Emerging Market Consumers, Part 2

Stephen DeAngelis

June 24, 2011

In yesterday’s post, I discussed the growing amount of wealth that is being generated in emerging market countries. I also pointed out that most of that wealth is going to be generated in urban environments. The final part of yesterday’s discussion talked about the super-wealthy in emerging market countries. Today I want to concentrate on the growing global middle class. In a previous post, I noted that few pundits can agree on what constitutes “the middle class.” Christa Case Bryant agrees that “even experts can’t agree on what the middle class really is.” [“Defining ‘middle class’,” The Christian Science Monitor, 17 May 2011]. She continues:

“Is it income, or the way it’s spent? Education, or social status? Can salary denote more intangible characteristics of the middle class, like being cultured and idealistic? The answers are complex and imprecise at best.”

In the post mentioned above, I wrote, “I suspect that most people who consider themselves middle class make enough money to obtain the necessities of life and have enough left over for some discretionary spending.” I still think that having money for discretionary spending is what marks the middle class no matter where they are located. Bryant goes on to discuss the differences in perspective for those living in India, China, and Brazil. She concludes, “What’s important is how the purchases, perspectives, and pressures of this loosely defined global class are shaping the future.”

 

In yesterday’s post, I noted that economic progress generally precedes political transformation. China is a good example of this phenomenon. Peter Ford notes, “Consumer choice, not political choice, is the only freedom China’s middle class now enjoy.” [“In China, middle-class affluence, not political influence,” The Christian Science Monitor, 20 May 2011] Ford continues:

“A range of different sorts of white-collar people – entrepreneurs, employees of large state-owned enterprises and multinational companies, party and government officials, lawyers, doctors, and teachers – make up the middle class. By those criteria, these 300 million Chinese (25 percent of the population) are middle-class. The international consulting firm McKinsey & Company forecasts that by 2025 those numbers will have more than doubled to constitute 40 percent of the population.”

In another story about the global middle class, Christa Case Bryant writes, “By 2030, the global middle class is widely projected to at least double in size to as many as 5 billion – a surge unseen since the Industrial Revolution. This boom, however, is more global, more rapid, and is likely to have a far different – and perhaps far greater – impact in terms of global power, economics, and environment, say economists and sociologists.” [“Surging BRIC middle classes are eclipsing global poverty,” The Christian Science Monitor, 17 May 2011] There has been a lot of attention given to the economic superstars such as China, India, and Brazil — and for good reason. As noted above, China’s middle class numbers some 300 million people. That’s a lot of consumers; and consumers are good for business. Concerning India, Bryant writes, “Touting tigers, the Taj Mahal, and the towering Himalayas, India opened the 21st century with its ‘Incredible India’ campaign to attract tourists from around the world. But the unexpected happened. A surprising new face showed up on the Indian tourism scene to fill hotel rooms and tour bus seats: Indians themselves.” She continues:

“The curious and free-spending domestic traveler, … says Amitabh Kant, an Indian development official who wrote the book ‘Branding India: An Incredible Story,’ is an ‘economic savior’ for India. And, to boot, Mr. Kant says, middle-class Indians are a powerful market abroad, now outspending Americans in London, for example, by 10 percent. The ‘Incredible India’ surprise is part of a surge of prosperity that is rapidly expanding the world’s middle classes.”

Bryant notes that “India’s middle class is projected by the NCAER to grow by 67 percent in the next five years, to 267 million people, or nearly a quarter of its population.” Rudy Martin, editor of Emerging Market Winners, writes that the same economic boom can be found in Brazil and other Latin American countries [“Those Soaring Emerging Markets …,” Uncommon Wisdom, 16 October 2010] He reports:

“More than 30 million people moved out of the slums in Latin America since 2000, according to a recent U.N.-Habitat report. Argentina and Colombia experienced the biggest reductions, with 40% of their poor climbing out of poverty in the last 10 years, joining a swelling lower-middle class. As these people continue to move out of poverty they will have a huge impact on the already growing economies. With that comes increased demand for everything from cars to homes to wireless phones. Here are some highlights of increased consumer demand …

“— Brazilian auto production rose from to 3.1 million units in 2009, up 41% in five years (while U.S. car production dropped 53% in the same time span).

“— The country had 8.4 million paid TV homes at the end of June. The accumulated growth in the first six months of the year is 12%.

“— Retail sales in Brazil were up 11.4% in the first seven months of 2010 compared to the same period last year.

“— More than 85% of Brazil’s population lives in urban areas, creating massive demand for new housing.

“— And more!

“And while Brazil may be the largest economy in Latin America, other emerging Latin American economies are showing even faster growth. The IMF projects 2011 GDP gains of 6% or more for Argentina, Peru and Chile. Speaking of Chile …

“— Chile has reduced its poverty rate from 45% of the population in the late 1980s, to around 14% in 2009.

“— Chile now has one of the most developed mortgage markets in Latin America, representing 20% of GDP, up from 12% in 2002.

“— Chile’s retail sales are expanding at better than 13% annually.

“Indeed, if Latin America can keep up the growth of the past few years — as I fully expect it will — income per person will double by 2025, to an average of $22,000. Already, the emerging middle class of Latin America is aspiring to what is called ‘The six Cs’: A casa, carro, cellular, computadora, cable y cinema (a home of one’s own, a car, a cell phone, a computer, cable or satellite television and trips to the cinema.)”

