Welcome to China's China

By Michael Schuman

Wang Li may live deep in China's interior, in a city you may never have heard of--the provincial capital of Chengdu--but that doesn't stop her from shopping like the big spenders of Tokyo, Hong Kong or Shanghai. One Friday evening, Wang, 28, trolls down Chunxi Street, a jam-packed thoroughfare of flashing neon signs, McDonald's restaurants and boutiques, looking for the latest fashions she's admired in Cosmopolitan magazine.

First stop is a store selling oddly streaked jeans, next a shop with frilly jackets and flowery coats. After two hours of hunting, she finally plunks down $24 on a pair of brown shoes at a funky outlet selling studded boots and fluffy handbags that's playing earsplitting Gwen Stefani tunes. Wang spends nearly every yuan she earns as a real estate agent on shopping excursions, dinners and drinking sessions with friends. That's no small chunk of change. Since her first job in a coffee shop eight years ago, Wang's annual income has vaulted more than 1,500%, to $7,500. "Five years ago, I'd be happy if I had a little money to buy a small snack on the street. I was yearning for KFC, and my dream was to get pizza," Wang recalls. "Now I can do it."

Can do is the new M.O. of Chengdu. Although 1,000 miles from the glamour of Shanghai, Chengdu has a surprising number of choices for Wang and her fellow aspirants. As China's fourth largest city, it is catching up to the world's richest at a blistering pace. It has a booming economy, escalating incomes and 10.8 million people--more than New York City. Wooing the newly wealthy of Chengdu is a top priority for consumer companies from Coca-Cola to General Motors to Christian Dior. Chengdu is only one of several mammoth metropolises--like Chongqing, Wuhan and Xi'an--experiencing similar booms of investment, wages and jobs.

Welcome to China's China, a land of gargantuan urban centers beyond Shanghai and Beijing where the growth potential is giving consumer-products makers palpitations. "If you want to be No. 1 in China, you have to be successful in every city in China," says Ian Chapman-Banks, chief of marketing for North Asia at Motorola.

On Chengdu's main square, near the outstretched arm of a statue of Mao, sits a shopping center with Cartier, Zegna and Hugo Boss outlets. One night at the new Seibu department store, which opened last April, Italy's Missoni held a fashion show with Chinese models strutting to thumping reggae music. "Everybody who comes to Chengdu has a surprise," says an ebullient Antonino Laspina, the Italian trade commissioner in China, on the sidelines of the show. Living in Chengdu "is becoming like living in New York, Paris or Milan."

Not quite. Yet only a few years ago, the boundless interior was a daunting and unprofitable place for many companies. Giant cities like Chengdu languished, starved of investment and government attention that went to Beijing, Shanghai and Guangzhou. Chengdu was known mainly as China's largest panda-preservation center. Some companies like Korea's Samsung that tried to make an early move were disappointed and left, or limited their expansion.

The gaping disparity between East and West was also becoming a big headache for China's policymakers. Fearing disgruntled Westerners would grow unruly, Beijing stepped in seven years ago with an aggressive program to bring balance to the national economy. The government poured money into infrastructure like new airports and expressways throughout western China, with good result. "We follow the tarmac," notes Andy Coslett, CEO of Intercontinental Hotels, which is building like mad in Chengdu, Chongqing, Xi'an and other cities.

Residents of Chengdu, glued to the Internet and TV shows like Friends, are striving to connect with the outside world more than ever before, in fashion trends, food and lifestyles. Starbucks is importing its coffee-education strategy to persuade customers to splurge on a cappuccino. (A grande latte in Chengdu costs about $3.30, a huge sum in a city where locals typically earn less than $7 a day.) Starbucks has seven outlets in Chengdu (more than Peoria, Ill.) and is on its way to 10 to 15.

Foreign investors are lured west by the interior's lower costs--salaries for highly skilled college graduates in Chengdu are about 30% lower than in Shanghai--as well as tax breaks and other juicy incentives. After Motorola opened a software R&D center in Chengdu in 2001, the city government built the company a special building, complete with a rooftop patio.

