October 1, 2012 12:24 am

Cashing in on the middle class revolution

Culturally they are poles apart, but as consumer markets, China and India share more similarities than at first appears

The $10 Trillion Dollar Prize: Captivating the New Affluent in China and India, by Michael Silversteen, Abheek Singhi, Carol Liao and David Michael, Harvard Business Review Press, RRP$30

 

It is no secret that Asia’s two emerging superpowers are giving birth to a vast new middle class. But just what is meant by that term is rather less clear. Take India, a nation of about 1.2bn people. Are its middle classes those 5 per cent who live in car-owning households? Or are they the 21 per cent with motorbikes, or those roughly two-thirds who have a mobile phone or access to electricity?

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Such distinctions may be imponderable; Britain and America still can’t quite decide on what it means to be middle class either. But one fact is not in doubt: about 2.5bn Chinese and Indians are becoming wealthier at historically unprecedented rates, and the more prosperous among them are spending more. Much more, in fact: hence what Michael Silverstein and his trio of co-authors call the “$10tn prize”, or total consumption in both countries in a decade or so.

This titular figure is suspiciously neat and relies on assumptions of continued 8 per cent annual growth, which, in India at least, currently looks unlikely. The expansion will not be shared evenly either: China is already much the richer of the two, and its consumption rate will still be roughly double that of its southern neighbour by 2020.

That said, the authors, all of whom work for the Boston Consulting Group, make a convincing case for the importance of this eastward shift in global spending. Their book is engagingly written too – notwithstanding an unfortunate habit of dotting the text with bullet points and management jargon.

Most pleasing, however, are their many insights into changing customer habits. Some of this involves what the quartet grandly call moving up “the consumption curve”. One example of this is the fact that people tend to spend much more on their skin than their hair as they get richer – a crucial insight for luxury goods companies.

Equally intriguing are the stories of companies that have succeeded in China and India by adapting to local tastes. LG, the electronics group, chanced upon the idea of selling a television with extra loud volume controls and an automatic brightness setting, winning favour from Indians who often watch in noisy family living rooms, or even outside. Their microwaves have regional autocook settings too: rice-based idlis for the south, Bengali fish curry in the east.

This need to tailor products is one of the book’s main arguments, and one the authors use to rebut an obvious criticism: namely that there are such large differences between the two countries that comparing them makes little sense.

It is a fair point. Culturally, the two could hardly be less alike and there are obvious demographic differences as well: Indians have large families; China has a one-child policy. But they are more similar than they at first appear in other ways: India’s economy is smaller, but proportionally more orientated towards consumption, while China has a vast export sector.

More important is the fact that India lags behind its larger neighbour by about a decade, a legacy of its later opening up to globalisation. Yet this makes the comparison more instructive, not less, as is the case with luxury cars. Here China is already the world’s largest market, after an enormous growth spurt in the early 2000s that caught the likes of Audi and BMW flat-footed. But those manufacturers learnt their lesson and are now investing heavily in India, in anticipation of the same take-off occurring there.

Even so, the authors are right to stress that the emergence of a new Indian and Chinese consumption class is a long-term phenomenon that should be understood as part of the broader economic development of each nation, not just a story of companies selling knick-knacks in ever greater numbers.

Air conditioning is a good example. Only 2 per cent of Indians now own a cooling unit despite their nation’s oppressive heat. But few will be able to buy one until their country is able to produce inexpensive, reliable electricity; a trickier problem that it currently shows few signs of solving.

The same is true globally: consumable durables heading off to aspirational Asian homes will significantly increase demand for inputs such as steel and iron ore, pushing up costs for western consumers and putting untold new pressures on the world’s natural resources.

How this journey ends is unclear. Both India and China are poor countries: it will take a generation or two before either comes close to western per capita income and living standards. But their direction is clear enough, as are the aspirations of their peoples. This is a middle class revolution from which very few will emerge untouched.

The writer is Mumbai correspondent for the Financial Times

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