June 2012

The Emerging ASEAN Economic Community (AEC 2015) and the Challenge of Innovation - Micro View (Part 2) 1
By George Abonyi
Consumers in developed economies -especially the US and EU -- have been the primary source of demand driving Asian economic growth over the past 35 years. In response, East Asian 2 economies have expanded dramatically their share of the supply of manufactured goods on world markets. The region’s export-based development strategies were driven by very high investment rates, facilitated primarily by exceptionally high levels of domestic savings, augmented in some economies (e.g. Malaysia, Singapore, Thailand), but not all (e.g. Japan, Korea) by significant foreign direct investment (FDI). At the same time, East Asia’s investment-driven, export-oriented development strategy was accompanied by relatively low levels of domestic consumption, as illustrated by the case of China. The global economic crisis of 2008/09 has led to significant slowing of growth and rising uncertainty in developed economies (i.e. EU and US). In an atmosphere of increasing constraints and austerity, consumers in these markets are spending less, and are doing so more cautiously. However, as an earlier Brief 3 suggested, over the medium term the region -- East Asia in general, and the emerging ASEAN Economic Community (targeted for 2015, and referred to as AEC 2015) in particular -- is likely to continue to be largely dependent on its traditional export markets, in particular the US and EU, constraining the region’s growth. However, East Asia, including the emerging AEC 2015, presents significant growth opportunities over the longer term for firms from both within and outside the region. This is particularly important – and a significant challenge-- for the region’s smalland medium-scale enterprises (SMEs), the primary source of employment and income. 4 Consumers in emerging Asian markets, however, are likely to have different characteristics and buying patterns than those in developed economies, the traditional markets for the region’s manufactured exports. Therefore responding to opportunities that growing and integrating regional markets will increasingly provide, requires innovations in products, production processes, and business systems, differing from the present focus of regional production networks that serve primarily developed markets. This in turn, could also have significant payoffs in exports to developed 1

George Abonyi is Visiting Professor in the Department of Public Administration and International Affairs, Executive Education Program, Maxwell School, Syracuse University, and Senior Advisor, Fiscal Policy Research Institute (FPRI), Bangkok.

“Consumers in emerging Asian markets… are likely to have different characteristics and buying patterns than those in developed economies”

Asia Policy Briefs June 2012

“Emerging economies, particularly in Asia, will drive both regional and global economic growth.”

markets through “reverse innovation” that address new types of customer constraints, preferences, and market niches in these economies, given slow US recovery and an increasingly troubled EU.

2. Emerging Asia’s consumers
As developed markets slow over the medium term, relatively faster growth in population and disposable incomes in emerging economies, particularly in Asia, will drive both regional and global economic growth. (See Annex on emerging market economies.) With growing population and increased incomes, 40% of global consumer spending is expected to come from the region by 2030. 5 In 2010 middle class households, with annual disposable incomes of US$5,000 $15,000, as percentage of total households, is estimated at 31.7% in China, 14.6% in India, and 35.7% in Indonesia. (See Annex on the definition of emerging Asia’s “middle class”.) This is projected to increase to 46.2% in China, 41.1% in India and 58.3% in Indonesia in More generally, by 2020, 2020. 6 households with annual disposable income of US$5,000-15,000 in emerging Asia will account for 4.9% of global annual disposable income as compared with 0.8% in 2000. However, most of this growth will be at the low end of the “middle class” range, with average annual disposable income in Asia Pacific projected at $5,387 per capita by 2020; up from $2,711 in 2010. To put this in perspective, average annual gross per capita income in developed economies in 2010 was US$38,481. 7 Therefore for all the projected growth, emerging Asian economies, including China, will remain relatively poor over the medium term as compared with developed economies, with the vast majority of their population’s low rather than middle income. In addition, factors such as growing income inequality and a continuing high proportion of rural population will condition discretionary spending in these markets. Income inequality, as measured by the Gini Index (an index between 0-1, with 0 indicating most equality and 1 total inequality) has risen in China, Indonesia, Malaysia, and India between 2000 and

