The growing Chinese middle class presents an opportunity for multinational companies, and those who are invested in them, to profit from this demographic's new-found income, confidence, and brand awareness. Three commercial trends are developing as these Chinese middle-class citizens increase their standard of living. Personal computers, digital cameras, and gaming companies are keeping companies like Apple (AAPL 0.01%), Baidu (BIDU +0.17%), and Las Vegas Sands (LVS 1.89%) focused on this market and the profit it will continue to churn out in the coming years.
The exploding Chinese middle class, not slowing anytime soon
The rise in per-capita income of China's growing middle class has been driving growth in select industries in China. According to research and analysis by McKinsey & Company, the growth isn't over -- not by a long shot. The group predicts that by 2022, more than 75% of China's urban consumers will earn between $9,000 and $34,000 a year. Compare that to the 4% of the total Chinese population who fell within that range in the year 2000.
The magnitude of China's middle-class growth is transforming the nation. Source: McKinsey.
In 2012, this new middle class was comprised of nearly 200 million consumers, or 15% of urban consumption. However, McKinsey analysts say that by 2022, their share of urban consumer demand should more than double to 35%. By that time this group will be almost three times as numerous as the baby-boomer population that has been driving U.S. consumption for the past few decades.
The generation of consumers born after 1980 is more confident about personal income growth and brand awareness.
Multinational companies are starting to focus on Chinese middle-class consumers who were born after the mid-1980s and were raised in a period of relative abundance. Their parents, who suffered through years of scarcity and uncertainty, focused on saving and building economic security. Thanks to economic reform and China's government opening up to the world, saving is declining and discretionary spending is rising among this increasingly affluent generation. These consumers are ready to show their independence through consumption.
And these three companies are doing their best to dominate three consumer-focused industries in China.
Smart cameras: Baidu
Digital cameras may not appeal to savvy tech investors. In fact, worldwide unit sales have declined steadily since their peak in 2010. However, smart cameras are becoming popular in China as the growing middle class increases its use of "smart" and Internet-enabled electronics. One company that is making headway in this space is China's very own Baidu.
Fast Company recently named Baidu one of its "Ten Most Innovative Companies in China" for its move from smart software to smart hardware. The company is best known as the "Google of China" for being the dominant regional search engine since Google mostly left the Chinese market in 2010 due to search-restriction disputes with the Chinese government. Now Baidu is venturing further into hardware with its newest smart camera, which gives users an Internet-enabled monitoring device.
Under the brand Xiaodu, Baidu has produced a WiFi-controlled camera called Xiaodu iErmu. The smart camera records streaming video and stores it in the cloud, where the owner can watch it via a smartphone or other Internet-enabled device. This product markets nicely to a growing number of Chinese families with two working parents who may want to monitor children or aging parents while they're away.
Personal computers and smartphones: Apple
Smartphones and tablets have gotten a lot of press for their growth in Asia over the last few years. The personal-computer industry is also growing rapidly as more and more Chinese consumers seek to have laptops of their own. One company that is positioning itself for continued growth on both the smartphone and personal-computer front is Apple.
As Chinese consumers become more and more brand-aware and interested in luxury personal products, Apple is there to fill their needs. Emerging markets have become a surging source of revenue for Apple -- China in particular. When the company reported 2013 earnings two months ago, it reported a 1% decline in sales in the Americas but a whopping 29% increase in sales in China.
Building brand awareness and prestige in China is crucial for the company as it seeks to become the cool brand of the Chinese 20- and 30-somethings. Apple announced a deal at the beginning of this year with the largest Chinese mobile-provider, China Mobile, to sell iPhones to its users, which could bring in 20 million to 30 million new iPhone users on China Mobile's network this year alone.
Tourism and gambling in Macau: Las Vegas Sands
The Chinese tourism and entertainment industry has also benefited handsomely from the rise of the Chinese consumer. Industry revenue has exploded in Macau over the last few years, with gaming on the island pulling in more than $45 billion in 2013. Macau has increasingly become a destination for not only the VIP gamblers of China's elite, but the middle class as well.
According to research by Nielsen Group, the number of mainland tourists traveling to Macau grew 12% in 2013 over the previous year. The research also shows that while the bulk of tourists to Macau historically made trips to Hong Kong and added Macau as a side stop, more consumers are now going straight to Macau without visiting Hong Kong, showing Macau's growing allure as a travel destination for mainland Chinese. During this year's week-long Chinese New Year celebration, 770,000 mainland Chinese visited Macau -- more than the island's 600,000 total permanent residents and 23% more than visited Macau during the same holiday season last year.
Las Vegas Sands has already been dominating the Cotai strip. The two casinos on the strip owned by Sands, the Venetian Macao and the Sands Cotai Central, have already posted solid growth. Sands Cotai Central, for example, reported a 61% jump in revenue and a more than 250% surge in operating income in 2013. The company's new megaresort on the strip will be opening during summer 2015. The upcoming Parisian, set to open in late 2015, promises to be even more spectacular than its two predecessors. This $2.7 billion "integrated resort" will include over 3,000 hotel rooms and suites, around 450 table games, 2,500 slots, a retail mall, and a replica of the Eiffel Tower at 50% scale.
Total visitation to Las Vegas Sand's Sands Cotai Central in Macau. Source: Las Vegas Sands.
Las Vegas Sands has captured the most revenue from this segment. Over the last four years, Sands has taken more than twice as much revenue from Macau's mass-market gamers as Melco Crown and more than three times as much as Wynn Resorts, according to the company's 2013 year-end results. Adding shopping malls, theaters, and exhibition halls in the resorts and increasing the number of hotel rooms shows that Sands is still committed to appealing to more and more middle-class and mass-market consumers.
Source: Las Vegas Sands.
Foolishly looking for profits in China
A rising middle class in China -- bringing with it a rise in affluence and consumer confidence -- is a key growth catalyst for companies that can appeal to this new class of consumers. Foolish investors should continue looking for companies that are showing they have the drive and capability to compete for a chance to serve these consumers.
