The $10 Trillion Prize. David Michael
billion, to segment the middle class into emerging middle and middle, and to segment the upper class into lower affluent and upper affluent. The next billion are people in the lower class who have some disposable money in their pockets for the very first time and have the energy and ambition to move up into the middle class—they work hard, they care about their children’s education, and they choose better quality goods.
FIGURE 2-1
How the $10 trillion prize breaks down across classes
FIGURE 2-2
Household income in China, 2010 and 2020
In China, the threshold for entry to the middle class, taking into account the lower cost of goods and services, is an annual household income of $9,750. But we put the threshold for entry to the emerging middle class at $7,300, while the ceiling for the richest members of the middle class is $23,200 (figure 2-2). Guojun, who earns around RMB 80,000, or $12,500, fits squarely into this category.
In India, the middle class has an income range of $6,700 to $20,000 (figure 2-3). We often subdivide this class into two groups: the urban and the rural. Govind is comfortably middle class, earning more than 500,000 rupees, or around $11,000, from his various business ventures.
But if income is a key segmentation factor, it is not the only one. Other factors include education, occupation, and geography—and, as we will see in this chapter, these differences influence consumers’ attitudes and, importantly, their patterns of consumption.
First, though, we should meet the new members of the middle class.
FIGURE 2-3
Household income in India, 2010 and 2020
The Middle (Class) Kingdom: China’s New Bourgeoisie
Ma Guojun is typical of this new class. Born near Xining, the capital city of Qinghai province, he grew up in a poor family, the eldest of three boys. His father worked for the local electricity company and dreamed that his son, if he studied hard, would rise up through the ranks of Chinese society.
As it turned out, Guojun performed only modestly in his gaokao, the national college entrance examination, and secured a place at a university in Shenyang, rather than Beijing. There, he studied for a degree in material science and engineering. But he did so well that he was able to go on to study for a postgraduate degree at a university in Beijing. For him, this was a big turning point.
Soon after completing his studies, Guojun got a job as a researcher at Advanced Technology & Materials Company (AT&M). This manufacturer of metallic products was founded by a state-owned research institute in the late 1990s. His annual salary was RMB 60,000, or about $9,400. This was double his father’s salary and marked him as a member of the urban and emerging middle class. If Guojun felt special, he was not alone—many others were climbing the social ladder. In 2010, those living in emerging middle-class households or higher constituted 26 percent of the population. By 2020, this proportion will have risen to 50 percent. Much of this growth will take place in China’s fast-expanding cities, where 75 percent of the population will enter the emerging middle class or higher by the end of this decade. Today, the emerging middle class accounts for about 15 percent of the general population and 26 percent of the urban population. Guojun fit the bill perfectly. But he was not ready to rest on his laurels.
In Beijing, the middle class has to cut corners and budget tightly in order to live the better life. For instance, workers must sometimes go as far out as the fourth ring—the expressway encircling the city more than five miles from the center—before finding affordable apartments. The commute to work can then take ninety minutes or even longer.
At that time, Guojun did not feel rich, even though he was, by the standards of his family. He lived in a small apartment of just forty square meters, which he rented with a roommate, and it was poorly furnished and miles away from his office. It took him more than an hour to get to AT&M’s offices in the Zhongguancun Science Park, China’s answer to Silicon Valley, and he had to get there on the crowded subway. It meant that there was very little time for recreation. As he put it, “Every day was work, work, work.” Worse than this, he felt that even if he worked and saved for a lifetime, he still would not be able to afford a proper-sized apartment in Beijing.
At the age of twenty-seven, Guojun was lonely. He had fallen in love with a beautiful young woman in Beijing, but his modest financial income, together with the fact that he came from a city 1,250 miles from the capital, did not make him an attractive bet as a husband—or, more significantly, as a son-in-law. The girl’s parents forced the couple to go their separate ways. As he explained, “Her mom said, ‘This guy can’t lead a good life for himself, so how could he give you happiness?’”
Status, as expressed by a nice house and a good job, is a big factor in China, as we will see in chapter 8. “A house doesn’t only mean a place to live. It translates as a statement of affluence: security, health care, identity, and education,” Guojun told us. “A lot of people growing up in Beijing had houses bought for them by their parents. But for me, as someone who had migrated from a rural area, I had to pay for a house myself, and that’s almost impossible because of the high and rising costs of property.”
As he searched for a new direction, Guojun’s moment came when he stumbled across a job made for him: a lectureship in engineering at Qinghai University in his home city of Xining. Offered a comparable salary, he jumped at the chance to escape Beijing and return home. He knew his money would go further, he would stand a better chance of finding a wife and starting a family, and he would have a better life. This common migration pattern is driving the growth of the tier 2 and tier 3 cities in China.
Four years later, he has a wife, a one-year-old son, and an annual household income of RMB 80,000, or $12,500. He owns an apartment that is three times the size of the one he rented in Beijing—thanks, in part, to a gift from his parents—and he has many of the things that he wanted: a TV, a computer, and a new HTC smartphone that he bought on taobao.com, China’s largest online market.
Like many middle-class consumers, he is actively online, spending around two hours a day on the Internet—often sending messages to fellow lecturers on QQ, the instant messaging service. He used to spend more time than this, but his infant son now takes up many of his spare waking hours.
He definitely wants more—more goods, more savings, more comforts. He wants his own car; currently, he travels by train or shares the university’s car pool. He also wants to give his son every chance in life by providing him with the best education. He is busily putting money away to cover the cost of his son’s schooling. In an effort to climb the career ladder and earn a bigger salary, he is studying part-time for a doctorate at Lanzhou University of Technology. Every night after his son goes to bed, Guojun turns to his books, working until the early hours. Periodically, he takes the two-hour train ride from Xining to Lanzhou to meet with his professors. He will earn his degree this year, opening more doors to advancement. When he completes his PhD, Guojun will be one of more than sixty thousand new PhD graduates this year—a sixfold increase in the number of PhD graduates in ten years. He wonders whether an MBA would also be a worthwhile investment to help him stand out from the crowd.
Guojun has, in his words, achieved “the first half of his dreams.” In the decade ahead, he expects to continue to invest in himself and in his career. It is likely that his annual income will continue to rise as he opens more doors for himself and as his city of Xining becomes more prosperous. In so many ways, he is part of China’s middle class in motion—a fast-changing and mobile group that is redrawing society.
Cars,