Although the Chinese economy continues to slow down, it deserves attention for sustained growth of the inland market

1. Migration of the young working population from coastal to inland China

Consumption is slowing in major coastal cities in China such as Beijing, Shanghai, and Guangzhou.

In major inland cities such as Wuhan and Chengdu, on the other hand, consumption remains relatively high.

I regularly visit Beijing, Shanghai, and Guangzhou. As I see some large shopping centers in those cities, the numbers of shoppers are terribly small.

A floor where clerks outnumber shoppers is a frequent scene.

By contrast, huge shopping malls in Chengdu and Wuhan in inland China are often thronged with shoppers.

This contrast is sharper especially on weekends.

Only a few restaurants in shopping centers in Beijing and Shanghai are so popular that a line is formed in front of them. However, a line of waiting customers is seen at many of their counterparts in Wuhan and Chengdu. The whole area of eatery floors of such shopping centers are often very crowded.

There is a large difference in clientele between the coastal and inland regions in China. The clientele in the latter is primarily families with children while that in the former is not.

The regional disparity in growth is evident also in terms of the year-on-year growth rate of cumulative sales of consumer goods from January through November of 2024.

The growth rate was higher in inland cities – plus 5.3％ for Wuhan, plus 2.9％ for Chengdu, and plus 3.8％ for Chongqing. The rate was lower for coastal cities – minus 2.8％ for Beijing, minus 3.1％ for Shanghai, plus 0.3％ for Guangzhou, and plus 1.5％ Shenzhen.

Likewise, the population is growing faster in inland China than in coastal China. The rate of growth of ) at the end of 2023 from five years earlier (2018) was higher for the three inland cities – plus 31.3％ for Wuhan, plus 13.5％ for Chengdu, and plus 8.7％ for Chongqing. The growth rate for the four coastal cities was lower – plus 0.6％ for Beijing, plus 0.5％ for Shanghai, plus 7.2％ for Guangzhou, and plus 6.8％ for Shenzhen.

This gap is largely caused by the migration of young workers in their twenties and thirties from coastal to inland China. This constitutes a driving force behind the coastal-to-inland exodus.

The exodus is chiefly driven by the fact that housing and living expenses in coastal China have risen to levels where this young working population has difficulty making ends meet there.

Because these young workers fall under the child-rearing age bracket, the higher cost of living puts a particular strain on them.

This is why the labor force, especially younger workers, is moving from the coastal to inland regions, resulting in a gap in the growth of the usual residence population.

The younger generation represents the most motivated group of consumers. A population decline in this generation in major coastal cities in China plays a major role in driving down consumption there.

Chinese companies are also shifting their factories from coastal to inland China, expediting the migration of the younger generation.

The province of Sichuan, for example, has become home to large factories of corporations with the largest global market share in their respective fields. These corporations include BOE Technology Group Co., Ltd., a manufacturer of displays for PCs, smartphones, TVs, etc.; Contemporary Amperex Technology or CATL, a manufacturer of batteries; and the BYD Group, a manufacturer of EVs.

There are three major factors behind the shift of production bases from coastal to inland China. First, coastal China is experiencing rising production costs. These involve labor costs, real estate prices, and physical distribution costs.

Second, coastal China lacks suitable sites for building factories and is tightening restrictions such as environmental regulations.

Third, inland local governments are aggressively luring businesses.

All these factors are likely to remain in place going forward. Thus, the inland shift of Chinese companies is expected to continue.

2. Growing importance of the inland market

As all these facts show, there has been the coastal-to-inland shift of the most motivated group of consumers. Consumption contributes to some 60% of China’s economic growth.

If Japanese businesses are to survive in China, the most competitive market in the world, they need to change their marketing strategies to cope with this economic structural change.

To date, Japanese companies have concentrate their business operations in China on the coastal region centering on Shanghai and Guangzhou.

Accordingly, more and more Japanese firms have put up shop in costal China to supply their goods and services to these Japanese companies. As a result, this type of suppliers have taken up a significant share of all Japanese companies operating in China.

However, this scheme of things is crumbling.

Japanese businesses that have been doing business in coastal China for some time are seeing their competitive edge being eroded. For one thing, young talent is migrating to the inland region. For another, production costs are being pushed up in the coastal region.

Under these circumstances, Japanese businesses in coastal China, especially those that set up shop in China as a supplier to Japanese firms, are having a hard time in post-COVID China.

Yet some of the Japanese businesses operating in major inland cities are successfully maintaining their performance by tapping into the market for Chinese companies.

While more and more Japanese firms in coastal China have seen their performance deteriorate for the past one to two years, the relative advantage of those operating in inland China is beginning to attract attention.

Unlike those in costal China, these Japanese firms often partner with Chinese companies because Japanese potential partners are hard to find in inland China.

They take advantage of the support of their Chinese partners to cultivate new customers and liaise and negotiate with government officials. This is supporting their favorable business performance.

3. Challenges for Japanese firms setting their eyes on inland China

Although inland China offers ample business opportunities, competition in the Chinese domestic market is fierce. Without strenuous effort, it is difficult to survive there.

What matters is not only competitive technologies and services but also a marketing strategy that accurately assesses the needs of the Chinese domestic market and fully satisfies various customer needs.

The term “inland China” may be too general. The region is characterized by large inter-regional gaps among the major cities such as Wuhan, Chongqing, Chengdu, and Xi’an in terms of industrial structure and consumer characteristics; among Northeast China, North China, Central China, and South China; and among the provinces.

Inland China is also characterized by rapid changes in market needs associated with rising income as the region is experiencing relatively high economic growth.

To appropriately tap into this complex and diverse market, marketing strategy experts who are well-versed in market trends in every part of the region are essential.

