2014 Consumer Survey: China – The Next World Capital of I-nnovation?

Strategy& and The American Chamber of Commerce in Shanghai (AmCham Shanghai) have since 2011 conducted an annual survey of Chinese companies and MNCs. For the 2014 edition we gathered input from multinational companies (MNCs) and Chinese companies operating in the consumer space. Digital commerce has taken firm root in China, and the migration of consumer attention and engagement into the digital realm has emerged as a top issue for business.

Show transcript

Contributors: Stefanie Myers, Karen Pu, Steven Veldhoen, Bryan Virasami, Adam Xu, Leo Chiang Design: Mickey Zhou

Survey Background
The American Chamber of Commerce in Shanghai and Strategy& are pleased to present results from the fourth annual Business Response to Trends in China’s Consumer Market Survey. The survey seeks inputs from executives of consumer-facing companies operating in China, including Western MNCs and Chinese/other Asian companies. The survey aims to provide an understanding of how companies are responding to key trends in China’s growing consumer market. With many companies seeing challenges of slower growth, rising costs and lower margins, what are company executives thinking and what actions they are taking to compete? This year’s survey was launched to seek answers to these questions. The rise of “digitization” - e-commerce, online video, social media and social communication - has been identified in previous surveys as a key issue driving business strategy. This year the survey included a special section evaluating companies’ digital capabilities and how companies are responding to the rising digitization in China.

Digital commerce has taken firm root in China, and the migration of consumer attention and engagement into the digital realm has emerged as a top issue for business. Companies, especially home-grown Chinese companies, have grown more sophisticated in their approach to digital commerce, turning their focus from simply recognizing the pervasive and disruptive power of digital business to harnessing its power to win in a dynamic marketplace. In the process, they’re blazing a trail for the rest of the world to follow. Several recent developments highlight the key issues shaping the market for both multinational companies (MNCs) and Chinese companies operating in the consumer space. These issues include: Health and the environment. Amid several well-publicized incidents of alarming levels of air pollution in China’s largest cities, health and the environment have emerged as top-ofmind concerns for consumer-facing companies in China The digital commerce boom. The initial public offerings of China Internet companies, such as Weibo.com and Alibaba, have raised awareness

of China’s fast-expanding digital landscape. The rise of a new generation. Young people born in the 1980s and 1990s, with greater purchasing power and very different consumption habits than their parents’ generation, are increasingly the focal point for consumer-facing companies in China. Engaging with this new generation poses a challenge for established brands—and a potential disruptive opportunity for newcomers. Intensifying competition. China, for all its promise, has proved a challenge even for brands that are mainstays in developed markets. Revlon and Garnier, for example, have retreated from China, citing rising competition and costs. The challenge has grown more acute as growth in many sectors has slowed. These developments confront consumerfacing companies with two urgent questions: Which consumer trends are of overriding importance? What are the key steps that Chinese companies and multinational corporations (MNCs) must take to win in this evolving environment?

To gauge the business responses to these questions, The American Chamber of Commerce in Shanghai (AmCham Shanghai)
Business Response to Trends in China’s Consumer Market 2014

The demand for more transparency The growing importance of health and wellness Changing perceptions of value Increasing importance of the shopping experience Increasing connectivity among differenttier cities Explosive growth of consumer choice The rise of digital commerce, or “digitization” Evolution of the family unit

and Strategy& (formerly Booz & Company) have since 2011 conducted an annual survey of Chinese companies and MNCs. For the 2014 edition we gathered input from 80 companies, including 53 MNCs and 27 local companies engaged in a wide spread of consumerfacing sectors, including food and beverage, automotive, apparel, luxury, home care, and personal care. The survey asked executives from these companies to rank the importance of eight specific trends related to changes in consumer attitudes, changes in technology and the external environment, and demographics. They are:

Key Findings


Digitization Remains Topic Number One
Since the inception of the survey, both local

Exhibit 1

MNCs and Chinese Companies Agree: The “Rise of Digitization” Is a Top Consumer Trend
How would you rank these eight key trends in terms of their importance for your industry? Average Rank of the 8 Trends (most important = 1)
MNCs N=53 Changing Perception of Value Rise of "Digitization" Rising Importance of Health & Wellness Exponential Growth of Consumer Choices Increasing Connectivity Among Different City Tiers Consumer Demand for More Transparency Rise of Importance of Shopping Experience Evolution of the Family Unit 5.5 3.7 3.8 3.9 4.3 4.8 5.0 5.0 Chinese Companies N=27

