China’s Rising Middle Class Giant

China’s Rising Middle Class Giant

How Big and How Much is He Going to Grow?

Chinese economic numbers have been considered suspect by the west for years, but even  high-level Chinese officials are starting to admit that government figures on GDP growth, fiscal revenues, credit data, and imports/exports are unreliable, at best. “Many of the numbers are watery,” Dong Dasheng, former deputy auditor at China’s National Audit Office, told audience members at an annual meeting of high-level political advisors in Beijing in March. Noting that numbers have long been massaged, Dong said the official 7.4 percent GDP growth rate (lowest one in 24 years) for 2014 is far from the truth, but “relatively more realistic comparing (sic) to the numbers in the past years.”

Despite the likely manipulation of economic numbers, few people will dispute that China’s economy, like its population, is massive. The question is, how big and how much is it going to grow? It’s like trying to calculate the size of a giant by looking at his grainy photographic portrait, and then trying to figure out potential growth by rummaging through his compost bin to determine how much he consumes.

But, no matter what the answer is, a giant is still a giant, and the Chinese middle class has quickly grown into one such giant. Again the question is, how big and how much is it going to grow?

Let’s look at this giant’s portrait and rummage through his compost bin:

To start with we need to determine what constitutes “middle class,” an ambiguous term that can easily be misapplied if its parameters aren’t delineated. Broadly speaking, middle class is the group of people in a society who reside socio-economically between the working class and upper class. In describing the North American middle class social scientists generally apply social aspects–such as educational attainment and type of employment–to the equation. On a strictly monetary basis, social scientists and economists trying to constitute what determines middle class in North America have come up with annual income ranges from $35,000 on up to $150,000.

There is no hard-set definition of what constitutes “middle class” in China, but Helen H. Wang, author of the award-winning book–The Chinese Dream: The Rise of the World’s Largest Middle Class and What it Means for You–defines Chinese middle class as households with a “third of its income available for discretionary spending.” Monetarily, a middle class household would earn somewhere between $10,000 and $60,000 per year, says Ms. Wang.

Global consultant McKinsey & Company, which conducts extensive studies on China’s middle class, believes $9,000 to $34,000 per year constitutes Chinese middle class earnings. Where one lives in China can also dictate middle class standards, as the spending power of the yuan varies widely between regions and between the countryside and urban areas. Thus, someone living in Shanghai needs to earn several thousand dollars more per year to be considered middle class than someone living in a rural village in Qinghai province.

Annual income rates have grown phenomenally in China over the past three decades, with a 10-fold jump between 1980 to 2010. According to an analysis of official government statistics by the China Market Research Group, the average annual disposable income per capita rose from $280 in 1980 to $3,000 in 2010, which put the typical Chinese household at earning about $9,000 per year as of 2010.  As of January 2014, the National Bureau of Statistics of China reported the average annual disposable income per capita at about $4,720, a 57 percent increase from 2010. The World Bank reports that China’s gross national income per capita quadrupled from 2000 to 2013, rising from $2,830 to $11,850.

So, how many Chinese are middle class, and how many will be middle class in the years to come?

Ms. Wang put the number at “more than 300-million” and at “more than the entire population of the United States,” and believes this population will reach 700- to 800-million by 2022. These indefinite figures have been bandied about by numerous other sources over the past three years, likely due in large part to the extensive media coverage Ms. Wang has received since the release of her book.

While not putting a specific number on today’s Chinese middle class, and, like Ms. Wang in referring to it as larger than the total U.S. population, McKinley & Company believes that China’s middle class will number 630 million by 2022. This equates to roughly 75 percent of the urban population and 45 percent of the country’s entire population.

The Brookings Institution, a highly influential Washington, DC think tank, put China’s middle class at 157-million people as of 2009. Brookings’ “absolute approach” for defining middle class uses the delineation of “households with daily expenditures between $10 and $100 per person in purchasing power parity terms.”

