A common mistake made by foreign companies entering China is to approach the Country of the Dragon as a single and unified market. In reality, the Chinese market is huge and extremely diverse.
To give an example, the city of Shanghai alone has a population equal to that of Australia (about 26 million people) and a GDP that equals that of the Philippines (469 billion dollars). At the same time, there are much smaller and less known cities, with extremely different economic and social dynamics.
Thus a tiered system was created for Chinese cities.
This system classifies the 613 cities in China into 4 or 5 different levels (with “1” being the highest and “4/5” the lowest) based on several factors that we will see below.
Understanding how these levels work and the opportunities that derive from them is of vital importance for foreign investors, since it allows you to have a much broader view of the different markets that exist within the country and therefore which strategies to implement.
In fact, potential consumers in China are not concentrated only in large cities such as Beijing, Shanghai, Shenzhen and Guangzhou but also in other areas. We are talking about the low-end cities where the vast majority of the most “lively” consumers are found, ie those who are experiencing significant growth in their income, purchasing power, product awareness and consumer behavior.
Note that there are no official lists based on this type of classification; in fact, the Chinese government does not publish or recognize this definition or a system of cities divided into levels. However, this subdivision is often used by the media and in the business world in general.
What are the parameters for classifying cities?
Not being an official division, there is no univocal version of how cities are classified by levels.
In 2017, Yicai Global , a financial magazine, published an unofficial 5-tier list of the most commercially attractive cities in the China. This ranking assessed the commercial attractiveness of 338 cities based on five factors: 1) concentration of commercial resources, 2) the extent to which a city serves as a commercial hub, 3) vitality of urban residents, 4) diversity of lifestyles , 5) future dynamism.
Another unofficial list published by South China Morning Post ranks 613 Chinese cities in 4 levels based on other parameters such as population size, GDP and administrative hierarchy.
As a general guideline we can say that the 1st tier cities are the largest and richest, often considered the megacities of China. As the levels advance, cities decrease in size, wealth and development. Currently, the only cities classified as Tier 1 are Beijing, Shanghai, Guangzhou and Shenzhen.
However, the tier system is not static, a city can move up or down the rankings as its development changes over time. There are many important and wealthy cities inland that have developed at a very fast pace in recent years (also supported by government economic development) an example is Chengdu, which is now a tier two city.
Now let’s see what the business opportunities are at the various levels.
Level 1 cities: the most developed (and most sought after)
When foreign investors are looking for potential markets to enter, Tier 1 cities often top the list.
These cities have large populations with high income levels. In addition to the huge size of the market, people living in these areas are generally more aware of the latest trends and foreign products present, as well as having the economic capacity to purchase them.
These cities are saturated with competitors and expensive to penetrate. Consumers here are more price sensitive, and your costs of getting noticed will be higher, so it’s not an easy challenge.
One way to approach the market is to focus on niche products or services that can meet a particular need or form partnerships with local businesses that already have a strong market presence. Do your homework well before jumping into this market.
Level 2 city: excellent choice for new brands
Although the cities of Level 1 have long been the target market for many companies, in recent years there has been a growing interest in Level 2 cities. This is due to several factors, including the lower costs of doing business in these locations, the steady growth in population income, central government-backed economic development plans and the opportunity for greater market share.
Consumers in Tier 2 cities are typically younger and more brand-conscious than those in Tier 1 or 3 cities. They are also more likely to work in industries that are experiencing high levels of growth, such as technology, finance and service sanitary. As a result, they have good disposable income and are willing to spend on premium products and services. Furthermore, foreign products are often seen as more attractive than local brands.
Although the overall cost of doing business in Tier 2 cities is lower than in Tier 1 cities, the costs of labor, land and rent are still relatively high. Furthermore, many of these cities are located in central or western China, which can pose challenges in terms of logistics and transportation, although many links have been improved to ensure the connection between these areas and the local and global supply chain.
In general, companies that are willing to invest in developing a market presence in Tier 2 cities can reap significant rewards. Of course, success depends on having a well thought out marketing strategy that takes into account the unique needs and preferences of consumers in these areas. But for companies willing to take on the challenge, Tier 2 cities can be extremely attractive investment destinations.
Level 3 and 4 cities: less developed, but with growth potential
In recent years, the Chinese economy has shifted its focus from first tier cities to second and third tier cities. This is partly due to the fact that tier one cities are increasingly saturated, both in terms of population and economic activity. Conversely, tier two and three cities offer more room for growth and investment. Furthermore, many of these cities are located in strategic locations that make them suitable for future growth and in recent years the Chinese government has prioritized the development of these areas as part of its plan to promote balanced regional development.
Consumer habits in these cities are changing as incomes and the middle class rise (if you want to know more about the rise in the middle class, let’s talk about it here ). This represents an opportunity for companies to tap into this growing market not only by targeting consumers but also by contributing to the development of the region.
These areas are still under development, so making predictions about how the market will evolve is extremely difficult.
But for companies that are willing to take these risks, there is significant growth potential.
Do you want to promote your brand in China but don’t know which strategy to implement? Contact us for advice, we will build the perfect project for you!