1 2 3 4 5 6 7 8

4 1 6 2 8 7 3 5


4.8 3.9 5.9 4.9 4.1 4.5

“…the pace and volume of digital innovation has captured the business world’s attention…”

companies and MNCs have ranked the rise of digitization as one of the top trends in the consumer marketplace (See Exhibit 1.). Yet a significant proportion of both local players and MNCs are not fully confident in their readiness to respond to the trend successfully. A far greater percentage of Chinese respondents to this year’s survey (25 percent, compared with 17 percent in 2013) report that they are “fully prepared” to respond to the digitization trend, compared with just 6 percent of MNCs, down from 29 percent in 2013. Companies understand that digitization represents a major disruption of the Chinese consumer market, but many are unsure how to turn that disruption to their advantage. MNCs, in particular, have been slow to enter business areas where digitization is creating

the greatest value, possibly because many are enjoying success in the bricks-and-mortar marketplace and are reluctant to invest heavily in digital, where success is uncertain. Chinese companies, by contrast, are investing heavily in developing their digital businesses, devoting an average 25 percent of their budgets to digital initiatives and online channel development, compared with 12 percent for MNCs. Both MNCs and domestic companies say they lack a clear overall plan to develop and deploy the capabilities needed to support a successful digital business. Many local companies and MNCs aren’t sure which capabilities to prioritize and develop first. Despite this uncertainty, Chinese companies are energetically experimenting with

Business Response to Trends in China’s Consumer Market 2014


Exhibit 2

Business Response to Trends in China’s Consumer Market 2014

The Importance of “Activation-Related” Capabilities is Increasing
Importance of the Capabilities Normalized % of the respondents who prioritize each capability as the first or second most important for their company
Segmentation & needs assessment Innovation Personalization & targeting Social influence & advocacy Real-time decision-making Omni-channel experience Measurement Optimized content 1 7 10 1 Platforms & Activation Insights & Analytics 7 13 39 42 23 29 26 62 34 100

97 100


opportunities arising from the expanding digital channel. These experiments take many forms, and inevitably, many will fall short of their objectives. Yet the pace and volume of digital innovation has captured the business world’s attention and may well produce widely adopted business models and practices.  

“activation-related” capabilities as increasingly important to digital success. (See Exhibit 2.) They are: Innovation Social influence and advocacy The omni-channel experience In addition, both MNCs and domestic Chinese companies also agreed that two key obstacles inhibit full realization of their digital potential. (See Exhibit 3.) They are: Structures or processes that do not support full development of digital capabilities Human resources challenges that inhibit progress in digital capabilities development—specifically, the ability to attract entrepreneurial people eager to conduct high-risk, high-reward

China Emerges as a Digital Innovation Hub
Most companies responding to this year’s survey agree that a few capabilities are crucial. As they did last year, both Chinese and MNC respondents to the survey singled out segmentation and needs assessment as the top capability need for success in the digital marketplace. In a new development, respondents also identified three other

Exhibit 3

Key barriers to the full realization of the potential of the digital trend in China (% of respondents)
MNCs % Existing structures or processes do not support the trend Human resource challenges Conflicts between new and existing channels Demands of the current core business limit resource availability Technological challenges Lack of R&D to assess trends Concerns about intellectual property protection Challenges in reaching agreement with headquarters on digital strategy Rising input costs Challenges in making partnerships work 55 43 30 30 26 21 21 15 15 13 26 7 33 15 33 48 56 59 74 Chinese Companies % 85

experiments with new ways of doing business To overcome these challenges, consumer facing companies in China will need to find new ways of attracting and rewarding people and new ways of organizing work. Chinese consumer-facing companies are racing to develop key digital capabilities and remodel their organizations to develop those crucial capabilities to their full potential. They are exploring uncharted territory, finding their way through trial and error. What follows is a sampling of some of their experimental forays into the digital realm. If successful, these experiments might one day be recognized as the first manifestations of truly disruptive innovation. These digital explorers include: Three Squirrels. This snacks company

has pioneered a direct-to-consumer model that is creating new value for a specifically targeted consumer segment – the young, female Chinese netizen Joyoung. This kitchen home appliance company is attempting to build a consumer-to-business model, sourcing product ideas from consumers and precisely gauging demand through presales Huangtaiji. This quick-service restaurant chain is building brand equity from scratch by engaging with consumers through social networks HSTYLE. This fashion apparel company, part of the Taobao cluster of companies, has broken down traditional functional silos and replaced them with “mini buyer groups”—cross-functional merchandising teams that operate like startups. Encouraged to take risks, they

