World Economic Forum
At the 19th National Congress of the Communist Party of China held in October 2017, the leadership announced that China has entered a new era of development, and reconfirmed that the government will continue to play an important role through policy and regulation. On the global stage, China will play a more visible role and will continue to be a strong promoter of cross-border trade as the Chinese economy deepens its integration into the global economy. Domestically, China will continue to focus on economic growth, but with an emphasis on restructuring the economy and improving the population’s quality of life. In the context of the Fourth Industrial Revolution, China will transform from a follower to a leader, defining new growth trajectories as part of the government’s “innovation, technology and entrepreneurship” mantra.
Within this regulatory and policy environment, four major drivers will shape consumption in China over the next decade: 1) economic growth: China’s economy will continue to migrate from an investment-driven model to a consumption- and services-driven model; 2) demographic shifts: China will move from a relatively younger to a relatively older and ageing population; 3) technology and innovation: China will advance from being a major manufacturing power to an active leader in digital innovation—a path it has already begun; and 4) consumer attitudes: with significant growth and transformations in China, consumers will evolve from their relatively price-sensitive mindset to a more premium-seeking attitude, but distinctions between Chinese and Western lifestyles will remain.
The regulatory and policy environment and these four major drivers offer a view of the most likely consumption scenario in China in 2027. Over the next decade, China will transition to a consumption-driven development model. Chinese consumers will be richer, older and more heterogeneous than they are today. Ten headlines of a base-case scenario, summarized below, paint a vision for the future of consumption in China:
- The world’s largest middle class, fuelled by income growth, will reshape consumption. In the coming decade, consumption will grow by an average 6% annually to reach RMB 56 trillion ($8.2 trillion), fuelled by a middle class that will represent an estimated 65% of households.
- Growth of the elderly population will create new demands. By 2027, an estimated 100 million people will have joined the ranks of those over the age of 60, representing 22% of the Chinese population. The sheer number of elderly people (324 million) will pose challenges to economic growth, but it will also create opportunities for products and services tailored to this demographic.
- The digital “little emperors” (generations of the 1990s and 2000s) will have higher expectations. By 2027, about 200 million people born in the 1990s will start families, and about 150 million in Generation Z will transition from school or university to the Chinese workforce. They will prefer premium and personalized products and services, and consume more than their predecessors.
- Consumers will share—not own—assets and services across many more categories. The sharing economy, which took hold so easily in China, will grow at a rate of 40% annually, and could account for 20% of China’s GDP by as early as 2025. Consumers are already accustomed to paying for access rather than ownership, and by 2027 this model of consumption will become a routine part of their lives.
- “Widgets to digits” will reshape retail on a much wider scale. Technological innovation will propel China’s already robust e-commerce sales. By 2027, online channels will have an even wider reach and retailers will invent new roles for offline channels to create seamless online-offline integration. Most transactions will be mobile-enabled and hence digitally traceable.
- Personalization will become the new mass market. Over the next decade, the personalization of products and services to serve the varying needs and demands of millions of Chinese consumers will not be an option for businesses, but a requirement.
- Data will become the new oil. By 2027, China may have fewer than five companies controlling most consumer data; they will extract, process, refine, value, sell and buy this key resource. Increasingly, companies that control data will have a substantial competitive advantage.
- Urbanization will take a new direction. About 70% of China’s population in 2027 will reside in urban areas, with more urbanization occurring in inland provinces and in tier 2 and 3 cities instead of in saturated coastal megacities. Advances in technology will enable and support this shift, ultimately resulting in better consumption and lifestyles.
- Technology will also pose a risk. In addition to providing opportunities, rapid technological development will create risks for consumers and society, including those related to tensions between digitalization and privacy, the challenge of inclusive growth, and the environment and sustainability.
- Consumption will continue to have unique Chinese characteristics. The preference for a westernized vs Chinese lifestyle today in China is split approximately 50/50. Over the next decade, consumption will take two paths: one consumer segment will remain Chinese-focused while the other will opt for a more Western lifestyle. As a result, distinct divisions in spending behaviour will continue to exist.
While overall this base-case vision represents the path China is most likely to take, uncertainties definitely exist. Two major alternative scenarios could also evolve: one is a “middle-income trap” scenario that could occur if such risks as a skills gap and automation contribute to uneven income growth, and the other is a “turning inward” scenario that could occur if government policies favour protectionism, leading to a rise in nationalism.
To thrive in China over the next decade, businesses serving consumers will need to rapidly develop certain critical capabilities: 1) customer-centricity and data-driven personalized offerings; 2) a digital strategy for major elements of the value chain; 3) the agility and readiness for frequent transformations; 4) the capability to acquire and retain the right talent; and 5) corporate social responsibility and engagement, beginning with sustainability.
In line with the vast changes, the coming decade will also bring a host of major challenges that will need to be addressed at the societal level. To ensure a better future, responsible leadership as well as potential collaborations through public-private partnership will be required to mitigate accelerating challenges:
- Employment and skills: In its pursuit of a consumption- and services-driven economy, the government is striving to provide job security and is gradually shifting the workforce from low-income to high-income jobs. However, many employees could lack the skills and training required to obtain higher-income employment.
- Social inclusion across income, geography and age: As the needs and aspirations of different demographic segments diverge, the digital divide could widen between urban and rural dwellers, low-income and high-income earners, and the young and elderly populations.
- Environment and sustainability: In addition to air and water pollution as well as other existing environmental issues stemming from industrial development, new consumption models based on e-commerce, online-to-offline (O2O) services and the sharing economy could create further environment and sustainability concerns.
- Trust and transparency: The next decade could see a rise in trust issues regarding fake products, and rising consumer concerns about data privacy and security.
As China marches forward, many stakeholders have the potential to shape the country’s consumption future: the government with its supportive policies, businesses that exist today and emerging entrepreneurs with their innovative business models, and academic institutions with their progressive education models. Working together, these stakeholders can help deliver an ecosystem that benefits not only consumers but also society at large. By moving beyond the societal challenges in a collaborative way, China can build a consumption landscape that serves as a model for other fast-growth consumer markets.