DESIGN AND THE CHINESE CONSUMER: TOWARD A FUSION FUTURE

Jeff Yang, VP, Consumer Strategist, Global View

Client
Kohler Co.
Nona Beining

Business Issue
● Kohler is going into design review with Herb Kohler on the 16th. They are exploring global design in China, India, Russia, and Middle
East. This call is meant to be an introduction to Global Advisory.

● We've already forwarded folders of observations on design for each region. For this call we'll focus on China and provide them a global
advisory call experience.

Objectives | Key Findings | Insight 1 | Insight 2 | Insight 3 | Insight 4 | Macrotrends

OBJECTIVES MACROTRENDS AND VALUES

Kohler is interested in how important heritage is to Chinese consumers when it comes to
design.

● Do they want Chinese heritage inspired design?

Cultural FusionSM
● Do they want American inspired design? Other regions of inspiration? Other elements of
design that appeal to Chinese that we should make them aware of?

KEY FINDINGS
Proactive interest in experiencing
● The definition of home is changing in China, even as homeownership has increased.
multiple cultures and new cultural hybrids
More and more consumers are seeing home furnishings and decor as a marker of
grounded in popular and consumer
identity and a palette of status — yet there's less and less space for them to do so in
culture.
urban settings. Historically overlooked as "private rooms," bathrooms and kitchens now
VALUES
offer tremendous new opportunities for such consumers to express themselves.
identity,
authenticity,
● Nostalgia and identity are huge driving values for Chinese consumers. Updating and
style,
innovating around folkloric themes, elements of cultural heritage (both from recent and
change,
ancient history) and traditional symbols can be a powerful way of catering to consumers’
pride
desire to bridge China’s past and future, while playing to their deepening sense of
cultural pride

● Western brands must nevertheless take advantage of resurgent interest in Chinese

cultural identity with care: Numerous companies have run afoul by accidentally placing a
Chinese signifier — an architectural monument, a historical figure, a symbolic animal — Memory

in a subordinated, embarrassing or negative situation. MarketingSM

● The surest route? Investing in and partnering with local talent.

Using history as an active resource to
Insight 1 take a nostalgic trip through time,
recycling the stuff of our collective past.
China's Urban Boom and the Rise in Homeownership VALUES
China is experiencing the most rapid urbanization of any country, with 45% of its citizens nostalgia,
living in urban areas, a figure that has risen 10% in the last decade. heritage,
tradition,
● The cities are also absorbing millions of rural workers, who are coming to the cities to belonging,
settle down or to earn more money. The rapid influx has caused housing prices to rise identity
and puts enormous pressure on public infrastructure.

● In parallel to this rural-to-urban shift has been soaring private home ownership. Given
 the lack of space in city environments, newlyweds are breaking away from tradition and
setting up separate households. This is a monumental cultural change in China, as the
ideal of “home” is shifting from a shared place of extended family, to a private oasis of
luxury and personal pride.

● Home mortgages are still a new concept, having been launched in 2001; they were an
important part of the rapid privatization of government subsidized housing. By 2003,
roughly 80% of families in Shanghai, for example, owned their homes, and almost all
homes were out of government hands. Mortgage lending rose at an annual rate of
115% between 1998 and 2004, and by 2004, 90% of consumer loans representing well
over $218 billion were in the form of mortgages.

Housing privatization has had two major effects on the consumer market.

● First, when people own their homes they possess tangible wealth. Economists have long
known that the tradeoff between spending and saving is influenced by consumer
perception of wealth. The greater the wealth, the less need to save. Moreover, housing
prices have been rising. Thus, there are now millions of Chinese with considerable wealth
and the expectation of rising wealth. This has stimulated more consumer spending, and
it should also stimulate Chinese consumers to tap into their considerable financial
savings for large purchases. (Chinese households still save over 50% of their income on
average.)
● Second, when people own their homes they tend to spend more on their homes. This
means decorating, fixtures, and other forms of home improvement. This is the primary
reason for the accelerated investment in China by foreign home related retailers such as
Ikea, Kingfisher, and Home Depot.
● When Chinese purchase a new flat in a high rise building, they are essentially purchasing
rooms that are no more than empty concrete boxes. Everything else must be added by
the owner including plumbing, electrical wiring, shades and curtains, bathroom and
kitchen fixtures and appliances, and flooring. It's a blank canvas — and middle class
and affluent consumers are taking advantage of it. Meanwhile, given the limited space
in urban dwellings relative to traditional homes, consumers are looking to new rooms for
self-expression and the enshrining of status: The bathroom and kitchen, both of which in
traditional homes were "private rooms" that were kept entirely separated from social
areas and thus hardly treated as showcases.