Business Response to Trends in China’s Consumer Market 2014

Human Resources, Organization, and Process Are the Key Barriers


run their sub-brands with full autonomy and are rewarded or penalized based on business results
Business Response to Trends in China’s Consumer Market 2014

Product delivery offers the second “moment of truth” brand-building opportunity. The specially designed Three Squirrels delivery box includes a free box opener packaged with a letter, addressed to “Dear Master,” that thanks the consumer for her purchase. The nut products arrive in vacuum-sealed bags rather than the conventional cans and boxes that consumers would find on store shelves. Along with easy-to-use return forms, the order includes a free clip for resealing the bag in case the nuts aren’t consumed in a single sitting, as well as tissues for cleaning the hands after eating and a small trash bag for disposing waste.

Segmentation and needs assessment:

Three Squirrels Targets Young Women
Three Squirrels, which launched its first online store in 2012, is an online-only manufacturer and marketer of nut products, which it sells through the Tmall, an electronic businessto-consumer marketplace, and other e-tailer websites such as Jingdong. After focusing on consumer segmentation and needs assessment, it devised a marketing strategy aimed squarely at young female consumers, a key segment in Chinese e-commerce. These affluent and aspirational young shoppers consume most of their media online, via both personal computers and, to an increasing extent, mobile devices. Three Squirrels’ marketing is designed with their online habits and preferences in mind. It aims to deliver an end-to-end brand experience with maximum impact at two key “moments of truth”—the moment the consumer lands on the website, and the moment she receives her order. The company’s strategy depends on detailed mapping of the customer experience. The experience begins with cartoon characters representing the three squirrels in the company name, who greet visitors to a colorful, kinetic website. Consumers interact with customer service through a dialogue box featuring a customer-service “squirrel” who answers questions and offers guidance to its “master”—that is, the shopper.


“Consumers interact with customer service through a dialogue box featuring a customer-service squirrel”
The company’s online-only, direct-to-consumer business model has also given Three Squirrels the opportunity to restructure the value chain.

Selling exclusively through online channels simplifies distribution and lowers associated costs, while the shorter value chain means the nuts are fresher when they arrive at the consumer. They also cost less than brands and products sold through offline channels, bolstering Three Squirrels’ consumer value proposition. Only time will tell if the experiment succeeds, but it’s already clear that its digital, directto-consumer model has reconfigured the experience of shopping for a packaged food product, creating new consumer value through product freshness and price competitiveness. The consumers that Three Squirrels is targeting today are largely limited to digitally savvy young female consumers. As the digital generation comes of age, however, Three Squirrels’ business model could spread to other segments and disrupt the fast-moving consumer goods space. modeled on single-serving coffee and tea


dispensers. In December 2013, Joyoung released the beta model of the dispenser to a select group of enthusiastic company loyalists and solicited their feedback to refine it. It then gathered online orders for the upgraded version of the dispensers. Only when those orders passed a predetermined threshold did Joyoung give its manufacturing vendor the go-ahead to produce it. This reversal of the typical manufacturedgoods value chain, achieved by leveraging the online channel, enabled the company to start production only when it could do so at scale. And with pre-orders in hand, Joyoung did not have to tie up capital in inventory—

Joyoung Crowd-Sources Product Design
Joyoung, a maker and marketer of kitchen appliances, has approximately 4,000 employees. One-quarter of them work in innovation and development. Joyoung is the first Chinese consumer appliance maker to borrow a page from the playbook of Xiaomi, the Chinese telephone handset maker that solicits online feedback to design its products. It has quickly grown into one of the country’s major players in smartphone sales. Like Xiaomi, Joyoung is a product innovator, enlisting its customers to help design its flagship product, a one-cup soy milk machine

