Every month, Matthieu David-Experton (E10), founder of Daxue Consulting, gives us an update on the China market. Today, he says businesses would be wise to pay more attention to the Chinese working class.
Estimates at the lower end of the spectrum total the Chinese middle-class to 110 million people (total workforce is 770 million). This is bigger than even the United States’ 92 million strong middle class and makes the spending habits of the Chinese middle class a force to be reckoned with – both in the Chinese and global economy.
However, the middle-class forms just one narrow 11% slice of the Chinese population. Away from the buzz surrounding the spending habits of the middle-class are 623 million people of the Chinese working class. This workforce was the primary driving force behind the double-digit GDP growth and the rise of China as a world superpower, not only producing products but also the crops that fuelled the masses of workers. Despite their integral importance in China’s growth little attention is focused on this group.
More Attention Should Be Paid to China’s Working Class
China currently holds the largest fraction of the world's health at 16%, and it is no secret Chinese pople are becoming more wealthy. This wealth rise will not be limited to the middle and upper echelons of Chinese society but many of the working class should also see an increase in their wealth. These future urban and rural masses-come-consumers will bring their way of life to the market and understanding them should prove to be important.
According to Doung Saunders, there are 387 million rural workers*, around half of China’s total working population. They earn less than $2000 on average*. With this low income and fewer jobs available, the spending of these people is very basic… For now. Meanwhile, the urban masses number 236 million* and earn an average of $5,858. These are blue collar workers or migrant who have moved from the interior in search for better-paid jobs. This group is likely to see some of the largest rises in relative wealth.
Origins of the Chinese Working Class
Both of these groups have been shaped over 30 years since Deng Xiaoping first implemented economic reform policies. Over this time China has gradually transitioned away from a centrally planned production economy to a market economy (but retaining a focus on production). The transition started in the late 1970s and involved the “decollectivization” of agriculture, opening the economy to foreign investment and allowing entrepreneurship, followed by the privatization of many state-owned enterprises (SOEs).
Although reforms have helped China realize a phenomenal increase in wealth and hundreds of millions have been brought out of poverty over the last 30 years, most workers have not felt the wealth seen by large Chinese companies to a significant degree.
Employment Sectors for the Urban Masses
Most Urban Masses (formed by a mix of local blue-collar and migrant works) work in the manufacturing and construction sectors. The scale of workers in these two fields is no coincidence. Workers, and specifically migrant workers, are the main source of cheap labor for China’s factories and were largely responsible for China’s prosperous growth. Large numbers of construction workers were then required to build the cities that were needed as a result of economic growth. Other major sectors include retail as well as a mixture of various areas of work that fall under the ‘other’ category.
Data from Centre on U.S.-China Relations
The Awkward Existence of the Migrant Worker
Many big SOEs focus on recruiting these migrant workers because are cheap labor who have incomes below the poverty line of 3000 Yuan/month back home in their rural areas. As China has minimum wages set significantly below the poverty line (as low as 2030 Yuan/month even in developed cities), companies need only pay workers a small magnitude above the average levels of incomes in rural areas to incentivize them. This explains the higher concentration of migrants on the east coast where China’s most developed tier-1 cities are located.
Data from People’s Daily Online and Xinhua News Agency
These migrants are mostly men who are not educated past middle school level. Their lack of higher education means options are limited. Together with employers seeing their labor as a low price, profit maximizing commodity, this situation typically leads to workers generally lacking bargaining power and rights, and many live on company sites. These factors are probably the main reasons why many working class migrants have to face poor working conditions, which has been the focus of controversy recently. There is a stigma attached to migrant workers as low skilled, low educated peasants or 农民Nongmin. This means migrant workers tend to be highly marginalized by Chinese society, despite being indispensable and accounting for half the country’s GDP.
Data from People’s Daily Online
Problems Faced by Migrant Workers
Granted, migrant workers commonly own land in rural areas, which ensures they have a place to live in their home provinces. However, unable to sell their land and paid a low salary, they struggle to afford good housing in cities, hence many live on employee work premises – which is a double penalty, as they can’t access to local social services without a urban residency certificate.
Meanwhile, the great influx of people to cities has been putting a great pressure on transport, electricity and water infrastructures, leading to price increases that are sometimes unaffordable for low-income migrants.
In rural areas, family, friends, neighbors and children form a social safety net, but in urban areas, this support is not present. The lack of public services, social benefits, and rights prevents migrants from accessing a healthy and good quality of life.
What Can Businesses Do to Anticipate the Partial Rise of the Working Class?
The hundreds of millions working class are forced to save money due to lack of access to education and other services. This is a restraint against the much-desired shift to consumerism. Ensuring these people have better access to services and safety nets is in the economic interests of China. As the shift to consumerism continues, this huge pool of the masses can act as a major catalyst for the Chinese economy as they did in the production based economy.
With them, they will bring their mindsets, likes, dislikes, cultures, and ways of doing things developed from their traditional ways of life.
To prepare for these consumers, businesses can look to the past for answers. Not so long ago Chinese consumers at all levels were too new to the market and took a pragmatic attitude to buying products. However, around six years ago products and brands which consumers could form emotional ties started to perform better as consumers matured. This same behaviour may be expected by the rising masses. However, these people have lived their lives budgeting frugally and spend on all but the essentials, and they may require more time than the first wave of Chinese consumers and mirror the behaviour of the older Chinese generation.
A further approach can be the implementation of a two-pronged strategy. In order to target both value and more wealthy customers, some companies provide value products (particularly focusing in lower tier cities) while simultaneously providing a more premium offering suited to middle-class consumers in higher tier cities. This would allow for consumers emerging from the working class to be targeted in addition to middle-class groups of consumers.
Read our previous Chinese Chronicle here.
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