china

China's big problem: growing old before growing rich

China's big problem

In November 2005, Jerry Chen bought a minivan. By doing so, he joined thousands of other Chinese people who did the same and helped the multi-purpose vehicle (MPV) segment almost double in size, making it one of the fastest-growing segments in China's automobile industry.

What made Jerry, a 34-year-old Shanghai resident, a happily married man with a wife and a child, who works as a senior executive for a multinational company, buy a car larger than necessary in a time of rising fuel prices?

His parents.

Jerry's case is a real-life example of how China's aging population and low fertility rates are changing more than just the demographics of the world's most populous nation. That's a big event in itself, with immense implications. What should concern media and marketing professionals now is that China, by growing old before growing rich, is directly impacting the consumption capacity and patterns of its most desirable consumers: the up-and-coming urban middle-class.

Not only will the number of people in their prime decrease as a result of aging, their incomes too will shrink due to a combination of reduced GDP from labour shortages, and (possibly) higher taxes to pay for medicare. All this at a time when their expenses are increasing because they are caring for their aged parents and their child.

Will this market of one billion-plus customers still seem as attractive then as it does today?

ANCIENT CHINA

  • By 2010, China will no longer be the world's most populous country. That will be India.
  • By 2010, China will have 300 million people older than 50. That's almost as many people as the entire population of the United States by then
  • From 2010 onwards, China's sandwich generation, i.e. people 20–49 years old, who are the core consumers for a majority of marketers, will actually start decreasing.
  • By 2030, China's population will actually start shrinking.
  • By 2050, close to half the population of China will be older than 50. That's more than 600 million people, and China's population will be lower than it is today.
  • By 2050, China's elderly population will outnumber India's by 103 million, whereas the total Chinese population will be smaller than that of India by 51 million (see Figure 1).

THE DRAGON GREYS

As is the case with any China-related statistics, the absolute numbers are quite startling. There are close to 100 million people aged 65 and over in China today. One in every two 60-plus Asians is Chinese and one in every five 60-plus people in the world is Chinese.

The demographic profile of the Chinese population is changing rapidly. A combination of factors, including controlled birth rates, lifestyle changes and improvements in medical care, has led to an ageing Chinese population.

For years the world has worried about the Chinese population and how there are far too many Chinese around. But projecting forward, a far bigger problem will be how there will be too few Chinese people. This is particularly important for the Chinese themselves.

Their economy, known as the factory of the world, depends on an endless supply of young desperate workers willing to work 16 hours per day, for meagre wages. A population decline will reduce the supply of factory workers, increase the upward pressure on wages, and make goods made in China uncompetitive when compared with other parts of the world such as South America, where devout Catholicism, proximity to the United States (China's largest trading partner) and poverty combine to reduce costs in these markets, and are likely to make them more attractive for manufacturers.

In short, population implosion is going to hurt China's GDP, putting less money in the pockets of Chinese consumers.

DIFFERENT SHADES OF GREY

Ageing population is a demographic issue which many countries the world over have been facing for years. In such terms, Japan is currently the oldest nation in the world and many European countries such as Italy and Germany are fast closing in on Japan. But compared to these other nations, China is in a unique position in the world today. Countries like Japan, Italy and Germany got rich first before they got old, but the same cannot be said for China.

In terms of development indices and prosperity China is still closer to developing nations of the world, but in terms of population demographics it mirrors the developed nations of Europe and Japan. Additionally, China lacks the social safety nets of the Western nations and Japan to care for the elderly.

Unfortunately for China, its GDP growth has been unable to keep pace with the declining fertility rate, thus causing an imbalance much more acute that anything seen in other countries with aging populations.

With fewer mouths to feed, increasing GDP per capita and improving the general standard of living could prove easier. This is exactly what has happened. Over the last few decades China has had one of the strictest population policies the world has ever seen. The one-child policy has been implemented so successfully that in urban China an entire generation has grown up without siblings. But through this policy, China has increased the standard of living of the existing population. Any visitor to Shanghai will attest to that.

While this strategy might have worked in the short term, in the long term it has created an entirely new demographic crisis. Going into the next century China will be the oldest poor country in the world. For all the rapid progress and economic reform that's happening in China, it still remains among the poorer countries, placed 122nd in the list of nations ranked by per capita income.

LESSONS FROM JAPAN

Given the unique position that China is in, it's difficult to take corrective action by emulating the model of Western countries and Japan. Let's take the example of Japan, China's Asian neighbour, which has been living and coping with this phenomenon for a while now. Last year for the first time, the number of deaths in Japan outstripped the number of births and the population of the country actually declined by 19,000. The current fertility rate of less than 1.3 children per woman of childbearing age, increases the pressure on the working population significantly.

But there are a few critical factors that make the situation in Japan quite different from what China faces.

