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January 2015  1

US Exports to China

January 2015

Top 13 Industries Benefiting from China’s Urbanization By Danielle Goodman

City living has led to significant lifestyle shifts such as more on-the-go eating and spending on healthcare and entertainment. China sees urbanization as a way to boost the domestic economy through increased consumption rather than trade

As China’s population continues its rapid migration from rural areas to urban environments, consumption trends in the country have been shifting rapidly. Rising urbanization has led to particularly strong demand in China’s construction and real estate sectors, as more housing and commercial structures are being built in first, second and third-tier cities. This increased city living has brought on significant shifts in lifestyle, such as more on-the-go eating as well as increased spending on healthcare and entertainment. China’s urbanization rate increased from 10.6% in 1949 to 53.7% in 2013. According to the country’s recently released urbanization plan, the goal is to attain a 60.0% urbanization rate by 2020. China sees urbanization as a way to raise incomes and living standards for rural residents as well as boost the domestic economy through increased consumption rather than trade. So far, the plan seems to be working. Most Chinese consumers have experienced an improvement in living standards over the past five years. In the five years to 2013, per capita income in China grew at an average annual rate of 10.2%, causing an increase in China’s middle class. In Shanghai, one of China’s richest cities, the average annual income is estimated to be slightly above

$20,000, according to World Bank data, putting the city on par with some US cities, such as Detroit. IBISWorld has developed a list of Chinese industries that are expected to perform particularly well in this new phase of Chinese urbanization. These include industries in the food production, retail, entertainment, and healthcare and fitness sectors. Food Production China is changing rapidly, and so are the country’s tastes. As China gradually evolves into a consumer society, new food products, including chocolate, candy and bakery products, are appearing with increasing regularity. Rising average annual incomes increased exposure to Western and international cuisines, and a greater array of goods in supermarkets are all working together to increase sales of snack foods. As a result, revenue for the Chocolate and Candy Production industry in China is estimated to grow 13.3% to $23.9 billion in 2015. Moreover, revenue for China’s Bread and Bakery Product Manufacturing industry is set to rise 16.1% to total $17.2 billion. The faster pace of modern, urban life is also leading Chinese citizens to opt for quick food options such as frozen and

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canned food. Increased working hours and busier lifestyles are driving high growth in the Frozen Food Production and Canned Food Production industries, to the tune of 14.1% and 10.9%, respectively, in 2015. Retail The urbanization movement in China has led to large increases in demand for urban infrastructure, including utilities such as internet services and mobile networks. According to the China Internet Network Information Center (CNNIC), the number of internet users in China totaled 591.0 million in June 2013, ranking the country first in the world. In the first half of 2014, there were 632.0 million internet users, representing about 46.0% of the whole population. The rapid development of the Internet Services industry in China has caused internet-related retail industries such as the Online Shopping industry to flourish. Over the past five years, the Online Shopping industry in China grew 55.2% annually to $414.8 billion in 2014.

Although the Online Shopping industry is still immature, customer confidence is high and there is large potential for continued growth. In 2012, only 42.9% of internet users made purchases online, but by the first half of 2014, online shoppers accounted for 52.5% of total internet users. Some of the most popular products being sold online are internet-reliant, such as consumer electronics. In particular, smart phone and computer tablet manufacturers in China are enjoying phenomenal growth in domestic sales. In 2012, smart phone users in China reached 380.0 million, up 72.7% from the previous year. In 2013, the number of smart phone users topped an estimated 500.0 million. By the end of 2013, the domestic smartphone penetration rate was 55.0%. The Smart Phone Manufacturing industry in China is very export-focused, with 86.3% of revenue coming from foreign demand in 2014. However, in the past few years, exports and domestic demand have been growing at similar rates, indicating the rising importance of Chinese consumers to the

Top 13 Industries Benefiting from China’s Urbanization Industry

2014-2015 Growth Rate (%)