In its report–China’s Emerging Middle Class: Beyond Economic Transformation–Brookings reported that China’s middle class represented roughly 12 percent of the total population as of 2009, but that China’s middle class was on the cusp of expanding exponentially due to China’s    rapid growth rate and because a significant proportion of the population was “close to the lower-bound threshold of [Brookings’] definition of the middle class.” Given this assessment, Brookings believes China’s middle class will consist of about 42 percent of the population by 2020, and over 70 percent of the population by 2030.

Using these percentages with Chinese population projections puts the number of middle class in China at roughly 575-million by 2020, and more than 960-million by 2030.

Ernst & Young Global Limited’s Middle Class Growth in Emerging Markets report has projections similar to Brookings, placing China’s middle class as of 2010 at about 150-million, with this number rising to almost 500-million by 2020, and almost reaching 1-billion by 2030.

All of these projections about the size of China’s middle class are “giant-like,” to say the least. But will these projections be reached?

Brookings brings up several uncertainties that could impede the growth of China’s middle class, foremost being whether China can continue generating economic growth at the levels its been achieving for the past two decades. Noting that China’s “labor-Screen Shot 2015-11-10 at 5.24.33 PMintensive export-led growth…is showing signs of strain,” Brookings suggests that China needs “a new growth strategy” that encourages much greater domestic consumption. “The great uncertainty for China is whether its current growth is sufficiently robust to carry it forward until the middle class consumption engine can start to fire, or whether growth will stall before the middle class really matures.”

Ms. Wang, while more optimistic, addresses this issue as well by saying that Chinese households, which traditionally save 20 to 25 percent of their annual earnings, need to be encouraged to save less and spend more. Ms. Wang’s optimism is driven in large part by her observation that China’s younger generations are “consuming like crazy.”

An observation shared by McKinsey & Company, which considers the younger generation born between 1990 and 2010 to be the most westernized to date. The company expects that this generation–three times larger than the U.S. Baby Boomers who drove U.S. consumption for years–will double their share of consumer demand within 10 years.

Such observations are supported by recent data, such as U.S. exports to China growing from $27-billion in 2003 to $124-billion in 2014, or the fact General Motors sells more cars and trucks in China than in the U.S., whereas just 11 years ago the ratio was one vehicle for every 10 sold in the U.S.

Another factor to consider about the Chinese middle class is that it may be bigger than pundits think, and wealthier. As with their government, Chinese people are known to be “watery” when reporting financial numbers. Undeclared wealth is called “gray money” in China and it represents the proceeds from corruption (considered by some as rampant in China), income earned from “gray” areas of the economy, and unreported income such as year-end bonuses that most Chinese do not report. A 2012 survey by the China Society of Economic Reform concluded that gray income accounts for $1 trillion per year, or 12 percent of China’s economy.

But what of the elephant in the Chinese living room (pardon the pun) that no one seems to notice. That being the lop-sided demographics of the country that make it the fastest aging country in the world by median age, and estimated to become among the oldest by median age within 20 years.

China’s economic success has been largely driven by its vast pool of labor, but the water in that pool reached its peak and is now starting to slowly but steadily evaporate. According to China’s National Bureau of Statistics, the country’s potential labor force shrunk for the first time in modern history in 2012, an emerging trend that is expected to continue for at least the next 20 years due to the country’s “one-child” population control strategy.

That one-child policy, according to Chinese government statistics, has kept the country’s population in check by a factor of 400-million people. And while that had served as an economic accelerant of sorts because those additional people did not need to be fed, clothed, educated or housed, it also means that many fewer consumers, wage earners and taxpayers to help continue driving the country’s economy.

China’s lop-sided demographics suggest that the coming years will bring a dramatic decline in the cheap labor market that has served as the primary driver of the Chinese economy. At the same time China will see a dramatic increase in its elderly population, which earns little, spends little and pays little in taxes, yet will need much in the way of government services and health care.