Some consumer trends that have come out of the rise of private homeownership:

● An increased interest in displaying economic success and cultural refinement through

home decor. As in the West, kitchen appliances and electronic entertainment are
increasingly used as displays of status.
● Large circulation home decor magazines are encouraging people to furnish their homes
with more upscale and sophisticated cultural tastes.
● Growing preference for expensive luxury furniture and fixtures, despite their expense
vis-à -vis salaries.
At the same time, the intersection of urbanization, aspiration and the changing nature of
family in China have all contributed to a radical redefinition of “home.”

● In urban areas, where the bulk of the middle class resides, apartment living is universal.
The typical home in China features a small kitchen, one to two bedrooms, one
bathroom, a living/dining room combination, and a big balcony.
● The typical urban household of three has on average between 1000 and 1200 square
feet of living space.
● Private outdoor space does not exist, though blocks of towers tend to have shared
courtyards and play areas. White-collar professionals are gravitating to skyscrapers
offering luxurious amenities, such as playrooms and even preschools or private daycare
for children.
● Because both parents usually work outside the home, they usually turn to grandparents
to take care of kids — but due to space constraints, the old "multigenerational"
household is increasingly rare. Instead, a child’s life is divided between her parents and
her grandparents’ home, usually a “cup of soup” away.

Insight 2

China and the West: Ambivalent Aspiration

I have heard about Paris for so long that when you say luxury, I think of Paris fashion and
dessert.
– Cynthia, 23, female, Shanghai, executive assistant
Cosmetics products from France are very good, expensive and 100% natural.
– Kiki, 27, female, Shanghai, boutique sales

I think most people will associate France with luxury because it is just so classic. I think
they have the techniques to design great brands.
– Jay, 24, male, Nanjing, travel agent

To be honest, I’m not sure how many luxury brands are actually made in their own
countries. A lot of them are made in China but why do we still have to pay much more
compared to the consumers overseas?
– Winnie, 23, female, Shanghai, HR representative

When I think of things made in China, I associate a lack of delicacy, customization, and
good after-sales service.
– Sophie, 22, female, Shanghai, PR

Chinese brands don’t sell their best quality goods to Chinese. Contrary to the Japanese, we
send our best goods to other countries, and the left-overs and poor quality items are left
here to be sold.
– Cynthia, 23, female, Shanghai, executive assistant

I don’t know of any but I don’t think I would buy it anyway. A luxury brand needs time to
prove its value. What’s more, I believe western brands have better design.
– Lena, 25, female, Shanghai, computer programmer

It’s undeniable that China covets certain traits of its developed-world peers: wealth,
power, respect (fear, if necessary) and recognition as a global leader. But they don’t want
to bow to Western expectations or be forced to embrace Western values — and in fact
many Chinese remain strongly xenophobic.

● Indeed, while the Chinese pay lip service to some Western political ideas (democracy,
free speech), they do not define them the same way. The West misread the Tiananmen
protests as a budding “American Revolution,” but rather than overthrowing the
government, they were seeking to engage with it to purge the things they felt were
ruining the Party.

● Where design is concerned, China aspires to Western brands because they have a
legacy that conveys status and quality — and legacy is something that Chinese
consumers deeply respect. But they do not aspire to them because they are Western!

● The Chinese would like their domestic products to reach the same quality and status of
Western goods, which would allow them to switch their allegiance to the “home team.”

● Already, in many commodity areas that are not perceived as threatened by consumer
safety concerns (as are foods, medicines, etc.), pride in the nation’s accomplishments
compel many consumers to prefer local brands, all other things being equal.

Ultimately, the truth is that Chinese consumers have mixed attitudes toward brands.

● When it comes to luxury products or products for which quality is perceived as highly
important, consumers are highly brand-conscious. Luxury brands are sought after when
purchasing apparel, footwear, jewelry, or cosmetics.

● When purchasing home-related products, brands are important as well. Chinese

consumers prefer to spend more on a known brand name for such products as kitchen
and bathroom fixtures, appliances, housewares, and furniture. All of these are products
that may be seen by others — thus, the status of the brand is critical in those purchases.

● On the other hand, for many packaged goods that have commodity-like appeal, and
which friends and neighbors are not likely to see, brands hardly matter.

