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China’s Tier City System: What it Means for Brands

Posted by: Labbrand Consulting Co., Ltd.

Date added: Mon 30 Jul 2012

In the past two decades, numerous cities in China have experienced unprecedented economic growth. This economic phenomenon triggered the rise of a classification system based on “tiers” that aims to rank cities throughout China in terms of their population size, development of services, infrastructure and cosmopolitan nature. Although the tier system is often criticized for being inexact and lacking standardized criteria, it can serve as a useful reference for companies that are trying to structure their China strategy. Beginning in the 1980’s, the Chinese government began investing large amounts of capital in major Chinese cities in order to stimulate economic growth in different regions of the country. Because every city experienced growth at its own pace, it became relevant for the economic and business communities to become familiar with this tier- based classification method.

TIER 1 CITIES
Tier 1 cities were the first to be opened to competitive economic development by the Chinese government. These cities are recognized for being densely populated as well as culturally and economically influential. First tier cities attract the attention of foreign enterprises given their large middle class representation and income levels well above the national average. Cities that fall within this category represent China’s most developed markets in terms of consumer behavior. Smaller companies also tend to target these cities as they feel they offer the lowest risk point for market entry. However, brands seeking to establish themselves in first tier cities are also exposed to high operational costs and increased levels of competition.

First tier cities register total retail sales of around 30 billion RMB (4.75 billion USD), and an annual per capita income of around 11,000 RMB (1,774 USD) (EU Chamber of Commerce). Shanghai, Beijing, Shenzhen, and Guangzhou are examples of cities that fall within the first tier classification. These cities are known for being important political, cultural, industrial and financial centers in China as well as key hubs for the greater East-Asia region.

TIER 2 CITIES
The rapid economic growth and rising incomes in 2nd tier cities has caught the attention of foreign investors over the past several years. The markets in second tier cities are a lot less competitive and the labor costs are substantially cheaper compared to first tier cities. A rapid increase in consumer spending in second tier cities is creating more demand for foreign brands. However, the income of consumers in second, third, and fourth tier cities has been reported to be less than half compared to those in first tier cities. While first tier cities are targeted by international well-known brands, lower tiers become the center of action for local Chinese brands. Companies that establish themselves in such cities tend to face challenges such as a lack of talented personnel, as well as immature marketing practices. At the end of 2011 around 60 cities in China qualified as second tier cities (China Sourcing).

Some sources point to a more complex method of classification within second and third tier cities (rightsite.asia). This method of classification divides cities into three subcategories within their tier: high, medium, and low. Tianjin and Chengdu are examples of cities that fall within the second tier high category. These two cities are considered rapidly developing economic centers. Within the second tier medium subcategory we see places like Nanjing and Xi’an where economic development shows relatively stable progress. Second tier lower cities are generally characterized for being the capitals of some provinces as well as cities that show increasing economic development. Second tier lower cities include Wuhan and Hefei.

TIER 3 CITIES

Because the tier system is not a universal standardized method, defining the characteristics that make up the lower tiers can be challenging. In recent years, several multimillion-dollar corporations such as Volkswagen and Foxconn have relocated their headquarters or built new factories to 3rd tier cities. As a result, land and housing prices have skyrocketed. There are approximately 200 county-level cities in China that fall within the category of a 3rd tier city (China Sourcing). Within third tier cities there is also a categorical subdivision like the one mentioned earlier. Third tier high cities include Zhongshan and Shantou. Third tier medium cities include prefecture level cities like Xining and Baoding. Within the third tier low subcategory we can also see prefecture levelcities such as Yingkou and Dandong, cites located in the Liaoning province.

USEFULNESS OF THE TIER SYSTEM
Although it has not been made explicitly clear by the Chinese government what constitutes each tier, the generally accepted classifications are a useful reference for brands. Specifically, it can help to select cities for market research fieldwork. China has more than 120 cities that have a population of 1 million people or more, and 80% of them have fieldwork facilities. A brand can select multiple cities within a targeted tier, or a cross section across various tiers, to conduct fieldwork according to their research and business objectives.

It is important for brands to regularly obtain up to date information on the tier classifications, due to the rapid pace of development in China.

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