The Rise of the New East

Business Strategies for Success in a World of Increasing Complexity

B. Simpfendorfer

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137370051
• eBook ISBN: 9781137370068
• Topic: Business
• Subtopic: Business Communication
• Index: Business

Taking the reader on a tour of the fast changing East, Simpfendorfer urges the business world to respond by planning for the unexpected. Now that the East has secured its role as a powerful player on the world stage, The Rise of the New East provides simple business strategies for dealing with an increasingly complex global environment.

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THE RISE OF THE EAST’S MIDDLE CLASS

SELLING TO THE REGION’S NEW CONSUMERS

HARTONO JAP LEANS FORWARDS IN HIS CHAIR TO TELL HIS STORY. “I asked the hotel developer, who are your target clients? Who wants to stay in a hotel that is far from the beach? In fact, it’s not even near the beach, but in Bali’s business and commercial area.” He pauses before continuing. “Then I visited two years later and the hotel was full. But not with foreigners. It was full of middle-class Indonesian tourists who didn’t mind traveling back and forth to the beach each day on buses or in cars, as well as some middle-level professionals on business trips. Brilliant! This was a real success story.”¹

Jap was a banker at the time and was assessing whether to give the developer a loan. In the end, the hotel was fully occupied and profitable. The owner had benefited from the rise in domestic tourism as Indonesia’s increasingly affluent middle class started to spend its wealth and wanted to visit Bali—no different from foreign tourists. But rather than travel by plane, many traveled by bus and ferry to the island. They were also happy to stay in cheaper hotels away from the beach. They had growing purchasing power, just not enough yet to stay at the island’s more expensive five-star hotels.

The rise of Indonesia’s consumers has captured the attention of multinationals, and understandably so—from beaches to biscuits, consumers are shopping. The world’s fourth most populous country was always going to be one of great opportunities and, finally, the country appears to be delivering as promised.

In Jakarta, the country’s capital, consumers are increasingly tempted by a growing range of premium products from shampoos to foreign beers. Unilever, the Anglo-Dutch consumer goods multinational, has seen its annual sales more than double in five years to $290 million.² Honda, the Japanese motorcycle manufacturer, similarly saw its sales double to over 4 million units during the same period. Meanwhile, traveling salesmen fill the country’s growing number of budget hotels, from Fave to POP! to HARRIS, marketing their goods and tapping into the growing number of affluent consumers.

For the city’s wealthier residents, car ownership is also rising rapidly. Passenger car sales doubled in five years to 850,000, making the country a larger car market than either Australia or Spain and likely to shortly overtake the United Kingdom.³ Jakarta’s sprawling low-rise suburbs and the municipal government’s failure to invest in road and rail infrastructure result in suffocating traffic. But, for the city’s residents, multi-hour commutes in slow-moving traffic are a visible sign of having joined the expanding ranks of middle-class households.

As a former China economist, I see that Indonesia’s consumer boom shares many similarities to that of China over the past two decades. China has already seen huge growth in sales of premium beers and shampoos, as well as rapid expansion of the country’s budget hotels, such as Home Inn or Motel 168. Indonesia’s auto sales have also flourished at almost the same point they did in China when GDP per capita crossed $4,000. And, of course, many Chinese cities are suffocated by similar traffic jams, although the country’s rapidly expanding subway networks do at least offer an alternative to road rage.

Jap has the right idea. Educated in the United States and Singapore, he returned to his home country in 1995 to ride Indonesia’s robust growth. Working in a number of senior positions for international banks across the region, he eventually joined a local leasing and financing company as Vice CEO. He is a generous host as we eat together at Ocha & Bella, an Italian restaurant at the Morrissey Hotel. I ask if this is it, the moment Indonesia’s consumers really emerge. “Yes,” he answers. “With more than half the population below the age of 30 years, the consumer story will be hot for the next 20 to 30 years.”

The rise of China’s consumers was already a powerful story. But the notion of another 240 million Indonesians gradually joining them is also persuasive. Together, they are the world’s first and fourth most populous countries and are finally, and justifiably, emerging as important sources of global growth. There will be bumps in the road and periods of slow growth or rising inflation; indeed, Indonesia was facing such a bump in the autumn of 2013. But as Jap argues, it is the next 20 to 30 years that companies are banking on in Indonesia—as well as in China and the rest of the East.

THE SHEER SIZE OF THE EAST’S CONSUMER CLASSES DAZZLES. IT’S NO surprise really, given that the region accounts for 50 percent of the world’s population. But the numbers make for a wonderful set of PowerPoint slides as management teams try to convince their executive boards to invest in more retail outlets, bigger sales and distribution networks, and larger marketing teams.

