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Size counts: China and India flex
their consumer muscle

No longer mere low-cost production centres, China and India are leading the Asian buying spree. Say hello to a new giant, the Asian consumer.

By V ROMESCHCHANDRA
Singapore, May 2011

Asia, led by China and India, is moving from being a production centre to becoming a consumer society with far-reaching consequences

The growing march of the Asian consumer - led by behemoths China and India - is going to change the global balance of power and corporate interactions.

THERE is a new megatrend in the global economy. It is the rise of the Asian consumer, particularly in China and India, but also elsewhere in the region. It is a story that could play out over at least half a century and promises to have as dramatic an impact on the world as the rise of the American consumer in the post-war era of the 1950s. It will have huge implications – for companies (both within Asia as well as foreign multinationals), for investors and for governments, not to mention the consumers themselves.

The rise of Asian economies over the last 50 years – which started with Japan in the 1950s and then spread to Korea, Taiwan and Singapore, and later to the rest of Southeast Asia, with China and India taking the lead since the 1980s – has been mainly a story of production. With the notable exception of India, Asia’s rising prosperity has been largely driven by an export-oriented economic model. Asia has been the world’s biggest factory, a gigantic, increasingly integrated production machine churning out everything from toys, garments and shoes to electronics, engineering goods and automobiles.

For the last half century the West and, above all, the United States, has voraciously consumed what Asia has produced. In the process, Asian countries have almost uninterruptedly run trade and current account surpluses. America, by contrast, has run deficits that have ballooned in recent years. Between 2003 and 2008, for instance the US current account deficit averaged US$700 billion, equal to around five percent of GDP. Almost half of the US deficit was with the countries of East Asia. In short, America has been the main consumption engine and Asia the main production engine for the global economy.

But this dynamic is now changing. Asia ’s growing prosperity, especially since the 1980s, when the Chinese economy started to take off, has been a major impetus for this change. Asia’s pro-export policies – essentially low wages and cheap currencies – are becoming increasingly obsolete and unsuitable. This has become increasingly evident after the global financial crisis of 2008/09.

Developing Asia accounts for more than half of the world’s population, but less than 30 percent of its GDP. In China, consumption as a proportion of GDP is about 35 percent – among the lowest in the world — compared to 65 percent in the United States

After almost two decades of reckless borrowing – much of it based on rising home valuations – American consumers have been brought down to earth by collapsing house prices and high unemployment. As Morgan Stanley’s Chairman for Asia, Stephen Roach put it, the once-mighty American consumer who held up the global economy like an Atlas, emerged from the crisis “overextended, over-indebted, income short and wealth-depleted.” Forced to rebuild their balance sheets, US households are seriously rethinking their consumption and savings habits. The US savings rate – the total amount of saving relative to GDP – has soared from about one percent in the pre-crisis year of 2007 to almost seven percent in 2010. There is no let-up in sight; US home prices have continued to fall into 2011.

European consumers are in no position to fill the gap left by their retreating American counterparts. Most of Europe is reeling from a sovereign debt crisis brought on by government borrowing to either finance bloated state sectors, as in Greece and Italy, or to bail out banks after the global economic crisis, as in the UK, Spain and Ireland. Governments across Europe have unleashed “austerity" programmes, slashing expenditure and downsizing their public sectors. If, as seems likely, there is debt restructuring (a polite term for managed default) in the Eurozone over the next year or two, there could be more trouble for European banks, including in large economies like France and Germany. Meanwhile, faced with rising unemployment and stiff mortgage payments, European consumers – with the notable exception of the Germans – are not much better off than their peers across the Atlantic, although they have the benefit of more generous welfare payments.

As for Japanese consumers, the story is dire. The triple whammy of the earthquake, tsunami and nuclear crisis that engulfed Japan in March 2011 has dealt a body blow to what was left of Japanese consumer confidence, which was weak to begin with. Japan has been flirting with deflation and recession since 1990. Lifetime employment is no longer a given. Part-time work is common. The younger generation has no experience of boom times, and their parents have turned cautious. A survey of Japanese consumers by the consulting firm McKinsey’s in November 2009 had some telling findings. Japan, it says, is hit by the “Sugomori syndrome” – translated as “chicks in the nest”. The survey found that the four top ways Japanese people spend their days off are, in order, surfing the Internet; watching TV or reading; sitting around the house; and listening to music – in other words, everything other than going out and spending money. Rich as they might be in per capita terms, Japanese consumers cannot be counted on to provide much of a fillip to global growth, at least for now.

That leaves the roughly 3.5 billion consumers of so-called developing Asia. They punch well below their collective weight. Developing Asia accounts for more than half of the world’s population, but less than 30 percent of its GDP. In China, the most populous country, consumption as a proportion of GDP is about 35 percent – among the lowest in the world — compared to 65 percent in the United States. Asia’s underperforming consumers is what makes economists believe that if the world economy is to have a new consumption engine, developing Asia must be a big part of it.

