Excellence: Put your money where your markets are

From 2010 to 2020, China’s aggregate household income will increase by more than $3.2 trillion. Income increases in India will total $1.4 trillion during the same period. This is definitely impressive, but hardly the whole story. In fact, rises of similar significance are expected in a host of “non BRIC” countries—emerging markets that should be on the radar screens of most global companies and, by implication, most supply chain executives.

However, simply relating an emerging economy’s growth potential paints an incomplete picture. Companies with growing aspirations also must understand the product and service needs triggered by various levels of income improvement.

Consider what happens when an emerging-market household’s annual income surpasses $5,000. At this threshold, spending on personal goods, televisions, mobile telephones, and two-wheel vehicles could reach critical mass. According to a 64-country Accenture study, an additional 225 million emerging market households will earn $5,000 or more by 2020. China and India will enjoys the greatest rises. But the $5,000 number will also increase by 11 million in Indonesia and nearly 8 million in Nigeria.

At the $15,000 level, household spending begins to include items such as cars, computers, and basic financial products. Within the scope of the Accenture survey, emerging-market households with incomes of $15,000 or more are forecasted to rise from 36 percent in 2010 to 54 percent in 2020. This would add 240 million households to this income segment, with half the increase coming from China alone. In Russia, 12 million additional households are expected to earn $15,000 or more by 2020.

Big things happen when annual household incomes reach or exceed $30,000—including major boosts in the demand for homes, healthcare services, and basic leisure goods. By 2020, India could gain 21 million households earning $30,000 or more per year. Brazil and Turkey are expected to add 5 million and 4.7 million households, respectively. Over the same time period, the number of Chinese households making more than $30,000 per year will increase more than any other country in the world.

At $50,000 per year, emerging-market spending begins to include more life insurance and pension products, leisure and tourism services, and luxury consumer goods. By 2020, China could bring 5 million additional households to this segment. South Korea is expected to double its number of $50,000 households to 42 percent.
From 2010 to 2020, Turkey’s share of households with annual incomes of $50,000 or more is estimated to nearly double—from 18 percent to 34 percent. This translates to an additional 3.6 million households in that income segment. Kazakhstan could more than double the share of its population at the $50,000 level—from 7 percent to 15 percent. By 2020, Kazakhstan will have 770,000 households earning above $50,000.

Growth has varying drivers
Growth statistics mean a lot. However, it’s important to note that improvements across economies and geographies are seldom a case of comparing apples to apples. Take India, whose growth is fueled primarily by domestic demand—private consumption accounts for 56 percent of India’s economy. China’s economy, on the other hand, is built largely on investment and export growth—private consumption comprises only 34 percent of China’s growth. In Russia, growth is heavily dependent on natural resources: Oil, fuel, and gas accounted for 69 percent of the country’s exports in 2010.

Given these critical distinctions, it often makes sense for companies to base their emerging-market analyses and penetration strategies on regions and cities, rather than countries and continents. In China, for example, there are stark variances in income, demography, religion, and language. It’s possible that the most significant opportunities will be found in lesser-known cities and provinces.

Zhengzhou is a prime example. By 2020, this capital of China’s Henan province will have a larger economy than Sweden, Hong Kong, or Israel. Another example is Surat in the Indian state of Gujarat, which is forecasted to be home to nearly 8 million people by 2020—more than the countries of Paraguay, Uruguay, Norway, Finland, Singapore, Libya, Togo and Republic of the Congo.

Economic data and projections are a key starting point for companies seeking to expand their sales, sourcing, or manufacturing presence in emerging markets. But, far more granular analyses are needed to make growth manageable as well as profitable.