First-Tier Suburbs: the Unspoiled Land with Great Economic Potential

20/02/2019

A journey within the suburbs of China’s largest first-tier cities. An unexplored and unspoiled land, which revealed to be a significant market opportunity

 

Tian Feng was born and raised in Beijing, his home is located beyond the capital’s sixth ring, in Fangshan district, southwest of the city. Working in Chaoyang, Sishiqiao area, he takes about two and a half hours of public transportation just to get to work.

“Of course I have a car, but the office is more than 31 miles away, not to mention the traffic and tolls to be paid. The metro is much more comfortable,” says the 28-year-old boy.

His parents live in Beijing as well but on the opposite side of town. “I go to visit my parents once a month because the round trip takes just over six hours.” This year, on the occasion of the Chinese New Year, Tian Feng has once again embarked on his personal “journey” to celebrate with the parents.

 

First-tier suburbs - beijing - guomao district - cifnews

© ZhangKai. Beijing, Guomao area. While consumption slows down in first-tier cities like Beijing, second tiers like Xi’an will drive China’s consumption in the future.

 

Beijing is certainly one of the most famous cities in the world. The Chinese capital is a true living contradiction that bewitches anyone who comes to this town. Tian Feng shares his everyday life with many other young millennials who live in Beijing, a first tier whose population is almost the same as Australia’s and whose GDP has reached over 446 billion dollars.

Today, many young people prefer to buy a house in the areas located beyond the fifth ring of the city. Among these, the Fangshan is the cheapest district, followed by the Tongzhou district, in the eastern suburbs of Beijing. A choice these young Chinese make out of necessity.

Tian Feng and other millennials will represent the Dragon’s middle class in the near future but today, their income, despite living in Beijing, is comparable to that of citizens with a relatively low wage level living in lower-tier cities.

 

First-tier suburbs - beijing house price map - cifnews

© TMPost. A map of house prices in Beijing. Located on the outskirts of town, Tongzhou and Fangshan are the least expensive districts.

 

Can we speak of lower-tier cities within first-tier ones, then? The answer is yes.

This is the economic reality of a great metropolis, home to a diverse economic landscape, which is tangible but unknown to most people. Indeed, the Chinese government is also focusing on the development of suburbs to boost domestic demand, which drives the country’s consumption.

Fengshan does not even look like Beijing at all. Many modern buildings make it looks like these big districts do not belong to the capital. “The Emperor is far away,” jokes Tian Feng referring to Beijing’s suburbs beyond the fifth ring, where Mobike or Ofo bikes are rarely seen and where there is no trace of the trendy cafès of Sanlitun, Chaoyang or Guomao. The futuristic skyscrapers of Zhongguancun, the capital’s “Silicon Valley”, seem far away too.

Even if these suburbs are located in Beijing, watching around, the streets and neighborhoods look more like those in Tier 3 or Tier 4 cities. Although the fact that such a mega city could be home to various economic situations is not surprising, it is interesting how these economic realities can coexist within the same municipality reflecting also a different way of doing business in a city where e-commerce is king.

People living in Fengshan, Tongzhou or Daxing have the same purchasing power of people living in Yantai, Shandong province, or in Xiamen, Fujian province. As well as in other lower-tier cities across the country, here, e-commerce platforms such as Pinduoduo, Kuaishou, and Qudia – under the acronym PKQ – are the protagonists.

“Since this year, I started to see Pinduoduo ads near my home,” says Tian Feng. Pinduoduo actually overtook JD in lower-tiers’ online sales. The reasons why this platform succeeded are many, including, in particular, geo-tagged marketing, which is a strategy already used by Weibo to advertise certain contents. The concept is simple, the platform can decide where to make a specific advertising campaign visible even in individual neighborhoods, according to the target’s location.

 

Second-tier cities are the backbone of the Chinese economy. In the not-so-distant future, more than half of the rich Chinese will live in second-tier cities, which are now considered “first-class opportunities” by both Chinese and foreign investors.

 

The People’s Republic is not always easy to approach, “true” China is much richer and heterogeneous than the average Western traveler might expect.

But which is the country’s main driver of change?