It remains unclear how much this elephant in the living room is going to impact the economy and how much it may slow the expansion of the middle class. But it’s an elephant. It may be sleeping now, but when it wakes up people are going to notice.

–Presented to SPI June 2015



Wang, Helen H. The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You. Bestseller Press, 2010, 2012.

Kharas, Homi, and Geoffrey Gertz. China’s Emerging Middle Class; Beyond Economic Transformation. Brookings Institution Press, 2010.

Barton, Dominic, Yougang Chen, and Amy Jin. Mapping China’s Middle Class. Insights & Publications. June 2013.

Chen, Lu. Why Chinese Economic Data Can’t be Trusted. China Business & Economy. March 2015.

Kuhn, Anthony. Lure of China’s Gray Economy Reaches Rich and Poor. National Public Radio. January 2014.

The World Bank. World DataBank: World Development indicators. 2015.

China Profile. Median Age of the Population in China, India, Europe and the United States of America, 1950-2100. June, 2011.

Rodney Dangerfield of Telecom Sector Seeks Respect

Rodney Dangerfield of Telecom Sector Seeks Respect

—June 9, 2009

Interdigital Communications Corporation (IDCC) has long been the Rodney Dangerfield of the wireless Telecom sector, as it just “can’t get no respect,” from either Wall Street or many of the big wireless players.  However, that may finally change later this summer as the world’s leader in cell phone sales, Nokia, could decide to come to terms with IDCC rather than face a possible U.S. importation ban on its smart phones.

IDCC has been seeking respect and revenues from its technology and patents since it was founded in 1972.  Its attempts to generate revenues from its proprietary wireless phone system resulted in significant operating losses, but the company realized that its patented cell phone technologies–those used both in handsets and for transmission (base stations)–were crucial to the development of the fledgling worldwide cell phone system. 

The big cell phone players, however, basically decided that IDCC’s patented technologies were not “essential” to the system, and balked at paying the royalties Interdigital sought, forcing the company to seek redress through the court system.

In 1995 Interdigital lost a crucial patent infringement case against the biggest cell phone maker of that time period, Motorola, which reputedly made other companies even more hesitant to license with IDCC and pay for the company’s technology.  This despite the fact that the U.S. Patent Office, and several European patent offices, revalidated and affirmed the disputed patents in 1999. 

A 10-year legal battle Ericsson resulted in a settlement in 2003, but the settlement itself disappointed Wall Street as it appeared that IDCC, which had reportedly been seeking more than $1 billion in damages, accepted “pennies on the dollar” (the settlement gave IDCC $34 million for past infringement and established a new license with rates of between .5 percent to .75 percent for handsets and a flat $6 million per year for base stations).  However, Wall Street did get excited because IDCC announced that the Ericsson settlement initiated licenses and multi-million dollar payments from Samsung and Nokia under licensing frameworks (basically agreements to pay whatever Ericsson agreed to pay) IDCC had in place with those two companies, and the stock rose  from about $14 to reach a high of $27.14 within two months. 

Of course, both Nokia and Samsung claimed foul, initiated arbitration and began other legal maneuvering (Nokia has initiated more than 10 separate legal actions–most of which ultimately proved unsuccessful–in the U.S. and abroad in a strategy some call “delay and obfuscate”) to get out of paying IDCC anything for its patented technology.  Ultimately, after arbitration awards granted to IDCC, appeals of those awards and other legal maneuvering by the defendants, Nokia in 2006 paid $253 million for their use of IDCC patented technology up to the year 2006, while Samsung in late 2008 settled for a reported $400 to $500 million to cover both past infringement and a royalty bearing license good until 2012.

At this point in the story it should be noted that most of the above mentioned legal saga revolved around 2G (or second generation) cell phone patents.  IDCC has also been a key player in the development of 3G technologies (which resulted in “smart phones” and is used extensively in wireless computing) and served on the international standards body that coordinated the development of 3G for commercial application.  The standards body reportedly accepted about 300 IDCC contributions of patented technology as either essential to the system or commercially attractive.