2015 Revenue ($billion) 540.2

Online Shopping

30.3

Cinemas

24.3

5.9

Smart Phone Manufacturing

20.1

82.7

Computer Tablet Manufacturing

15.9

36.3

Bread and Bakery Production

15.2

17.3

Frozen Food Production

14.1

15.8

Chocolate and Candy Production

13.3

23.9

Movie Production

12.9

5.9

Pharmacies and Drugstores

12.8

80.4

Pharmaceutical Manufacturing

11.4

120.2

Gym, Health and Fitness Clubs

11.2

5.1

Sports Equipment Manufacturing

11.1

27.9

Canned Food Production

10.9

30.2 SOURCE: IBISWORLD

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US Exports to China

industry. In 2015, domestic demand is set to grow 19.9% to $14.5 billion. Meanwhile, the relatively lower cost and portability of computer tablets (compared with personal computers) has been driving growth for manufacturers of those devices. In 2015, IBISWorld forecasts domestic demand for the Computer Tablet Manufacturing industry will grow 14.6% to $14.7 billion. Entertainment In addition to faster-paced, on-the-go urban lifestyles, the main drivers of retail sales for products like smart phones and computer tablets are increased leisure time and demand for entertainment. China’s Movie Production and Cinemas industries also benefit from these trends. Chinese films have become very popular and now account for almost two-thirds of total movie ticket values in China. The domestic production of feature films for the Chinese market has been growing strongly from 558 films in 2009 to an estimated 1,110 in 2014. Although still small, the Movie Production industry grew 27.4% annually over the past five years to $5.2 billion in 2014. In 2015, it is set to grow 12.9%. Despite the rising price of movie tickets, especially in urban centers, visiting the cinema is an inexpensive form of entertainment compared with other leisure activities, such as visiting theme parks. This makes going to the movies a very popular pastime in China. Additionally, as more cinema chains are established, especially in China’s second, third, and fourth-tier cities, the number of moviegoers is expected to grow strongly. In 2015, IBISWorld forecasts the Cinemas industry will grow 24.3% to $5.9 billion. Healthcare and Fitness One negative side effect of urbanization in China has been more sedentary lifestyles. As the requirement for physical

activity at work is falling, more modern and occupational diseases are beginning to affect the health of professionals. At the same time, rising incomes and increased leisure time have led to greater health consciousness among urban dwellers. These two trends have been fueling the development of China’s healthcare-related industries. The Gym, Health and Fitness Clubs industry in China has been developing rapidly in recent years. Fitness activities represent both a health and fashion trend, especially among China’s professional class. As a result, the industry grew 15.6% annually over the past five years. In 2015, it is set to grow 12.0% to $5.1 billion. In the upstream Sports Equipment Manufacturing industry, domestic demand is projected to grow 16.3% to $17.8 billion in 2015. Visits to hospitals and health clinics have also been on the rise, from 2.1 billion in 2010 to an estimated 2.7 billion in 2014. Increasing incomes, expanding medical insurance coverage and the development of the country’s healthcare infrastructure have made healthcare more affordable and accessible. In 2011, 472.9 million of urban citizens were insured with basic medical insurance, about 68.5%. IBISWorld estimates that the total reached 550.0 million in 2014. The healthcare system in China requires further reform, with long wait times for hospital appointments and very high and inconsistent pricing for drugs sold at hospitals. These challenges have benefited the competing Pharmacies and Drugstores industry, which retails drugs at lower prices and caters to the segment of the population who would rather self-medicate. Over the past five years, revenue for the Pharmacies and Drugstores industry rose at an annualized rate of 17.6% to $71.3 billion in 2014. Prescription drugs

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contributed almost half of industry revenue and over-the-counter drugs (OTC) about 40.0%. Although hospitals continue to be the main distribution channel for prescription and OTC drugs, upcoming healthcare reforms will enable drugstores to become the major distribution channel in the near future. In line with growth in the Pharmacies and Drugstores industry, IBISWorld forecasts strong performance in the upstream Pharmaceutical Manufacturing industry with anticipated growth of 11.4% to $120.2 billion in 2015.

Continued Growth The strong growth of industries in the food production, retail, entertainment and healthcare sectors is expected to continue over the next five years as China’s urbanization continues. However, while local Chinese businesses are seeking to meet China’s growing market, IBISWorld expects that US and other international operators with strong economies of scale that produce innovative products will gain increasing market share in these sectors and benefit from the country’s increasing consumption.

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