Business Response to Trends in China’s Consumer Market 2014



instead, it sold virtually every unit before it was produced.
Business Response to Trends in China’s Consumer Market 2014

around its menu of traditional Chinese pancakes and other breakfast foods. It was founded in 2012 by He Chang, who earlier in his career worked at Baidu, travel site Qunaer, and Google. With ambitions to rival quick-service giants such as KFC and McDonalds, Huangtaiji has thrown out the traditional marketing textbook, opting instead to build its brand using social media such as Weibo, Wechat, and Dazhong Dianping. With 110,000 followers on Weibo alone, Huangtaiji has conducted offbeat socialmedia campaigns to generate excitement for its products and services. To promote its homedelivery service, for example, it staged an event in which Huangtaiji’s pancakes were delivered by Tesla electric sports cars—all of it covered on social media, complete with video clips.

It is an open question whether a new model of product innovation and supply chain like Joyoung’s will succeed in the marketplace. After launching its beta model end of 2013, Joyoung has reported that sales have fallen somewhat short of its original high expectations. The reasons for the disappointing results are unclear, but the reversed consumer-to-business model is potentially disruptive. In the future we could see other companies base new products on instant and early consumer inputs and reshape the supply-demand curve through pre-sales.


Social Influence and Advocacy:

Huangtaiji Goes Online to Build Excitement
Huangtaiji, a new player in the quick-service restaurant space, is making creative use of social media to build interest and excitement

Huangtaiji’s most audacious marketing initiative, however, may be its promotion of its management team, which takes as its model the hyping of a new pop-music group. The company encourages its social-media

followers to choose their favorite Huangtaiji executive and cheer him on against other executives. The initial success of Huangtaiji is a wakeup call for established brands that used their scale and dominance of one-way media channels such as television to speak to consumers. In today’s environment of ubiquitous social media, brand-building has become far more competitive and less reliant on sheer scale to establish advantage. Content marketing is becoming more critical. Whoever can identify, create, and stimulate the spread of relevant content and associate it with a specific brand will emerge the winner.

Organizational Innovation:

At HSTYLE, Small is Beautiful
In addition to focusing on activation-related digital capabilities (segmentation and needs analysis, innovation, social influence and advocacy, and the omni-channel experience), consumer-facing companies in China are also reorganizing themselves for the digital world to address the organizational challenges, especially the challenge of attracting topnotch talent. They are prototyping nimble, entrepreneurial organizations that remove barriers to innovation and push decisionmaking and P&L responsibility down to frontline employees. HSTYLE is one of these cutting-edge innovators. The Shandong-based apparel retailer, founded in 2008 and now with roughly 2,300 employees, courts fashionconscious consumers with brands such as AMH, MiniZaru, NANADAY, Soneed, Forqueens,

Dequanna, niBBuns, Souline, and ZIGU. One of HSTYLE’s organizational experiments is its designer-to-consumer model, anchored by “mini-buyer organizations.” Each minibuyer group competes with each other group for budget allocations. The teams typically consist of five employees, who own P&L and are responsible for style selection, design, marketing and sales. As of 2013, about 130 mini-buyer groups were operating at HSTYLE. Each team operates like a small startup within the larger organization, with responsibility for designing or selecting apparel sourced from South Korea. They all operate under the same basic ground rules, with their startup capital and monthly budgets governed by strict limits. The three top mini-buyer teams (based on their six-month sales records) are awarded a budget bonus. The three teams with the

Business Response to Trends in China’s Consumer Market 2014



lowest six-month sales are disbanded. The teams subcontract many business
Business Response to Trends in China’s Consumer Market 2014

Exhibit 4

functions to shared service providers within the organization. A central warehouse operation, for example, provides logistics and inventory support, while a central HSTYLE call center handles customer inquiries. Another central group handles photographic work. These central service organizations are themselves set up as profit centers, negotiating contracts with their internal customers, the mini-buyer teams, and competing with each other for resources and rewards. An organizational model centered around many small startup teams that share resources is not entirely new. For years, information and technology business such as software development and professional services firms such as consultancies have embraced a similar model. But the rising importance of digital agility in both the marketplace and the workplace could lead companies in historically information-light industries such as manufacturing to adopt the flat and flexible design of software and professional services organizations.