Starting in about 2003, Interdigital began publicly announcing that its goal was to get paid for every 3G device sold worldwide, and that it was aiming to receive from between $1 to $2 per every device.  Since then, IDCC has managed to license more than 50 percent of the 3G market with companies such as LG Electronics, Research in Motion, Apple, Panasonic, NEC, Hitachi, Kyocera, High Tech Computer, Arima, Toshiba, and, most recently, Samsung, coming to terms with the company.

And now Nokia, which remains the biggest hold-out, is facing an August 14 “initial determination” on whether the International Trade Commission (ITC) should ban the importation of Nokia handsets into the U.S. due to infringement of IDCC patents.  The ITC case mirrors the one IDCC had with Samsung prior to their settlement, in that it involves some of the same patents and that the ITC staff have recommended a finding of “no violation” (and thus, no importation ban) against the alleged infringer.  Samsung agreed to settlement just weeks prior to the “initial determination” deadline in its case, and many pundits believe Nokia will do the same. 

While the ITC staff recommendation would appear to favor Nokia, ITC judges are not under any obligation to follow the staff recommendation, and, in fact, often rule contrary to them.  And, like Samsung, Nokia just cannot afford even the risk–a sword of Damocles–of an importation ban due to the scale of the potential economic disruption it could cause.

If Nokia settles as expected, the rest of the 3G market, including Sony-Ericsson and Motorola, is expected to quickly follow.  In fact, IDCC officers have alluded to a 3G license framework the company has with Sony-Ericsson that dictates the terms under which that company will take a 3G license, and many analysts believe the primary dictate to be that IDCC licenses Nokia to 3G.       

A Nokia 3G license would boost IDCC’s annual revenues by at least 30 percent, and adding the other holdouts to the mix should represent a doubling of revenues.  While the company has been aiming for licensing terms of between $1 to $2 per 3G device, it appears that the company has been getting terms of between $0.50 to $1.25.  However, this still adds up to hundreds of millions of dollars in revenues per year, most of which will flow to the bottom line as the company generates almost 100 percent gross margin on licensing revenues. 

And these revenues should continue to increase every year for the foreseeable future as the number of 3G devices being sold every year continues to grow.  Under Interdigital’s own projections for the year 2012, with 75 percent of the 3G market licensed at $1 per device the company would earn about $700 million in 2012.  With 100 percent of the market licensed at $1 per device this figure almost reaches $1 billion.   

The company has more than 3,000 patents issued worldwide, with another 9,000 pending, and was ranked 141 among companies worldwide for the number of patents issued by US Patent Office in 2007.  Its patents cover 3G wireless, the future 4G wireless, wireless LAN and Mobility/Convergence.  Its roster of current 3G licensees represents a “who’s who” of the wireless business and currently help the company earn more than $1 per share (excepting a recent $37.1 million repositioning charge).  The addition of Nokia and other holdouts, along with a growing market for 3G devices, could easily raise the company’s earnings to between $2 to $3 per share by late 2010.

With a current P/E of around 109  and a price to sales ratio of 3.6 we cannot argue that the stock is cheap, however we would argue that the P/E is misleading given the repositioning charge.  We believe that future positive news flows, earnings surprises, new licenses, and growing revenues make the stock especially attractive on a forecasted 2010-2011 P/E of 9.5.  We expect investors to drive the price back up to the $32 to $36 range by the end of the year.

Disclosure: Long IDCC


Harley Davidson Executives, Investors Wear Generational Blinders

Harley Davidson Executives, Investors Wear Generational Blinders

–One of more than 70 articles I produced for the Financial Website, Seeking Alpha.

