china consumer market strategies 2011 2

8/3/2019 China Consumer Market Strategies 2011 2

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China ConsumerMarket Strategies 2011How MNCs and Chinese companies are competing

in the worlds astest growing market


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The American Chamber o Commerce in Shanghai | booz&co.

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Its not breaking news to say that the Chinese con-sumer market is dynamic and expanding rapidly.Thats a given; after all, China is forecast by mostanalysts to become the second-largest consumermarket in the world by 2015, not far behind theUnited States, with enough purchasing power tobuy 14 percent of the worlds products, up fromve percent today. In short, the consumer environ-ment in China ve years from now or even nextyear will by all measures be markedly differentthan today.

But different in what way? Which trends aremeaningful and which are likely to have a lesserimpact on the future of Chinas consumer market?How can Western multinationals (MNCs) andChinese companies best take advantage of the vastopportunities that the emerging Chinese middleclass, the increasingly prosperous urban areas andthe improving lot of the rural consumer offer?Perhaps most importantly, what should companiesbe wary of in this rapidly expanding competitivemarket?

The American Chamber of Commerce in Shang-hai (AmCham Shanghai), in cooperation with

Booz & Company, a leading global managementconsulting rm, explored these questions in a rstof its kind survey of 135 predominantly Chineseand Western multinational companies that do busi-ness in China (only two percent of the companiessurveyed were non-Chinese Asian organiza-tions). The results were eye-opening in what theyrevealed about the likely evolution of the Chineseconsumer market over the coming years and,equally intriguing, in what these companies bothChinese and Western said about how well theyare prepared for the changes that are certainly on

the way and about the capabilities they still needto develop to compete effectively in China.

AmCham Shanghai and Booz identied six fun-damental trends that are impacting the Chineseconsumer market today and asked the compa-nies participating in the survey to rank them inorder of importance: Greater External Exposure(called External Exposure in the survey ques-tionnaire); Access to the Internet and MobileCommunications, or Information Technology(IT); Increased Awareness of Healthy Livingand Nutrition (Health and Nutrition); Evolutionof the Family Unit; Mobility; and Work/Life

China Consumer MarketStrategies 2011

Exhibit 1

The survey tested six Chinese consumer trends

External

Exposure

Consumer expectations driven by an increase in choices

More and more Chinese consumers are being exposed to different types of lifestyles as they travel beyond their immediatesurroundings and electronic media becomes ubiquitous. This level of exposure opens the eyes of what is available globally andis driving new and higher consumer expectations for what they desire to buy here in China.

Trends Description

Information

Technology

Improved access to information and new consumer channels

As China continues to modernize, Chinese consumers increasingly are adopting and using new technologies in their daily livesincluding Internet, PC, mobile communications and gaming. Online platforms also create the opportunity to utilize an e-commerce channel to compare product/prices and ultimately buy. Over the next 3-5 years, the growth in e-commerce in China

will significantly change the way in which consumers access information, interact and shop.

Health &

Nutrition

An increased scrutiny on what is consumed and how time is spent

Awareness of healthy living/nutrition is just now emerging as a focus of the Chinese consumer in China. The next decade willwitness a heightened awareness and concern around health, nutrition and sustainability in their lifestyle. As this trend takes hold,all sectors will be impacted - food & beverage, apparel, travel and leisure - as more scrutiny is placed on what is consumed andhow time is spent.

Evolution of

Family Unit

Changing demographics will impact purchasing decisions

The Chinese family unit, as we know it today, will evolve dramatically in the face of changing demographics and economics.These changes could affect purchasing behaviors in many ways including product innovation, packaging sizes, packagingdesign, access and delivery, etc.

Mobility

Changes in the how, where and why of consumption

Major investments in infrastructure (train, road, etc.) will increase Chinese mobility and blur distinctions between city tiers.Wealth will be more geographically dispersed and employees will trade off shortened commute times with their residencelocation. This will affect how and where consumers will buy products.

