McKinsey has released a report of what they foresee happening in 2015. It is not ground breaking, but raises some interesting points on the consumer market and how new government plans will effect it. See the entire report here.

In summary: 

  • Improving productivity and efficiency will remain the key to maintaining profitability for many companies, given lower economic growth (overall and at a sector level) and the impact of producer price deflation on multiple sectors.
  • The impact of technology as it eliminates jobs in services and manufacturing will become even greater (but still not in government).
  • As a result, the government will keep a sharper focus on net job creation and the quality of those new positions. Companies will hire even more information technologists to keep up in the race to exploit technology better than their competitors.
  • The push to lower pollution, and now carbon emissions, will lead to even greater investment in domestic solar and wind farms, boosting the global position of Chinese producers.
  • High-speed-rail construction will continue domestically and increasingly abroad, as Chinese companies become the builder of choice for high-speed rail globally. Beyond these, there are several additional themes that will be important in 2015. I describe them below.

Aspects of interest to advertisers:

Wages: Next year will likely see the lowest annual income growth in China for at least a decade, with knock-on implications across the economy. Early signs are already there. Government data show urban disposable income rose in single digits year on year in the first nine months of 2014, a hint at the big shift that is under way.

Jobs: Job seekers next year will realize that the historical attractions of working in state-owned enterprises and government are not coming back—the job for life, opportunities for status, high pay, and other perks are gone for good. The private sector has become the driver of job creation in China, with official statistics (likely understated) showing an increase of 50 percent or more in private-sector jobs over the past five years. However, many of these jobs are relatively low skill and low paying. In 2015, the service sector’s criticality to job creation will be called out even more by the government.

It’s all about consumer confidence: As a result, Chinese consumers will feel less financially secure in 2015. Fewer will feel they have a job for life, most will see wages rise more slowly, many of their real-estate investments will decline in value, and lower interest rates will make other investment products look less attractive. Overall, the momentum of their wealth generation will slow dramatically after a decade of remarkable acceleration. And if they have children graduating from college in 2015, they will likely see them struggle to get a good job.

Lower consumer confidence may then translate into lower growth in discretionary spending. Fortunately for many in the middle class, they have already bought their home, car, and other core trappings of middle-class life. Many Chinese consumers could easily postpone further big-ticket-consumption items and, at the same time, cut back on daily consumption spending. Price deflation reduces the perceived opportunity cost of waiting to spend. Already there are signs of this. Recent Nielsen numbers showed only a 3 percent increase in annual purchases of fast-moving consumer goods. More specifically, food and beverage company Tingyi reported a 13 percent decline in turnover in the third quarter of 2014, while beer volume sold by brewing and beverage group SABMiller fell in its most recent reporting period. And remember: very few in the current Chinese middle class were in the middle class the last time there was an economic slowdown. They could well overreact to a small slowdown and turn it into a larger one as a result.

Individuals going global: Governments around the world will compete harder to capture a greater share of China’s international tourism and outbound-investment boom. The new US ten-year multi entry visa sets a bar for other countries to follow. The United Kingdom’s guaranteed 24-hour turnaround on visas for premium business travellers sets a bar for speed, although the $1,000-plus price is eye watering. Beyond visas, many countries also offer popular investment paths to a passport or permanent residency. The majority of those using these schemes in most countries are Chinese. In the most popular countries, limited supply is allowing governments to push up the required investment dramatically. We might hear about a $10 million passport this year.

Airlines are also big beneficiaries of this growth in international travel, with a new wave of growth in direct flight connections to key global cities from second- and third-tier Chinese cities (two recent examples are Wuhan to San Francisco and Changsha to Frankfurt). While these routes have been subsidized initially by local Chinese governments, the subsidies won’t be needed for long.

More online content restrictions: Shops offering pirated DVDs will make a comeback in 2015 as the rule of law extends to what can and cannot be shown online, pushing very popular international series off the Internet. US series including The Big Bang Theory and The Good Wife have already been blocked, and rules announced in September by the State Administration of Press, Publication, Radio, Film and Television require unapproved shows to be removed from websites by the new year. Perhaps only in China will the selection of available online content be more tightly controlled than the availability of physical content. Or maybe the international providers of virtual private networks will learn to accept payment from UnionPay cards, and demand for their services will skyrocket. Cinemas will likely also benefit, as good-quality online sources for newly released movies have almost entirely disappeared.

Advertisements