Harley Davidson Inc. (HOG) yesterday reported an 84 percent plunge in third-quarter profits and announced the dissolution of its Buell line of specialty sport motorcycles and the sale of its MV Agusta division in order to focus its resources on its namesake brand.  Harley Davidson CEO Keith Wandell said the return from the sale of an MV Agusta or Buell is far less than the return the company gets from a Harley Davidson, and that “we’re going to be able to grow the company more quickly … by investing in the power of the Harley Davidson brand.”  According to the Wall Street Journal, Wandell admitted that both Buell and MV Agusta have a strong following, but that those divisions were “diverting investment dollars away from the Harley brand to support those brands.”

The shares rose almost 5 percent on the news, and were up another 3 percent in this morning’s trading, but we wonder if investors have considered how the company plans to generate these greater returns when the Baby Boomer generation that makes up the vast bulk of its customer base is rapidly aging out of the market, and the generations following do not seem to share the same affinity for the iconic brand.

On a price to sales and price to book ratio one can see from the chart below that Harley Davidson is back to the levels of the late 1980s.  With the average age of a Harley owner at 47 years, the difference now is that unlike the period 1990 to 2002, the company is no longer mining the demographic growth market of the large Baby Boomer generation.  So, not only is the company’s potential market base growing smaller due to the smaller size of the oncoming Generation X, its growing smaller because the oncoming market base has displayed little inkling that it even likes the product.

In short, we feel that the company is making a big mistake in divesting itself of two brands that have far more appeal to younger generations than the Harley Hogs, and that company executives, as well as investors, have blinders on with regard to the multi-generational earnings power of the Harley Davidson brand.

How many people under 40 do you know that own or want to own a Harley Davidson Motorcycle? We know of none, and an informal poll of friends and family turned up none, which is not saying a whole lot because aforesaid informal poll certainly lacks statistical significance.  However, anyone giving any consideration to investing in HOG should conduct their own informal poll because those 40-and-under-year-olds are Harley Davidson’s fast approaching future market, and early indications suggest this future market doesn’t give a fig about Harley Davidson.  However, ask an under-40-year-old motorcycle rider if they’d like to own a Buell or an MV Agusta, and the response will likely be quite positive and in some cases may even induce a Pavlovian response.

The stock price action would suggest that we do not know what we are talking about; however, demographic change does not happen overnight, it’s a relatively slow progression, kind of like the Harley riders of today slipping into old age and out of their Hogs and into golf carts and wheel chairs.  As this comes to pass, Harley Davidson is going to see significant sales declines if the incoming and younger generations don’t buy into the Harley Davidson brand.

And Harley Davidson’s earlier success was built on a brand, the branding of the outlaw biker.  In the 1960s and ‘70s the Harley Davidson logo was signature wear for the “Hells Angels,” other biker gangs, and bad-boy wannabes–relatively rare and thus “cool.”  Today the logo seems almost ubiquitous on middle-aged and elderly bikers, who wear far more black leather and sport shinier chrome on their Harleys than any Hells Angel ever did.  The once cool, outlaw-style logo has been homogenized, and is about as outlaw and cool as the Walt Disney (DIS) logo.

Harley Davidson has been seeing significant sales declines since 2006, and the CEO reported that it will “bump along the bottom through 2010,” but suggested that the company’s “strategy,” cost-cutting efforts, and overseas opportunities position it for future growth.  We believe that a rebounding economy will help Harley Davidson for the short term, but feel that demographic headwinds will prove detrimental to the company’s long term future unless it accounts for the younger generations (please see our July 17 Seeking Alpha article).  With the boot Harley is giving to Buell and MV Agusta it appears that executives aren’t giving full credence to younger generational tastes quite yet, but at least they still have a bit of hope with the V-Rod model.

Oh, and speaking of overseas opportunities, Harley Davidson executives believe that India and China represent great opportunities and plan to significantly boost the company’s presence in both countries.  Let’s see, Harley Davidson primarily makes big, in many cases really big, production motorcycles.  People in China, and even more so, India, on average are among the world’s shortest people.  There’s just something not right about this picture.