The key to the Asian consumer story is the rise of the middle class. According to a seminal study by economist Homi Kharas for the OECD published in 2010, if we define a global middle class as those living in households with daily per capita incomes ranging from US$10 to $100 per day in purchasing power parity terms, Asia accounts for 28 percent of the world’s middle class today in terms of numbers of people. By 2020, that share could double. And by 2030, two thirds of the world’s middle class will be in Asia.

When it comes to spending, the study estimates that currently, Asia ’s middle class accounts for just 23 percent of total consumer spending. By 2020 – just nine years away – it will be 42 percent and by 2030, it will swell further to 54 percent, more than five times that of North America. In other words, we could right now be just past the take-off point of Asian consumption.

Increases in incomes will change patterns of consumption. The experience of developed economies over the last century suggests that as incomes grow, the proportion of income spent on food and other essential items declines, while that spent on “useful” and discretionary items increases. However, while this is broadly true, it will not happen at the same pace everywhere. There are important variations between different countries. Therefore a more detailed examination is needed of consumptions trends and aspirations.

A recent detailed survey of 13,000 consumers in six emerging markets (Brazil, China, Egypt, India, Indonesia and Russia) by the private bank Credit Suisse sheds some light on the different predilections of consumers in different countries. The survey found that, in general, the rich are getting richer more quickly than lower income groups. This suggests that markets for discretionary spending will grow faster than markets for essentials in emerging economies – certainly in Asia.

As income levels rise beyond a certain point, consumers tend to gravitate towards international brand-name goods. Middle-class Chinese consumers in particular show clear preferences for international brands. This is however not true in the case of essential goods and services, where locally branded items do as well. Chinese consumers are also increasingly becoming owners of properties and cars, both of which are likely to remain fast-growing industries in China for decades to come, not only in large cities, but even in third and fourth-tier towns.

A notable trend among Indian consumers, according to the survey is that they tend to spend proportionately more on education than others – around 7.5 percent of total income on average. They also exhibit a relatively high degree of sophistication in their savings behaviour. The penetration of banking and insurance is quite high compared with other emerging economies. And also unlike elsewhere, most consumers have a bank account. Simple forms of mobile banking using cellular phones are also spreading across India.

Indonesian consumers were found to have a high degree of optimism. While their focus is more on essential items, given low income levels, this is rapidly changing. Consumers are increasingly aspiring to own motorcycles, cars and property.

China’s currency undervaluation (by as much as 30 percent, according to some estimates) is disputed by its government. But as China ’s currency strengthens against the majors, other Asian countries will be more comfortable allowing their currencies to do so as well. This will fuel a consumption boom in the region

The rise of the Asian consumer spells huge opportunities for companies. Some economies, India’s and China’s in particular, already have extremely strong local companies in a range of consumer goods industries, especially in markets for non-luxury goods. Several multinationals are also deeply entrenched in these markets, including Colgate, Coca-Cola, Pepsico, Procter and Gamble, Unilever and Nestle. Economists speculate that there will be increasing scope for mergers and acquisitions in these non-luxury goods industries, with big players buying out entrenched local brands to expand their product lines in growing markets.

However, some local brands have also achieved the scale and amassed the resources to reach out across the seas to do their own acquisitions. India’s Tata group for example has made major acquisitions in the auto sector (buying out Land Rover and Jaguar) as well as in beverages (purchasing Tetley Tea and Good Earth herbal Tea in the US, among others). While there have been several large acquisitions by Chinese companies in resource industries, its consumer company giants have also shown signs of being active: for instance, Lenovo has bought out the PC division of IBM, and Geely Motors has bought Volvo. As Indian and Chinese companies strengthen their global management capabilities, more acquisitions will follow in the years to come.

But this is not a foregone conclusion: in order to achieve the “great rebalancing” towards more consumer driven economies, Asian policymakers will have to change a lot of the policies that have thus far held Asian consumption back, including making major institutional changes. If they fail or falter, the “take-off” will happen more slowly.

The biggest part of the story is China. The country’s leadership is aware – and is constantly reminded by the rest of the world – that its consumption has nowhere near kept pace with its growth over the last three decades. The government is trying to rebalance the economy, with a view to boosting consumption, reducing the reliance on exports and dealing with rising income and regional inequalities.

There are three main elements of the great Chinese rebalancing act: increasing wages, stepping up the pace of currency appreciation, and putting into place social safety nets.

