Quotes of the Day

If you're a CEO and you don't know Chen Xiangjian, you may be headed for early retirement. The soft-spoken, bespectacled 32-year-old from the Chinese city of Chongqing doesn't seem to realize the power he has, describing himself as "quite common." But Chen is one of the most sought-after people in the world, a man who can decide the fate of corporations, move stock markets and reshape the global economy.

One look inside his two-bedroom apartment shows just how he's doing this: with his wallet. Upwardly mobile and increasingly free-spending, Chen is the prototypical Chinese consumer, and he—along with hundreds of millions of others like him—are on a shopping spree that would once have seemed unimaginable. A Toshiba TV forms the centerpiece of his living room. Chen owns an LG DVD player, films his 1-year-old daughter Youyou on a Sony digital video recorder, chats on a Samsung camera phone, and surfs the Internet on a Sony laptop computer. Chen, who earns an annual salary of $4,800 working at a state-owned engineering firm, bought the apartment in 2002; last year, he took out a mortgage and invested $60,000 in a second, much larger four-bedroom pad, which he rents out for $300 a month. As part of his "10-year plan," he also wants to buy a car (he has his eye on a Ford), attend the 2008 Olympics in Beijing, and take his first vacations outside of China, to Washington, D.C. and the Maldives. But Chen holds even higher hopes for his daughter. "By the time she's my age," he predicts, "her life will be as good as the best in America."

Chen's isn't an impossible wish. Mainland China's economy is expanding so quickly that every year more and more Chinese can afford their own versions of the American Dream. They are already among the world's most influential shoppers. Each year, Chinese buy more TVs and mobile phones than Americans do; and Chinese consumption has helped push up global prices for oil and steel. But that's nothing compared with the binge still to come. Last year, Chinese consumers spent only 9% of what U.S. consumers spent—but they're rapidly catching up. Investment bank Credit Suisse First Boston (CSFB) forecasts that spending by Chinese will quintuple in the next 10 years to $3.7 trillion. China will be among the world's three fastest-growing markets over the next decade, says CSFB, in everything from PCs to cars to airplane tickets.

For many of the world's biggest companies, winning in China is becoming the difference between growth and stagnation, success and failure. Investment bank UBS estimates that at least 75% of the $260 billion of foreign direct investment that has poured into China over the past five years has been invested in businesses serving the mainland domestic market. Nokia predicts that a quarter of all new mobile-phone subscribers over the next five years will be Chinese, and by then, China will likely have overtaken the U.S. as the Finnish firm's biggest market. Martin Coles, president of international operations for Starbucks, says the coffee-shop chain has only 127 outlets in China out of its global total of 9,261—but notes that "long-term we see China as potentially our second largest market after the U.S." Nearly 30% of all new McDonald's opened this year will be in China. And General Motors expects China to overtake Japan as the world's second biggest car market next year. But the potential remains boundless. For example, only 8 out of every 1,000 driving-age Chinese currently own a car, compared with 940 per 1,000 in the U.S. "China is probably the most important market for the global industry," says Phil Murtaugh, who ran GM's China business for nine years before resigning in March. "If you don't take advantage, it's going to have a major impact on your corporate profile."

According to CSFB, Chinese consumption is likely to expand by 18% a year over the next decade, whereas the U.S. will see only 2% annual growth. Within 10 years, CSFB predicts, "Chinese consumers will likely have displaced U.S. consumers as the primary engine of global economic growth." That may sound ominous to China's economic rivals, but it isn't. In fact, this historic shift may prove to be the salvation of the global economy. With increasing urgency, economists have been warning that world trade is overly dependent upon U.S. consumer spending, which has accounted for 25% of world GDP growth since 1998. Debt-ridden Americans will eventually be forced to cut back—and when they put away their credit cards, economic growth globally will suffer, especially in U.S.-export-driven Asian economies. With U.S. trade and budget deficits at record levels, the high likelihood of a major adjustment in American consumption means that "Asia could be in serious trouble," says Stephen Roach, chief economist at Morgan Stanley.

