Emerging Market Consumers, Part 1

Stephen DeAngelis

June 23, 2011

In several past posts, I’ve made the assertion that economic progress generally precedes political transformation. The logic for that is fairly straight forward. When a population moves out of poverty and into the middle class (i.e., its members find themselves with discretionary spending money), their attention naturally turns to politics. Why? The reasons are many. To name a few: they don’t want their hard-earned cash taxed too heavily; they want freedom of movement and expression; and they expect the government to provide them with services that improve their quality of life. Because economic progress has such a dramatic impact on politics, both political and economic analysts are carefully watching the emergence of the new global upper and middle classes. Fareed Zakaria told Nora Dunne, “The growth in emerging markets is not just at the economic level. It’s also happening in terms of psychology. Chinese, Indians, and Koreans are feeling a much greater sense of political confidence and assertiveness. You see this on the world stage everywhere.” [“How the American dream went global: interview with Fareed Zakaria,” The Christian Science Monitor, 23 May 2011]

 

Zakaria’s claim that economic progress is leading to political transformation “everywhere” may sound like hyperbole, but it is not far from the mark. There are only a few dark corners of the world where globalization has yet to shine its light. Most new members joining the global upper and middle classes will come from urban settings. Analysts from McKinsey & Company claim, “Over the next 15 years, 600 cities will account for more than 60 percent of global GDP growth.” They provide a great interactive map that allows you to explore questions like: “Which of them will contribute the largest number of children or elderly to the world’s population? Which will see the fastest expansion of new entrants to the consuming middle classes? How will regional patterns of growth differ?”

 

The map mentioned above makes it clear that demographic growth is not evenly spread across the surface of the globe; neither is economic progress. McKinsey analysts report, “More than 20 of the world’s top 50 cities ranked by GDP will be located in Asia by the year 2025, up from 8 in 2007. During that same time period, our research suggests, more than half of Europe’s top 50 cities will drop off the list, as will 3 in North America. In this new landscape of urban economic power, Shanghai and Beijing will outrank Los Angeles and London, while Mumbai and Doha will surpass Munich and Denver. The implications—for companies’ growth priorities, countries’ economic relationships, and the world’s sustainability strategy—are profound.” [“Urban economic clout moves east,” by Richard Dobbs, Jaana Remes, and Sven Smit, McKinsey Quarterly, March 2011]

 

Most of the “profound implications” for business referred to by Dobbs and his colleagues are related to the growing global middle class (which will be the subject of the second post in this two-part series on emerging market consumers). As in times past, however, most of the new wealth that is being created is controlled by a handful ultra-wealthy individuals and families. Those individuals are more and more likely to come from emerging market nations. [“Brics becoming billionaire factory,” by Alan Rappeport, Financial Times, 9 March 2011] Rappeport reports:

“The number of billionaires in leading emerging economies has surpassed the number of those in Europe for the first time and is quickly closing in on the US, according to new figures from Forbes. The US still has the world’s most billionaires, with 413 individuals with a total net worth of $1,500bn. At the beginning of this year, the Brics countries – Brazil, Russia, India and China – had 301 billionaires, 108 more than in the previous year, and one more than Europe. ‘The global billionaires this year reflect what’s going on in the global economy,’ said Steve Forbes, chief executive of Forbes magazine, pointing to the growth in emerging economies.”

It is not just BRIC countries that are producing billionaires. The article points out that the world’s wealthiest man, Carlos Slim Helu, comes from Mexico. Rappeport writes, “As the world economy recovered, the number of billionaires rose to a record 1,210 in 2011, boasting a total net worth of $4,500bn as of February 14.” He continues:

“In Asia, the number of billionaires has nearly tripled in the past two years to 332, with 115 in mainland China alone. The richest man in China is Robin Li, founder of the search engine Baidu, with $9.4bn. … India’s 55 billionaires have an average net worth of $4.5bn. … Japan, once the economic engine of Asia, is now lagging behind with just 26 billionaires. Europe’s fortunes are also starting to slow, with its number of billionaires overtaken by Asia for the first time in more than a decade. Booming commodity prices have helped Russian billionaires.”