Today industrial parks outside the city center house research labs from Nokia and Ericsson. U.S. bearings producer Timken is investing $15 million in a factory that will start production this year. Intel has poured $525 million into two chip-assembly and -packaging plants, one of which opened in 2005, while the second will start production this year. These facilities ship from Chengdu's airport to customers around the globe. Overall, foreign direct investment in Chengdu totaled $1.9 billion from 2001 to 2005. The results have been spectacular. GDP growth in Chengdu averaged 13.3% between 2001 and 2005, outpacing Shanghai's 11.9%. In 2005, per capita GDP reached $2,700, still only a third of Shanghai's but 70% greater than in 2000. Wages have surged more than 90%, to more than $2,400 a year on average during that same period, rapidly approaching Shanghai's $3,300.

Consumers in Chengdu are taking a page from the American book on spending, since they appear less interested in saving and more willing to take on debt to indulge themselves. Despite having lower incomes, Chengdu ranks among China's three largest cities in the number of privately owned cars clogging the roads. GM's sales in Chengdu grew about 40% in 2006, twice that of Beijing. Zhao Jinhui, vice president of Chengdu-based Eastern Kingo Auto Group, a large Chevy dealer in China, says that 22% of his customers finance their purchases, compared with only 5% nationally. "In Beijing, when they get rich, they buy cars; in Shanghai, apartments. In Chengdu, they buy both," Zhao says.

Chengdu's car-crazy locals chalk up their carefree spending habits to the city's more laid-back atmosphere. It's China's L.A.; the stressed-out Type A lifestyle is, like, so Shanghai. But also at work is their desire to catch up to China's wealthier metropolises. Like many nouveau riche, people in Chengdu have got into a keeping-up-with-the-Wangs mentality. Jin Jin, 27, a staff member at a local university, says he spends 10 times more each month than he did two years ago, especially on branded sportswear from Nike, Adidas and Reebok. "The reason I do this is because I cannot make my girlfriend think that I am poor," he says.

Still, capitalizing on all this new spending isn't automatic or even easy in a country of 1.3 billion. "I don't think that it has ever been more difficult to go national than in China," says William Ghitis, president of global apparel at Invista, the maker of Lycra. One hurdle is the logistical nightmare created by China's sheer size. Motorola has tripled the number of its sales outlets, to 30,000, in just the past 18 months to penetrate deeper into interior markets. Chapman-Banks says it often takes weeks to get new phones to these outposts. Then there's the challenge of organizing marketing efforts and training salespeople in such far-flung locales. "This is the most complex market I've ever worked in," he says.

Another problem is staffing. Cities like Chengdu don't have enough managers with global experience. HSBC, a company with a vast history in China, opened a branch in Chengdu in 2005 to service corporate customers. It would like to begin retail-banking operations in the city, but a dearth of local talent is one factor holding it back. "It is not easy to find staff who are familiar with foreign operations but also have a good understanding of the local market and customs," says Henry Han, manager of the Chengdu branch.

Many foreign consumer companies are undaunted by such problems, and competition between them is heating up. Helena Tan, general manager of a Buick dealership in Chengdu, says that when she first started managing the business eight years ago, she had three competitors. Now Tan is fighting it out with 15, from Nissan, Toyota and Volkswagen to local players like Chery. Tan provides all kinds of extras to keep Chengdu drivers in Buicks, such as handing out hair dryers, rice cookers and other gifts to car buyers and computer games to entertain those waiting for auto repairs. "A few years ago, customers would come in with bags of cash begging you to sell them a car," Tan says. Those days are over.

The secret to success in cities like Chengdu is going local. French hypermarketer Carrefour, which opened its fifth outlet in Chengdu in January, overhauled its prepared-food department to cook up the chili-laden specialties favored by natives, including marinated rabbit heads and roasted duck jaws. Samsung reopened its operation here in 2004, but it is going native. Shoppers in China's west, says Ko You Chan, Samsung's managing director for the western districts, usually expect a small gift when they make a major purchase. So Samsung liberally doles out free DVDs and other goodies. Result: sales of Samsung consumer electronics were up 50% in the region in 2006. The lesson, says Ko, is that "it's not easy to control everything from Beijing."

In all likelihood, Chengdu and China's other interior cities will look more and more like Shanghai every year. The optimistic citizens of Chengdu, such as Liu Xindi, couldn't imagine anything else. Liu, 33, has seen his income skyrocket 20-fold since he began working 15 years ago. Now Liu, who sells ads for the local Yellow Pages, can splurge whenever he wants on his soccer shoes, badminton racquets and biking gear. But he still thinks the good times are just starting to roll. "Of course, I think my life will be better in the future," Liu says confidently. "The economy of the city is growing, and it's not going to stop. There's no question about it."

With reporting by Jodi Xu/Beijing