Work-LifeBalance

An increased emphasis on quality of life purchases and leisure activity

As standards of living and incomes rise among Chinas middle and upper classes, there will be a greater focus on quality of lifeand achieving an adequate work-life balance. As wealth continues to grow, people will begin to focus more on enjoying the fruitsof their labor, increased attention to leisure activity, domestic travel, interest in arts/science and self betterment.


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Balance. (For a detailed description of thesecategories, see Exhibit 1.)

No. 1 Trend: Information Technology

On the whole, companies participating in thesurvey identied Information Technology (IT) asthe most signicant trend impacting consumerbehavior in China. But this result came aboutbecause IT was the overwhelming choice of theChinese companies. By segregating the responsesof Western MNCs, which comprised 70 percentof the surveyed companies, a far different, moretelling outcome is arrived at. Instead of IT, themultinationals as a single group chose ExternalExposure, which includes increased familiaritywith Western products in leading Chinese cities,as the most meaningful trend. An examination ofthe implications of both IT and External Exposuremore closely offers some insight into the strategicapproaches that these companies plan to deploy astheir operations in China mature.

IT essentially, shopping on the Internet and cellphones as well as gaming and social media wasportrayed by both MNC and Chinese respondentsas very much a market trend that will inuence thewidest swath of Chinas emerging consumer class.Nearly 50 percent said people under 20 wouldbe impacted and 90 percent expected the trend tohave an effect on 20- to 40-year-olds. In addition,more than any other trend, IT is anticipated to al-

ter the shopping activities of lower-income groups(


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Chinese companiesare ocusing on manu-acturing low-cost prod-ucts with limited eorton building up brandawareness and loyalty.When consumers trade

up, they could losesigniicant market shareto branded and highquality products.

- Executive o a Chineseapparel company

In the old days, Chinesecompanies had a costadvantage while west-

ern companies had highquality and better brandawareness. The gap ismore and more small.

- Executive o a ChineseAuto company


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Interestingly, despite these sharply different salesthrusts, the MNCs and Chinese companies bothoverwhelmingly agree that the Western companies

could most effectively respond to IT as a trend(apparently, even if they choose not to). More thananything, this is probably a nod to the decade ormore head start that Western companies have hadin e-commerce in their home markets.MNCs Eye Consumers With ExternalExposureSomewhat in contrast to IT, External Exposurecan be viewed as a trend that leads to morediscerning and demanding consumers, whoseexpectations have been whetted by what theyhave seen is available in other parts of the worldthrough travel, in new Western stores in bigChinese cities and in electronic media. Surveyrespondents believed that External Exposure willmost impact wealthier Chinese in Tier 1 cities andconsumers aged 31 to 40. External Exposure trailsWork/Life Balance and Healthy Living and Nutri-tion in affecting Chinese consumers earning morethan 25,000 renminbi per month. By and largefor MNCs, these are the types of consumers whothey understand best and hope to reach in drovesin China, particularly with higher-priced itemsthat are distinctive in quality, features and ofteninternational cachet.

Indeed, the potential impact of External Exposureon brand loyalty, which many MNCs view as acritical factor in their success in China as they also

do around the world, is extremely high, accordingto the survey. More than 70 percent of respon-dents felt that this trend would increase consumer

allegiance to specic brands, placing it at the topalong with Work/Life Balance and Healthy Livingand Nutrition two areas that obviously dependheavily on repeat customers for specic products.

The condence that MNCs have in targeting thistrend is apparent by the number of multinationalsurvey respondents a whopping 64 percent whoclaimed they are more effective than their Chinesecounterparts in understanding and responding to thistrend. But the Chinese companies displayed a bit ofdaring of their own. Fifty-eight percent said that theybelieve they were better suited to attract consumersinuenced by External Exposure.

Still, although both MNCs and Chinese com-panies expressed some condence about beingable to address certain individual aspects of theChinese consumer market, overall the surveyfound that neither Western nor Chinese companiesthought they were sufciently prepared for any ofthe key trends (see Exhibit 3). This is primarily amanifestation of the structural and organizationalhandicaps that both MNCs and Chinese compa-nies concede they have and uncertainty about theprecise direction that the rapidly evolving Chineseconsumer market will take.

