The Global Markets will have sustained growth over the next 25 years because of the emerging middle class in developing countries... specifically China and India. Those organisations that develop relationships and business in India and China will, in my view, be well set for the next 25 years.
Salient Points
- ‘Shifting Wealth’ from West to East over next 25 Years
- Middle Class spurs growth and Innovation a nd there is a huge swell of Middle Class in China, Asia and India (growth from 1.8b spending $21trillion to 4.6b spending 56trillion
- Annual output to grow from 63 trillion per annum to 200 trillion per annum in 25 years
- The growth does not depend on a rebound in US or European consumer demand, but depends on the inevitable demand from a new large, growing Asian middle class, that is of sufficient size to provide the impetus for demand growth that the world needs.
"The most important development, I believe, of the 21st century will be the rise of Asia. China has already trebled its share of world GDP over the past two decades and India has doubled it. Both these giant economies of Asia are bound to gain a considerable part of their share of world GDP that they had lost during the two centuries of European colonialism...”
This quote from India’s Prime Minister, Manmohan Singh, encapsulates the optimism that continues to dominate economic scenarios for India, China and indeed Asia and the world.
For forty years between 1965 and 2004, the G7 economies accounted for an average of 65 per cent of global GDP measured at market exchange rates. Underpinning the performance of the G7, and indeed driving the global economy, is a large middle class.
Global consumer demand has so far been concentrated in the rich economies of the OECD. Will that also shift towards Asia as their Middle Class emerges?
Currently, Asia accounts for less than one-quarter of today’s middle class. By 2020, that share could double and could account for over 40 per cent of global middle class consumption.
Who is this middle class that tends to drive economies?
The middle class is a social classification, reflecting the ability to lead a comfortable life. The middle class usually enjoy stable housing, healthcare and educational opportunities (including college) for their children, reasonable retirement and job security, and discretionary income that can be spent on vacation and leisure pursuits.
It is the source of entrepreneurship and innovation—the small businesses that make a modern economy thrive. They bring new ideas, physical capital accumulation and human capital accumulation.
They provide the “consumerism” that defines the middle-class: they provide the growing disconnect between consumer desires and incomes (enabling leverage and bank lending to fulfil their desires) and are prepared to pay a little extra for quality as a force that encourages product differentiation and thereby feeds investment in production and marketing of new goods.
According to Wharton marketing professor John Zhang, marketers must pay close attention to this population to reap the benefits of an expanding global middle class.
Coca-Cola's chief executive Muhtar Kent sees this market as critical to his company's future and describes the scale of the opportunity as equivalent to adding a city the size of New York to the world every three months. The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the middle class as earners making between $10 and $20 a day -- adjusted for local prices -- which is roughly the range of average incomes between Brazil ($10) and Italy ($20).
A look at the geographic distribution is striking. In 2000, developing countries were home to 56% of the global middle class, but by 2030 that figure is expected to reach 93%. China and India alone will account for two-thirds of the expansion, with China contributing 52% of the increase and India 12%, World Bank research shows.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2011
Table 1. The Global Middle Class, 2009: People and Spending
The Growth of Consumerism in Europe and USA over past 75 years and current GFC halting it!
Over the past 65 years, the middle class consumers in “the developed countries (America and Europe) have fuelled demand, while Asia has been the source of supply.
The unlocking of spending power in the middle class in rich countries was achieved by financial innovations , growth in consumer credit, mortgages and home equity withdrawals. Households could tap into their wealth from growth in their property values to feed their consumerism.
The GFC brought a halt to this as property values declined and households lost their wealth and ability to borrow (sort of like a massive pyramid scheme!). They are now becoming a saving nation, and consumerism is shrinking in these countries as they try to rebuild their wealth. It is unlikely that there will be sustained growth in these markets in the short to medium term.
Enter BRIC and emerging Countries – Growth in Middle Class and Consumerism
The growing ranks of middle-class consumers span a dozen emerging nations, include almost two billion people, spending a total of $6.9 trillion annually. Our research suggests that this figure will rise to $20 trillion during the next decade—about twice the current consumption in the United States.
The world is looking to BRIC countries to provide
the new middle class and growth in consumerism…. Specifically China and India.