Chinese companies Are Investing More Aggressively to Develop the Online Channel
Average share of sales from online channels

24% 20%




2020 (expected)
Chinese Companies MNCs

Average share of budget dedicated to digital initiatives and online channel development


The Next World Capital of Innovation?


Chinese e-tailers have made an aggressive bet on their digital potential. Chinese companies are beginning to differentiate themselves from their MNC rivals, according to the 2014 survey. They are investing more intensively than MNCs to develop the online channel and to install governance mechanisms tailored to digital strategies. (See Exhibit 4.)
Note: the expected figures for 2020 are self-reported in the 2014 survey by respondents


2020 (expected)

Note: the expected figures for 2020 are selfreported in the 2014 survey by respondents As a result of these moves, a growing proportion of Chinese companies have been designated “leaders” by Strategy&’s “Digital Profiler” tool, which categorizes companies as leaders, scholars, pioneers, or novices, depending on the extent and intensity of their digital activities. (See Exhibit 5.) In 2104, 44 percent of the Chinese companies responding to the survey qualify as leaders, up from 26 percent in 2013. By comparison, 34 of MNCs responding to the survey in 2014 are classed as leaders, up from 21 percent in 2013.

By virtue of their rapid development of key digital capabilities, Chinese companies are emerging as leaders of the new global digital economy. No longer content with copying the developed world’s digital business models, they are innovating their own, while Chinese venture financiers are funding startups in digital hotspots such as Silicon Valley and Tel Aviv. A growing number of cutting-edge Chinese companies have developed innovative organizational models to address a highly connected marketplace. In a shift from the days when Chinese digital enterprises copied
Business Response to Trends in China’s Consumer Market 2014


Exhibit 5

Chinese Companies Continue to Outperform MNCs as Digital Leaders
Digital Profiler Comparison 2013 vs. 2014
89 80

MNCs vs. Chinese Companies Year 2014
53 34% 27 44% 4% 52% 0%

22% 38% 6% 7% 13% 10% 65% 40%

19% 13% 34% MNCs

Chinese Companies

Year 2013
58 21% 5% 9% 31 26% 3% 65% 6%

China 2013

China 2014 66%

Leaders Scholars

Pioneers Novice MNCs Chinese Companies


U.S. companies such as Google and Amazon, digital entrepreneurs in the U.S. are now borrowing concepts and models from Chinese companies—often with funding from Chinese or China-connected sources. This development might well turn out to be early evidence of China’s transformation from a production center to an innovation center. Will China become a net exporter of innovation in digital practices? Will its digital innovations produce the next world-beating global company? It’s starting to look that way. Over the past decade, Chinese companies such as Alibaba and Taobao have emerged onto the global stage thanks in large part to their relentless innovation, which is one of the top priorities of Chinese executives with international ambitions for their organizations. The upshot: many of the digital innovations coming on the scene in China today may well spread to the global marketplace tomorrow, challenging MNCs in their own proverbial backyards. Such is the nature of competition in the digitally driven 21st century. With computing power ubiquitous and ever less costly, barriers to entry have crumbled away. The idea of sustainable competitive advantage begins to appear almost quaint in an environment when competition can spring up out of nowhere, virtually overnight. Much of that competition is sure to emerge from China. Because of the unique way that China’s demand economy has developed, the marketplace is something of a blank canvas, where entrepreneurs can devise new models unburdened by legacy forms of doing business. As a result, China’s digital marketplace is an arena where big risks and bold experiments are the order of the day and entrepreneurs are culture heroes. The energy, skill, and resilience of these pioneers may well transform China into the global capital of digital innovation.

Business Response to Trends in China’s Consumer Market 2014

About The American Chamber of Commerce in Shanghai
The American Chamber of Commerce in Shanghai (AmCham Shanghai), known as the “Voice of American Business in China,” is the largest and fastest growing American Chamber in the Asia Pacific region. Founded in 1915, AmCham Shanghai was the third American Chamber established outside the United States. As a non-profit, non-partisan business organization, AmCham Shanghai is committed to the principles of free trade, open markets, private enterprise and the unrestricted flow of information. For more information, please visit: www.amcham-shanghai.org.

About Strategy&
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. We are a member of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services.