Mobility Gains Buoy ConsumersThe extraordinary dynamism of the Chinese con-

Exhibit 3

Neither Chinese companies nor MNCs believe that they are fullyprepared for any of the consumer trends, though the Chinesecompanies are a bit more optimistic

35%

42%

52%

42%

54%

51%

48%

42%

41%

40%

34%

23%

Fully prepared Some preparation,

but not sufficient

No or very

limited preparation

26%

12%

18%

7%

15%

17%

External

Exposure

Evolution of

Family Unit

Health &

Nutrition

Information

Technology

Mobility

Work-Life

Balance

Question: To what extent is your company responding to this key trend?

68%

71%

50%

50%

81%

42%

21%

21%

36%

22%

13%

25%

Fully prepared Some preparation,

but not sufficient

No or very

limited preparation

33%

6%

28%

11%

14%

7%

Response of Western MNC Companies Response of Chinese Companies

N = 91 Companies N = 32 Companies

Source: Business Response to Trends in Chinas Consumer Market; joint study of The American Chamber of Commerce in Shanghai and Booz & Company; Booz & Company analysis


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sumer market was highlighted by the second mostimportant trend identied by all respondents namely, Mobility or the ability of Chinas popula-tion to get around more easily. As infrastructuremodernizes at a remarkable clip, distinctionsbetween small and large cities and even ruraland urban areas become blurred, and the typesof retail outlets Chinese consumers can shop in

expand. Surveyed companies felt that Mobilitywill primarily affect newly minted middle-incomeconsumers in Tier 3 cities and countryside com-munities, which are expected to take advantageof improved roads and rail lines by commuting toTier 1 and Tier 2 cities for jobs and shopping butcontinuing to live and frequent a variety of retailoutlets in their current home regions. In otherwords, Mobility could help develop and expandTier 3 cities and what could pass as Chinese sub-urbs near the biggest of the Tier 1 cities.Chinese companies appear to be in a better posi-tion to prot from this trend, in particular from

emerging consumers in more far-ung parts of thecountry. The survey found that Western MNCsbelieve they lag in go-to-market strategies forthe wide range of retail outlets that are pepperedacross Chinas many regions, reecting in part thehigher comfort level of Chinese companies with

the predominantly third-party distribution modelin which wholesalers and face-to-face distributionrelationships play a big role.

Where They Fall ShortIn each group of companies, there was remark-able accord on the largest structural hurdles thatthey must overcome to address the six trends(see Exhibit 4). More than 70 percent of MNCrespondents said that human resources challenges chiey, lack of required skills and the inabilityto adequately develop and retain talent are theirgreatest concern. This mainly grows out of thedifculties MNCs are having in nding sufcient

numbers of Chinese workers with the leadershipcapabilities and conceptual and communicationtalents they are seeking.

By contrast, only 13 percent of the Chinesecompanies viewed human resources as an impedi-ment. Instead, they were far more wary about theirorganizational structure, processes and tools. Havingbecome so adept at low-cost manufacturing andmass-market product development, these companiesare clearly anxious about their ability to scale uptheir business model for a diverse group of consum-ers at home and for export to overseas locations.

Exhibit 4

the survey oundthat neither Western norChinese companies

thought they weresufciently prepared orany o the key trends.

The barriers that MNCs and Chinese companies say they mustovercome to face critical consumer trends are starkly different

13%

14%

35%

38%

47%

49%

72%

Western MNC

N = 91 Western MNC, 32 Chinese Players

Question: What are the key barriers or challenges your company needs to overcome to address these key trends?

Challenges in reaching agreement withheadquarters on making the changes

needed to respond to these trends

Conflict of existing channels with new

channels

Challenges in making partnershipswork

Technology challenges

Demands of the current core businesslimit resources available to address thetrends

Existing organization structure,

processes and/or tools in place do notsupport the trends

Human Resources (HR) challenges /lack of required skills; retention,

training

Challenges in reaching agreement withheadquarters on making the changes

needed to respond to these trends

Conflict of existing channels with new

channels

Challenges in making partnershipswork

Technology challenges

Demands of the current core businesslimit resources available to address thetrends