Japan as a nation became rich before it became old. Also the baby-boomer generation in Japan, who are just about entering the over-60 age group, are a well-qualified group and are the custodians of years of accumulated technical and managerial skills. This, coupled with the fact that average life expectancy is currently at 82 years and climbing, makes it easier for the government and the corporate sector to respond to this new situation.

Japan has identified that the solution lies in fixing employment and retirement systems so as to allow people to work more easily for more years to come. Changing mandatory retirement laws and removing age restrictions on hiring, are other changes that are being actively discussed to battle the problem. This way, Japan will be able to keep its ageing workforce employed for longer, thereby reducing the burden on society. Japan is also slowly opening corporate doors to women – an area that has been predominantly a male bastion. This again will help spread the burden of supporting an aging society among a larger workforce (see Figure 2).

THE EFFECTS OF IMMIGRATION

Western countries grappling with the problem of an aging population have another big advantage apart from trying to keep people working for longer: immigration. Immigrants moving en masse to Europe, the USA and even Australia help support the tax burden of the older population and also provide the numbers to keep the nation young.

In spite of the fact that China is opening up, and a huge number of expats are entering the marketplace, immigration is still a long way off and cannot be looked at as a panacea. Current rates of unemployment and underemployment are already so high that the question of keeping older people in the workforce for longer simply does not arise. Also, the equivalent of the baby-boomer generation in China have spent most of their lives working for state-owned enterprises and the skills they have acquired are not really suited to the current rush of private-sectors jobs that are flooding the market. The gender equality mandated under the communist regime has already ensured a place for women in the workforce so there is no new able-bodied group to look towards to share the burden.

POLITICS AND PENSIONS

The over-60 age group in China today are mostly those who entered the workforce in the days of the Cultural Revolution and were tied to their government jobs for life. These jobs didn't provide them with much opportunity to save for retirement. The state took care of all their basic needs but didn't really plan what would happen to these people post retirement. In the prime of their careers they were not allowed to own property, and investment options were close to non-existent.

State-owned enterprises do provide a meagre provident fund scheme to their employees, but with the aging population and the increasing number of lay-offs, many companies find themselves in a situation where they have more pensioners to support than actual workers. Even today, China does not have a proper social security system for its people.

Medical insurance is the other area of growing concern in China. Only around 3% of the 1.3 billion population enjoy the benefits of health insurance policies, compared with 63% in the United States. And, in many cases, this system is not sufficient to cover most serious aliments.

With rising medicare costs, this could prove to be another big burden on the aging Chinese population. So as we can see, the older generation of the Chinese population lack the financial independence or the continued earning capacity that similar age groups in Japan and other Western countries enjoy.

Currently, books on 'marketing to one billion customers' are bestsellers in China. By 2050, with more than 600 million people older than 60, will marketers continue to woo and invest in this aging market when India with its young and growing population is right next door? Admittedly, there'll still be more than 500 million people who will be between 20 and 44 years of age, but their incomes will be under severe pressure when they have to care for the older generation.

THE 'SANDWICH' GENERATION: CAUGHT IN A JAM

In a sense, Chinese society is closer to other Asian societies, where the main investment that people can make for the future is their children. As in India, thanks to the absence of government-mandated social security and medicare, the older generation lack financial independence and rely on their children to take care of them in their old age.

This brings us to the crux of this demographic crisis. With the changing demographics of the Chinese population, the bigger fallout is not the growing consumer segment in the over-60 age group, but the impact that this segment is likely to have on the core 25–44-year-old consumer group. With an increasing retired population to support and the next generation to look out for, our core consumer group is bound to have increasing pressures on their disposable income and this is likely to significantly impact their purchase decision-making process and consumption habits across a variety of categories. Previously the commonly used adjectives to describe this omnipresent, consumerismfrenzied group included terms like 'upwardly mobile' and 'young working class,' but looking ahead a key descriptor for this consumer group will be the fact that they are the 'sandwich' generation (see Figure 3).

For a multitude of marketers and advertisers in China the 20–44 age group form their core target group. Purchasing decisions by cohort make the difference between success and failure for many brands in this market. But their lifestyle and purchasing decisions are slowly but surely undergoing changes. Eventually, this group of consumers themselves will shrink.

In an attempt to correct this shrinkage of a highly desirable consumer group, the Chinese government is trying to implement measures such as slowly relaxing its tight control over the number of children women are allowed to have. Rules are being relaxed in smaller cities; couples are allowed to pay fines and have more than one child; if both parents are single children, then they are allowed more than one child, etc. In the future it is also likely that the government will impose a medicare surcharge on people to offset the cost of caring for so many senior citizens.

