WSJ.com - Firms Advised to Court China's Nascent Middle Class May 31, 2006 <a href="/keyword/dow-jones-reprints/" ><a href="/keyword/dow-jones/" >dow jones</a> reprints</a> This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order <a href="/keyword/reprints-tool/" >reprints tool</a> at the bottom of any article or visit: www.djreprints.com. See a <a href="/keyword/sample-reprint/" >sample reprint</a> in PDF format. Order a reprint of this article now. Firms Advised to Court China's Nascent Middle Class By ANDREW BROWNE May 31, 2006; Page A4 HONG KONG -- Foreign companies focused on China's most affluent consumers should lower their sights, or risk missing a vast sales opportunity, according to U.S. consultancy McKinsey &amp; Co. Today's blue-collar workers in China, currently ignored by most multinational companies, are set to become the biggest single consumer force in the country as they climb the income ladder, McKinsey says in a research report that challenges some of the basic assumptions of foreign businesses in China. Relatively few foreign businesses selling in China have started wooing lower-income consumers. Among the most successful is Procter &amp; Gamble Co., which has created products designed and packaged for that market. Many other companies, however, remain focused solely on the most affluent group of consumers, largely in coastal cities. McKinsey argues that companies need to start courting lower-income workers now. Those workers, who are flooding into cities from the countryside, will soon start moving into the ranks of the lower middle classes, McKinsey predicts; the firm estimates that group will swell to 290 million people by 2011 -- roughly the size of the current U.S. population. As their wealth expands further, the firm estimates, these people will create a vast army of middle-class consumers, some 520 million by 2025 -- more than half of the urban population of China at that time. One optimistic assumption in the McKinsey study is that China will overcome the widening gap between rich and poor and create a thriving middle class, thus escaping the fate of many developing societies that consist of a large underclass of poor, a thin layer of super-rich, and a few middle-class people in between. Andrew Grant, managing director of McKinsey's Greater China business, which also includes Taiwan and Hong Kong, calls that assumption &quot;hard-headed optimism.&quot; He argues that the government understands the risk and is taking effective steps to address inequality. McKinsey says China's future middle-class consumers will look very different from those in the U.S. and other developed countries, where income peaks among people age 45 to 54. In China, the wealthiest members of the middle classes in the next few decades will be young: age 25 to 44, reflecting better educational opportunities that lead to higher-paying jobs. The firm defines lower middle class as families with annual household income of 25,000 yuan, or about $3,100, to 40,000 yuan, while the middle classes will earn 40,000 yuan to 100,000 yuan. The McKinsey report notes that 100,000 yuan in China buys a lifestyle similar to what an annual income of $40,000 gets in the U.S. The new middle classes will spend most heavily on health care, housing and utilities as well as recreation and leisure, the report estimates. Mr. Grant says that smart foreign companies will figure out ways to sell to the emerging lower middle classes &quot;or risk being sideswiped.&quot; That includes measures such as expanding beyond the wealthy coast to second-tier cities further inland; cutting product prices by, for instance, buying more locally; and creating brands for different segments of the market. It also means training more local Chinese managers instead of hiring ethnic Chinese from Hong Kong and Singapore, who now fill management positions at multinational firms' operations in Chinese coastal cities, Mr. Grant says. In the new world, foreign companies will make money on sales of mass consumer goods and services, rather than high-margin luxuries, Mr. Grant says. He adds that...