According to the “2019-2020 Internet Trends Report – 2019-2020 中国 互联网 趋势 报告” released by Tencent‘s Penguin Intelligence think tank in January, millennials from the age of 20 to 30 are the most active users in the Dragon’s web universe, a number which is bound to grow steadily especially in second and third-tier cities where the high percentage of goods and services’ purchase is driving the country’s economic growth.

 

First-tier-suburbs - internet trends - tencent penguin - cifnews

© Penguin.com. “2019-2020 中国 互联网 趋势 报告 – Internet Trends Report 2019-2020”.

 

These emerging metropolia represent the future of China’s market and, at the same time, they also represent an opportunity for many entrepreneurs who intend to enter new potential markets. As a result, cities such as Xiamen or Shenyang in Liaoning province have become the backbone of the second-tier cities’ development race, which have now nothing to envy to major urban centers.

 

The market of big cities’ suburbs is still mostly unexplored and therefore, it offers a large room for growth. Especially for PKQ, which represent the main e-commerce platforms in the area.

 

As mentioned above, the central government supports the development of suburbs. According to a recent document issued by the Chinese Ministry of Industry – 进一步 优化 供给 推动 消费 平稳 增长 促进 形成 强大 国内 的 的 方案 (2019 年) – the Council of State is actively promoting the development of lower-tier cities to boost domestic consumption. In addition, within the document, there is a chapter entirely dedicated to the large peripheral areas of Tier 1 cities, a sign that Beijing analysts equate suburbs with lower tiers.

According to statistics, the main Chinese first tiers’ outlying districts, such as those of Shanghai, Beijing or Guangzhou, have the same development rate and the same purchasing power as lower-tier cities.

Moreover, as well as in Tier 2 or Tier 3 cities, here e-commerce meets consumer demand, even if with substantial differences. If the Tier 1 city center represents the domain of the duopoly Alibaba/JD, platforms like Pinduoduo rule the suburbs.

 

Today, about one billion people represent the great driving force behind China’s domestic demand.

 

State analysts believe the expansion of domestic demand must follow two paths, the increase in both the investments and consumption. The recent number of sales for the Spring Festival confirmed that third and fourth-tier cities are becoming more and more the backbone of Chinese consumption.

For what concerns the “consumption power”, the figures show that Guangdong, Zhejiang, Jiangsu, Shangdong, Fujian, and other coastal provinces are among the top areas for sales on Tmall.

 

First-tier-suburbs - consumption in lower tier cities - cifnews

© TalkingData. Consumption in the lower tiers is rising. Today, over 50% of consumption in China takes place in lower-end cities.

 

For what concerns urban dimensions, instead, the growth rate of New Year’s consumption in Tier 3 and 4 cities reached 55%, exceeding that of Tier 1 (51%) and Tier 2 (54%) cities. Even fifth tiers have shown an interesting increase in consumption of 53%.

Furthermore, with regard to sales orders, third-tier cities recorded the highest growth, even exceeding second-tier ones. During the Chinese New Year, urban centers such as Baoding, Langfang, and Yancheng experienced an increase in consumption, especially in the cross-border e-commerce sector. A sign of how digitalization and online market are growing year after year.

 

Shi Yuzhu, economist and entrepreneur, said: “the Chinese market is like a pyramid, the peak is only a small part of it, the great potential is at the base”.

 

E-commerce and targeted policies to support the middle class have certainly broadened the demand for domestic consumption. Actually, Chinese lower tiers serve as an important outlet for overseas products entering the Celestial Empire.

However, although they definitely represent a good alternative to the saturated markets of first tiers, these realities also create room for growth, namely their suburbs. Indeed, China’s economic growth will depend even more on that slice of population living “beyond the sixth ring” in the future, as well as on Tier 3 and Tier 4 cities.

Today, the battle for e-commerce dominance in these areas is not over yet, but platforms such as Pinduoduo or Kuaishou seem to be two steps ahead of giants like Alibaba, which is more interested in first-tier cities and foreign markets like the South East Asian one.

Chinese big cities’ suburbs are finally emerging as an unexplored and unspoiled land full of opportunities.

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