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PNC INSIGHTS Magazine Spring/Summer 2014 Issue
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In his new book, author Karl Gerth examines how Chinese consumers are vibrantly transforming domestic and international markets.

It wasn't so long ago that the only places where Chinese men and women could get their hair cut were in grungy state-run shops staffed with indifferent workers. But now, the personal-grooming industry, like many other Chinese industries, is booming: more than 1.5 million hair salons, department stores and boutiques generated $168 billion in 2009, up from $24 million in 1982.

This is but one example of the spectacular growth and social revolution in the Chinese consumer market that author Karl Gerth includes in his thoroughly researched and fascinating book As China Goes, So Goes the World. Gerth looks at the explosive growth of consumerism in China from many angles, such as the seemingly bottomless thirst for Western luxury goods and the fact that China has already created one of the most economically stratified societies in the world. Throughout, however, he emphasizes that the growth of Chinese consumerism remains under the firm and effective control of the central government, which abandoned Mao's "productivist" model that produced commodities such as steel in favor of a consumer-focused system under the economic reforms that began in 1978 and continue today. The goal: to produce a vibrant domestic market for Chinese products.

Central to this strategy was the decision to join the World Trade Organization (WTO) in 2001, opening China to foreign investment. The money came pouring in, but so did foreign goods to compete with domestic production. State industries were privatized; the quality and availability of even basic commodities increased and consumer appetite grew. By design, China is becoming its own best customer, Gerth explains. Consumer spending has increased from 33% of the GDP (the lowest of any major economy) to a rate similar to that of the U.S. and world average of 70% to 80%. That translates to $4 trillion - still less than half the consumption rate in the U.S., but already more than Japan's and catching up to that of the European Union.

Gerth's book is not a primer for businesses seeking to enter the Chinese market, but there are plenty of lessons and caveats to be gleaned from it:

China is still a very poor country. While a third of the country's population, 430 million people, could be classified as middle class - and there's a sliver of great wealth at the top - most Chinese, particularly in rural areas, have negligible disposable income.

Vast China is not a single market. Companies unprepared to learn the spending habits of China's many market segments are unlikely to succeed.

Corruption is rife. Most of the wealthiest Chinese are not entrepreneurs, Gerth explains, but rather political insiders who have peddled their influence - which means doing business there can be tricky.

Luxury goods are hot. China is the world's third largest buyer of global luxury brands, with demand continuing to grow.

Fake goods abound. China is already both the world's largest producer and largest consumer of knock-offs.

China is building its own brands. Western businesses not only face competition from traditional Chinese trading partners such as Taiwan and Korea, but also from China itself, which is working toward the creation of global brands to sell to itself and the world. The computer-maker Lenovo and appliance manufacturer Haier are but two well-known examples.

This is a must-read for those looking to enter the Chinese market, and a fascinating one for anyone interested in China's enormous economic and social impact on the world at large.



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