Asia: the rise of the middle class

Autor: Pilling, David; Hille, Kathrin; Kazmin, Amy

Zhou Yuanyan is becoming middle class - one ring road at a time. When she moved to Beijing as an 18-year-old from Inner Mongolia, she lived in a village on the capital's sixth ring road, an hour and a half by bus to work. After starting out as a waitress she quickly switched to selling property. "I increased my commission income quite a bit over the past three years, so we were able to move twice," she says with a flash of pride, charting her progress to the fourth ring road and, eventually, the third. Now 22, Ms Zhou lives with her mother in a small apartment about 40 minutes from the city centre. She makes between Rmb3,000 and Rmb6,000 a month ($455-$910), depending on commission, which puts her on the cusp of the middle class, according to a definition used by Boston Consulting Group. Her mother makes Rmb1,500 in a cleaning job. They spend Rmb2,000 on rent and save about Rmb1,800 a month. Ms Zhou feels able to indulge herself a little. She is glued to her new LePhone, a smartphone made by China's Lenovo, and spends much of her free time chatting online, playing online games and - another feature of Asia's emerging middle class - shopping online. She dreams of buying a flat but harbours no illusions of being able to afford one like those she sells in Beijing, where house prices are now comparable with those of Washington. "I would have to save about a year to buy just one square metre in an apartment like that," she says. Even so, the story of steady material progress that she and tens of millions like her can tell gives credence to the long elusive dream of a Chinese middle class. Until recently, many economists were openly sceptical about the idea that China, or any other emerging Asian economy, could spirit a sizeable consuming class from the mass of poverty at the base of the social pyramid. But that scepticism is beginning to fade. This year could be the one when talk of Asia's export-led development begins to give way to a realisation that much of the region's future growth will be self-generated. That could even begin to address the global imbalances resulting from Asia's export-led model that have been at the heart of the global financial crisis. Not only in China but in countries including India, the world's second most populous; Indonesia, a fast-growing nation of 240m; and Vietnam, 85m-strong and following in China's developmental

footsteps, the consuming class is beginning to grow. Even in less obviously successful economies such as the Philippines, which has a population of nearly 95m, years of steady if sub-optimal growth are creating pockets of broader affluence. The emergence of a middle class in Asia beyond the prosperity that already exists in Japan, South Korea, Taiwan, Singapore and Hong Kong will have far-reaching consequences. With growth likely to be anaemic in Europe and possibly America for many years to come, businesses from food to insurance are desperate for new consumers with money to spend. Many may find the opportunity they need in Asia. The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. In 2006, Arthur Kroeber of Dragonomics, an economic consultancy, put out a report in which he poured cold water on the "fairy tale" of a Chinese middle class on anything like an American scale. He estimated that a mere 20 per cent of urban Chinese households - 110m people in a country of 1.3bn had significant discretionary spending power. The bulk of Chinese belonged to what Mr Kroeber called "surviving China", a vast mass of poverty and subsistence outside the affluent islands of Shanghai, Beijing and the Pearl River delta. But Mr Kroeber is among those to have changed his mind. More quickly than expected, many Chinese have reached a "threshold level" of income, an unpredictable point at which consumption takes off. Furthermore, he says, the real level of Chinese income, held in cash or hidden from view, is higher than captured in official statistics, a long-held assumption corroborated by recent research. Dragonomics now estimates 300m people - 23 per cent of the population - have significant discretionary spending and live in cities large enough to be accessible by big companies. If those 300m, who belong to what Dragonomics calls "consuming China", were a nation, they would live in an economy two-thirds the size of Germany's. McKinsey, another consultancy, expects the middle class to expand from 29 per cent of China's 190m urban households now to 75 per cent of 372m urban households in 2025. "The upper middle class are the ones that are ready to buy a small apartment, that have a car, that think about leisure activities more," says Max Magni, head of the consumer products practice in Greater China. Those in the band below are "starting to live in buildings with multiple apartments, so they start to care about what other people think about them and spend accordingly", he says. The lower middle class are those recently able to afford more than the bare necessities.

The emergence of an Asian middle class is certainly not limited to China. Ireena Vittal, a retail specialist at Mc-Kinsey, says India's 1.2bn people can be divided into roughly 250m households. Of those, 100m live in poverty and have little realistic prospect of attaining middle-class status. Just 2m households enjoy the same standard of living as rich counterparts in the US or Europe. The interesting segment from a retail standpoint is the next level down, she says. There are 14m-15m households with an annual income of $7,000-$10,000 - a number set to explode to 40m households, or 200m people, within five years. India is like China in 2001, says Ms Vittal. "After two decades of systemic growth, the whole bell curve of income distribution moves to the right." These households spend a lower proportion of income on food, devoting more to housing, private education, healthcare, motorcycles, kitchen fittings, air conditioners and clothes, she says. Even if India's economy grows at an annual 7.3 per cent - below the current 8.5 per cent - Mc-Kinsey reckons that by 2025 it would have a middle class of 580m people. The era of the free-spending Indian consumer is not here quite yet. Chaitra Manjunath, the 26-yearold daughter of a carpenter, is typical. Although she has found a relatively well-paid job at a foreign back-office outsourcing company in her home town of Shimoga, near Bangalore, 70 per cent of her salary goes to repay the Rs200,000 ($4,418) she spent on an MBA programme. With the rest, she buys an occasional "luxury", such as dress material. The rest of her disposable income - like that of many in high-savings India - goes on gold, insurance and shares. If progress is a three-hour, bumper-to-bumper traffic jam to the capital's airport, Indonesia too is going places. Over the past decade the number of vehicles on Indonesia's often inadequate roads has nearly quadrupled from 3m to at least 11.3m. "There are so many cars now," says 25-year-old Amanda Sompi, who works for a Jakarta-based information technology company. "Ten years ago there weren't so many, but so many people have moved to Jakarta." Ms Sompi may not be able to afford a car of her own just yet. But she too has worked her way up in a short time from Starbucks, where she was paid Rp2m ($225) a month, to an advertising agency paying her Rp3.1m and to her present job as an event manager at an IT company, earning Rp5.4m. "I can pay for myself and give a bit for my little sister's education," she beams. "I just became an independent woman." Euromonitor, a market research group, expects the number of Indonesian households with annual disposable income of $5,000-$15,000 to rise from 36 per cent today to about 58 per cent in 2020.