Existing organization structure,

processes and/or tools in place do notsupport the trends

Human Resources (HR) challenges /lack of required skills; retention,

training

3%

3%

10%

10%

13%

74%

13%

Chinese Players



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Strikingly, the Chinese companies virtually

ignored all of the other possible levers that couldpose problems in creating a strong and uidconsumer market presence. It is quite possible thatthe lack of organizational structure among thesecompanies is profound enough that it impacts theirability to clearly see the potential weaknesses inother parts of their business model.While much in the survey separated MNCs andtheir Chinese competition, there was unanimityin the steps that they plan to take to tackle theseconsumer trends. Four broad tactics stood out:conduct research to better understand the trend;

develop new products and services; adapt thebrand strategy; and adapt the marketing communi-cations strategy (see Exhibit 5).

Interestingly, each of these tactical steps is a rev-enue-side activity, focused primarily on attractingconsumers and revving up sales. Operational ac-

tions lean factories, cost-cutting, improved sup-ply chain management, better logistical programsand the like were not given as much urgency.

Portrait of the Chinese ConsumerViewed with a broad brush, the survey providedan interesting prole of the Chinese consumerwho will be most impacted by the six highlightedtrends taken as a whole, and in so doing identiedthe core customer for many domestic businessesand MNCs that hope to thrive in China. Simplyput, he or she will be between 21 and 40 yearsold, live in Tier 1 or 2 cities and earn a middle-class income between 10,000 and 50,000 renminbiper month (See Exhibit 6). In addition, the newChinese consumer is Internet-savvy and will havegrown up in the era of market liberalization andglobalization, while having avoided the hardshipsof previous generations. As a result, he or she ismore condent and bold, more self indulgent andindulged (if they are under 30, they probably haveno siblings and were the focus of family life intheir homes) and more likely to spend money ontravel and leisure pursuits than their parents, whoprobably viewed such activities as unaffordableluxuries.

In addition, by large majorities, respondents saidthat all six trends would motivate consumers tobe willing to pay more for higher quality products

only 13 percent o

the Chinese companiesviewed human resourcesas an impediment.Instead, they were armore wary about theirorganizational structure,processes and tools.

Exhibit 5

MNC and Chinese companies believe that revenue side, ratherthan operational, actions are the most critical to address Chineseconsumer trends

Top 3 actions chosen by companies while being asked What are the important actions to address

the impact of this consumer trend?

External Exposure

Conduct research to

better understandthe trend

Adapt the brandstrategy

Develop new

products & services

External Exposure

Conduct research to

better understandthe trend


Develop new

products & services

InformationTechnology

Develop newproducts & services

Adapt the marketing

communication

strategy

Conduct research tobetter understand

the trend

InformationTechnology


Adapt the marketing

communication

strategy


the trend

Health &Nutrition



Adapt the marketingcommunication

strategy

Health &Nutrition



Adapt the marketingcommunication

strategy

Evolution ofFamily Unit


Conduct research to

better understand

the trend

Adapt the brand

strategy

Evolution ofFamily Unit


Conduct research to

better understand

the trend

Adapt the brand

strategy

Mobility


Conduct research to

better understand

the trend

Develop new

products & services

Mobility


Conduct research to

better understand

the trend

Develop new

products & services

Work-Life Balance




the trend

Work-Life Balance




the trend



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Exhibit 6

and services as long as they have sufcient infor-mation to make an intelligent decision about whatto buy. This would seem to favor MNCs that put apremium on more attractive brands.

However, IT generally seen in the survey as apotential strength and focus of Chinese compa-nies could provide a counterweight to the threemores that some Chinese consumers are embrac-ing: more variety, more quality, more loyalty.ITs greatest effect is on younger, less wealthyconsumers, who by and large seek to use the pric-ing transparency of e-commerce, the peer-to-peercommunication capabilities of online shoppingand social networking sites and the vast amountof information available on the Internet to nd the

best prices for similar quality products or services.

Indeed, surveyed executives said that most of thetrends would encourage greater use of the Internetand mobile apps as a sales channel; only Work/Life Balance and Health and Nutrition, which tendto be of interest to older, wealthier consumers, ap-pear to increase the importance of the bricks and

mortar shopping experience.

