As he later blogged, "She was
gesticulating with her fingers to make the number 'two' and
pointing at the television. My Mandarin was no better than her
English, and it was only after she left that I saw the news that
China had just overtaken Japan to become the second largest economy
in the world."
For Galgey, the story was about the
pride the Chinese have in the country's recent economic
achievements - compressed into less than a lifetime. It is, say the
IMF, only a few years before she will be able to celebrate China's
arrival as the largest economy in the world, at least by some
measures of spending power. And where China goes, India and Brazil
are following.
The speed of this transition has been
remarkable. By 2030, Asia's economy could be larger than that of
the US and the European Union combined, with the region's share of
world GDP swelling from a little under 30 per cent to more than 40
per cent. According to Anoop Singh, head of the IMF's Asia and
Pacific Department: "Twenty years from now, Asia's economy as a
whole will be larger than that of the G-7 and half the size of the
G-20". And Latin America-which, like Asia, had its financial crisis
early-is growing at speed as well.
When the economic trends are combined
with population changes and urbanisation, it is not surprising that
the world is now looking to the south and south-east. We are likely
to see another billion people on the planet in the next twenty
years, who will mostly be found in the new mega-cities in Asia. And
Asia and Latin America also have younger populations-certainly
compared to Europe and Japan-which gives them, for the time being,
an economic and innovative energy.
The consultancy McKinsey has put some
numbers on the scale of the coming global shift. In typically
breathless style, it reports, "The rapidly growing ranks of
middle-class consumers span a dozen emerging nations, not just the
fast-growing BRI C countries, and 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 goldrush, it seems, is on.
There are some wrinkles, though. It is
unlikely that China, in particular, will continue to grow at the
same hectic rates we have seen over the last couple of decades.
Like India, it is rapidly moving out of the stage of being a low
cost producer. Issues of inequality continue to surface. Resource
shortages, in particular food and water, are already causing
problems. Pollution is problematic. In India, corruption remains an
acute issue, and-for all the millions who have been lifted from
poverty there -it still has the largest population of the world's
poor within its boundaries, some 350 million.
And in Asia, in particular, there is
poor social protection, for dealing with unemployment and
healthcare, which means that families save instead of spending.
From a global perspective, this has meant that China has been able
to carry on underwriting America's debts, but it is not a route to
a balanced or stable global economy. Even orthodox economists have
started to point to the successes of Latin America in this respect.
Generally left-of-centre governments have started to address high
levels of inequality, and increased social protection, with the
result that people have started to buy more, creating more
balanced, and more prosperous economies.
Shifts in corporate
ownership
Perhaps, so far, the biggest
fundamental economic shift has been the global changes we are
starting to see in ownership. There are now 61 Asian businesses in
the FT's Global 500, based in China, India, Taiwan, Singapore and
Indonesia, and Asian multinationals are reshaping some of the
world's biggest industries. It is not coincidence, either, that
Bill Gates has been displaced as Forbes' richest man by the Mexican
telecoms tycoon Carlos Slim.
The result is a re-shaping of the
world's industrial landscape. In the car business, for example,
Volvo has been acquired by China's Geely, after changing hands for
$1.5 billion. India's Tata group now owns Land Rover and Jaguar, as
well as being the world's largest steelmaking group. In
telecommunications, China's Huawei is the world number two in
mobile-infrastructure equipment, behind Ericsson. Its rise has
provoked a major restructuring of the global market, which saw
Siemens and Nokia merge network infrastructure divisions and
France's Alcatel acquire America's Lucent.
The Chinese telecoms company, China
Mobile, meanwhile, is among the world's ten biggest companies by
market capitalisation, with more than 508 million consumers. It has
also pushed its way into the top ten of the brand value survey
BrandZ. This acquisition trend seems certain to continue. Because
developing markets have weathered the global downturn better, they
are in a position to buy.
A Grant Thornton survey in March this
year shows that 44% of privately held businesses in Brazil, Russia,
India, and China are planning to grow by acquisition in 2011, up
from 27% last year. In other words, the story here is not the one
that's usually told. This is not a tale about virgin consumer
landscapes, with people anxiously waiting for the delights of the
world's finest packaged goods products. Instead, we see markets
which have strong and successful local players, with skilled
workforces, different patterns of innovation, and which are moving
rapidly up the value chain and into new markets.
Most of the world's science and
technology graduates now come from China and India, and China is
already-by some distance-the world's largest producer of both solar
panels and wind turbines. Huawei, similarly, was listed as one of
the world's top innovators by Thomson Reuters. Network provider
China Mobile is now one of the top ten global brands in Millward
Brown's annual BrandZ rankings - a list that assesses consumer
brand equity as well as financial performance. The notion that
Western businesses do the design and leave the low-cost production
to the Global South is rapidly becoming out-dated.
And there are two big implications
from all of this. The first is about innovation, the second about
brands and branding.
