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Characteristics of Emerging Cities in China and Corporate Strategy to Enter the Market economic relations, business management

Author Furong Jin, Hyong-Kun Lee, Park, Jinhee, Hongwon Kim, CHOI JI WON Series 14-15 Language Korean Date 2014.12.30

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As China is undergoing a rapid shift in paradigm of its economic growth from an export-driven one to one focused on domestic consumption in the wake of the global financial crisis, the consumer market in China is expanding gradually, especially in the new emerging cities. Foreign companies, which had mostly based their marketing centers in first-tier mega cities such as Beijing and Shanghai, are now competing to enter those new emerging cities. Despite such developments, however, South Korean companies are still tied to the coastal area, where most of the first-tier cities are located, with respect to their entry into the domestic consumer market in China. And the insufficient information available about the local market, combined with the lack of distribution channels and deteriorating brand competence, is hindering their efforts to develop their own domestic consumption market.
Given the backdrop involving such shifts in the economic climate, this study is aimed at analyzing the characteristics of the consumer market in the new emerging cities in China and coming up with recommendations with regard to strategies for entering them. This study contains two important  differentiating factors: 1. The first point of the study that differentiates it from the rest is that it analyzed the consumer market with its research focus on the specific, ‘micro’ consumer attributes limited to 10 target cities in China, instead of reviewing all major metropolitan areas; 2. This study performs a one-on-one survey and case study in terms of its research methodology, while also applying key management theories such as consumer behavior model, 4P and STP strategy.
Equipped with such differentiating factors, the ten emerging cities in China were selected based on a quantitative method followed by interviews with local consumers in the emerging cities to identify their characteristics. Especially, a case study on the South Korean companies operating in China was performed through in-depth interviews with company officials working in companies with a local presence in China.
For this study, a total of 287 Chinese cities at the prefecture level and above were classified into 4 levels while considering their respective consumption scale and growth indicators, and selected the cities that satisfied the definition of the emerging city.  For the consumption scale indicator, three variables including per capita GRDP in 2011, the size of the consumer market (total retail sales of consumables) and size of the potential market (per capita disposable income × population in the urban center) were considered, while the annual rate of increase of the said variables from 2009 to 2011 was assumed as the growth potential. And the top 50 cities as measured by their consumption size were excluded to pick out actual ‘emerging cities’; and the high-growth cities were selected from the selected 50 cities, while the cities overlapping geographically were excluded from the pool. The emerging cities selected through such filtering process include: Second-tier cities such as Chongqing(重庆), Ordos(鄂尔多斯), Chengdu(成都), Changsha(长沙), Daqing(大庆), Xi’an(西安) and Zhengzhou(郑州), and third-tier cities such as Nantong(南通), Jiaxing(嘉兴) and Hefei(合肥).
And to identify the consumer characteristics of the 10 emerging cities selected, 50 consumers from each city were surveyed for their consumption pattern, consumption characteristics and their perception on and assessment of South Korean products, with the survey results being analyzed with such statistical methodologies as frequency analysis, ANOVA and regression analysis.
First, the result of the frequency analysis shows that consumer products with relatively larger shares in the total consumption includes grocery, daily necessities, clothing and fashion products whereas in the service segment the expenditure on transportation/communication, eating out and culture/entertainment took the largest share in the total consumption. The purchase channel of those consumer products differed slightly by product category such as grocery, cosmetics, clothing/fashion products and home appliances, while the use of online channel was also active.  The respondents valued quality, followed by the price, in making the final purchase decision, while relying mostly on the Internet in collecting information on the products. And they were interested in ‘green’ and well-being products as much as in other products. After analyzing the eight different tendencies that are related to consumer psychology including conspicuous consumption, impulsive purchase, pursuit of the latest trends, price sensitivity, curiosity toward new products, preference for imported brands, preference for specific brands and level of trust in advertisement, the consumers in the emerging cities valued practicality and self-satisfaction, and their sensitivity to price increases was not high though they did respond somewhat to price increases. They displayed significant interest in new products and did not place much importance on whether they were imported or Chinese brands. And they