I am fascinated with China as a consumer market. It has 1.3 billion people and if one reaches just one percent of the market.....

Joel Backaler over at China Observer blog just came out with a post assessing McKinsey's newest report on China's consumer market. The post is entitled, "One Country, Many Markets – McKinsey’s Alternative Method of Analyzing Chinese Consumers," and it describes McKinsey's newest innovation of dividing China's consumer market by clusters, as opposed to region or cities. I buy into the cluster approach, as does Joel, though with some reservations:

So, if you can’t consider China’s market at the country level, then what is the most appropriate way to divide up China? At the provincial level? At the city-tier level?

McKinsey’s answer to this question is: Neither. McKinsey suggests an alternative approach, which they call a “Cluster Map.” They divided China into twenty-two city clusters, defined as “groups of cities that are developing around one or two large hub cities.” The twenty-two clusters are broken down by size with Kunming and Taiyuan classified as “Small clusters,” Xiamen-Fuzhou and Chengdu classified as “Large clusters” and Shenzhen and Hangzhou classified as “Mega clusters.”

What does all of this “clustering” accomplish from a China business strategy perspective? First, in terms of industry composition, clusters develop around certain industries. The report cites Shanghai’s automotive industry as an example. Due to SAIC and GM’s successful joint venture, a developed network of automotive parts suppliers has emerged in the suburbs and cities nearby. Additionally, McKinsey found that clusters offer a more accurate depiction of consumer preferences as income differences across city tiers decrease.

I think the city cluster analysis is an innovative way of approaching China market strategy. That said, I am still not convinced it is the best approach or that a best approach exists at all. The key takeaway from my perspective is that the days of looking at “The China Market” are over. Companies are scrambling to find a more tailored approach to be successful in China’s many markets, adopting multiple strategies to gain access to their portion of the coveted 1.3 billion consumers.

Not only does McKinsey divide China into clusters, but it also lists out each cluster's percentage contribution to China's GDP. A couple of things struck me by this list (which can be found on page 9 of McKinsey's report). First, is that 92% of China's urban GDP comes from these 22 clusters. Second, that the "Shandong byland" cluster comes in a pretty close third, right after Shanghai and Beijing in terms of its contribution to China's GDP. Shanghai and Beijing (called Jingjini) each contribute 10.8% while Shandong contributes 9.0%.

This strong showing reinforces something that many of our clients have been doing of late and that is launching their businesses in Qingdao or Dalian, rather than in far more expensive Shanghai or Beijing. They are telling us that they prefer this so-called second tier cities because they are good places to check on their concepts in China, at a slightly lower rate than if they were to do so in Beijing or Shanghai. Now of course Qingdao is not going to serve as a perfect stand-in for Shanghai, but it ought to at least be a good indicator.

What do you think?