Opportunity In China’s 4th-6th Tier Cities & Counterfeit Cigarettes

China Daily Review: Two interesting links about China today, both about business. The first is great for anyone looking to do some serious business in China’s huge 4th and 6th tier cities (yeah, we’re not even talking about 2nd or 3rd tier here, we’re talking where most foreigners have never gone before!). The second is great for anyone who has ever bought a pack of cigarettes and thought there was something a wee bit dodgy about it…

Business opportunities and insights for the underserved parts of China…

Ogilvy & Mather has published a report on China’s 4th-6th tier cities (hat tip littleredbook) that may be useful for the China entrepreneur looking beyond China’s already well-developed first and second tier metropolitan markets. Keep in mind that many of these cities are still larger and more populous than the vast majority of Western cities. The market is there, but tapping that market successfully has been hit or miss for many. Maybe this report can guide you in the right direction. Some excerpts to whet your appetite:

China’s 4th-6th tier towns, which account for 37% of China’s population, have notably different consumer cultures and retail landscapes not only from the major metropolises of Beijing, Shanghai and Guangzhou but also from 2nd-3rd tier cities, according to “China Beyond,” a new study released today by Ogilvy China. Moreover, what works in big cities for marketing firms and brands may not work in the 4th-6th tier locales which range from prefecture level cities to county level towns. Nevertheless, a vast opportunity exists for companies that can tap into local and regional psyches and lifestyles.

The pace of development is amplified by the anxious youth and their relationship with technology. Most young people, though optimistic about the future, do not know how to use the Internet for information, education and better opportunities. Their online behavior mirrors the lackluster, drab realities of a provincial life. Brands that are able to redirect some of the pent-up energy to fuel entrepreneurship, creativity and consumerism are likely to benefit.

Families in small towns usually have two children, and their sphere of influence is arguably larger than that of the pampered big city child. This social reality offers many opportunities for marketers to become more relevant to consumers by helping to create a better future for children. They also need to be cognizant of the influence an older sibling can have on the behavior of the younger child. At the same time, there is relatively less pressure exerted upon children – since all the family’s hopes do not rest on that one child.

There is a natural affinity with open spaces. In low tier cities, many engagements and interactions happen in public. This is contrary to urban people living in closed quarters, with limited capacity and range for activities. It demonstrates that brands must communicate with consumers on the move.

For instance, the hang out culture in lower tier cities means outdoor media can be used to engage rather than simply inform. Brands could tell more ’stories’ rather than a ’short message’ or ‘one key visual’. Brands could help people to hang out together in places they naturally tend to converge to. Food and beverage brands could bring people together with make-shift stools, tables and fixed umbrellas as premia.

Counterfeit brands have taken off in low tier cities as consumers desire brands that symbolize success but are unable to buy the real brands due to vast income gaps. As a result, fake FMCG and consumer durables brands are widely available in China’s lower tier cities – a different phenomenon from what is seen in the big cities where luxury brand fakes proliferate.

Mom-and-pop stores and wet markets are being pushed out while hypermarkets and open-shelf convenience stores are taking over. However, these stores stock far more local and national Chinese brands than international brands. There is also a strong appetite for “new things,” which means consumers easily tire of old brands that do not constantly change and innovate.

All good stuff for the business-minded amongst you that aren’t still enamored by Shanghai and Beijing or Hangzhou and Chongqing or…yeah. Read the rest at Ogilvy »

A business opportunities for those who want to bring down Big Tobacco…sorta…

From Slate (via Danwei) comes this eye-opening and lung-blackening expose of China’s incredibly lucrative and equally shady counterfeit cigarette industry. Barring a few potentially inaccurate factoids slipped in for extra flavor, the article will not only make you question every fag you light up, it might also tempt you into the trade. Yikes. Here’s a juicy appetizer:

Ringed by thickly forested mountains, illicit cigarette factories dot the countryside, carved deeply into caves, high into the hills, and even buried beneath the earth. By one tally, some 200 operations are hidden in Yunxiao, a southwestern Fujian county about twice the area of New York City. Over the last 10 years, production of counterfeit cigarettes has soared in China, jumping eightfold since 1997 to an unprecedented 400 billion cigarettes a year—enough to supply every U.S. smoker with 460 packs a year. Once famed for its bright yellow loquat fruit, Yunxiao is the trade’s heartland, the source of half of China’s counterfeit production.

Today, China’s fake cigarettes—knockoff Marlboros, Newports, and Benson & Hedges—are flooding markets around the globe. They fuel a violent, multibillion-dollar black market and are even more hazardous to smokers than the real thing, yet the industry is little-known.

“Most factories are underground,” a Yunxiao cigarette broker confided in hushed tones. “They’re under buildings, unimaginably well-hidden, with secret doors from the basements.” Even the village temple—topped with an arched red roof and twisting, frescoed spires—conceals a factory below, she said.

Cigarette counterfeiting is immensely lucrative, with profits easily rivaling those of the narcotics trade. While a pack of fake Marlboros costs 20 cents to make in China, it can fetch up to 20 times that amount in the United States. And though a drug trafficker might land a life sentence if caught, a cigarette counterfeiter usually receives a comparative slap on the wrist—a handful of years in jail or possibly a fine.

Already drawing pro vs. con, risk vs. benefit tables? Read the rest at Slate »

Chinese government officials overseeing the destruction of counterfeit cigarettes.

An interesting suggestion in the above article is that the Chinese central government has a “strong motive” for cracking down on these counterfeit cigarettes. This is premised upon the state having a monopoly on the legal manufacture and distribution of cigarettes, whose revenues apparently contribute “nearly 8 percent of China’s budget”. Part of me, however, isn’t so sure the government is that strongly motivated, but perhaps that may rest on differences of interests between the central and local/provincial levels of government. Even so, I can imagine implicitly allowing this sort of counterfeiting to continue simply because it brings a measure of economic growth to China. Think about it, counterfeit cigarettes not only employ unskilled masses, they’re also a huge export industry, and they appease the masses’ desire for cheap “name-brand” goods for some semblance of first-world consumption standards. Oh, and Deng would be proud: Some get rich first too.