Chinese ready to spend on services

Next wave of growth will be driven by consumers buying leisure, financial and education products

China's next phase of sustainable growth will be driven mostly by high quality services, says Gordon Orr, the Shanghai-based chairman of McKinsey Asia, part of the multinational management consulting company of the same name.

Orr says China has already efficiently made a structural shift from export driven growth to domestic consumption-led growth. While this growth is slowing down during economic structuring, the emergence of quality services will likely become a new catalyst for growth.

"The consumer is already feeling more anxious today, and less certain about what they have to spend on because they have already bought their home and their car. Spending on services is discretionary and not compulsory, so they are looking to spend on high quality services, on value services," Orr says.

These new service opportunities exist in such areas as entertainment, sports, leisure and travel, financial services, education and healthcare, he says.

"What consumers are looking for is the ability to have a higher quality of life. The consumer wants a healthy lifestyle. They want convenience, personalization. People have more leisure time, but they don't want to sit around waiting," Orr says.

Many service sector firms in China are already stepping into the market to satisfy these needs, but the quality of service they provide still lags behind mature Western economies, as the service industry in the country is still relatively young and underdeveloped, partly because traditionally China's growth was driven heavily by exports.

In recent years, the Chinese government has devised policies leading to a structural shift toward a more sustainable domestic consumption-driven growth model, as can be seen in the 12th Five-Year Plan (2011-2015).

Fundamental to this structural shift is a desire to help China's industries move up the value chain, from low-cost manufacturing to high-end manufacturing, high-technology, services and creative industries.

Orr observes that these initiatives have been very effective in China, noting that as a result the Chinese have more wealth, and feels more secure in their lives and jobs, consequently spending more on basic consumption items like property and automobiles.

But he says as growth rates are now slowing in China, consumption now faces the risk of declining, because China's increasingly competitive market is making people feel less secure about their jobs and they are holding back from consumption.

"Incomes are now rising more slowly. Many white-collar workers' incomes are rising by just about 5 percent, and some are not rising at all. At the same time, property prices are now flat, meaning that people with apartments are not getting any wealthier.

"Meanwhile, job security is becoming a problem even in state-owned enterprises. Companies are facing pressure to become more efficient. There is very little recruiting, and even in the manufacturing sector we are seeing a lot of capital replacing workers," he says.

In addition, those with children graduating from universities are seeing their sons and daughters having trouble finding well-paid jobs upon graduation. Traditional sectors like coal, steel, textiles, shipbuilding and automotives are also experiencing slowing growth, significantly affecting consumer sentiment.

Within this uncertain landscape, the increasing availability of high-quality services in China would be able to generate consumption, growth, and stimulate the growth of related sectors through the process of training local workers, and equipping them with skills so essential to the service industry, Orr says.

One example is the opening of the Shanghai Disney Resort next year, which will have a wider impact than the theme park itself because, in the process of opening such a big complex, many workers will receive training on the expectations of the service industry.

Aside from the entertainment industry, Orr says great opportunities also exist in the sports sector. "Most sports events in China today are still dramatically underdeveloped compared with their international peers. The quality of Chinese soccer or basketball may be OK, but does it justify the same price you pay to watch a top quality soccer game in the US? Perhaps not."

Education is another area of service sector opportunity, particularly in adult education and vocational education, because as the Chinese economy becomes more competitive and efficient, workers need to continue to become trained in newer and more advanced skills.

"Fewer and fewer people will have a job for life, and have a set of skills that remain relevant throughout their career. So the education industry is re-equipping people who have worked in production lines, in bank branches, or as blue collar workers, to play another role and have a brighter future," he says.

Opportunities also exist in the leisure and travel industries, such as hotels, airports and high-quality tourism packages, to welcome the increasing growth of private sector leisure travel. Business travel has traditionally dominated the travel sector.

In financial services, Orr says the biggest opportunities may lie in wealth management, as many of China's first generation business executives have now become rich and need advice on managing and sustaining their wealth.

In the face of all these opportunities, Orr sees two challenges that need to be overcome. First, China's service industry still faces a shortage of skilled workers, and also Chinese consumers still need time to learn more about the industry, and gain trust for service providers.

"With services you need to trust the providers - that they will teach you what you need to know, that you will have a nice vacation, that they will provide you with good service. This confidence takes time to build up, and once you reach a tipping point for establishing confidence, it will take off rapidly," Orr says.

And riding on this trend is also the increasing availability of data analysis that allows service providers to efficiently understand consumers and their preferences, which is an important factor aiding this sector's growth, he says.

"There is now so much information, both online and offline, about what different segments of consumers need. Historically there is a lot more judgment, a lot more learning by doing, but now the service industry is much more data intensive."

This information about consumer preferences can either come from direct feedback that consumers provide, or services that Internet and data companies provide to analyze consumer behavior.

"If consumers sign up for location-based services, we can understand where they spend their time, how long they spend looking at something in a store, and if they look at your service online, whether they click through and buy it or then go to look at something else."

One example is the taxi industry, where efficient gathering of data allows companies to understand where high demand for taxis is likely to exist and at which time, so they can prepare their services accordingly," he says.

Orr says if China successfully transforms its economy so that high-quality services contribute to a higher percentage of GDP, it will enter a new phase of growth. But manufacturing will still remain a crucial part of its economy, although it will become a more efficient type of manufacturing.

"Manufacturing will play a unique role in China for many years to come, but innovation and the products developed out of it will be incredibly important," he says.

As a result of fast upgrades in China's manufacturing through investment in automation, computers and manufacturing technology, efficiency has significantly improved so that manufacturing has become much less labor intensive and much of the quality control previously performed by workers in assembly lines is now replaced with automation.

"The private sector is really pushing for productivity, and a lot of mid-sized industrial companies are competing successfully with multinationals in China, and are exporting more. What they're learning from their international counterparts is stronger marketing skills," Orr says.

He says these companies are now making significant expansions into both China and overseas markets, particularly in Southeast Asia, Africa and Europe. Many of these firms are Internet savvy, they employ highly skilled workers with a good grasp of English, and are international in their mindset.

"Often you find a really exciting company that knows their products and knows how to promote themselves. The fact they are Chinese is no longer important. They're respected globally because of their quality products," he says, adding that key sectors where Chinese manufacturing has demonstrated strength include information technology, electronics, medical equipment, biotechnology and telecommunications equipment.

"China will continue to import energy, agricultural products and basic materials, and the export of manufacturing products will remain an important part of its economy as it increasingly participates in the global economy," Orr says.

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 06/05/2015 page21)