Wage increases are the new big thing in China. According to a study by Credit Suisse, all 31 Chinese provinces and regions are likely to boost their minimum wages in 2011 for the second year running. China’s wage increases, demands for which have spread like wildfire, have been triggered partly by inflation, brought on by China ’s huge monetary expansion during the global economic crisis and rising food and commodity prices. Partly, they are the result of China’s boom spreading into the interior, creating labour shortages in coastal provinces, which depend heavily on migrant workers. Thus, some of the largest wage increases have occurred along the coast. Guangdong Province, which borders Hong Kong, announced that from March 2011, it will raise its minimum wage by an average 18.6 percent. In some factories, wages have risen by more than one-third.

China’s currency, the yuan, has long been reckoned to be undervalued against just about every major currency by governments, independent economists and even the IMF. Evidence of this is China’s huge build-up in foreign exchange reserves, which as at the end of 2010 stood at a colossal US$2.85 trillion.

For about a decade until July 2005, China kept its currency almost fixed to the US dollar. It then moved to a policy of a managed float, valuing the yuan against a basket of currencies. By mid-2008, it had risen by just under 20 percent against the US dollar. But when the financial crisis struck, China went back to fixing the currency against the dollar.

China’s currency undervaluation (by as much as 30 percent, according to some estimates) is disputed by its government. What is not in dispute, however, is that preventing the appreciation of the yuan holds down domestic purchasing power. It also provides an effective subsidy for export-driven coastal provinces relative to interior provinces. If China truly does want to rebalance its economy away from exports and in favour of its hinterland, appreciation of the yuan is inescapable. It will no doubt be done in a calibrated fashion to prevent any sharp and sudden loss of export competitiveness, but as it happens, it will accelerate the increase in consumption.

As China ’s currency strengthens against the majors, other Asian countries will be more comfortable allowing their currencies to do so as well. This will help fuel a consumption boom in the rest of the region.

Finally, consumption will also be aided by the expansion of social safety nets in Asia, starting with China. Ever since opening up its economy in the late 1970s, China has gradually dismantled the “iron rice-bowl” policies of the heyday of communism. State-owned enterprises are no longer the micro-welfare states that they were. The average Chinese consumer can no longer take for granted free (or even subsidised) healthcare, education or even pensions. With people having to increasingly provide for themselves, China’s precautionary savings rate has risen dramatically over recent years; household savings as a percentage of disposable income has doubled from 16 percent in 1990 to 30 percent today. The national savings rate (including corporate savings – which are also high) has risen more than 15 percentage points over the last five years, from 39 percent of GDP to 54 percent. The share of consumption has correspondingly fallen.

The dearth of social safety nets has also exacerbated the discomfort arising from rising income inequalities. If China’s poor were better taken care of, they would feel less resentful towards their wealthier brethren and corrupt officialdom than they do now. Beijing is wise to this problem and has started to expand social safety nets. For example, insurance coverage has expanded over the last decade. And in April 2009, a new set of reforms was launched to provide universal healthcare by 2020. As more social measures are put in place, China ’s precautionary savings will gradually come down, freeing up resources for consumption.

Governments of other Asian economies – notably India and the economies of Southeast Asia – are also feeling increasing pressure to expand social safety nets, particularly in light of widening income gaps. As social policies – which are currently patchy and rudimentary – become more entrenched and sophisticated in the region, consumption levels will go up.

Plenty can still happen to prevent Asia’s consumption story from taking off as optimists project. China faces many dangers: runaway inflation, a possible banking crisis arising from extravagant lending and a possible bursting of asset bubbles, and social unrest. Long-established savings habits will also be slow to change. India, for its part, is fiscally too constrained to dramatically increase social sector spending which it needs to do. The possibility of the return of global crises – a spiralling of Europe s sovereign debt crisis for instance – cannot be ruled out either. All of these will slow down the ability of Asian governments to put in place measures that accelerate domestic consumption growth.

However, no matter what, the broad contours of Asia’s consumption boom are intact; it can be delayed, but it cannot be stopped. And it will change the world.


A Southeast Asia-based analyst and columnist, the author has extensive experience in examining the regional economic transition up-close.

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J (29 April, 2013) – Singapore
Just a question open for discussion...
World's production centre vs world's consumer market - who needs who more?
Peter Pravichpoon (21 July, 2011) – Thailand
An excellent analysis of Asian consumerism and how it is shaping the world. It will be interesting to see how the China-India economic battle shapes up. What part will countries like Thailand, Malaysia and Indonesia play in this?
Pascal Aymar (31 May, 2011) – France
Beautiful analysis. Concise and pertinent. Thank you – This comment has been edited
Jay (15 May, 2011) – Singapore
Hello Mr V ROMESCHCHANDRA,

What do you think of focusing on Hong Kong and Singapore listed companies (especially consumers / retail industry) as an investment theme for the next few years?
Investoprenuer (13 May, 2011) – Singapore
Thanks for this great article.

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