Anticipation of the makeup and behaviors of theChinese consumer market, whose direction couldbe altered by any number of macro- and micro-economic variables, requires continuous analysisand ongoing research and development (R&D)to support the varied demands of the market.Chinese companies have much more ambitiousR&D plans, according to the survey. More than 60percent of Chinese companies said that they planto expand R&D centers in the country, comparedto only 26 percent of Western MNCs. From theMNC perspective, there are a number of logicalexplanations for this. For one thing, many MNCshave already built R&D centers in China. On theip side, the persistent lack of sufcient protectionfor intellectual capital in China constrains someMNCs from enlarging their R&D facilities. Butregardless of the reasons, more than likely therewill be a proliferation of Chinese-developed prod-ucts in the home market in the coming years.

Critical ChallengesGiven what is at stake a share of the fastestgrowing consumer market in the world theobstacles to puzzling out the rules of the road in

China are well worth the effort. Few businesses

respondents saidthat all six trends wouldmotivate consumers to

be willing to pay moreor higher quality prod-ucts and services aslong as they have suf-cient inormation to makean intelligent decision

The demographics of the new Chinese consumer

Question: Which consumers do you think will be most impacted by this consumer trend?

Average results of 6 trends

Different Tiers of CitiesDifferent Income Range

(monthly household income, RMB)

Different Age Groups

1.4%

18.5%

44.0%

75.9%

87.3%

Key and

Tier-1cities

Tier-2

cities

RuralTier-3 and

beyond

Others

49.6%

55.9%

73.3%

79.2%

58.3%

29.9%

RMB

25,001 50,000

per

month

RMB

10,001 25,000

per

month

RMB

5,000 10,000

per

month

Less than

RMB5,000

per

month

RMB

50,001 100,000

per

month

RMB

100,001and

above per

month

11.5%

24.3%

52.4%

83.4%

71.6%

33.8%

51 6541 5031 4021 30Younger

than 20

Older

than 65



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For my Chinese busi-ness partner, the mostimportant qualities areloyalty and hard work,believing we can alwaysslog through anythingi we are willing to putin the time and devotethe human resources,rather than implement-

ing specifc proceduresand technical know-how.Its a completely dierentmindset.

- Executive o a U.S.manuacturer ocused onChinas consumer market

Chinese frms areconfdent, but it reallydepends on industry. Ourindustry[fnancial services]is a highly regulatedindustry so Chinesefrms have a reason tobe confdent - they arebacked by Chineseregulators.

- Executive o a U.S. inancialservices irm


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are choosing to pass up the opportunity, andboth MNCs and Chinese companies have theirwork cut out for them.

The major concerns for MNCs are:

1) Although the differences are not very pro-nounced, Chinese companies nonetheless aremore condent than MNCs of being somewhator fully prepared for each of the six consumertrends.2) Considering the emphasis of Chinese com-panies on expanding R&D activities, whichblends well with the surveys finding thatproduct and service development is a primarypath to success in China, Western MNCs maysoon face more formidable Chinese competi-tion. These stronger rivals likely will be com-peting not only on price but also on innovativefeatures and offerings.

3) Chinese companies appear to be taking muchmore aggressive steps than their Western coun-terparts to embrace the Internet and take advan-tage of online sales channels, which emerged asthe No. 1 consumer trend in the survey.

4) Western MNCs tend to downplay the valueof Work/Life Balance as a consumer trend. Thiscame in fourth in MNC rankings but secondamong Chinese company respondents. Thiscould be an expensive oversight because con-sumers affected by Work/Life Balance are moredemanding about the products they buy and areusually willing to pay more for high qualityitems, biases that match up well with MNCbusiness models.

5) Human resources challenges, which werehighlighted by Western MNCs in the survey,must continue to be addressed with urgency. Themost innovative multinationals in fact are doingjust that. Beyond talent recruitment, training andretention signicant issues on their own becauseMNCs must build strong workforces in China Western companies are dangerously behind inlocal leadership. Only one-third of the CEOs of

Western MNCs China operations were born onthe mainland.