They need to grow the social safety net, education, medical insurance – they are currently building infrastructure in cities.. but there needs to be substantial institutional change to have a sustained middle class.
It seems that China and India have reached a tipping point where a large number of people will be part of the middle class and drive consumption.
This bodes well for Australia (see article in SMH 12 December 2011)
THE GLOBAL ECONOMY and the case for SUSTAINED GROWTH OVER THE NEXT 25 YEARS
In PPP terms, global output may reach almost USD63 trillion this year. North America (24 per cent), Europe (27 per cent) and Asia (34 per cent) dominate the world economy.
Importantly, the rich countries of the world only account for 53 per cent of global output now, compared to 70 per cent in 1990. The share of fast growing economies is much higher than was the case twenty years ago, which bodes well for growth over the next 25 years!
The economic centre of gravity would shift to Asia, which accounts today for 34 per cent of global activity, but by 2034 could account for 57 per cent of global output. Three giant economies, China, India and Japan will drive this growth.
By 2034, 25 years from now, the global economy may be USD200 trillion in PPP dollars.
Such a world is very different from the one we see today. It is significantly wealthier, with per capita incomes averaging USD21300 as compared to USD8000 today. (see graph of flattened GDP)
The rise of Asia would not be unprecedented. Indeed, it would bring Asia’s economic share into line with its population share and restore the balance of global economic activity to that in the 18th and early 19th centuries, before the Industrial Revolution led to the great divergence of incomes across countries.
See Hans Rosling's portrayal of Asia's Rise
The Reason for the growth is that Asia Pacific is coming from a low base. World will add 1.6b by 2034 –95% of the population growth will be in developing countries.
Growth of Middle Class
There is a significant global demographic shift from lower class to middle class in India and China.
The graph below indicates shows the forecasted growth of china’s middle class...
20% of population will grow from $2 per day to $9
per day
25% of the population will go from $7.50 per day to between 50 - $100 per day
Number and Share of Middle Class
Middle class will increase from 1.8 billion to 3.2 billion people by 2020 and to 4.9 billion by 2030. Middle class spending is trending to go fom $21tr to 56 trillion by 2030.
Almost all this growth is coming from Asia. See graph below.
In 2000, Asia accounted for 10% of the Middle Class SPending. By 2040, this could grow to 40% and in the long term 60%. See a graphical representation below:-
The fact that Asian consumers may substitute for US consumers tells us simply that in numerical terms Asia could become large enough to offset the stagnant purchasing power most analysts see as likely in the developed world.
It does not tell us anything about the nature of this demand in terms of what products will be consumed and where they will be made. But if the Asian middle class does rise, Asian savings may fall and redress current global imbalances to some degree.
Middle class = Growth
A few Salient Facts on the Growth of the Middle Class in China and India
China
China is expected to become the world's third-largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth. The McKinsey Global Institute projects China's middle class will increase from 43% of the population today to 76% by 2025. "The shift from investment to increasing consumption overall -- and as a share of GDP -- is very important to sustainable growth in the long-term. It has a current middle class 157m – retail growth has been 20% per annum and most recently 15% per annum.
Car sales –
in 2000 - USA
was 37%, China 1%
in 2009 China
13% (13 million vehicles)
2004, General motors sold 10 cars in usa for every 1 car in China. Now the ratio is 1 to 1. Soon, China will be a bigger market than USA for USAs largest automaker!
Apple could generate another $18 in earnings per share and $68 billion from sales, up 55% from this year’s base, in emerging markets by 2015, a team of analysts at Credit Suisse wrote in a report released Tuesday.Cell Phones
China has 700 million subscribers. In 2008, Nokia had sales in China of $8.2 billion (3 X USA revenue.
A 2007 survey of of 6000 Chinese Shoppers (middle class) found they spend on average 9.8 hours per week shopping vs 3.6 hours of American counterparts.
Middle Class in China is less than 12%. If exports slow, is the middle class large enough to take up the slack. Is it self sustaining?