I spent much of 2013 crunching numbers to measure the region’s middle classes. It isn’t a straightforward calculation. The middle class is generally measured by household income, but the problem is that tax collection isn’t widespread in many developing countries, which leaves economists trying to aggregate a mix of income measures from a variety of countries. It’s all very messy. To make the problem worse, there’s no real agreement on who “is” and “isn’t” middle class, so economists and consultants alike fall back on a range of terms, such as “mass affluent” or “upper aspirants.”

Regardless of the difficulty in concretely defining the middle class, the results are stunning. In 2013, I estimated the number of households earning more than $15,000 per year, adjusted for purchasing-power parity, at 400 million. Of those, half were in China and the remainder split evenly across the rest of the region. The number of households earning $25,000 per year was a lower but still sizeable 150 million, again with the majority in China.⁴

But it’s when the figures are applied to specific products that we see really impressive results. Here is an example: the number of automobiles sold in the East reached an estimated 24 million in 2012,⁵ meaning that the region’s car market was almost twice the size of the US market the same year.⁶ If each country were to record a 5 percent growth rate in automobile sales over the coming years, the figure would reach around 36 million by 2020. And for those who don’t believe in straight-line trajectories, sales growth at even half that rate would still result in sales of 30 million by the same year.

Auto sales are a popularly cited number as they are easily measured. For other products, analysts can derive figures based on economic and industry data, and it is easy to arrive at stratospheric figures even when applying some relatively conservative assumptions. For instance, the cosmetic and beauty product industry in the United States was worth around $60 billion in 2012, or 0.5 percent of total household consumption.⁷ Assuming that sales account for just 0.2 percent of household consumption in the East by 2020, the region’s cosmetic sales are expected to hit $40 billion the same year. And, by 2030, they may well reach $70 billion.⁸

At this point, however, the story does go horribly off track. Yes, the region’s consumption is large. But it is also spread across nearly 50 countries, each with different cultural tastes, customs barriers, and national currencies, to name just a few challenges. What sells in Jakarta won’t necessarily sell in Beijing.

Compare this to the rise of the mighty American consumer from the 1950s until the recent global financial crisis. During those six decades, American consumers accounted for around one-sixth of global growth, an astonishing feat.⁹ They also supercharged growth for what are now some of the world’s largest consumer product companies: Kellogg’s, Procter & Gamble, and Mars Confectionery. Many others also benefited from being able to sell to a fast-growing single market. Those same companies must look back fondly at the opportunity to sell to a market where everyone spoke the same language, settled in the same currency, and had generally similar cultural tastes.

Not so in Asia. The size of the region’s middle classes might dazzle, but so will its complexity. The same American consumer product companies have to not only sell across nearly 50 countries, but also set up retail outlets, sales and distribution, and marketing teams across a larger number of cities within each country. The region has more than 325 cities with populations greater than 750,000, as compared to just 59 in the United States. It is a complexity that will also assist local competitors who are more nimble at adapting to local tastes, who don’t face customs barriers, and who are dealing with a single currency.

And that’s just the beginning. The income disparities are also significant. Indeed, the talk about a middle class in China and Indonesia can be misleading as purchasing power in the two countries is materially different even if consumer product multinationals are making good money in both countries.

Again, we dug into the data and pulled out dozens of series on household income brackets and average salaries across the two countries. In China, the wealthiest 40 percent of urban households are earning more than $10,000 per year, although the actual figures vary widely by city and among top earners.¹⁰ In Indonesia, by contrast, the threshold for the wealthiest 40 percent of urban households was around $3,500. Certainly the top 5 percent of Indonesian households take home big salaries, but most of the country’s so-called middle-class consumers have significantly less purchasing power than do members of the middle class in China.¹¹

IF INDONESIA OFFERS GREAT PROMISE, THEN CHINA IS ALREADY DELIVERING thanks to those higher incomes. Yet, the challenges are also greater as the country’s shoppers are spread more widely: China has 143 cities with a population larger than 750,000 compared to 15 in Indonesia, making China a blueprint for complexity.¹²

Even the big Chinese retail and restaurant chains often focus on only parts of the country rather than blanketing every city with outlets. Take Peacebird, a local apparel chain with 922 stores in over 150 cities. Nearly one-quarter of those stores are in Zhejiang province, while neighboring Jiangsu and Anhui provinces account for another quarter. Or consider Little Sheep, a local hotpot chain that operates 376 restaurants in 121 cities. Nearly half the restaurant chain’s outlets are located in just five provinces, including Guangdong and Zhejiang in the south and Beijing, Hebei, and Shandong in the north.