Asia's consumers can help redress this imbalance by spending more—and China, the world's most populous country, can set the pace. Chinese consumers aren't nearly as rich as Americans yet, but they do have surplus cash. Urban households save about 23% of their earnings, compared with a near-zero savings rate in America. The U.S. has more millionaires than China does—2.27 million for the former compared with 236,000 for the latter—but the ranks in China are growing fast. CSFB estimates that mainland urban incomes doubled in the past nine years, and will likely rise another 46% over the next decade. By 2013, the bank predicts that 151 million urban families will earn more than $10,000 a year, up from only 3.8 million in 2003. "There is good potential for China to step into the breach and be a positive force for the world economy" by continuing to boost its consumption, says David Dollar, country director for the World Bank in Beijing.

Equally important, China's newfound wealth is seeping deeper and deeper into its vast hinterland. During much of China's economic boom, the modern shopping malls, flashy apartments and party-hearty lifestyles symbolic of New China were restricted mainly to pockets of nouveaux riches in a few major metropolises—Beijing, Shanghai and Guangzhou—and some special industrial zones along the coast, like Shenzhen. Cities like Chongqing in western China trailed far behind. But now the good times are coming to every corner of the country. In Chongqing, a city of 31 million people some 1,400 kilometers from the glitz of Shanghai, the main downtown shopping plaza boasts luxury outlets like Hugo Boss, Montblanc, Max Mara and Burberry. Couples munch French fries at KFC and McDonald's. French retailer Carrefour opened its third hypermarket in Chongqing in April, and Wal-Mart will open its first in July. "We can't even recognize this city," says Chen, the Chongqing engineering-firm employee. "You can feel how things are changing."

One sunny Sunday afternoon in Shanghai, Boston native P.T. Black sits uncomfortably on a dingy bed in a one-room apartment littered with empty Coke bottles and dirty plastic bags, attempting to stay one step ahead of that mesmerizing change. Black, 26, is what's called a "cool hunter," a marketing expert who is looking for "the Next Big Thing," he says. Today, Black, who works at Shanghai-based market-research firm Jigsaw International, is getting the scoop on what's hot and what's not from Li Chun, a 21-year-old NBA fanatic who lives in the tiny apartment. Li tells Black he got hooked on basketball in junior high school after watching a Japanese cartoon called Slam Dunk, and began playing every day "to show off in front of girls."

He often skips his job selling gold foil used in household products to watch Yao Ming and the Houston Rockets on TV. Any respectable basketballer, he explains to Black, wouldn't be caught dead in counterfeit sneakers—"I'd get laughed off the court"—and he'll scrimp and save to splurge on $90 Adidas shoes. What about soccer, Black asks? Li snickers—soccer is way down the cool food chain: "Soccer players can get maybe one girlfriend, basketball players can get three, but the hip-hop dancers can get, like, 10 girlfriends!"

That same week, Black, head shaved and collar turned up, exchanged notes on bands like the White Stripes and Fugazi with a Chinese punk-rock group in Beijing. Then he's off shopping with two teenage members of a break-dance troupe and their girlfriends at a Beijing indoor market crawling with teens and selling everything from fake Levis to Boston Celtics jerseys. The dancers become fascinated with one shop hawking T shirts featuring the rock group Kiss and the late Nirvana front man Kurt Cobain (which disturbingly read I HATE MYSELF AND I WANT TO DIE). "It's the new style," explains one member of this shopping expedition, 18-year-old Chang Lu, holding a Pink Panther shirt to her chest. "Relaxed, being yourself."