Asia's three biggest developing economies are all now witnessing something new: the emergence of a consuming class outside the biggest conurbations. "The growth of the middle class and its spending will be much faster in small-town China than in the biggest cities many foreign companies have concentrated on so far," says Carol Liao, a partner at BCG. Property prices in Beijing, Shanghai and Guangzhou are starting to squeeze people's income, she adds. BCG expects the middle class in cities with a population below 1m to grow twice as fast as in other cities. Neither is India's emerging middle class confined to New Delhi, Mumbai, Bangalore and Hyderabad. Numerous smaller cities - places including Ludhiana, Chandigarh, Pune, Coimbatore, Aurangabad and Surat - are experiencing growing affluence thanks to better education, sharply increased land values, and the service and manufacturing jobs created by India's economic boom. Shimoga, where Ms Manjunath lives, is a feeder city to Bangalore, 300km away and the centre of India's IT and outsourcing revolution. Even there, brands such as Nike, Adidas, Levi Strauss and the local Peter England have started to appear. To be sure, in the boardrooms of western companies, "middle class" tends to conjure up unrealistic images of American suburban life and consumption patterns. By this measure, emerging Asia's middle class remains relatively small. Someone with an annual income of $7,500 may be able to live fairly comfortably in China or Indonesia but would be considered below the poverty line in the US, where gross median household income is nearly $50,000. In India just 30m people pay taxes, an indication of the limited number of well-off Indians as well as the inefficiency of the tax system. Still, much of developing Asia seems to have reached a tipping point. If the projections of consultants are anything like accurate, the growth of the region's middle class will have enormous economic and commercial implications, not to mention environmental ones as a new consumer class puts further strain on the world's resources. Nomura reckons that by 2014, retail sales in China may surpass those of the US. While much of that consumption will be in "surviving China" - and thus of limited interest to big multinationals - a substantial part will be driven by a newly empowered and aspirational middle class. That is why the Chinese already purchase more cars and mobile phones than Americans and will soon buy more computers too. The Asian middle class is not quite yet in a position to power the global economy. But the day is fast approaching when it will drive a much greater share of Asia's own. Budding consumer classes enticed with starter packs of staples

Ever since Deng Xiaoping declared it glorious to get rich, multinationals have viewed China as a land of 1bn-plus sets of teeth to be cleaned, heads to be shampooed and stomachs to be filled, writes Louise Lucas. Three decades later (despite doubts that the late paramount leader actually uttered those words), the world's most populous country is awash with the products that form the staples of middle-class life. Many multinationals got it wrong in the interim: witness the numerous failed joint ventures where capital and technology passed to the domestic partner in exchange for scant recompense. Danone, the French dairy and water group, quit its venture in 2009 after accusing partner Wahaha, China's leading soft-drinks producer, and Zong Qinghou, its founder, of setting up lucrative parallel

businesses.legalled But perseverance and nifty strategies have paid off for most. Indeed, facing a moribund US and Europe, consumer multinationals are today particularly grateful for their emerging market operations. As Procter & Gamble put it to analysts last month, China will add another 270m middle-class customers in the next decade - roughly the same number as there are in the US today. Unilever, whose roots in the region go back to 1888, foresees the new middle classes accounting for the lion's share of global turnover. "We want to turbocharge and develop our growth in emerging markets - which means that, from the current contribution of 50 per cent, we want it to actually become the predominant part of Unilever's business and deliver 70 per cent," says Harish Manwani, the company's president for Asia, Africa, central and eastern Europe. His peers have their sights set firmly in the same direction - hence the rash of research and development centres opening in the region. Nestl, for example, plans to open a centre in India in 2012. There is also a spate of innovations targeted at middle classes less affluent than those of the developed world. Nestl sells single servings of instant coffee and stock cubes; Unilever tempts with sachets of deodorant and shampoo; several manufacturers sell nappies in packs of three. The ploy, of course, is to hook customers earlyand stay with them as their incomes rise. Not for nothing does Unilever refer to its offerings in the fast-growing Philippine market as "starter packs". Sachets of shampoo and conditioner, costing about 10 US cents each, have quickly come to account for almost one-third of the company's entire turnover in the country.

If all goes to plan, the "starter middle classes" will upgrade to more frequent purchases of fancier goods - and face the same mind-boggling array of bathroom products as Americans and Europeans. (Copyright Financial Times Ltd. 2011. All rights reserved.) Fecha de publicacin Jan 4, 2011 Editorial London Editorial The Financial Times Limited Lugar de publicacin London Materia de la revista Business And Economics Tipo de fuente Trade Journals Idioma de la publicacin English