THE NEW GLOBAL MIDDLE CLASS: POTENTIALLY PROFITABLE -- BUT ALSO

A version of this article was originally published by Knowledge at Wharton

A new global middle class is rising up from poverty in emerging economies around the world, providing competition for labor and resources, but also enormous promise for multinationals that tailor products and services to the burgeoning ranks of first-time consumers.

The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the middle class as earners making between $10 and $20 a day -- adjusted for local prices -- which is roughly the range of average incomes between Brazil ($10) and Italy ($20).

A look at the geographic distribution is striking. In 2000, developing countries were home to 56 percent of the global middle class, but by 2030 that figure is expected to reach 93 percent. China and India alone will account for two-thirds of the expansion, with China contributing 52 percent of the increase and India 12 percent, World Bank research shows.

According to Wharton management professor Mauro Guillen, the world's middle class has, until recently, been located in "the triad" of Europe, North America, and Japan. In the 1970s and 1980s, countries such as South Korea, Brazil, Mexico, and Argentina also built sizable middle-class populations. "Nowadays, it's China and India," says Guillen.

Wharton marketing professor Jagmohan Raju predicts the shift in distribution of the global middle class will continue as developing countries adapt to remain competitive in the world economy. "Due to economic pressures, more and more companies in developed nations are seeking educated work forces in emerging markets to outsource manufacturing and service jobs," he says. "More economic pressures in the West mean more jobs in emerging markets and a bigger middle class that has higher buying power."

Multinationals that have so far viewed developing nations largely as a cheap source of labor, are now poised to benefit again as many of the workers they paid to build their products are increasingly able to afford Western consumer goods.

Bill Amelio, CEO of Lenovo, the Chinese firm that merged with IBM's personal computer business, notes that China is now the world's largest market for television sets and cell phones and the second-largest market for automobiles and personal computers. "And that's just China. Add India, and we're seeing consumerism pulling up a lot of the poverty in many areas."

The McKinsey Global Institute, the consulting firm's independent economic research arm, projects India's middle class will grow from 50 million to 583 million people in the next two decades. At the same time, the country will advance from the world's 12th largest consumer market to the fifth.

Meanwhile, China is expected to become the world's third largest consumer market by 2025 as an expected transition from an investment-led economy to a more consumer-focused model brings about continued growth.

Clearly this broad expansion of a middle class with discretionary income to buy more than life's necessities presents a remarkable opportunity for multinational corporations. According to Wharton marketing professor John Zhang, the middle class in any country is at the forefront of consumption and leads important business trends. Marketers must pay close attention to this population to reap the benefits of an expanding global middle class.

At the same time, Zhang says, even though millions of individuals are now reaching middle-class status in their own countries, they still do not have the same levels of income as their counterparts in mature economies. To capture customers in these markets, companies must create new products that take into account price sensitivity.

For example, he says, Coca-Cola has a layered strategy for China in which Coke is sold in urban areas at only a slightly lower price than in Western markets. As a result, Coke is established as a brand to which new consumers aspire. At the same time, Coke is sold in the countryside for less, but consumers must drink their beverage on the spot and return the bottle to the vendor -- a strategy that saves costs and drives down the price. In addition, bottles are smaller than those in the West.

According to Diana Farrell, director of The McKinsey Global Institute, distribution is an important consideration for companies hoping to reach the emerging middle classes. Roads and airports are underdeveloped, particularly in India, a situation that presents a significant challenge -- and opportunity -- for companies that want to create innovative distribution systems.

Farrell notes that many Western firms focus on services, but that this sector is not as developed among the rising middle classes as consumer goods. One obstacle to reaching new consumer markets with services is regulation in foreign countries. For example, she points to India's restrictions on foreign ownership of retail businesses.

While the growth of the global middle class is predicted to continue at a rapid pace, forces exist that could derail the process of global expansion for Western multinationals. One factor to consider is the differences in income distribution between countries and within nations.

"When you look globally, you see an emerging middle class in some geographies and a stagnant or declining middle class elsewhere," says Wharton management professor John Kimberly. "What is truly interesting is the dynamic character of social class, certainly not stable on a global basis and quite variable on a country-by-country or region-by-region basis." While statistically speaking, there is an emerging global middle class, "we need to look carefully at the various indicators on a more fine-grained basis in order not to miss the variability."

Wharton management professor Stephen Kobrin cautions against making assumptions that the world's new middle class will act exactly as prior generations of middle-class consumers have around the world. He points to the common assertion that people rising into the middle class will press for democracy. But that does not seem to be happening in China where he suggests that people may be willing to accept more autocratic regimes in return for stability and middle-class lifestyle.

"The assumption has been that there's a link between capitalism and democracy, that as incomes rise and people become educated, they will increase pressure for democracy and freedom and civil liberties," notes Kobrin. "That may or may not be true."