–Originally Published Oct. 16, 2009 in Seeking Alpha.

Age Curve Report

Age Curve Report

Out of the various newsletters I edited over the years, this one was my favourite. It felt like my baby and I was quite proud of my research, story writing, editing and development; and each issue seemed better than the previous. This issue was perhaps my favourite of all 30 or so we produced, given that the feature story was about my homeland. 

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Click here to review the complete issue (and the state profile is the best story in the issue):

April 2010 Age Curve Report

He Should Have Used XXXX Alert

He Should Have Used XXXX Alert

I wrote these two blogs for a potential client last year. The client loved them and wanted me to blog for him, but was only willing to offer peanuts for my work. What's up with people who think writers are worth so little?  

So, you’ve met a new squeeze through an online dating service….

She’s hot!

She might be “the one!”

You’re smitten, and one date leads to another date, which leads to another date, but by the fourth date that magic starts wearing off….

By the fifth date you’re starting to think that maybe you’ve made a mistake. In fact, you might be wondering why you didn’t consider doing a background check on this woman, who just a week ago had you thinking weird domesticated thoughts like: I don’t need to go out with the boys Friday night, or Wow, check out the wheels on that baby stroller.

But now, as the prospect of your sixth date nears, has you thinking about how to disengage from this nascent relationship without causing undue stress.

Disengagement without losing an arm…or, possibly, a family pet.

Yeah, should have done a background check….

At least, that’s what the man from Thousand Oaks, California was probably thinking when his ex-online-girlfriend was found in his chimney last month.


Now we at are not saying that a background search in that case would have conclusively ruled out Genoveva Nunez-Figueroa as prime date material worthy of possible lifelong wedded bliss. But it could have provided warning signals. May have given that Thousand Oaks man enough information about his prospective date to make the relationship evolve more slowly….

Slow enough so that Genoveva would never have had any reason to end up in his chimney. Slow enough so that he might never have had any desire to date that woman…

…who ended up trying to break into his house by climbing down his chimney to do who knows what!

We’ll never know. But you can protect yourself from potential chimney-invading online dates by utilizing our services here at


Self Background Checks May Limit Damage from Identity Theft

Many people are confused about the concept of conducting a background check on themselves.

What? I’m not a criminal! or I haven’t done anything wrong! would be common responses to the notion.

But conducting a background check on yourself is perhaps as valuable to your peace of mind as the one you’re thinking about conducting on your daughter’s new boyfriend–the boyfriend who sports multiple piercings, has more ink in his skin than you have in your printer and said, “nice to meet you Daddy-O,” upon meeting you, while giving you a knuckle-bump to the forehead.

A background check on him might come up roses, but the one done on you may contain some potential thorns.

Consider that a 2012 study conducted by Javelin Strategy concluded that one in 20 Americans have been affected by identity theft, and that the Federal Trade Commission receives about 20,000 reports per week from consumers who’ve had their identities stolen.

And once your identity is stolen, the identity thief cannot only use that information to steal from you, but use your identity to abet his theft from others and make you appear to be the criminal.

The FBI’s website details the case of a Miami man whose identity was compromised for over 20 years. The victim’s driver’s license was suspended for driving infractions he did not do. He experienced trouble getting jobs due to records showing a felony conviction for a crime he did not commit. And he was denied a passport because the Department of State determined he already had one, even though he didn’t. All of this being the result of the identity thief’s use of the victim’s identity. And while the victim had filed a police report in 1989, the perpetrator was not caught until 2012.

Now we at are not saying that a background report would have  conclusively stopped the criminal from using the Miami man’s identity, but it may have mitigated the damage. Background checks would have allowed the victim to keep better track of how and where his identity was being used, information that could then be passed on to the police.

–Neither ever published, I’m sad to say….