While these measures are targeted at avoiding disaster in the long run, in the short term so much damage has already been done that these measures could make the situation worse. If couples start having more than one child, then the pressure on their already limited financial resources will only increase: two sets of parents and two children to take care of! And given the strict manner in which population policies have been enforced and tied in to economic reform, many young urban couples in China today do not want to have more than one child. Also any kind of tax or charge imposed by the government with the idea of benefiting the older generation will directly impact the money earned by the sandwich generation, thus putting even more pressure on a working population which is already supporting a growing retiree base.

In the short term, China is caught in a vicious circle of its own making, and soft measures by the government are not helping much.

IMPLICATIONS FOR MARKETING

The situation is serious and the fallout is not just restricted to the government, social scientists and economists. Given that a population of one billion and the growing middle-class spending power is what makes China arguably the most attractive, developing market for foreign investment today, the implications for marketers, advertisers and communication specialists are significant.

For categories such as automobiles and real estate, bigger will be better. With both children and parents to take care of, people will need to buy bigger houses to keep everyone together and take care of both their old and young loved ones. In the automobile sector, assuming the majority of the Chinese population continue to be single car households for some time to come, people will need to upgrade to seven-seaters and minivans to transport their extended families.

WHICH BRING US BACK TO JERRY CHEN AND HIS MINIVAN

Married with a child, he started off the decision-making process like most people in China do, for this category, with a price range in mind. This basically put him in the C/D segment within the automobile category. He did his initial information search, spoke to friends who had recently bought cars, and after a few dealer visits he had narrowed his choice down to two brands. So far a fairly typical decision-making process for the automobile category in most parts of the world. Then over a long weekend when his wife's parents had come to visit, he and his wife suddenly realised that there was one important thing they had forgotten to factor into their choice of car.

Both sets of parents were retired and living in different cities, but they usually ended up having at least one set of grandparents over to spend time with the grandchild as often as every other month. This would mean that every second month a family outing would involve the couple, the child, the nanny and two grandparents – a tight squeeze in a sedan. Needless to say, the budget was immediately increased and the final winner was a Honda minivan. This is a simple, but not uncommon, example of how changing needs can impact consumer choices in China today.

THE IMPORTANCE OF GIFTING

There are also other product categories that have slowly started to see the impact of demographic changes on their sales volumes. Apart from regular gifting categories such as confectionery and chocolates, mundane fmcg products including coffee, milk powder and multi-vitamins grow a large part of their sales volumes in China from gift packs.

Gifting as a concept works as a two-way system: gift packs targeted at children to give to their parents and also aimed at older consumers for giving to their children and grandchildren. Abundant potential exists given the number of gifting opportunities, which range from marriage, childbirth, birthdays and anniversaries to Chinese New Year, Moon Cake festival and Mid-Autumn festival to name just a few.

Gifting extends to other fmcg categories too. Given the rapid increase in migration from rural areas and smaller towns to the big cities in search of work, a large proportion of the working population still have their parents far away and need ways and means to keep in touch with them and take care of them. Mobile phones with larger keys and simple functionality for older parents to keep in touch with their children, no frills computers with easy-access internet connections, cameras to capture special occasions which are missed, are just a few examples.

Now as categories and product innovations go, these aren't new. In many of the Western countries and even in Japan, marketers have started to realise the potential that exists with the older group of consumers and have started to market products and brands targeted at them. But what makes this different in China is that for most of these categories, the actual purchaser could still end up being the sandwich generation and not the older consumer. The older consumer is still the end user but given their financial and physical dependence on their children, they will rely heavily on their children to make purchase decisions for them.

SOME CATEGORIES BENEFIT MORE THAN OTHERS

The sandwich generation lack avenues for investing their wealth to prepare for old age. The stock exchange is nonfunctional, banks are not transparent ... so where will they invest? This explains the booming real estate market. If the government has any intention of helping at least the next grey generation prepare better for the future, they will need to start offering dependable retirement avenues for its citizens. Financial services and investment funds will become a sunrise industry.

There will be a predictable boom in products targeting the old, where Japanese products will lead the way. Their proximity to China, decades of experience in the market, and offering solutions to their own aging population, will give them a head start. We may even see special lanes in downtown areas for the elderly using Toyota hybrid wheelchairs.

Pharmaceuticals are the largest spending advertising category in China and the bulk of these spends are controlled not by the large multinational brands but by strong local Chinese brands who offer a wide range of products in this market.

The other category is insurance which thanks to WTO policies is slowly opening up in China. If the private insurance sector in China mimics what happened in India when FDI was allowed in, we are bound to see a lot of multinational players coming in with aggressive marketing activity.

This article featured in Market Leader, Autumn 2006.

NOTES & EXHIBITS

FIGURE 1: AGE DISTRIBUTION IN CHINA 1950–2050

FIGURE 2: SELECTED WORLDWIDE FERTILITY RATES

FIGURE 3: SELECTED WORLDWIDE GDP PER CAPITA


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