China’s Two Markets
While GDP per capital now exceeds $8,000 in China, the country’s 1.3 billion population can be divided into 550 million people, who live primarily in China’s cities and whose per capita incomes are approximately $18,000 per year, and 750 million farmers and migrant workers who live in the countryside and whose per capita incomes are $2,000.
As a result, the China market is actually two distinct markets. For virtually every product, there’s a “foreign/local” market, characterized by higher technology and higher price, and a second purely local market which is characterized by lower technology and lower price. The foreign/local market isn’t necessarily dominated by foreign companies; rather, it’s simply the segment of the China market with price and technology levels that are most familiar to them. In this segment of the market, foreign invested enterprises compete with other foreign invested companies and the best of the local Chinese companies.
While most international companies consider the prices in the local market as too low for it to be relevant, China’s local market should not be ignored. First, it is large and ignoring it all together eliminates a meaningful part of the economy. Second, as income levels rise over time, the local market will merge up technologically, and price levels between the two markets will also merge, settling somewhere in between. Learning how to make and sell products for the local market will ensure long-term competitiveness. Finally, the local market is a breeding ground for future global competitors. Any company, no matter how low its quality or level of technology, can find a market for its products in China—if its price is cheap enough. Where a company with inferior technology or quality would likely fail in developed markets, it may live to compete another day in China.
In a familiar environment where they can compete the Chinese way, local companies have opportunities to gain scale in the large, local market. They can then move up to the higher-technology segment of the market as they gain expertise, and eventually may start to explore global markets.