Bryant reports that by 2022, the Organization for Economic Cooperation and Development predicts that, for the first time in history, the world will “move from being mostly poor to mostly middle-class. She continues:

“But today’s middle-class boom is unlike the Industrial Revolution, in which rising prosperity became a catalyst for increased individual and political freedom. Those in the emerging global middle classes – from an Indian acquiring a flush toilet at home to a Brazilian who can now afford private school to a Chinese lawyer with a new car in the driveway – are likely to redefine their traditional roles, and in doing so, redefine the world itself.”

If Bryant is really arguing that the new global middle class won’t seek “increased individual and political freedom,” I think she’s wrong; but she bases her argument on the fact that many new middle class participants come from communal traditions rather than individualistic traditions. She explains:

“From Aristotle to Alexis de Tocqueville, Western thinkers have championed the middle class as essential for prosperous, enlightened societies. They held it up as the engine for economic growth, the guardian of social values, and an impelling and protecting force for democracy. The new members of the middle class have been praised for their work ethic, like the shopkeepers, tradesmen, and professionals who spurred the Industrial Revolution. But they also differ in fundamental ways. They come from communal societies that rein in the individualism prized in 1800s America. Their exposure to the pitfalls of the West’s extravagant consumerism often makes them more frugal and environmentally conscious. And they are hesitant – for now, at least – to risk prosperity for political freedom.”

I agree with her that new members of the global middle class “are hesitant to risk prosperity for political freedom”; but, that is a far cry from arguing that prosperity this time around won’t be “a catalyst for increased individual and political freedom.” I think it will be. And while I agree with her that the new global middle class may be more frugal, I’m not convinced that they are a great deal more environmentally conscious. Profits still look like the driver behind many activities that are environmentally questionable — like rare earth extraction in China. Bryant goes on to ask, “What’s driving this bulge [in the growth of the global middle class]?” She writes:

“State policies such as Brazil’s increased minimum wage and India’s reduced tax rates have boosted incomes. Foreign investment is giving more people salaried jobs, and those in turn are driving demand for everything from mechanics to more fashionable clothes, says economist Homi Kharas of the Brookings Institution in Washington. And more are getting better education. That presents opportunities both for local entrepreneurs and multinationals – and could change the products available to the West.”

Over the past several years, I have mentioned that the basics for economic development include: good governance (especially the curtailment of corruption); improved infrastructure (especially a reliable source of electricity); increased foreign direct investment; and, a workforce that is educated and healthy. Look at the top of the heap of emerging market countries and you will find progress in each of these areas. When new consumers enter the market, they create a stream of discretionary spending. Retailers are anxious to get in front of that stream of money. As a result they have created products that appeal to consumers at the lower end of the middle class. Surprisingly, many of those products have found their way onto shelves in developed markets as well. Bryant explains:

“Last year, Levi’s specifically targeted Asians with its launch of dENiZEN, a new line for the ‘global citizen’ complete with pink T-shirts that say ‘Chase Your Dream.’ In a reversal of the usual currents of global markets, dENiZEN will come to the US this summer, where Target will carry a line adapted for Americans. There are other pioneers on this East-West route, particularly in consumer electronics, auto parts, and construction equipment, says Elizabeth Stephenson of the global consulting firm McKinsey & Company. In 2007, Finland’s Nokia introduced seven low-cost cellphones in India; at least three of them are now marketed in the US. Last year, General Electric developed a low-cost electrocardiograph machine for rural India, and within weeks 500 units were en route to Germany.”

To learn more about these subjects, read my posts entitled Innovation in (and from) BRIC Countries and Emerging Markets Beckon; but, Get it Right or Go Home. Bryant continues:

“‘As companies have begun to sell into emerging markets, they’ve had to innovate – both multinationals and local companies. They’ve learned to do things at a much better value-to-price ratio,’ says Ms. Stephenson, coauthor of a 2010 McKinsey report on emerging-market growth. ‘Now, what you’re starting to see is a lot of that innovation flow back. These new low-cost innovations are beginning to disrupt Western markets. The emerging market story is really a global story.’ Within a decade, Americans could start to see some of the inexpensive cars now being launched in China, such as GM’s new Baojun 630, which began selling last month starting at $10,800. But due to higher US standards for emissions and safety, along with consumer desire for sound systems and other amenities, even such cars will cost much more in America.”

The companies that will win the race to gain new consumers will be those that are most agile at adapting to local conditions and tastes. Bryant notes that globalization inevitably creates “tension between traditional values and upward mobility.” She believes, however, that communal societies, like India’s, will handle this tension better and keep citizens more “socially connected.” Many in the West are concerned watching their power and influence heading east. Since the generation of wealth is not a zero-sum game, they should be more concerned about how to take advantage of new business opportunities created by a growing middle class. Peter Wonacott states that people shouldn’t just be looking to Asia (or even Latin America) for opportunities. He writes, “Sustained economic growth in Africa has produced for the first time a broad middle class, one that cuts across the continent and is on par with the size of the middle classes in the billion-person emerging markets of China and India.” [“A New Class of Consumers Grows in Africa,” The Wall Street Journal, 2 May 2011] This is good news. A growing global middle class is something to be celebrated rather than feared. However, the continued growth of the global middle class is not inevitable. Heated economies and superinflation can wipe out years gains nearly overnight. Politicians in emerging market countries need to be wise stewards of the economy if they want their constituents to continue their climb out of poverty.