Innovating for the next three billion. The rise of the global middle class and how to capitalize on it
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2 February 2012 |
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ERNST & YOUNG S.R.L. |
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Introduction
At a time when major developed markets are struggling to sustain an economic recovery, it is easy to forget that opportunities abound in other parts of the world. Rapid-growth markets in Africa, Asia, Eastern Europe, Latin America and the Middle East continue to expand rapidly and play an increasingly dominant role in the global economy. Many of these economies are becoming major hubs of entrepreneurship, innovation and trade, as well as investment from multinationals from around the world.
Until recently, growth in these markets was dominated by investment, infrastructure and exports, but in the next decade, it is likely this picture will start to change. Major rapid-growth markets will start to steer their economies away from a dependence on exports toward a model of increased private consumption. Although not rich by the standards of developed countries, a huge middle class is already saving less and spending more, creating big opportunities for companies that can serve them with relevant products and services.
These markets are vast. The middle class in Asia alone currently numbers some525 million people, greater than the population of the entire European Union. Between now and 2030, an additional three billion people globally will enter this income bracket. Over the longer term, this explosion of spending power has the potential to make a significant contribution to a sustained global economic recovery and unwind long-standing economic imbalances between West and East.
We believe that this emerging demographic, which we call the next three billion, offers companies a rare and highly valuable opportunity to seize a new market ofunprecedented size by thinking differently about how they innovate. Although theemergence of this demographic is still at an early stage, companies must act now to create attractive products and services, establish a presence, and build market share and scale. Those that can sustain both a long-term commitment and the ability to innovate for the next three billion will be well positioned as this market swells in the next 20 years.
nIn this report, we examine the emergence of the next three billion and explore the capabilities that companies must build to align their businesses with the needs of this demographic. The report forms part of Growing Beyond, an ongoing Ernst & Young program that explores how companies can grow more quickly by expanding into new markets, finding new ways to innovate and implementing new approaches to talent.
Executive summary
The rise of the global middle class — and how to capitalize on it
Between now and 2030, the number of people in the global middle class will grow from 1.8 billion to 4.9 billion. The vast majority of these three billion new consumers, with daily expenditure of between US$10 and US$100, will live in Asia and other rapid-growth markets. Although the majority of these consumers will have expenditure at the lower end of this spectrum and therefore will not be considered middle class by the standards of developed economies, this vast cohortnevertheless has considerable spending power. Between 2009 and 2030, demand from the global middle class could grow from US$21 trillion to US$56 trillion.
Against a backdrop of sluggish growth in developed markets, this explosion of new purchasing power is good news for the global economy and the growth prospects of the world’s multinational companies. A rise in private consumption among the middle class, particularly in rapid-growth markets, will help to rebalance the global economy and create a vital new revenue stream for companies across a wide range of sectors.
Yet capitalizing on demand from the next three billion will not be straightforward. Many companies will need to rethink their product and service offerings to ensure that these offerings are tailored to the needs of this vast customer base. In the past, developed-world companies would typically take premium products that sold well in their home market and either sell them unchanged in rapid-growth markets or strip them down to make them more affordable. Neither approach was satisfactory. Premium products may have sold well to the elites in rapid-growth markets, but they were often irrelevant for the vast proportion of the population on lower incomes. And stripped-down products may have been more affordable,but they were not sufficiently tailored to meet the specific needs of local customers.
Reaching the next three billion will require companies to understand the unmet needs of the new middle-income customers and to create entirely new products and services to fulfill them. This will mean thinking differently about every stage in the product development process. Strong R&D capabilities will be important, but so too will be innovative business models, deep customer insight, and a culture and a mindset that support innovation.
The aim of our report, which is based on a survey of 547 executives from around the world and in-depth interviews with some of the world’s leading entrepreneurs, senior executives and thinkers, is to examine the capabilities necessary to innovate for the next three billion. We explore the scale of the opportunity and look at the approaches that companies are taking to develop affordable products that meet the needs of customers on lower incomes. We conclude with a model we feel describes the necessary capabilities for companies seeking to target the next three billion consumers.
