A Global Portfolio To Ride The Consumption Boom

Asian countries are fast climbing on to the 'shop till you drop' consumerist bandwagon that their hitherto conservative spending mindset stayed at arm's length from. Higher disposable incomes and favourable demographics are gradually creating a spending boom, particularly on the discretionary spending front, which is taking the Asian markets into a new growth trajectory. Vikas Gattani gives you a international perspective on the subject and Team DSIJ tells you how you can make the most of this wave on the domestic front.

Economies have evolved, transformed, boomed and busted. If innovation was the core of growth of ancient economies, the more modern times have seen the evolution and rise of the consumer as a major driving force. This has been truer in the context of the Asian region, whose emergence as the next big economic superpower has been talked about for almost two decades now.

Asia, and especially China, has been dubbed as the factory to the world and also its export house, given its predominance in manufacturing. The ability to produce, and to produce efficiently and at a much cheaper price has been supporting Asia’s claim to power. The model, propagated by Japan initially in the 60s and 70s, was copied by South Korea followed by South East Asia and then China. Reliance on cheap labour, improved technology, falling transportation costs and globalisation helped this model to succeed immensely.

But manufacturing is one part of the story. Unless there is a consumer to buy and use what you produce, no manufacturing initiative can ever succeed. Going by this fairly straight-forward logic, it is indeed the strength of the Asian consumer has led to the growth of the economies here.

Here are some simple statistics that shed light on the role that the consumer plays in the overall Asian economic scenario. Almost 50 per cent of the world’s population of 7.2 billion is in Asia, with the Asian population currently pegged to be around 3.3 billion. Excluding China with 1.3 billion people and India with 1.2 billion people, ASEAN’s combined population stands at around 600 million. This is larger than the US population of 320 million and Europe’s number of 490 million.
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What do these numbers really mean? Well, the sheer size of populations tells you the opportunity that awaits businesses in serving them. But are the numbers alone reason enough, and will they necessarily precipitate into an economic boom? Well, here is some more food for thought which will answer the critical question of why the consumer will lead the economic boom.

The spending patterns of consumers have undergone a sea change today. The large base of Asian consumers is spending or rather splurging in a big way. So, what is it that is suddenly leading the Asian consumer to this predilection for spending?

Empirical studies have shown that at the point when the GDP per capita of a country hits USD 2500, the demand for basic necessities is well taken care of and spending on consumer goods spurts. In other words, USD 2500 per capita is the sweet spot when middle income group consumption takes off. Most major economies of Asia, with the exception of India, now have a GDP per capita in excess of USD 2500 (See Table: Per Capita GDP Of Asian Economies (2012)).

Rising income levels, easier availability of credit, financial disintermediation and rising aspirational levels of the population all transform a country reliant on manufacturing to one that starts relying on the consumer. The US economy is regarded as a consumer driven society, with about 70 per cent of that economy related to consumption. The same is now happening in Asia as well. Additionally, the policy bias in a number of Asian economies, particularly China, is moving from an over-dependance on export and infrastructure investment-led growth to count on domestic consumption for growth.

Here are some numbers that clearly spell out the consumption boom to come. According to a study by Brookings Institution (a policy think tank based in Washington DC), Asian middle class consumption spend, which was estimated at around USD 4.9 trillion in 2009, is expected to go up to USD 14.8 trillion (up 3 times) by 2020 and upto USD 32.5 trillion (up 6.5 times) by 2030.

In fact, the world is in the throes of a major expansion of the middle class itself, particularly in emerging Asia. The global middle class is expected to grow from under two billion consumers today to nearly five billion within two decades. As a share of global middle class consumption, Asia’s 23 per cent in 2009 is expected to almost double to 42 per cent by 2020 and triple to 60 per cent by 2030. These are astronomical numbers by any stretch of imagination, but stand true today. The middle class is a key driver of growth, as the income elasticity, particularly for durable goods and services, for this class of consumers is greater than 1.

China and India are at the forefront of this expansion. The world economy can be expected to increasingly rely on the middle class population of these two Asian powers as key sources of global demand (See Table: Middle Class Consumption).

Such secular growth stories happen only once in a while and one should look at generating multi-fold investment returns from them.