The city of Zhengzhou has Peacebird and Little Sheep outlets. It lies about 300 miles from the coast in China’s heartland. It is a harsh city with few public parks, and it is covered in a permanent haze of pollution and construction dust as the developers build vast new commercial and residential districts. The local zoo is packed on a weekend for lack of options. But Zhengzhou is also the capital of Henan province and the commercial focal point for 90 million people, making it similar in size to Thailand or the Philippines. The city itself is home to 3 million people and growing rapidly as its gravitational pull attracts rural residents and former coastal factory workers.

Zhengzhou is a long way from Beijing or Shanghai, but if you’re shopping for a Dyson vacuum cleaner, then the flagship store of Zhengzhou’s biggest retailer, Dennis, is a good place to start. The retailer’s flagship store is over 15 stories tall and is built at the intersection of Huayuan Road and Nongye Road. It looms over its neighbors and brings to mind the grand commercial stores constructed by Harrods in London or Saks in New York a century earlier when retailers were bringing a new shopping experience to the masses. Inside, the store is all polished floors, bright lights, and attractive design. It’s also full of shoppers.

Here, on the twelfth floor, is one of Dyson’s two Zhengzhou outlets. Of course, Dyson’s products aren’t cheap. The British household appliance maker is famed for its engineering and ability to improve on commonly used household electrical goods. The company’s founder, James Dyson, initially started out by adapting technology used in sawmills to create the first vacuum cleaner that didn’t lose suction. More recently it is the company’s bladeless fans, large circular rings pumping out a steady stream of air, that have caught the world’s attention, including that of Chinese shoppers.

“We only opened three months ago,” said the saleswoman proudly as she handed over a brochure. I remark on the sticker price of $750 for a vacuum cleaner and she quickly points out that “Zhengzhou’s prices will always be higher after you add duty and logistics costs. We have to ship the goods a long way, after all,” she said.

Fair enough. But are they selling? “Yes, at least 20 units a week,” she replied confidently.

Now, a saleswoman might have an incentive to inflate her weekly sales in front of a customer. But Dyson understandably sees China as a big opportunity. By the spring of 2013, the company had opened up over 40 outlets across the country in first- and second-tier cities, and the company had planned to open at least 220 by the winter of 2013. Having initially delayed its market entry, Dyson subsequently faced a vastly larger, but also more complicated market. Opening up in just Beijing, Shanghai, or Guangzhou might have worked a decade ago, but not today, as Chinese household purchasing power has risen across the country and is no longer limited to just a few major coastal cities.

Helmuth Hennig, CEO of Jebsen & Co., has contributed to Dyson’s expansion. The company has a rich history as a more than 100-year-old Hong Kong–based trading house, marketing and distributing high-end products in China and the rest of the region for a range of clients from Robert Mondavi wines to Raymond Weil watches. Hennig himself has lived in Hong Kong for the past 30 years, working for most of that time at Jebsen, where he has sold consumer goods to Chinese households that might once have aspired to own a bicycle or a sewing machine, but today are increasingly likely to prefer a Swiss-made watch or a British-designed bagless vacuum cleaner.

It would be easy for Hennig to be optimistic given the changes he has witnessed. But he is instead reassuringly pragmatic as he lists the challenges for foreign brand owners. “The market has changed fundamentally in the past decade,” he says from his offices high above Hong Kong’s busy Causeway Bay. “It wasn’t so long ago that we sold only through the government-owned Friendship Stores in...

Table of contents

• Cover
• Title
• Introduction
• 1.  The Rise of the East’s Middle Class: Selling to the Region’s New Consumers
• 2.  The End of “Made in China”?: Major Changes Ahead for Manufacturing
• 3.  Tapping into the Muslim Market: Why a Halal Strategy Is Critical for Growth
• 4.  Bollywood Stars and Indonesian Punk Rock: A Flourishing Local Entertainment Industry
• 5.  China Goes Global, Again: A New Phase for Chinese Outbound Investment
• 6.  Small Trucks and Big Planes: Transport and Logistics in the New East
• 7.  The East’s Uncertain Urban Future: Targeting the Region’s Fast-growing Cities
• 8.  A Water and Energy Nexus: The Need for Sustainable Growth
• 9.  Conclusion
• Notes
• Index