What opportunities will this present to your business?
In 2019, I attended the annual Family Business Australia conference in Melbourne. I was fortunate to hear a presentation by Vaughan Scott, Professor in practice (MBA Programs) at University of Louisville College of Business. Vaughan highlighted some interesting statistical trends that as a business owner; peaked my interest. With his permission, I would like to share his presentation along with some of my own thoughts with you.
‘The West’ and ‘The Rest’ – The Geographical proportion of the World Population
The first trend that stood out was the proportion of people located in the geographic area known as ‘The West’ (15%) and ‘The Rest’ (85%). This data was recorded in 2015. Moving forward to 2100 and ‘The Rest’ is now predicted to hold 92% of the world’s population and only 8% for the West.
US Demographics and the Global Economy
The other consideration to strategize for is the demographics of the global economy. While growth rates in the USA are forecast to grow overall, research indicates the +65yr old age group for North America is growing the fastest which will put a huge burden on already stretched government services and reduce government revenue as this age group retire from the workforce.
By 2030, the +65yr old age group in the USA is forecast to grow by 31% compared to only 4.5% for the 25-40 yr. old age group. A well-considered migration (and/or retirement) policy will be vital for the US in years to come to help support the aging economy.
Interestingly, the US is not the worst placed country when looking at forecast population trends.
By 2030, the worst placed countries where the age group of >40 yrs. is forecast to significantly outbalance the younger age group of <30 yrs. are going to be Russia, Japan, China, Western Europe and Canada. This trend reflects an inverted population pyramid which begs the question – who and how much will these countries need to tax to fund the cost of their aging population? The burden of the younger generation having to disproportionately fund the cost of supporting an aging economy must surely slow down or reduce the growth of the middle class consumerism in each of these countries.
Winners of the Demographic Shift
Which countries will be the winners in these demographic shifts of population? Beaulieu & Beaulieu in their book, Prosperity in the Age of Decline, consider the countries with the greatest upside beyond 2030 (ignoring political instability) include India, Brazil, Mexico and Central America. As we move forward, these and other non-western countries appear to have the biggest opportunity of growing its middle class in the shortest amount of time.
Analysing the effect of the Global Middle Class
The importance of analysing the effect of the global middle class cannot be understated.
Globally, middle class consumption is approximately $40 trillion per year and contributes more to global growth than any other element of demand. Almost any international company that wants to grow its business needs to target the middle class. There are just too few rich people in the world, (currently around 190 million) to make a living by catering to them alone.
If you enter the middle class, you have a little extra money to make purchases beyond your basic needs; a toy for a child, or maybe even going to a restaurant or the movies. Shifting to meat and poultry consumption, taking a vacation, and flying to see friends or family are all part of the middle-class experience, as is spending on health, education, and insurance.
2018 – The Tipping Point
Towards the end of 2018 humanity experienced an important tipping point: half the population now lives at income levels that are either in or above the middle class. Analysis from World Data Lab now indicates that people have started moving from ‘poor’ or ‘vulnerable’ income categories to being middle class at much quicker rates. As the below figure shows, 5 people every second are now entering the global middle class.
Knowing the amount of people making a certain amount of money in a specific region is critical for every supplier or service provider as there are certain thresholds after which people tend to start buying certain goods. A study by the McKinsey Global Institute states that one of the first gadgets purchased in middle class households is a refrigerator (when households have a spending power of $7-$16/day), followed by buying transport and communication (spending power of $16-$17/day), and much later by washing machines (daily spending power of $27-$55/household) or leisure travel (approximately $50 daily spending power/household).
Dramatic Geographical Shift in the Middle Class
Analysing where the geographical shift in the middle class will occur is a large part of Kharas’ work with the Brookings Institution. Separating out ‘The West’ from ‘The Rest’ sees almost stagnant middle class growth between 2009 and 2030. However for ‘The Rest’ this increases from 847 million in 2009 to a projected 4324 million in 2030. Dissecting the data further, some key data modelling shows that 87% of the next billion middle class entrants will be descendants of Asian culture.
The next billion middle-class consumers will be 87% Asian
If a company has a billion customers today (earning above $11 purchasing power parity per day), then it should be able to attract 1.6 billion customers by 2030. But retaining global market share will depend mainly on attracting the new entrants to the middle class, who are overwhelmingly in China and India. To give your business the best chance to succeed, you need to position yourself where the greatest demand will be for the goods and services that you specialise in selling. When reviewing your strategy, you should be thinking what can I do to position my business to take advantage of markets as they stand now, but also plan for the next generation coming through as they will be dealing with a vastly different business landscape.
If you are interested in expanding your operations internationally, Walsh Accountants can assist and advise you on this growth strategy. Our International Division of tax and advisory professionals work closely with AIMS Relocation Specialist, a Singapore headquartered business & corporate relocation and immigration firm that has branches throughout the Asia Pacific region.”