would easily switch to other brands even though they did have established preference toward certain brands, while they did not put much trust in advertisements. They showed the greatest amount of interest toward purchase of Korean products though their perception on South Korean products was lukewarm, at best. The deciding factors in purchasing the South Korean products were quality and design. They also had an interest in buying such Korean products as clothing/fashion, digital products and cosmetics. When other competing foreign products are compared with the South Korean counterparts in terms of quality, design, price, and brand, the South Korean products were evaluated to be competitive in design, price and brand, but these consumers answered that South Korean products were just so-so in terms of quality and service. Such consumption patterns and tendencies as well their perception and assessment of South Koreans products differed depending on cities and demographical characteristics (sex, birth year, income level and others).
Meanwhile, an empirical analysis performed to identify the impacts product characteristics had on the consumers’ purchase behavior proved that such characteristics do have an influence on their purchase of South Korean products, thereby validating the consumer buying behavior theory.
When the marketing cases of the companies from South Korea, Japan, and Taiwan that entered such emerging cities were analyzed along with consumer characteristics in the emerging cities from the perspective of 4P and STP, the companies from each country strove to attract customers by differentiating their products and services (Product aspect). And South Korean companies were utilizing ‘green’ and Korean Wave actively, while attempting to differentiate their products and brand image by developing new products customized for each region. Also, companies from various countries were pricing their products in accordance with the product characteristics and competitiveness (Price aspect). In terms of Place, companies from various countries selected store locations by considering the product attributes and convenience of customers in visiting the store. Regionally, Japanese and Taiwanese companies entered the first-tier cities followed by expansion into second-tier and third-tier cities, thereby closing on their target region. In terms of Promotion, Taiwanese companies were utilizing various methods of competition related with their business, whereas South Korean companies were not up to that level.
Next, in terms of STP, companies from various countries segmented their customers in accordance with their respective income level, tastes, age level and life style (Segmentation aspect), before narrowing down their customer group by their product type with their target focused mainly on the middle income class or over (Targeting aspect). And they were positioning themselves among the customers by highlighting country-specific product images and through provision of unique services (Positioning aspect).
Based on the results of such analysis, this study came up with recommendations regarding the strategies required to enter the emerging cities as below:
 1. Some of the promising areas companies may enter are - clothing/fashion, cosmetics, digital products, general home appliances and processed foods in the consumer products, and eating out, culture/entertainment, beauty/health and medical care in the service sector. 2. Companies are required to improve product competitiveness in terms of 4P perspectives and utilize the green/well-being marketing actively while utilizing the psychological factors as well such as pursuit of the latest trends and curiosity towards new products (Product & Price strategy). With regard to placement strategy, the store location should be selected by considering various factors comprehensively such as commercial supremacy, parking convenience, entrance of similar and related competitors to the market and target segment, while the establishment of the distribution channel would be more effective when implemented through indirect sales channel such as commercial agents. And the distribution channel should be selected depending on the item; active use of online channels is also recommended. In terms of Promotion strategy, it is also recommended that products be publicized via WeChat and utilize the recent popularity of Korean Wave. Third, it is necessary to come up with customized market entrance strategy by segmenting the customers according to their sex, birth year and income level. And it is recommended to target women, those born in the 1980's and 1990's and income brackets higher than the middle-income group. Fourth, as there are differences among those emerging cities in terms of consumption patterns and characteristics, perception and assessment on the South Korean products, it is also required to come up with customized entrance strategy by identifying the characteristics of each emerging city.
 
Meanwhile, it is necessary for the government to expand its R&D investments to strengthen product competitiveness and enhance the country image, while also laying the groundwork for entering the online and offline distribution networks. And the government needs to provide PR support and settlement in the local cities for Korean companies while also expanding their effort to achieve overseas expansion.

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