Meanwhile, Chinese companies face their ownchallenges:

1) As incomes rise and the Chinese consumer be-comes more mature, sophisticated and demanding as shown by the importance of External Expo-

sure as a trend Chinese companies will have tobecome much more adept at capturing higher endmarkets with higher quality products.

2) Chinese companies must tackle shortfalls inorganization processes, tools and governance.All of these are critical attributes for compa-nies to scale their operating models to meet theneeds of a varied and dynamically changingconsumer base. Survey interviews revealedthat as many private Chinese companies grow,decision-making naturally moves from thefounder to a broader group of senior execu-tives, who often lack the business acumen andinstincts of the boss. Incoherent strategies arethe unfortunate result. Hence, it is essential forthese companies to install an organizationalsystem that formalizes the decision-makingprocess so that it can be vetted by key guresin the company and generate coherent marketstrategies with more consistent outcomes.

3) Chinese private companies see themselves asmuch more ready to take advantage of the sixconsumer trends than Chinese state-owned en-terprises (SOEs). Not a single SOE said that itwas fully prepared for any of the trends, while

11 percent to 50 percent of private Chinesecompanies claimed to be prepared, dependingon the trend. Clearly, the SOEs must play catch-up quickly or risk missing critical tipping pointsin the consumer market.

4) Beware of overcondence! Chinese companyrespondents were much less concerned thanMNCs on key business challenges such as de-mands on human resources, technology challeng-es, partnerships and channel conicts. Companiesshould review these issues to ensure they are notunderestimating the impact on their strategic plansand their ability to respond to market trends.

The AmCham Shanghai/Booz & Co. survey wasunique in its attempt to register the opinionsof both leading multinational corporations andChinese companies, both state-owned and pri-vate, about the most inuential trends affectingthe Chinese consumer. In essence, the ndingsprovide both a snapshot in time of the condi-tions seen in the market today and an illustra-tion of how these conditions will likely evolveover the coming years. Indeed, it is the wayWestern MNCs and Chinese players navigatethe distance between today and the near future

that will determine where they land in the raceto the top of this vital marketplace.

Chinese companies appear

to be taking much more

aggressive steps than their

Western counterpartsto embrace the Internet

[ as a sales channel ].


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Survey BackgroundThe Trends in Chinas Consumer Market survey was con-ducted by The American Chamber of Commerce in Shanghai(AmCham Shanghai) in cooperation with Booz & Company, aglobal management-consulting rm that works with many ofthe worlds top businesses, governments and other institutions.A total of 135 companies with extensive sales operations inChina were surveyed in April and May 2011. The companieswere presented with six trends impacting the Chinese con-sumer and in a series of 22 questions were asked to rank themby the following: a) their overall importance; b) how these six

trends will separately impact consumers in the coming years;and c) how businesses are responding to these trends. Findingswere then further explored and validated in focus groups andone-on-one interviews.

Of the companies surveyed, 70 percent were Western multina-tionals, 15 percent were private Chinese companies, 10 percent

were Chinese state-owned enterprises, four percent werebased in Hong Kong or Taiwan, and two percent were otherAsian companies. Broken down by industry, 38 percent wereconsumer goods companies, 33 percent were industrial outtscatering to the consumer market such as auto companies,nine percent were materials companies, eight percent werehealthcare-related and 12 percent were in other categories.The survey was conducted through online questionnaires andfollow-up interviews.

For complete survey results please go to www.amcham-shang-hai.org/publications

Contributors: Siobhan Das Bachran, David Basmajian, JoniBessler, Ashley Cahill, Andrew Cainey, Jeffrey Rothfeder,Jason Xi, Adam XuDesign: David Dieter


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The American Chamber o Commerce in Shanghai

Suite 568, Shanghai Centre

1376 Nanjing Road West

Shanghai 200040 China

1376 568200040

Tel +8621 6279 7119Fax +8621 6279 7643

www.amcham-shanghai.org

Booz & Company

Suite 2511, One Corporate Avenue

222 Hu Bin Road

Shanghai 200021 China

222 25 2511 200021

Tel +8621 2327 9800

Fax +8621 2327 9833

www.booz.com/cn

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