More often than not people decry the fact that so few people control so much wealth. Ruchir Sharma argues, however, that countries need more not fewer billionaires if they are going enjoy future economic success. [“For healthier development India needs far more new billionaires,” The Economic Times, 9 May 2011] Before you dismiss Sharma as an elitist, he admits that in some countries the presence of billionaires demonstrates an underlying corruption that undermines rather than promotes economic progression. His prime example is Russia. He writes:

“There is something anomalous about the fact that Russia’s billionaires number as many as China’s, even though its economy and market capitalization are less than a third in size compared to the world’s largest emerging market. Not just that but Russian billionaires have almost twice as much wealth as their Chinese counterparts, they mainly originate from one city – Moscow – and little churn has taken place at the top with eight of the richest 10 common between the latest list and that of 2006. … [That] suggests that in Russia, the distribution of wealth is extreme and power is well entrenched at the top. Such high levels of concentration aren’t surprising considering that nearly 80% of Russia’s billionaires are in the commodity space where government patronage is often needed to make wealth in those industries. Russia’s billionaire list also shows that outside of the oil and materials sector, little other economic activity of any size is underway as only modest wealth is being generated in more innovative businesses such as tech and media.”

Although he admits that there are problems in China, he asserts that China is a better example of why billionaires are important for a growing economy. He continues:

“At the other end of the spectrum is China’s list [of billionaires], which lays bare the country’s unstated rule that it is not good for an economy to have billionaires who are too rich and for too long. Not a single billionaire in China has a net worth of more than $10 billion; compare that to 16 in Russia and 8 in India. Only one business tycoon, who made China’s list of top 10 billionaires five years ago, was on the roster in 2011, and all the other nine few faces created their wealth outside the commodity sector. … To be sure, there is plenty of talk regarding crony capitalism in China too and some reports even suggest that a majority of the Chinese worth more than $10 million are children of high-level Communist Party officials. While such rumors are hard to confirm, it is apparent that Chinese leaders certainly do not want to go the Mexican way where just a handful of families control the economy.”

In other words, Sharma believes it is better for a country to have 100 billionaires than a single individual worth $100 billion. James Mackintosh notes that emerging market billionaires have generated wealth for investors as well as themselves. “Emerging-market shares have more than doubled in value in the past six years, while shares in developed markets are up only 16 per cent.” [“The new frontiers of wealth,” Financial Times, 26 May 2011]. He continues:

“The link between billionaires and foreign investors may seem simple enough. Emerging markets tend to be inefficient, with success often involving the right government connections and friendly regulators. The mere act of creating a billion-dollar fortune proves someone has the ability to navigate these tricky waters. Invest alongside them – an increasing number of these billionaires run listed companies – and investors will be towed along in their wealth-creating wake.”

Rudy Martin, editor of Emerging Market Winners, agrees with Mackintosh that “billionaires are not getting rich in a vacuum.” [“Those Soaring Emerging Markets …,” Uncommon Wisdom, 16 October 2010] Since this is a post about emerging market consumers, I really don’t have to point out that consumers need money or access to credit. That’s why I’m starting the money trail at the top — with the billionaires. They are the emerging markets first consumers. This actually concerns some governments. Sharma points out that “Chinese policymakers are wary of the power of big business and Beijing’s recent ban on outdoor advertising of luxury goods shows that the economic leadership is increasingly concerned about a potential backlash against conspicuous consumption.” Despite the advertising ban, Rahul Jacob reports, “The luxury goods market in China is booming,” [“Tastes of the newly wealthy,” Financial Times, 16 March 2011] He continues:

“McKinsey … released a report forecasting that spending on luxury goods by Chinese consumers would grow by 18 per cent annually to about $27bn by 2015 – when the market will surpass that of Japan, the current biggest market. Aaron Fischer, an analyst at CLSA, a Hong Kong-based brokerage, is even more bullish. He estimates that annual growth in luxury sales in greater China – like McKinsey’s numbers, this includes Taiwan, Hong Kong, mainland China and sales to Chinese tourists shopping overseas – will be 25 per cent, accounting for 44 per cent of global sales by 2020. Luxury goods companies from Gucci and Salvatore Ferragamo to carmakers BMW and Mercedes-Benz, can attest that the abandon with which wealthy Chinese shop is prompting them constantly to revise their sales targets for the region.”

Jacob reports that luxury goods companies are having to adjust to the Chinese luxury goods market because Chinese millionaires “are 15 years younger than their overseas peers and they spend more per transaction.” He continues:

“Unlike in the west, men … account for a larger proportion of luxury goods sales than women. They also tend to buy luxury goods as gifts for wives, girlfriends, mistresses and business contacts in higher numbers than in the west. ‘Relationship-building’, for example, a euphemism for bribes, is enough of a factor for luxury stores to have more stores in Beijing than the number of wealthy in the city would justify. This tendency towards conspicuous consumption also extends well beyond the ranks of the wealthy.”

Although emerging market super-wealthy individuals help generate wealth and jobs, it is the growing global middle class that will have the most far-reaching and profound impact on the world’s economy. The global middle class will be the subject of my next post.