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.

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

Design: Mickey Zhou

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-of-

mind 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 consumer-

facing 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)

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 consumer-

facing 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:

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 different-

tier cities Explosive growth of consumer choice The rise of digital commerce, or

“digitization” Evolution of the family unit

Key findings

Digitization Remains Topic Number One

Since the inception of the survey, both local

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MNCs and Chinese Companies Agree: The “Rise of Digitization” Is a Top Consumer Trend

Exhibit 1

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)

MNCsN=53

Chinese CompaniesN=27

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

1

2

3

4

5

6

7

8

4

1

6

2

8

7

3

5

4.2

3.6

4.8

3.9

5.9

4.9

4.1

4.5

3.7

3.8

3.9

4.3

4.8

5.0

5.0

5.5

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

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

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.

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

“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

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The Importance of “Activation-Related” Capabilities is Increasing

Exhibit 2

Importance of the CapabilitiesNormalized % 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

2013 2014

100 97

62 100

42 34

13 23

39 29

1 26

7 7

10 1Platforms & Activation

Insights & Analytics

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 pre-

sales 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

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Human Resources, Organization, and Process Are the Key Barriers

Exhibit 3

Key barriers to the full realization of the potential of the digital trend in China (% of respondents)

MNCs % Chinese Companies %

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 85

43 74

30 56

30 59

26

21

21

15

15

13

48

33

15

7

33

26

“Consumers interact with customer service through a dialogue box featuring a customer-service squirrel”

run their sub-brands with full autonomy

and are rewarded or penalized based

on business results

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 business-

to-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.

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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.

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, direct-

to-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.

innovation:

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

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 manufactured-

goods 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—

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instead, it sold virtually every unit before it

was produced.

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

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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 social-

media campaigns to generate excitement for

its products and services. To promote its home-

delivery 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.

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

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followers to choose their favorite Huangtaiji

executive and cheer him on against other

executives.

The initial success of Huangtaiji is a wake-

up 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 top-

notch talent. They are prototyping nimble,

entrepreneurial organizations that remove

barriers to innovation and push decision-

making and P&L responsibility down to front-

line 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 fashion-

conscious 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 mini-

buyer 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

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lowest six-month sales are disbanded.

The teams subcontract many business

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.

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.)

Exhibit 4

Chinese companies Are Investing More Aggressively to

Develop the Online Channel

Average share of sales from online channels

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

2014 2020(expected)

11%

20%

24%

37%

2014 2020(expected)

12%

25%

22%

35%

Chinese Companies

MNCs

Note: the expected figures for 2020 are self-reported in the 2014 survey by respondents

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Note: the expected figures for 2020 are self-

reported 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

Chinese Companies Continue to Outperform MNCs as Digital Leaders

Exhibit 5

89 53

58

80 27

31

China 2013 China 2014

Digital Profiler Comparison2013 vs. 2014

MNCs vs. Chinese CompaniesYear 2014

Year 2013

MNCs

MNCs

Chinese Companies

Chinese Companies

22%

38%

13%

10%

40%

6%

7%

65%

34%

21% 26%

65%66%

44%

52%

19%

13%

34%

4% 0%

3% 6%9%5%

Leaders Pioneers

Scholars Novice

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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.

SHU

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About The American Chamber of Commerce in ShanghaiThe 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.

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