Earlier this year, a McKinsey report predicted that China will have 290 million middle class households by 2011 with annual income ranging approximately from $3000 to $5000. By all accounts, this prediction seems too conservative. A recent report by Boston Consulting Group and experts at Wharton says that China has already 25 to 30 million middle class households with annual income of $4300 to $8700.

While this causes much excitement in the business community, many difficulties remain for western companies that want to sell in China. On one hand, Chinese consumers are embracing new economic ideas and lifestyles, buying goods that have long been unavailable to them; on the other hand, they are part of a consumer culture and economic system that are very different from the West. Here are the key points from the BCG report and my comments:

Although China has 1.3 billion people, only 400 million are in urban areas. Coming from a culture that is extremely frugal, the middle class Chinese are both savers and spenders. There are people who are looking for value and a bargain price, and there are others who are seeking a premium branded product.

Some of the most popular products among the middle class are color televisions, mobile phones and personal computers. Interestingly enough, in big cities like Shanghai, diamond engagement rings are big sellers, even though the concept of Western-style engagement prior to marriage does not exist in China.

Chinese value education tremendously. Families with kids spend a disproportional part of their incomes on their children’s education. Chinese are also very status conscious. They are willing to spend much of their discretionary income on items that will help them rise in status, but won’t spend on anything their friends and neighbors cannot see. There is so called “consumptive anxiety” – the need for people to buy products so as “not to be left behind.”

Perhaps the biggest challenge for companies selling in China is navigating through its fragmented sales and distribution channels. Many distributors are state-owned. Local government officials, often on the boards of local companies, make it very difficult for companies from other provinces to do business in order to favor the products of home-grown companies. As one senior executive said, doing business in China is half business and half politics.

China is so big, with many diverse cultures and traditions. It’s almost impossible to generalize the market. For the next five years, most of the growth will be in smaller cities. The needs of these consumers are very different from those from big cities. It’s critical for companies to have a localized mindset and develop products that factor in the local tastes and appeal to the consumers in smaller cities.

China, emerging middle class, China business, emerging market, Chinese consumers