To Black, whose clients include several multinational companies that he declines to name, this is priceless intelligence. China remains an inscrutable and financially perilous mystery to most outsiders; understanding the local youth helps big companies keep their brands cool and their products selling. "Chinese consumers are developing in their own way and at a very high speed," says Black. "It's hard to keep track." Today's Chinese consumers have gone way beyond the stage when they were just happy to own their first TV. They want to be trendsetters, they're brand savvy, and they're increasingly clued in to what's happening outside their country. Only a few years ago, most Chinese were cut off from global pop culture by tight censorship and travel restrictions. But their sources of information have multiplied. About 94 million Chinese surf the Internet, up 18% in 2004. Chinese took nearly 29 million trips overseas in 2004, up 42% from the year before. Korean and Japanese rap videos are widely available on Chinese TV. DVDs of American TV shows like Friends (almost always pirated) are wildly popular and shaping the aspirations of China's youth. Young Chinese "want to relate to Friends," says 17-year-old high school student Gondolewa Gao. "They really believe that is how people live in America."

These increasingly cosmopolitan Chinese consumers have embraced an astonishing array of foreign influences. Today's A-list includes the pop star Madonna, the Sex Pistols, body piercing, video games, break dancing, baggy T shirts, and Japanese schoolgirl uniforms. Chinese consumers "are making up for 40 years of lost history," says Black. Think of it as a kind of Pop-Cultural Revolution. After decades of strict social control, many Chinese are using what they buy to assert their individuality. The biggest consumer trends today, says Black, are "independence of thought, independence of lifestyle, the taking of risks." This is especially true among young Chinese women. A study by public relations agency Hill & Knowlton revealed that one of the hottest items for twentysomething women is G-string underwear. Once taboo or entirely unavailable, the skimpy panties have since become the mark of an assertive, modern woman.

This burgeoning love of all things foreign presents an enormous opportunity—and competitive advantage—to big-name international brands. Another Hill & Knowlton study found that the top 12 coolest brands among Chinese kids were all foreign. Nike took the top spot, trailed by Sony and Adidas. Meanwhile, a survey by advertising agency Euro RSCG showed the brands growing fastest in popularity included South Korean electronics giant Samsung, Internet search engine Google, and Crest (yes, toothpaste). Multinationals are eager to play up their foreign credentials. In 2003, after years of running China-specific ad campaigns, McDonald's imported its global I'M LOVIN' IT ads, but added a local twist last month by releasing a Chinese hip-hop version of the theme song. Starbucks has transplanted its U.S.-style shops into China with only minor innovations—such as green tea Frappuccinos—to suit local tastes.

Few have proved more adept at tapping into the new aspirations of young Chinese than Ilan Sobel, Coca-Cola's general manager for marketing in China. "Chinese teens today are yearning for individual self-expression," says Sobel, who was born in South Africa. "The key is how to take that insight and work it into our advertising campaigns." Sobel is always looking for what he calls the "passion point" of modern Chinese youth. Last year, for example, Coke launched a new slogan in China—"Get Refreshed Your Own Way"—that connects directly to consumers' desire to assert their individuality. Sobel has hired spokespeople who are all seen as major trendsetters in China, such as pop group S.H.E., Will Pan (a VJ for music station Channel V) and Olympic gold-medal hurdler Liu Xiang. This year, Coke is plastering cybercafés with special ads featuring characters from a popular online video game, World of Warcraft, and is giving away 10,000 free trips to Hong Kong Disneyland in an attempt to appeal to mainlanders' new love of travel. "Understanding the consumer is paramount," Sobel says. "You need to win their hearts and souls."

