What is the size of the middle-class market in China?

Last week: Three basic trends shaped the week’s economic news. The first, a moderating trend in the industrial core of the economy, was reflected in the slowed pace of new orders. Meanwhile, the situation in Japan—which suffered a loss of power of up to 25 percent—has now curtailed some auto- and electronics-related part supply. This shortfall is slowing production in the United States, as well as other countries, including China. Finally, the domestic service sector—especially retail (but not real estate)—continues to expand moderately. The combination of a slightly slower industrial sector and minimal growth in the service sector is delivering an economy on the simmer. That could well describe the domestic economy through spring and perhaps right through summer.

THE SITUATION ABROAD

Global trade rose by 1.3 percent in January, or about the same pace as in December. Trade based on exports from emerging markets continues to grow at at least double the overall rate. Interestingly, among emerging markets, exports from Latin America are rising even faster than those in the Asia/Pacific region—likely reflecting the impact of rising commodity prices. Meanwhile, exports from advanced countries actually edged lower in January, with exports from the euro-zone and Japan falling. This could continue for a short spell, as delays in Japanese parts are causing some production slowdowns. By late spring, however, part supply, product output, and export shipping could all be in catch-up mode. Nevertheless, the basic pattern of faster trade from emerging countries than advanced countries is likely to continue for some time—certainly through this year and next.

FACT OF THE WEEK I

2.1 million. In this age of ever-expanding media, it seems ironic that listeners of terrestrial radio (as opposed to satellite or web-based audio services) have increased by 2.1 million since 2009—a nearly 5 percent rise. With so many teens and young adults listening to music on advanced devices (including their cell phones), who exactly is turning on the radio?  Arbitron says 1.1 million more listening are tuning in to Spanish-language stations. And who is advertising to them? The Radio Advertising Bureau says ads for cars accounted for $1.8 billion of the $17.3 billion in total ads in 2010, up 6 percent from 2009. Eschuchame!

FACT OF THE WEEK II

70 percent. Half of the world now lives in metropolitan areas—and many of these metropolises are near coastlines, with not a few in zones prone to earthquakes and/or tsunamis. By 2050, 70 percent of the global population could be living in urban areas. One consequence will be a rise in greenhouse gases—the same population living more densely tends to produce more emissions. Why? Two possible explanations: Urban transportation requires more energy. And in growing cities, refuse piles increase accordingly and have to be carted away, at further distances. On the other hand, heating or cooling city apartments involves lower per-unit costs and higher energy efficiency than less dense housing.

QUESTION OF THE WEEK

What is the size of the middle-class market in China? And how big will it get over the next two decades?

Since “middle-class” means different things to different people, one has to choose a definition of what is middle class now and guess at how much it might grow. The World Bank defines the middle class as those earning between $10 and $20 per day per household member—or between the average wage in Brazil and the average in Italy. On this arbitrary basis, there are not quite half a billion middle-class consumers in the world today, a figure likely to double over the next two decades.

Think about it. It is like adding a city of almost three million middle-class residents, workers, and shoppers a month. In other words, adding the equivalent of the Philadelphia metro area, each month, for two decades. Not everyone living in that metro area today qualifies as a middle-class consumer. Think of a taxi driver or pizza deliverer. So the actual size of the metro area, including such service workers, would in fact be larger still.

Put another way, half of the middle class today lives in developed countries. By 2030, nine out of ten are likely to be what today are emerging countries. China and India alone could account for two-thirds of the increase—or will be home to those new middle-class cities of three million every month. However, the real picture depends on who is counting and what is being counted.

By one measure 562 million Chinese are urban dwellers. This figure however includes those living in “small towns” (which could mean a town of a few hundred thousand) far from the big central cities. The number actually living in or very close to major cities could easily be half that figure. That does not, however, change the picture of a nearly doubling over the next two decades.

China has between 1.2 and 1.3 billion people. Some marketers focus on the nearly 110 million who have the money to purchase cars, computers, furniture, and other “middle-class” goods and services. Reaching these consumers will be a challenging proposition since they are dispersed across China’s urban centers. The country has relatively weak logistical systems. That’s a problem in terms of servicing an integrated supply chain. How big the market is now, and how fast it grows, are matters of conjecture. That China will become an important if not dominant factor in corporate marketing plans would seem indisputable. After all, a company adding a good portion of the potential three million new global customers a month, is likely to be making a lot of money.