Food and Drink
Despite having strong global brands, multinational companies face challenging competition in emerging markets, as these economies already boast aggressive local players that have captured a significant portion of spending. Chinese beverage maker Hangzhou Wahaha, for example, has built a $5.2 billion business against global competitors such as Coca-Cola and PepsiCo by targeting rural areas, filling product gaps that meet local needs, keeping costs low, and appealing to patriotism.
The World Bank’s Doing Business survey found China ranking 61st in the world in terms of ease of access to credit. Investment climate surveys suggest that less than half of SMEs have a bank loan. Econometric results indicate that there is less employment growth in firms facing greater difficulties in accessing credit. According to Aziz and Cui (2007), the programme of bank restructuring in China emphasized stricter rules to minimize non-performing loans, leading firms to cut back further on employment. The corollary is that as banking reforms take root, and as privatisation and private enterprise growth moves ahead, employment growth could accelerate. This would raise the share of labour in national income and the share of household disposable income in GDP.
3 main things that are hindering people to move from lower to middle class
- Differences in schooling and educational attainment are already the most significant determinants of income inequality in China (World Bank, 2009). This needs to be a central long term strategy.
- Household consumption is only 37% of GDP vs Global average of 61%. Or additional amounts could be channelled into Public Projects.. would have the same effects.
- Bank Credit tough for SME’s
A recent article indicated that China Government and Developers have built cities with 56 million units that are empty, with school facilities and state of the art transport and infrastructure. This is an interesting strategy to grow the middle class, with government giving Chinese families who are keen to move to cities and be educated, a unit on a 99 year lease, charging them say 20% of their Gross Income or market rent (whichever is less) . By providing them this opportunity… good housing, schools, transport and infrastructure, they will fast track a strong middle class, that will enable growth to be self perpetuating for the foreseeable future.
The notion of “Build and it will come” resonates!!
INDIA
The McKinsey Global Institute, the consulting firm's independent economic research arm, projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the 5th.
According to McKinsey, this middle class comprises government officials, college graduates, rich farmers, traders, business people and professionals. These groups choose what they will consume, rather than be driven by the necessities of life. Such discretionary choices, reflecting the tastes of the new Indian middle class, will dominate consumption patterns.
Parents also feel that the qualities their children will need to get ahead have changed. From 1990 to 2001, there has been a striking increase in those answering that the following quality was important for their children: independence (30 per cent to 56 per cent); hard work (67 per cent to 85 per cent); thrift and saving (24 per cent to 62 per cent); and determination and perseverance (28 per cent to 46 per cent). In other words, the changing values associated with middle income families are already visible in India, and these changing values are conducive to economic development.
Distribution is an important consideration for companies hoping to reach the emerging middle classes. Roads and airports are underdeveloped, particularly in India, a situation that presents a significant challenge -- and opportunity -- for companies that want to create innovative distribution systems.
India’s middle class could surpass that of China by 2020
India faces many obstacles to sustained growth:
• The current economic crisis.
• Deficiencies in human capital and public infrastructure.
• Weak bureaucracy and judiciary.
• The middle-income trap.
• Social problems of poverty, migration and unemployment.
• An unstable regional neighbourhood.
• Global resource constraints.
It has, however, found a way to navigate through these problems since 1991. Every developing country faces a set of structural constraints that can potentially hold it back. If the country is sufficiently motivated and far-sighted, it can overcome such obstacles. That is why the track record of sound performance is so important in indicating the likelihood of continued success.
There are several reasons to be optimistic about continued accelerating Indian growth:
• The global economy could be set for faster
long-term growth, thanks to the structural
change towards developing countries.
• Growth in Asia will dominate, with India benefiting from neighbourhood
effects—the fastest growing markets in the world will be closer to home.
• Indian investment levels and manufacturing growth have started to pick up.
• India
has turned the corner on public sector debt—the share of interest to GDP that
must be financed from budget resources has fallen since 2002, leaving more
fiscal space for infrastructure spending.
• Indian demographics and urbanization are favourable.
• India’s
emerging middle class can drive growth in the same way as in other countries.
• The shift in values that underpins the political economy of reform appears to
be well in hand in India.
Indian fixed investment has sharply increased in the past few years, steadily rising from 22 per cent of GDP in the 1980s to 25 per cent in the 1990s to more than 35 per cent in recent years. While still short of the levels attained in China and Vietnam, the acceleration of capital formation in India should position it well for future growth.