Yet the China market can still be a heartbreaker that can try the hardiest of corporate souls. "Everyone thinks you've got 1.3 billion people and you sell $1 to everybody and you're O.K.," says Bill Patterson, Asia president for the U.S.-based Home Depot home-improvement chain. "But that is not a guarantee." Virgin territory it is not. Today's mainland market is something like capitalism on steroids: multinationals are not only fighting one another for customers but also large, increasingly savvy Chinese companies—like appliance maker Haier, PC manufacturer Lenovo and electronics outfit TCL—not to mention an army of small Chinese brands that often hold sway in only one town or province. China has 268 manufacturers of air-conditioners and 126 of refrigerators. Nokia estimates that 900 models of mobile phones are currently on sale in China; only 80 are available in the U.S. Fickle, trendy consumers in big cities like Shanghai sometimes replace their phones every three months—compared with the global average of about 18 months—forcing the major phonemakers to pump out new models as quickly as they can. Samsung offers an average of one new model per week in China. The heightened competition puts pressure on prices and profits, especially as local companies can often make their products much more cheaply than foreign rivals. Consulting firm Bain & Co. estimates that Chinese appliance makers have a 30% cost advantage even over foreign firms manufacturing in mainland factories. China "is a proving ground for international companies," says Colin Giles, a senior vice president at Nokia in Beijing. "Only the strong will survive."

Problems particular to China—such as rampant piracy—are forcing some big companies to overhaul the way they do business. Mark Horak, executive vice president of Warner Home Video, says Chinese buy 1 billion DVDs or VCDs of movies a year—95% of them pirated and sold for as little as $1. So, in November, Warner (which is owned by the parent company of TIME) began dropping prices of its DVDs in China to as low as $2.65 in the hope of wooing consumers away from pirated copies. "What we're trying to do is get the business off the street and into the stores," says Horak. Likewise, video-game designer Electronic Arts plans to offer its games in multiplayer, online versions in China as well as on CD-ROMs and cartridges for the first time ever. "You don't want to concede defeat, but you want to approach it creatively," says Jon Niermann, the company's Asia president.

But perhaps the biggest challenge now facing international companies is geography. Foreign brands are already well known primarily in the big three cities—Shanghai, Beijing and Guangzhou—where incomes are at an all-time high. But their future success will depend on how well they penetrate the country's less wealthy locales. Motorola hopes that its new $40 mobile phone will win consumers among lower-income Chinese; in December, Hewlett-Packard introduced a stripped-down PC (running the virtually obsolete DOS operating system, not Windows) priced as low as $320. "The company that has already started to establish a foothold in the next tier of cities is in a much better competitive position," says Adrian Koch, senior vice president of HP in Asia.

Samsung, however, learned the hard way how unrewarding it can be to venture into China's interior. In the 1990s, the Seoul-based company had sales offices throughout China. But Samsung found that Chinese in the hinterland didn't have enough income to buy their products. So, five years ago, the firm shut down its offices in smaller cities and focused entirely on Beijing, Shanghai and Guangzhou. The strategy worked—Samsung repositioned itself as a premium brand—and the company is tentatively expanding by reopening sales offices in select cities like Chengdu. "At first we thought we could sell to every Chinese," says Liu Ran, a marketing manager for Samsung in Beijing. "We learned a lot of lessons."

For Coke's Ilan Sobel, the fight for the Chinese consumer is "a 24-hour-a-day job." It's 9:15 a.m. one Thursday in April, and Sobel is already at a Century Mark supermarket in the eastern city of Hangzhou. At least twice a month, Sobel ventures from his Shanghai office—"the ivory tower," he calls it—and wanders through a different city to get a firsthand look at Coke's China business. He rearranges bottles of Coca-Cola and Minute Maid orange juice on shelves to perfectly align the labels, and snaps pictures of Coke's advertising displays with a camera phone. He tastes a sample of Vanilla Coke that a young Chinese woman clad in a bright-red Coca-Cola shirt and angel wings is offering to shoppers to ensure it's ice-cold. A few minutes later, he's walking the streets, peering into garbage cans to see what drink bottles have been tossed out and quizzing convenience-store clerks about how his new products are selling. Nearly every shop in the neighborhood is draped in Coke advertising, but even that's not enough for Sobel. He points across the road at a newspaper kiosk. "Can we do something with that?" he asks. "We need to make sure we are immersed in the consumer's world every single day." The future of the global economy may depend on it.

• Michael Schuman
• China's expanding Consumer Class will provide much-needed retail therapy for a global economy that's dangerously dependent on The U.S.