Malaysia - The rise of Asia’s middle class

It is not just a China and India story but one of South-east Asia too? ROBIN CHAN looks at the changes expected in the region that is projected to have half of the world’s middle class by 2020.

COMPANIES rub their hands with glee when they think of Asian consumers.

Dr Bala Shankar, an adjunct professor at Singapore Management University, recently wrote: “Asia is home to nearly four billion consumers, more than half the world. If the predictions that China and India will overtake many of the Western nations in GDP terms come true, it could be the largest bonanza for the marketers.”

The key is the rising middle class.

While there is no standard definition or measurement of the middle class in Asia, whether it is by income or consumption, whatever it is, the figures show the middle class is growing, and fast.

In its report, Imagining Asia 2020, DBS Bank defines the middle income group as those individuals who spend more than US$10 (RM31) a day.

By that measure alone, Asia today has a middle class of 525 million people. They make up 28% of the world’s middle class, said DBS.

This is projected to expand significantly to an incredible 1.74 billion people over the next 10 years.

They will then make up half of the middle class population in the world.

It’s not just a China and India story but one of South-east Asia too.

“Over the next nine years, Malaysia and Thailand will see a significant increase in the number of people who will spend more than US$10 a day,” DBS said.

The growth of the upper middle class in China will surge from 80 million in 2010 to 208 million by 2020.

As Asia’s middle class grows, so will its demand for goods and services.

“The rising middle class will be a significant factor in reshaping national economies. They will be an influential and profitable market segment thanks to their size and emerging buying power,” noted DBS.

No wonder consumer giants like Procter & Gamble and Unilever have set up headquarters in Singapore to be closer to the Asian market.

They also have innovation centres to provide products specifically for different Asian tastes and preferences.

An example Singapore’s Economic Development Board chairman Leo Yip likes to cite is that the thickness of Asian hair is not the same as that of European hair, so shampoos sold in Asia must be made with different levels of conditioner.

According to DBS, global demand from the middle class will expand from US$21 trillion (RM65.1 trillion) to US$35 trillion (RM108.5 trillion) by 2020.

Over 70% of this growth in demand will come from Asia.

How will this burgeoning middle class spend its money?

Middle class families generally have fewer children and spend more on health care, nutrition and education than the poor do, according to DBS.

Asia’s middle class will be similar, influencing how their new money will be spent.

“Having fewer children would give middle class parents greater ability to afford quality education for their children,” said the DBS report.

“More women would also be more likely to rejoin the workforce. Additionally, families would have more opportunities for savings and personal consumption.”

Durable goods

For a start, there will be much more demand for durable goods such as refrigerators, cars, television sets and mobile phones.

Just take a look at these numbers for the mobile phone market: China already has some 780 million mobile phone subscribers. In India, there has been a significant growth of 66% in the number of mobile phone users from 2000 to 2010.

But these figures represent only about half of the population in these countries, which means China and India still have substantially untapped markets.

While the middle class is growing, the more impressive expansion will come from the income groups of those earning between US$4 (RM12.40) and US$10 (RM31) a day, especially in Indonesia, Vietnam, India and China, said DBS.

They will also demand goods and services but at a cheaper price, which will in turn drive the search for innovative solutions to achieve this.

Godrej, an Indian manufacturer, is one such company, selling refrigerators for just US$70 (RM217).

Other companies, such as Unilever, sell 10-cent (31-sen) shampoo and conditioners.

Education and health care

It is not just demand for goods that will rise. The middle class will also be willing to spend more on important services such as education and healthcare.

DBS said the middle class in Thailand spends about 4% of its income on these two services. This is more than double what the lower-income group is willing and able to spend.

The Chinese spend a higher proportion of their income on education and healthcare.

This will in turn drive demand for infrastructure – more schools and hospitals.

Cars and property

China’s car market is already the largest in the world, overtaking the US’ two years ago.

An incredible 18 million cars were sold in China last year. DBS forecasts car ownership to grow further as incomes rise, more roads are built and car makers aggressively roll out new designs for the Chinese market.

By 2020, two out of every 10 Chinese will own a car.

This means that total sales will surpass 30 million by 2020 at a growth rate of 5.3%.

In South-east Asia, car demand is expected to grow at an even faster pace. DBS expects car ownership to grow from the current 9% pace to about 10.5%, and at a similar rate each year from 2010 to 2020.

Housing demand in Asia is forecast to grow from a market value of US$694bil (RM2.15 trillion) last year, to US$1.1 trillion (RM3.41 trillion) by 2020, said DBS.

It calculated that 16.5 million property deals will be transacted in China, Indonesia, Hong Kong, Singapore, Thailand and Malaysia. The populations of these places combined make up a quarter of the world’s total population.

These figures will be music to the ears of property developers, who will be able to offer a wider supply of properties catering to different income groups.

“The pace and pattern of this growth will vary according to

market development and demographics in each country,” said DBS.

In China, it will be driven by low ownership levels, urbanisation and a high incidence of people in the home-owning age range.

In countries such as Indonesia and Malaysia, it will be sheer demand for housing, as people under 25 make up about 46% of the population and will soon progress to the home ownership age.

Energy and commodities

China today consumes four billion barrels of oil a year of the 6.9 billion barrels consumed in Asia a year. This is second only to the US’ seven billion barrels each year.

By 2020, China is expected to raise its consumption to 4.3 billion barrels a year.

By 2035, it will account for more than a fifth of total global oil demand, up from 17% today.

With energy-hungry China and India, coal demand is also expected to remain high, and grow at an 8% annual rate until 2020, said DBS.

But don’t expect Asia to become much greener. Renewable energy is unlikely to be able to make up for much energy demand by 2020. Coal power plants are still estimated to account for more than 70% of power generation, said DBS.

Palm oil and rubber will also be in hot demand in Asia.

“It will be home to 86.3% of the 81.7 million tons of global palm oil supply, and 95% of the 15.5 million tons of global natural rubber supply over the next eight years,” said DBS.

The Straits Times/ Asia News Network

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