India’s DEMOGRAPHIC DIVIDEND
India is set to reap a demographic dividend. Its labour force should grow by more than 1.7 per cent a year over the next 30 years, while population growth is just over 1.2 per cent. So, the ratio of working age population to total population is on the upswing. In addition, India still has a relatively low labour force participation rate of 61 per cent. As the population becomes more urban, rich and educated, participation rates are likely to rise.
Goldman Sachs forecasts that 500 million people will be added to India’s cities by 2039. It notes that 10 of the world’s fastest growing 30 urban areas are in India. To see the impact of demographics and urbanisation on labour force participation, look at China, which has a labour force participation rate of 82 per cent and a labour force of over 800 million, compared with India’s 516 million. There is a possibility that higher labour force participation could add another full percentage point to India’s labour force growth over the next 20 years bringing it up to 2.7 per cent.
The demographic dividend takes many forms.
- It provides for a rapid reduction in poverty as the dependency ratio shrinks.
- It gives families the means to save, accumulate and invest in their own well-being.
- Perhaps most important, it permits greater investment in children and human capital—the foundation for Indian growth for the next generation.
BODING WELL FOR A Bourgeoning MIDDLE CLASS!
Some Stats, Forecasts and Graphs predicting Indias Growth
India could witness a dramatic expansion of its middle class, from 5-10 per cent of its population today to 30 per cent in 30 years. With a population of 1.6 billion forecast for 2039, India could add well over 500m people to its middle class ranks by 2039 (Figure 8).
The figure shows that today very few Indian households would have incomes exceeding even USD5 per day. In fact, the mean per capita household expenditure in 2005 was just USD3.20 per day, according to the World Bank. But between 2005 and 2015, half the population will cross the USD5 per day line. Between 2015 and 2025, half the population will surpass the USD10 per day line, the OECD definition of the middle class
Bottom 40% will
go from 2.50 per day to $40 per day
Top 30% will go from $5 per day to $80 per day
Growth of India – China Trade
India-China trade has been growing at more than 50 per cent a year since 2002, to reach about USD37 billion in 2007. The growth rate of bilateral India-China trade was twice the average growth in total exports from either country. China is already India’s top trading partner. After adjusting for partner GDP, the propensity to trade between China and India is also higher than for any other major trading partner. Already, there are major acquisitions by Indian companies in China and vice versa. As these business ties deepen, the underpinnings of future trade growth will become stronger.
India’s proximity to China, and by extension to the whole of East Asia, will factor in its projected growth acceleration.
CONCLUSION
It is possible that China and India will lead a global recovery. This scenario, importantly, does not depend on a rebound in US consumer demand, but depends on the inevitable demand from a new large, growing Asian middle class, that is of sufficient size to provide the impetus for demand growth that the world needs.
They will demand a range of new goods and services and growth will be driven by product differentiation, branding and marketing.
How can we take advantage of this growth?
There are many strategies and ways to enter these markets and attract these consumers.... but to achieve success the two critical factors are speed and scale.
An Organisation will need to work at a more local level, gaining scale in specific regions and categories by teaming up with deeply knowledgeable on-the-ground partners. They can help not only in product development but also in distribution and market positioning—the crucial final steps to reaching highly local consumer markets.
A key success factor to by Multinationals will be to recruit, train and retain local talent and accelerate leadership development. Expatriates alone will not cut the mustard. Building your Organisations talent pool in these areas, will give you a competitive edge to seize the Middle Class opportunity.
WHAT CAN PREVENT THIS FROM HAPPENNING
- Potential Political instability?
- will China’s middle class grow at the pace that is needed to sustain the current growth?
- How will the world (USA) cope with this shift of power to Asia?
- A black Swan?
Hopefully, the global crisis we had to have will result in more robust structures being put in place to manage the global economy better, and if so, then the underlying structural forces for global growth through a burgeoning Asian middle class can bring in a new era of growth, wealth and prosperity.
Bibliography and other interesting articles
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2011
Asia's RIse - How and When Hons Rosling
http://www.mckinseyquarterly.com/Capturing_the_worlds_emerging_middle_class_2639#