The New Global Middle Class: Potentially Profitable — but Also Unpredictable

mic Listen to the podcast:

A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers, according to Wharton faculty and analysts.

Coca-Cola’s newly appointed 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.

According to Wharton management professor Mauro Guillen, the world’s middle class has, until recently, been located in “the triad” of Europe, North America and Japan. In the 1970s and 1980s, countries such as South Korea, Brazil, Mexico and Argentina also built sizeable middle-class populations. “Nowadays, it’s China and India,” says Guillen. “The driver is economic growth. As the economy expands, the domestic market starts to become bigger, and it is typically a middle-class market.”

Wharton marketing professor Jagmohan Raju predicts the shift in distribution of the global middle class will continue as developing countries adapt to remain competitive in the world economy. “Due to economic pressures, more and more companies in developed nations are seeking educated workforces in emerging markets to outsource manufacturing and service jobs,” he says. “More economic pressures in the West mean more jobs in emerging markets and a bigger middle class that has higher buying power.”

As a result, multinationals that have so far viewed developing nations largely as a cheap source of labor, are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods. “Countries like India consist of young consumers who are ambitious and save quite a bit, but are also willing to spend on small luxuries like Western brands of consumer packaged goods,” says Raju.

Bill Amelio, CEO of Lenovo, the Chinese firm that merged with IBM’s personal computer business, notes that China is now the world’s largest market for television sets and cell phones and the second-largest market for automobiles and personal computers. “This demonstrates that there is a big consumer economy that’s being driven in China, which is exactly what the Western world was looking to happen many years ago. And that’s just China. Add India, and we’re seeing consumerism pulling up a lot of the poverty in many areas.”

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 fifth.

Meanwhile, 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. China has maxed out on the input model,” says Diana Farrell, the Institute’s director. India has been more open to consumption, but like China it has a very high savings rate that Farrell says should be converted to consumer spending to strengthen the overall economy.

Aspiring to New Brands

Clearly this broad expansion of a middle class with discretionary income to buy more than life’s necessities presents a remarkable opportunity for multinational corporations. According to Wharton marketing professor John Zhang, the middle class in any country is at the forefront of consumption and leads important business trends. Marketers must pay close attention to this population to reap the benefits of an expanding global middle class.

At the same time, Zhang says, even though millions of individuals are now reaching middle-class status in their own countries, they still do not have the same levels of income as their counterparts in mature economies. To capture customers in these markets, companies must create new products that take into account price sensitivity.

For example, he says, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor — a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West. “Coca-Cola customized a product for lower price points so that [those consumers] can have a taste of the product. As the economy grows and more people join the middle class, demand will keep increasing,” says Zhang.

According to Farrell, 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.

Amelio points to management structures that multinationals should embrace to conquer new consumer markets. As an American, he says, he realizes how difficult it is for a Western company to grasp the changes underway in developing consumer markets. He said a key metric for managers is whether growth is as fast — or faster — than market growth in emerging economies such as Russia, Brazil and China.

“If you’re not planning to have more business outside the U.S. than in the U.S. market, then you’re probably planning wrong,” he notes, adding that management diversity is crucial. Lenovo’s merger, he says, forced the company to build a top management team with varying global perspectives. “It’s important to cherish diversity, but it’s difficult to do. The best way is to put people from diverse backgrounds at equivalent levels” and let them debate issues that arise. Lenovo currently has 10 different nationalities represented on its management team: “A diverse set of thinking keeps us honest,” Amelio says. In addition, Lenovo operates on a hub system with no official global headquarters. “We blew up our idea of a headquarters and it forced more decentralization and more decision-making closer to the customer.”

Farrell notes that many Western firms focus on services, but that this sector is not as developed among the rising middle classes as consumer goods. “When it comes to services, we’re pretty [much in] the early days,” she says. One obstacle to reaching new consumer markets with services is regulation in foreign countries. For example, she points to India’s restrictions on foreign ownership of retail businesses.

‘The Dynamic Character of Social Class’

While the growth of the global middle class is predicted to continue at a rapid pace, forces exist that could derail the process of global expansion for Western multinationals. One factor to consider is the differences in income distribution between countries and within nations, according to faculty.

“When you look globally, you see an emerging middle class in some geographies and a stagnant or declining middle class elsewhere,” says Wharton management professor John Kimberly. “What is truly interesting is the dynamic character of social class, certainly not stable on a global basis and quite variable on a country-by- country or region-by-region basis.” While statistically speaking, there is an emerging global middle class, “we need to look carefully at the various indicators on a more fine-grained basis in order not to miss the variability.”