Because most Japanese businesses have to date concentrated on coastal China, excellent inhouse China experts are often well-informed about the coastal market.

Many of the Japanese firms operating in China have depended heavily on sales to Japanese corporate customers. They often lack the talent with the marketing capabilities needed to tap into the inland market.

Therefore, if Japanese firms are to seize inland market opportunities, it is imperative to deliver the four actions described below.

The first action is for company presidents themselves to visit inland China often. Their mere words that stress the importance of focusing on inland China will not drive their companies.

Visiting there only once or twice a year is inadequate. An annual on-site inspection that lasts for a few days will be insufficient if they want to “feel” market needs.

Company presidents should go to inland China regularly – at least several times a year. As long as they keep saying that they are too preoccupied with other duties as a company president to do so, they cannot possibly tap into inland market opportunities.

The second action is to set out a policy of focusing on the inland market as a basic strategy for China business.

That requires rethinking on how to manage operating bases in inland China and securing talent who excels in marketing in the inland region.

Since inland China lags behind coastal China, Japanese businesses still harbor the impression that inland China remains underdeveloped.

If you visit there, however, you will notice that infrastructure and shopping centers that are just as good as those in the coastal region are being constructed one after another.

The first thing to do is to put a structure in place that can accurately assess the diverse and rapidly changing needs of the inland market.

The third action is to promptly put the above-mentioned policy into practice.

In order to sit down and work on marketing in inland China, it is necessary to assign talent to bases there.

These days, many Japanese businesses tend to bring back their local representatives from such bases.

In parallel with this move, their hitherto independent operating bases in inland China are often downgraded to the status of a branch office to their operating base in coastal China.

It is often that case that the work that was previously done by local representatives comes to be managed remotely by existing local representatives at such coastal bases in Shanghai and other cities, without additional staff being assigned to that task. Because of the additional workload, such existing representatives at coastal bases often manage operations in inland China only when they have time to do so.

In fact, I hear that many Japanese firms send their employees from the coastal to inland regions only once or twice a year. If that is the case, there is no way of knowing what is going on in the Chinese inland market.

Japanese businesses in China should preferably assign permanent representatives to their inland bases. When that is difficult, they should make personnel arrangements that allow the same staff members to stay in selected inland cities for several days every month for at least several years.

Such staff members do not necessarily have to be Japanese.

The fourth action is to set up a joint venture or forge a partnership with a Chinese company in order to capitalize both on its capacity to negotiate with Chinese government officials and on its market development capabilities.

Of extreme importance is identifying such a Chinese company.

Chinese companies are legion and diverse. On top of that, those that are well-versed in the inland market are few among Chinese business partners of Japanese businesses that focus on coastal China.

Accordingly, even local representatives of Japanese firms have little idea of which Chinese businesses are blue-chip companies.

Asking Japanese or foreign consulting firms to find such a reliable business partner is of little help because they have few veteran consultants who are well-versed in the inland market.

4. Why lobbying matters

If a Japanese business finds itself in such a difficult position, it should resort to lobbying to tap into the Chinese inland market.

A Japanese business that wants to find a joint venture or otherwise partner may want to consult with the local government that has jurisdiction over the area where its operations are based. But that local government has information on that area only. So prospective partners are limited in number.

If a Japanese company is to find such a business partner among those across China that will help sell its products there, it should gather information in liaison and negotiation with relevant departments of the central government rather than the local government.

However, if the local government has an official who has extensive personal contacts, he or she may offer strong support.

The Chinese government wants to lure investment from blue-chip foreign companies. So, it has an incentive to introduce dependable Chinese firms to these foreign companies and encourage them to set up joint ventures or forge partnerships with Chinese firms.

Vast experience in liaising and negotiating with government officials is important for effective lobbying; it is instrumental in building personal networks – and facilitating the exchange of views – with relevant government departments.

Even if Japanese firms have excellent Chinese employees, these employees rarely excel in liaising and negotiating with government officials.

For this reason, a foolproof approach is to ask for support from lobbying experts.

Experts who do lobbying are called lobbyists. Lobbyists to turn to for help should preferably not only be highly trusted by the government but also maintain permanent personal networks with many relevant government departments.

Japanese companies face diverse challenges in China. How to tap into the inland market is one of them. Which government department to contact and consult with varies depending on the project in question.

Lobbyists who handle projects in a limited number of fields have difficulty in developing their capacity as a lobbyist because they cannot accumulate various experiences in liaising and negotiating with government officials.

Dependable lobbyists are few. Naturally, a rather handsome remuneration must be paid for their services.

The annual lobbying cost for a company in the United States reportedly amounts to several hundred million yen to several billion yen. Paying such a high cost alone may not bring about favorable results.

However, sporadic and short-term lobbying to cut down the costs will lose trust from the government and thus diminish the chances of success.

It is important to use dependable lobbyists and sit down and make long-term efforts to build favorable relationships with relevant government departments.

From the mid-1990s onward, the Japanese government significantly tightened regulations on contacts between government officials and private enterprises. As a result, Japanese companies have all but abandoned the practice of liaising and negotiating with government officials in Japan.

Consequently, Japanese businesses as a whole are now less aware of the significance of lobbying.

However, that significance is well recognized in other major economies such as the US, Europe, China, and South Korea.

Lobbying is important for supporting not only business expansion into inland China but also China business and global business.

The unwillingness to pay these costs needed can bring about huge losses by selecting the wrong business partner (for a joint venture or otherwise) or by incorrectly assessing government policy intentions.

Sparing no cost in gathering information and liaising and negotiating with government officials is an important issue for Japanese businesses aspiring to expand their business globally.