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Second-Tier Cities Soar

Why Tianjin and Wuhan are hot spots for investment 

The phrase "China is booming!" has become a common refrain in the global business community over the past decade. But in the past couple of years, it has become an understatement. The country has been one of the only bright spots in the world economy, and it’s not primarily coming from the biggest, shiniest or most famous cities.

While first-tier cities like Beijing and Shanghai are expanding at a steady pace, the real growth is happening in second-tier cities like Tianjin and Wuhan. Second-tier  cities (China’s 15 biggest cities after Beijing, Guangzhou and Shanghai) account for roughly six percent of China’s population, but they contribute about half of the ountry’s total foreign direct investment (FDI).

Second-tier cities have some common advantages that are driving their rapid growth. Low operational costs and large developing consumer and industrial markets are attractive to both producers and sellers. Meanwhile, local governments are supporting their cities, often in successful attempts to attract foreign investors.

In Wuhan and Tianjin, the strong, competitive business environment is the foundation for FDI. Their international finance industry is well established. The question now is why international foreign companies are buying into the Chinese market and how are they able to compete against the domestic banks of China. In specific, tier two cities are becoming a first mover advantage for many foreign banks that have diluted themselves away from the highly concentrated banks dotting the tier one cities. This environment has created less competition and thus, more market share for foreign banks to enjoy. With the Chinese government opening the floodgates in the banking sector to full fledged competition, international banks are swarming in to seek the potential in the growing Chinese economy. The domestic banks of China also have many disadvantages working against it which causes international companies to swoop in and take the Chinese consumers. Under the government’s lending policy,-where banks have lent capital to profit losing companies-improper management and ineffective information systems, domestic banks suffered setbacks in its industry. When international banks came to China, they provided better quality service, improved and convenient ways of operating and targeted a specific group of high income consumers where they provide higher and more attractive interest rates for saving. With these determinants in mind, it is no wonder international banking has thrived successfully in tier two cities.

Chasing the Chinese Consumer

China’s stimulus package, which was put in place to fend off a recession in the wake of the financial crisis, has benefited the Chinese in second-tier cities greatly. Wuhan, for example, has witnessed rapid economic development since the opening up of the Yangtze Economic Belt and the construction of the Three Gorges Dam project, as well as a high-speed rail to Guangzhou. The result of these and other factors has been average annual growth of just over 10.5 percent. Furthermore, an increasingly wealthy consumer population and low operational costs helps investors in second-tier cities are able to maximize on their profits.

In the midst of all of this second-tier city growth, foreign companies have faced significant challenges in China including complex regional discrepancies in market behavior. The recent and rapidly growing Chinese economy has made marketing research a vital player for international companies in understanding the needs and trends of the Chinese consumer. Research on market attractiveness, service quality and consumer behavior are all becoming critical in this highly competitive market, especially for those in the luxury or branded goods industries, which are increasingly successful in cities like Wuhan and Tianjin.

Lapping up Luxury Goods

The rapidly growing purchasing power and appetite for high-end products has caught the attention of top international companies. One example is Louis Vuitton. The company entered China about 20 years ago and now has more than 15 boutiques spread across 13 cities. The fact that luxury brands like Louis Vuitton were able, not only to survive, but to thrive during the global recession, indicates how brand-hungry the Chinese consumers are.

The population base in small cities is the main attraction for the luxury segment. Compared to Europe and the US, China’s second-tier cities are very large markets. China has over 100 cities with populations of over one million, opening up the floodgates to immense possibilities for international market development. The 15 second-tier cities are even bigger than that, often with populations larger than all, or virtually all, American cities.

Surveying the different desires of first and second-tier cities

Recently, Force Research surveyed one of our successful clients, a luxury product retailer of branded accessories. We polled 10 regions: Beijing, Qingdao, Chongqing, Tianjin, Guangzhou, Hanzhou, Shenyang, Shenzen, Shanghai and Nanjing. In each region, we interviewed 10 respondents under the age of 50 with high personal income to describe the service and environment they preferred. The conclusion of our research revealed that residents of second-tier cities desire proactive sales people in a quiet service environment with wide product choices. In contrast, first-tier city residents prefer to choose products by themselves, before getting a salesperson’s recommendation. Interestingly, second-tier customers held lower expectations of service level
compared to their first-tier customer counterparts.
Comparison of Tier 1 and Tier 2 Perceptions in Service Quality of Luxury Store

The chart shown below depicts a recent survey Force Research conducted in four second-tier cities and lists the different attitudes that each one has towards a luxury boutique.
Chart Depicting Service Quality in Tier Two Cities

  Service Atmosphere Layout
Tianjin Demanded professional
service and asked a lot of
questions, required a very
open minded sales associate
Customers enjoyed music The customers said it was too
small for their liking
Shenyang Demanded quicker service
than the rest of the three, but
took a lot of time in picking out
what they wanted
Customers enjoyed music and
displayed more than average
appeal for the counter displays
The customers indicated that
chairs needed to be available
in front of the
Qingdao Were critical of sales
associates attitudes, noticed
friendly and helpful service
right away
Customers thought music was
too loud
The customers thought more
chairs were needed to make
the lThe customers indicated
that chairs needed
to be available in front of the
countersyout more comfortable
Hangzhou Were most critical of sales
associates’ appearance,
seemed to be a large factor
in what they felt about the
Customers enjoyed the
atmosphere. More stores needed
in different location of Hangzhou
The customers thought more
chairs were needed to make
the layout more comfortable

Growing Importance

As markets of first-tier cities mature, the second-tier cities are rising to the challenge to take its place. All these second tier cities provide extreme economic growth for China and each one contributes differently to the rising star that is China’s economy. Tianjin is the leading city for the ever increasing demand for international products while Wuhan experienced the fastest GDP growth. Both the government and business investors have been supporting and realizing the economic potential and technological development of their cities.

As the cost of living in first tier cities skyrocket to unrealistic prices and become a major expense for foreign companies, investors are seeking and embracing their vision of developing markets in Tier 2 cities. There are many important factors and observations that distinguish Tier 1 cities from their Tier 2 counterparts. These include product understanding and market exposure. For example, consumers in tier two cities do not expect the same high quality service as that of tier one and the volume of complaints has been relatively smaller as well. In this aspect, tier two cities are easier to cater to than the tier one  marketplace. If you visit the tier two cities, it is evident that the branded casual wear is making a strong debut. Hugo Boss and Burberry are among a few foreign companies who have successfully managed to dominate their brands in the tier two markets. Additionally, women’s shopping and beauty products such as Estee Lauder are finding its way up to the consumers anticipating hands. In the future, the consumers of tier two cities will become as affluent as the tier one cities. Consequently, this will lead to preemptive marketers who will want to gain the largest market share of this time. From this, it is clear that many foreign investors will want to hop onto the second-tier bandwagon. The trends that are currently reshaping the minds of the Chinese consumer are happening because of international companies making a strong presence, filtering through from first then to second tier cities. These visions that international companies have today will become the footprints of those who wish to succeed in the 21st century markets of tomorrow.

By Force Research (Beijing)

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