China’s Self-Described Losers Play a Winning Role

China’s Self-Described Losers Play a Winning Role

Consumer Underclass May be Where the Real Money Is

WEI GU 

Feb. 13, 2014 11:12 a.m. ET

Much has been made of China’s brand-conscious big spenders, but an underclass of consumers may be where the real money is for many businesses.

People who have embraced the label diaosi, a term that has come to essentially mean “loser,” are becoming a potent force in an economy where growth in sales of luxury goods is slowing and the middle class is still small and focused on basic needs such as housing and education.

Typically, diaosi are recent graduates who live comfortably with their parents and spend most of their free time and what little disposable income they have on the Internet—playing games, watching videos or shopping for deals.

The term originally referred only to young men with uninspiring looks, low income and limited prospects, but rising negative sentiment toward the rich has helped to increase the respectability of the diaosi brand.

Self-identification as diaosi appears to be strongest among 30- to 39-year-olds. In an online survey conducted by the Internet portal Sohu, 64%, 81% and 70% of people in their 20s, 30s and 40s, respectively, said the term applied to them.

The identity has become so popular that even the superrich—including technology entrepreneur Shi Yuzhu, former chief executive of online game developer Giant Interactive GroupGA +0.45% and Zhou Hongyi, co-founder of Internet security firm Qihoo 360 Technology Co.—have publicly referred to themselves diaosi.

Chinese are increasingly self-identifying as diaosi, which roughly means “loser,” and they are becoming an important part of China’s emerging consumer culture. James Roy of China Market Research tells Wei Gu why companies are targeting this group.

What they lack in spending power compared with Western teens or rich Chinese, diaosi make up for in sheer numbers. Some of China’s mostsuccessful companies, including Tencent Holdings Ltd., Alibaba Group andYY.com, have built multibillion-dollar businesses targeting them.

The rise of diaosi has been driven by two big forces in Chinese consumption: rising costs and an emerging virtual economy.

Escalating prices have made owning houses, cars and other status symbols unattainable for many. Rather than saving all their pennies to spring for flashy brand-name luxury products, diaosi have chosen to spend them on affordable entertainment, most of it online, often on virtual versions of products they can’t afford.

Tencent’s 89 million customers spent $20 each, on average, in the third quarter last year on items such as virtual clothing and accessories to dress up their avatars in the popular QQ chat application.

This isn’t to say that diaosi have completely shed the Chinese taste for putting money away—but when they do it, their pennies can add up in breathtaking fashion. Alibaba’s online payment affiliate Alipay, for example, has a money-market fund, Yu’E Bao, which means “leftover treasure,” that garnered 49 million customers and accrued more than $40 billion in investments as of mid-January. After just six months in operation, this makes it one of the world’s largest money-market funds. The average user is 28 years old and the average account size is $800.

Meanwhile, Alibaba’s online bazaar chalked up a record $5.7 billion sales on Nov. 11, more than twice as much as Cyber Monday in the U.S.

Although not all the buyers self-identify as diaosi, the buzz is mostly spread by young consumers who have a lot of time on their hands and love seeking out bargains.

Two hot new stocks on Nasdaq in 2013—online travel-comparison site Qunar.comand58.com Inc., WUBA -0.82% which sells classified ads, cater to this type of price-sensitive customer.

The majority of Chinese are still poor by Western standards. An annual household income of merely $10,000 puts a Chinese family into the country’s top 23%. Double that and they are in the top 9%.

People who can afford big-ticket luxury goods are in a very small minority, but that is still a big number. Millions of households have assets in excess of $1 million, based on the 2012 China Household Finance Survey by researchers from China’s Southwestern University of Finance. But even the fabulously rich have soured on conspicuous purchases, as a government crackdown on corruption has damped luxury sales.

The most successful businesses are the ones that can engage the haves and have-nots on the same platform, giving the rich an audience to show their wealth off to. Gambling companies entice hundreds of millions of players with free games, and they are rewarded when users collectively spend millions of yuan on virtual costumes and weapons, regardless of their relative wealth in the real world.

With China’s economic growth steadily cooling off, the supply of diaosi looks set to rise, meaning businesses will need to continue satisfying their particular type of demand. The winners among Chinese companies will be those who win the hearts and minds of these “losers” by focusing on value for money and spending more on online marketing.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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