Investors target China's lower-tier cities - AVCJ Forum

“Alibaba found that e-commerce transactions are continuing to grow for women in tier two, three and four cities, but stagnating in tier one cities. The reason is that people in tier three and four cities have no mortgages – every dollar they earn goes into discretionary spending. In Beijing and Shanghai, higher costs in areas like property and education are holding back spending power,” Teck Loon Goh, head of investor relations at GGV Capital, told the AVCJ USA Forum.

He noted that Hellobike, not Mobike or Ofo, is the largest bike-sharing business in China by fleet size. The company, which first received backing from GGV and others in 2016, is not to be found in tier-one cities. It claims to have 20 million registered users with 800,000 bicycles and 32,000 service stations across more than 220 cities, primarily tier-three and tier-four locations.

Four cities in China are classified as first tier, according to McKinsey Global Institute, with 46 in tier two, 193 in tier three, and 696 in tier four. About 60% of the 833 million urban dwellers were living in third-tier cities and below in 2018. Household consumption reached $2.3 trillion in 2017, and Morgan Stanley projects it will hit $6.9 trillion by 2030. Of that, $8.4 trillion will come from urban centers and the rest from rural areas.

Alibaba attracted 102 million new active customers to its domestic retail marketplaces in the 12 months ended March, taking the total to 654 million. Less developed cities accounted for 70% of those new additions.

Morgan Stanley further estimates that the disposable income gap between tier-one cities and the lower tiers will narrow from 46% in 2017 to 36% by 2030. However, this will not necessarily translate into a boon for overseas brands. While echoing the view that lower property costs are enabling rapid consumption growth in lower-tier cities, Jessie Yan, a director with consumer-focused mid-market buyout firm Lunar, observed that many domestic brands are overtaking their foreign counterparts.

“Local consumers are more sophisticated, they spend more time researching, and seeing that they get value for money,” she said.

Technology plays a critical role in facilitating consumption activity in low-tier cities, whether spending power is concentrated on consumer products, online content, or healthcare. James Ieong, a managing partner at Pagoda Capital Partners, claimed that 40% of national healthcare spending is focused on Beijing and Shanghai. He believes technology can do for healthcare what it is already doing for retail. “5G infrastructure will unlock a lot of consumption power in rural areas,” he said.

This power is intensified by demographics. Millennials are more willing to spend online than their parents – creating a market for premium products and services – and they have more money at their disposal. Those born after 1999 are the second generation of single child families, which means a millennial married couple could stand to inherit six pieces of property, of which only three might be mortgaged, according to David Wei, chairman and founding partner at Vision Knight Capital.

“There are 30 provincial capitals in China. Homeowners in these cities are millionaires by US dollar standards,” added Tony Jiang, a co-founder and partner at Ocean Link.

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• Topics
• Greater China
• Expansion
• Consumer
• Technology
• China
• Pagoda Investment
• GGV Capital
• Lunar Capital Management
• AVCJ Events
• Vision Knight Capital