Meanwhile, according to Maurizio Bussolo, an economist with the World Bank’s Development Prospects Group, it is not clear how well Western multinationals will fare in reaching the emerging middle class. “We have observed that if you look at the economic cycle in the last five to 10 years, you see that the U.S., Europe and Japan have a cycle that is becoming disconnected from the economic cycle of the developing world,” says Bussolo. That means if there is a crisis in the U.S. or another rich country, it does not necessarily harm progress in the emerging economies. It also means growth in the developing world does not necessarily benefit mature economies. “There is some disconnect. It’s not necessarily true that all these new clients that appear in the Third World will be served by U.S. and European firms. It is not clear to us that Chinese clients will prefer a U.S. firm for services if they can have equal quality from a Chinese firm.”

He predicts that future globalization will be built, at least in part, on new integration between South Asia and East Asia and other developing markets. “Mainly these countries have traded with the U.S. and Europe, but now there is new South-South integration.” For example, Chinese businesses are investing in South America and Africa, not only to gain access to commodities, but to get in position to profit from sales to the emerging middle class.

Lately, the developing world’s middle class has been blamed for rapid and unsettling increases in commodity prices, but faculty and analysts say the tightening will be corrected, in the long run, by forces of supply and demand. “In the case of consumer durables, such as automobiles and washing machines, supply can be expanded quickly. The same goes for non-durables, such as soft drinks,” says Guillen. “The problem is with oil and foodstuffs. A major driver of price increases for these goods has been expanded demand from China and India.”

Raju suggests that the emerging middle class is only part of the problem. “It is indeed possible that increased consumption in China and India will lead to higher prices for many basic goods, but the role of the middle class may not be any more than that of other groups,” he argues. “It is the higher consumption and, might I say, often the waste of resources in developing countries that is also contributing to the price rise. But there is no doubt that increased consumption by those who did not have discretionary incomes in the past will contribute to price increases.”

Another potential blow to reaching the new ranks of the global middle class would be protectionist policies by countries with a middle class that feels threatened by growth abroad, including the United States.

In an article that appeared last month in the International Herald Tribune, Amelio argued that growth is not a zero-sum game and that businesses are now on the brink of profiting from new markets in the current era, which he calls “Global 2.0.” What you’re going to hear about in the coming general election “is the economy, and it’s becoming clear that some people might view protectionism to be the way to go,” says Amelio. “I’m hopeful that cooler minds prevail. History is full of examples of how policies restricting trade hurt the home country.”

‘Global 2.0′

According to Wharton management professor Stephen Kobrin, regardless of who may be hurt temporarily, lifting millions of people up from poverty is a positive step. “Nobody should have to live on … $1 a day.” The degree to which workers in the U.S. and other developed markets will benefit from the rise of a global middle class will depend on their own level of competitiveness and their ability to move toward new technology and highly skilled jobs requiring better education systems, he says. “The fact that this is a good thing may not mean it’s a good thing for the U.S. in the short run, but as the world gets richer, there should be more demand for U.S. products — assuming the U.S. remains competitive.”

Kobrin, however, cautions against making assumptions that the world’s new middle class will act exactly as prior generations of middle-class consumers have around the world. “This is important, because we tend to assume all middle-class people have certain values,” says Kobrin. He points to the common assertion that people rising into the middle class will press for democracy. But that does not seem to be happening in China where he suggests that people may be willing to accept more autocratic regimes in return for stability and middle-class lifestyle.

“The assumption has been that there’s a link between capitalism and democracy, that as incomes rise and people become educated, they will increase pressure for democracy and freedom and civil liberties,” notes Kobrin. “That may or may not be true.”

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"The New Global Middle Class: Potentially Profitable — but Also Unpredictable." Knowledge@Wharton. The Wharton School, University of Pennsylvania, [09 July, 2008]. Web. [15 September, 2014] <http://knowledge.wharton.upenn.edu/article/the-new-global-middle-class-potentially-profitable-but-also-unpredictable/>

APA

The New Global Middle Class: Potentially Profitable — but Also Unpredictable. Knowledge@Wharton (2008, July 09). Retrieved from http://knowledge.wharton.upenn.edu/article/the-new-global-middle-class-potentially-profitable-but-also-unpredictable/

Chicago

"The New Global Middle Class: Potentially Profitable — but Also Unpredictable" Knowledge@Wharton, [July 09, 2008].
Accessed [September 15, 2014]. [http://knowledge.wharton.upenn.edu/article/the-new-global-middle-class-potentially-profitable-but-also-unpredictable/]


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far