The Hunt for Profits Goes South With Purchasing Power Rising, Euro Firms Eye Developing World
Ever on the lookout for tomorrow's customers, Western corporations have set their sights on industrializing economies and developing nations. It's a huge opportunity, but low cost isn't the only important criterion for a vast new group of consumers. Innovations are also important for this growing market.
The "One Laptop per Child" initiative has been so popular that Intel is now developing an ultra-cheap computer for markets in developing nations.
As a member of the executive board of Beiersdorf, the Hamburg-based cosmetics company that owns the Nivea brand, he routinely fits visits with Chinese, Thai or Indonesian consumers into his travel schedule so that he can form an impression of the way they live. Kleinschmidt is convinced that "Asia, as well as Eastern Europe and South America, are among the most important engines of economic growth."
While market shares were divided up long ago in Europe and North America, Western producers are discovering and developing new growth opportunities in newly industrializing economies. In addition to providing them with legions of low-cost workers in these countries, globalization has created a constantly growing number of consumers who can now afford luxury items like skin cream, mobile phones or even a bar of soap.
Dean has identified people with monthly household incomes of between $63 and $700 as the "Next Billion" potential consumers. It isn't the handful of new super-rich individuals but the masses whose economic ascent has only just begun that promise to deliver the true blockbuster market. Of course, Western corporations like Nestlé, German insurance and financial giant Allianz or Beiersdorf have to make allowances for their clientele's meager budgets and, of course, this requires extremely efficient and low-cost production. It is certainly no coincidence that the world's most inexpensive car was unveiled last week not by Toyota, Ford or Fiat, but by India's Tata conglomerate, which comes armed with loads of expertise on how to manufacture and market products for vast numbers of low-income consumers.
But low prices alone are not enough. For Western producers, it is also critical that they manage to sway new consumers in Africa or Asia with solutions precisely targeted to their needs. One example is a seasoning cube containing iodine, which Nestlé hopes to market successfully in Africa. In India, German consumer products maker Henkel sells miniature packages of its "Pril" dishwashing detergent for one rupee apiece, or a little less than two cents. Another innovation is a mobile phone that, though lacking complex functions, contains a built-in flashlight -- a valuable feature in countries were power outages are a daily occurrence. These are all products tailored to the unique needs of the next billion -- consumers worldwide who, though far from affluent, no longer live in poverty and have small amounts of disposable income.
This new, enormous target group includes people like Li Ying. The young Chinese woman who opens the door to her apartment to a group of Beiersdorf market researchers has only been living in Shanghai for a few months. Her tiny, one-room apartment measures only 4.5 square meters (about 50 square feet). She shares a kitchen area and bath with nine neighbors. But Li Ying, 24, is not poor. As an employee of a real estate company, she earns a monthly salary of about 450.
Graphic: The Next 4 Billion
"China represents an enormous opportunity for us," says Beiersdorf executive Kleinschmidt. In 2007, Beiersdorf's Chinese operations grew by almost 50 percent and its sales reached 90 million. The Hamburg-based company expects its Chinese market to grow by leaps and bounds in the future.
Beiersdorf's new factory near Shanghai, slated to open its doors in 2009, will begin its operations at an initial annual capacity of 12,500 tons of personal care products. The German company also plans to move into the Asian hair care market and recently spent 270 million to acquire an 85-percent stake in China's second-largest manufacturer of hair-care products.
Once disregarded because of their poverty, the people of the developing world are becoming attractive consumers for two reasons: their growing affluence and their growing share of the world's population. Eight out of 10 of the earth's inhabitants now live in developing countries, a number that will increase to nine in less than 20 years. By 2025, the Third World will be home to 7.2 billion of a forecast global population of 8 billion.
China's ongoing economic boom is spreading to ever larger segments of the population. Beiersdorf spends a lot of time and money on its market research and development efforts, hoping to win over this potentially vast market for its Nivea products. "It would be a sign of Western arrogance to assume that consumers in China or Brazil have been waiting for generations to finally be blessed with our German products," says Kleinschmidt.
He speaks from experience. In Korea, for instance, Beiersdorf's attempt to introduce a face care product based on a Western recipe was a failure. And a skincare line containing rice and lotus ingredients, a big seller in Germany, where it is marketed as one of the secrets of Asian beauty, was met with derision by an Asian focus groups.
These kinds of experiences have taught manufacturers to spend more time and effort analyzing the needs of their new target audiences. This can lead to the marketing of products in Asia that Western consumers may find perplexing. In Thailand, for example, Beiersdorf has successfully marketed a deodorant that bleaches the skin in the user's armpits when used on a nightly basis.
In this way, Western corporations' enthusiasm for the world's newly industrializing nations creates both new markets for well-known products and innovations.
- Part 1: With Purchasing Power Rising, Euro Firms Eye Developing World
- Part 2: Blurring Business and Development Aid
- Part 3: Micro-Insurance and Mobile Phones for the World's Poor