The implications for
innovation
We are increasingly seeing innovation
emerging from the new competitors in Asia and Latin America which
has originally been designed for local markets. Such products tends
to have squeezed out features and materials to reduce cost.
Historically, such products would be
unlikely to gain traction in more affluent markets, but in a
post-crisis climate, more affluent consumers are increasingly also
savvy shoppers who understand that choice comes with a cost. So
Huawei's $100 smartphone has been developed for the Asian and
African markets, but there are already signs of a 'grey market'
which imports handsets into the US . The Tata Nano is a lightweight
car that has been designed against Indian pricepoints, but which is
likely to be modified, to comply with market regulations, as a low
cost model for Europe and elsewhere.
And global brands have also been
learning how to adapt innovation from the South for their
traditional markets. From our Streetscaping network, we see
increasing numbers of examples. France's Groupe Danone, for
example, learned about reverse innovation in Bangladesh, where they
set up local microplants that produced a tiny fraction of the
yogurt of a standard facility, partly because of the lack of
refrigerated storage. The lessons learned from Bangladesh helped
Danone launch a low-cost yogurt sub-brand called Ecopack in
France.
In the specialist health sector,
Medtronic developed for the Indian market a low-cost pill-sized
pacemaker which could be inserted in the heart using a stent. This
was both a simpler procedure-so more surgeons were capable of
carrying it out-and the design also included a sensor for remote
monitoring. The company now plans to launch this in the United
States and Europe, and sees opportunities to adapt it for other
health conditions, such as Parkinson's.
Sometimes, such innovation is just a
matter of repositioning a product for a new market. Nestlé's Maggi
brand-low-cost, low-fat dried noodles developed for rural India and
Pakistan-found a market in Australia and New Zealand as a healthy
and budget-friendly alternative. P&G, similarly, found that the
market for its Mexican Vicks Honey Cough cold-remedy syrup could
extend to Western Europe and the US.
Of course, there are risks in this.
Philips has considered launching in the affluent world the low-cost
solar-powered lighting it designed for Ghana. But this might
cannibalise existing products and hurt margins. But this is a
classic business conundrum: if you don't launch these products
yourself, a competitor will-and quite likely a new competitor from
Asia or Latin America.
The implications for
brands
Increasingly, in this world, we expect
to see brands operating in more complex ways than in the past to
manage the complexities of different markets, new competitors, and
more complex consumer behaviour. As we argue in our recent report
on The Future of Global Brands, increasingly, global brands will
start to build local brands, sometimes in partnership with local
businesses, using local expertise to "co-create" new products for
this emerging middle class, rather than merely copying existing
lines.
Some examples:
-
dENiZEN by Levis. dENiZEN was launched
last year in Shanghai, the first time Levis has launched a brand
from the outside of the US , and the first Levi's brand to have its
headquarters outside the US. The five-pocket jean is aimed at 18
-29 year-olds in China, Singapore, South Korea, and, in the future,
India. Levi's calls this target group "Asia Rising." In style and
price, these jeans are all about this new global consumer. As
importantly, these jeans represent a ground-up approach to building
a global presence. Content new consumers, new markets
-
Shang Xia. Shang Xia is a new Hermès
luxury brand launched last year targeting the Chinese market.
Historically, Hermès expanded by buying existing brands. But as
with dEN iZEN , Shang Xia is being launched from the ground up,
using local know-how and materials to build a global presence at a
lower price point. A Hermès representative has insisted that it is
"a Chinese brand, developed in China with the Chinese team, based
on Chinese craftsmanship and broadly made in China. We don't want
any confusion." The challenge for Hermès, as one scholar of the
Chinese luxury market has noted, is that products specifically
targeting the Chinese market are often "less welcomed than products
that are totally foreign". It will be interesting to see if Hermès'
co-creation model resolves this challenge.
-
BonVi. Launched in Ghana in 2009 by
Amway, BonVi-a range of personal, nutritional, and household
products-was developed through a live prototype run in rural Ghana
involving in-home interviewing and village charrettes with feedback
on everything from product samples to the proposed colour of the
brand identity. BonVi aims at a mass market using local engagement
to convert existing Amway products to fit local needs, and
co-creation to identify additional needs learned from local
collaborators that can be met by new products within the global
capabilities of Amway such as water purification tabs. There are
always risks here; Coca Cola discovered the hard way in India that
its American approach to water management created more enemies than
friends, and has spent the best part of a decade developing
different approaches which ensure that local communities are not
disadvantaged by the presence of a Coke plant, rebuilding its
reputation slowly as it goes.
But the bigger challenges are in the
deep restructuring of the world economy. When China does become the
largest economy in the world, it will be the first time that the
largest economy has not also contained the richest consumers.
However large the growth of the 'emerging middle class' over the
next decade, they will still be far poorer than the middle classes
in the affluent world-even as those more affluent consumers are
still squeezed by debt and rising costs. The big opportunity is for
innovation for a crowded planet which uses less resources, costs
less to produce, and still rewards its innovators. It will take a
very different mindset.
Additional research by Anand Rao