’s newly rich, there are $75,000-plus Cadillac SRX sport-utility vehicles and $55,000 CTS sedans. A bit lower down, the $30,000 Buick Regal continues to be a top seller, but it’s now positioned as the vehicle of choice for cost-conscious entrepreneurs who want a prestigious car. For their midlevel underlings, there’s the $15,000-to-$20,000 Buick Excelle — offered in various models. And for younger urbanites buying their first cars, GM’s Chevrolet marque now has the $19,000 Epica sedan, the $10,000-to-$12,000 Aveo hatchback, and the $5,700 Spark minicar. Meanwhile, in the countryside GM offers the Wuling, which goes for $4,000 to $6,500. This boxy minivan can carry seven passengers, a couple of hogs, or a dozen sacks of potatoes. “We had a very limited product line in China,” says Wale, who took over GM’s top China job in March. “Now we have an extremely well-developed range of brands and cars.” And they’re available at nearly 1,000 outlets across the country, up from just nine in 1998. Add it all up and it means lots of metal moving off the lot: GM China’s vehicle sales this year are expected to grow by 20%.

$37 WASHING MACHINE
GM isn’t alone in discovering that China is not a monolithic market. The country, with 1.3 billion citizens speaking more than 100 dialects, is wildly diverse. What people eat, wear, and drive differs greatly from north to south, east to west, rich to poor, young to old, city to countryside. Urumqi in the northwest is further from Guangzhou in the southeast than Oslo is from Rome, and the desires and needs of people who have benefited from the economic changes of the past two decades barely resemble those of individuals who have been left behind. “It’s clear that you can’t treat China as just one country,” says Glenn Murphy, managing director of ACNielsen China in Shanghai.

And while it was once enough for companies to focus on the 100 million or so Chinese living in Beijing, Shanghai, Guangzhou, and a handful of other big cities, today they’re scrambling to offer products tailored to more segments of the population — rural, urban, middle class, wealthy, and poor. That means an explosion of choice for consumers. Appliance- and gadget-maker Samsung has discovered that customers living in steamy Guangdong Province need larger refrigerators than those in the more temperate north, so it started shipping bigger fridges to the south. Household-goods company Procter & Gamble Co. () has won over consumers in China’s hinterlands with a budget detergent called Tide Clean White, while holding onto city customers with the more expensive Tide Triple Action. And Nokia Corp. () now pumps out scores of phone models aimed at every conceivable type of user, and has more than 100 sales offices in virtually every corner of China, up from just three in 2002. “We were trying to run China by just managing it centrally as one market,” says Colin Giles, Nokia’s senior vice-president for sales and marketing in China. “When we started to roll out local distributors, we realized how diverse the market really is.” Since it revamped its strategy, Nokia has clawed its way back to the top spot among cell-phone brands sold in China after slipping three years ago.

It’s not just the multinationals that are segmenting the market. Chinese companies are doing the same. Appliance maker Haier Group, for instance, sells dozens of washing-machine models in China, including a tiny one targeted at rural customers that costs just $37. Lenovo Group Ltd. manufactures not only PCs that cost $2,000 or more and double as home-entertainment centers, but also simple machines costing just a couple of hundred dollars that are aimed at poorer rural families who want their children to become computer-literate. And local auto maker Geely Automotive Ltd. today offers five models, up from just two in 2003. The $17,000 Mybo is marketed as a family sedan for city drivers, while the $3,700 Haoqing is aimed at recent college grads just buying their first set of wheels.

Learning about these emerging groups of consumers is the No. 1 task for multinational and domestic companies alike. They’re meeting it by conducting focus groups and surveys across the country to anticipate shoppers’ needs and desires. To succeed in China, you have to “understand the psychographic profile of Chinese consumers, their emotions, and what they identify with in a brand,” says Viveca Chan, brand expert and former China head for the advertising agency Grey Global Group. Grey has divided young Chinese into 11 categories based on their lifestyles and aspirations — everything from independent types who don’t follow consumer trends to shoppers on the cutting edge.

Other companies are spending lots of time with customers. Last spring, GM designers and engineers flew to Guangxi Province to visit microvan buyers at their homes and farms. James Shyr, director of design, recalls sitting on the sidewalk, smoking with drivers and talking about the features they like and dislike. “They use their microvans to run around from Monday to Friday hauling a lot of goods, but on the weekend they clean it up and take it for an outing,” Shyr says. So instead of the greater luxury Shyr’s designers might have wanted, they stuck with a more utilitarian design that is better suited to rural lifestyles.

Similarly, Motorola Inc. () dispatched teams of researchers to far-flung locales. The company, which stumbled in China two years ago when local rivals started to eat into its market share, discovered that even consumers far from the bright lights of Shanghai and Beijing are becoming more discerning. “In the lower-tier cities, the young people look at value, but they’re also very individualistic,” says Motorola China boss Michael Tatelman. The result: Motorola designers are devoting more time and energy to the lower end of the market, and even the company’s least expensive phones allow users to download MP3 songs and customize their ringtones. And while Motorola doesn’t design phones specifically for rural China, it is now better at getting the right handsets to each location — a bigger supply of cheaper phones in rural areas, and snazzier ones in cities. “The demographic differences have always been there, but we’ve become more sophisticated in our ability to identify them,” Tatelman says.

As marketers figure out how to reach China’s variegated consumers, rural China looms ever larger. It numbers some 750 million residents, and in the first half of this year per-capita incomes in rural areas were up by 12.5%. Local competition is stiff. Wahaha, for instance, is China’s largest beverage producer because it developed its distribution in rural areas. Wahaha’s marketing sometimes consists of simply painting the company’s logo on village walls. “Distribution is a huge challenge for the [multinationals] in rural China,” says Fu Guoqun, a professor of marketing at the Guanghua School of Management at Beijing University.

Yet the multinationals keep getting more sophisticated in tailoring their message for both urban and rural consumers. P&G, for instance, reaches China’s city strivers by sponsoring a popular reality TV show called Absolute Challenge, which has featured contestants vying to win a job as a product representative for Crest or Cover Girl. At the same time, P&G has blanketed village kiosks and mom-and-pop stores with advertising materials emphasizing the value offered by Tide Clean White and low-end versions of Crest and Oil of Olay skin cream. Breaking out of China’s cities is a challenge, but one that more and more companies, local and foreign, know they must take on.