Insight 3

Hybrid Vigor: Toward a "Glocally" Optimized Future

Where design-focused brands are concerned, the emerging ideal is a blend between
traditional (Chinese) and contemporary (Western) semiotic cues, across all categories,
driven by both nostalgia and identity, as demonstrated by Chinese brands that are
succeeding in the market:
● Shanghai Jahwa has re-launched a high-end beauty brand (Jing Daily, 08.24.10) that was
very popular in the Shanghai of the 30s, Shuang Mei — under the name Shanghai Vive.
With very Art Deco packaging, the brand store is located in the famous Peace Hotel,
which just reopened its doors. Besides beauty products, one also finds there jewelry and
accessories, helping establish it as a true "lifestyle" brand evocative of Shanghai and its
jazz-era status as "the Paris of Asia." This brand provides a luxury step-up point for
Shanghai Jahwa’s portfolio, anchored by Herborist, a masstige personal care brand that
puts TCM ingredients in Western formulations and packaging, which saw its sales rise by
60% in 2009). (http://www.shanghaivive.com.cn/english/)

● The LAYEFE store, located in Shanghai's upmarket Xintiandi district, has created a space
where people can buy products that are entirely Asian: hand-embroidered bed linen,
glassware, vases, lacquered wooden trays and fine porcelain from Jingdezhen, in Jiangxi
province. Owner Chen Yifei believes that China's expanding ranks of young, middle-class
home owners are ready to start filling their homes with stylish furnishings and are
seeking a distinctly Chinese "lifestyle" brand that embodies mainland sensibilities
presented with contemporary flourishes. To foster this kind of cultural cross-
pollination, Chen is planning together with Stanley & Partners to build a creativity center
which will be over 20,000 square meters in size, housing art and design workshops, a
cinema, an exhibition space and other creative amenities.

● First Auto Works, a long time provider of official Party cars in China, recently
announced a relaunch of the famous Red Flag limousines as a prestige brand in their
range. In the Fifties, the Red Flag cars were Chinese copies of official Russian
limousines. Now, they present a unique opportunity for China to establish an upscale
luxury marque that owes its legacy not to the West but to its own history and heritage,
while jumping on the recent surge in Revolutionary Era nostalgia (for example, the hot
theme nightclub Red Capital, http://www.redcapitalclub.com.cn/RedCapital.html)

Insight 4

What This Means to Kohler

● Nostalgia is a huge driving force for Chinese consumers. Post-‘80s parents are nostalgic
for the innocence and simple pleasures of their childhoods; their parents (today’s
grandparents), growing up in times of chaos, are nostalgic by proxy for things they
never had. Updating and innovating around folkloric themes, elements of cultural
heritage (both from recent and ancient history) and traditional symbols is a powerful
way of catering to consumers’ desire to bridge China’s past and future.

● Yet beyond mere nostalgia, there's a potent nationalistic desire to reflect, represent and
celebrate Chinese identity in the present tense, by taking intrinsically Chinese concepts
and phenomena and building them into modern consumer lifestyles.

● While Western brands can't draw from the consumer value of nostalgia, they do have the
ability to take advantage of resurgent interest in Chinese cultural identity — but this
must be done with care, deep cultural sensitivity and real engagement.

● Numerous companies have run afoul by accidentally placing a Chinese signifier — an

architectural monument, a historical figure, a symbolic animal — in a subordinated,
embarrassing or negative situation. This has been particularly problematic when such an
image has appeared in an ad from a country seen as one of China’s direct or historical
rivals, e.g., America or Japan. A few years ago, Toyota ran a magazine ad in which
stone lions were depicted bowing to a Toyota Prado as it drove past, with the copy
stating: “Prado. You have to respect it.” Because stone lions are such a potent cultural
symbol, Toyota and the magazine were both driven to make an official public apology to
China.

● The best route? Investing in and partnering with local talent. China’s design
communities are expanding and increasingly drawing international attention, and local
efforts in fine arts, architecture and industrial design are at the forefront of the campaign
to integrate the country’s cultural heritage into its modernization efforts.

● And the pool of talent is surging: In just the past few years, there's been an increase in
design schools in China from 0 to 450, while design spaces like Factory 789, formerly an
East German military factory in Beijing, and Shanghai 1933, a one-time slaughterhouse
turned gallery, exhibit and performance space, have proliferated. The buzzword: Turning
the “Made in China” image to a “Designed in China” reality.
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