Emerging Asia is also 2010. 8 characterized by increasing urbanization, a strong driver of wealth creation, but also of fragmentation. For example, Asian cities such as Bangkok and Jakarta are likely to have greater similarities in their consumer preferences and spending patterns to each other, than each of those cities will have to rural regions of their respective countries. And much of Asia’s population will continue to remain rural. Emerging Asia’s markets are likely to remain further fragmented over the medium term, for example by continuing infrastructure constraints. Within East Asia, ASEAN is characterized by growing disposable income levels, leading to rising purchasing power, coupled with demographic shifts to a younger, bettereducated population, and increased urbanization. This will create a consumer market with particular needs and constraints, and increasingly strong buying power. (See Annex for example of a growing ASEAN electronics and IT industry.) ASEAN’s population is projected to reach more than 650 million people by 2020, half under 30. This large younger population will have a significant impact on future consumption across the region, and therefore on patterns of production, investment and trade. In this context, transition of households from low to middle income will be a key factor in future consumption patterns. 9 By 2020, middle class households in ASEAN (in the $5,000-$15,000 income range) are expected to have an aggregate purchasing power of at least US$0.75 billion as compared to US$0.5 billion by households with greater than US$75,000 in annual disposable income. 10 A growing middle class notwithstanding, given present income levels and income distributions, low-income households will continue to be the backbone of the region’s consumer economy. This dominant market segment represents additional business opportunities for firms adopting innovative business models, for example similar to those proven to have been successful in other emerging markets, particularly in China and India (see section 3.2).

“[But] growing middle class notwithstanding…lowincome households will continue to be the backbone of the region’s consumer economy”

Asia Policy Briefs June 2012


“Fundamental challenge is…strengthening marketresponsive innovation…to take advantage of opportunities in emerging Asian markets”

3. 1 Innovation for emerging Asian Markets - Redefining the concept of innovation
Emerging Asian markets in general, and the AEC in particular, present significant opportunities for firms within and outside the region. However, many products designed for developed economies are not likely to work very effectively in settings with limited and erratic power supply, inadequate access to maintenance and supporting services, significant constraints on household space, challenging rural environments, fragmented markets, and multiple uses that may be quite different than originally intended for a product. Therefore the fundamental challenge is not simply exporting, but strengthening market-responsive innovation in order to take advantage of opportunities in emerging Asian markets. In these settings, innovation is likely to be most effective when it starts from an understanding of the particular customer needs and constraints, and works back to a product or service. Innovation for emerging Asian markets therefore has to be approached by firms and governments as a broad concept, encompassing activities beyond basic research and development (R&D) and related highlevel science- and technology-driven innovation (STI). It includes (1) “new-tothe-firm” adaptation of existing technologies – for example leading to process improvements and lower production costs for existing products; (2) “new to the market” products that can range from incremental changes to existing products, designing new products for existing customers, or developing new products for new customer groups; and (3) creation and commercialization of “newto-the-world” products, for example building on basic R&D, that create entirely new markets. 11 A broad concept of innovation provides a wide range of potential entry points for firms aiming to serve emerging Asian markets, beyond investment in basic R&D. This is particularly important for (regional) SMEs, for who adapting existing technology to particular local user needs and settings is more likely to provide accessible routes to commercially viable products and services. 12

Emerging Asian consumers are “low earners but high yearners” 13 , with increasingly higher aspirations and awareness of options. The challenge is innovate products that are “good enough” -- as compared with “leading-edge” science and technology-based innovation (STI) -- but better suited to local user conditions in terms of lower cost, smaller or from less expensive materials, fewer or different features, easy to use and maintain, and delivered ideally across fragmented markets. 14 In the context of this type of “frugal innovation” 15 investments in early stage product-related interactions with consumers, in production process improvements, in technology adaptation, and in new types of business systems – including sales, distribution, and support activities -- may be as or more important than basic R&D, in shaping innovation and commercializing new ideas. Innovation is likely to be needed at virtually every stage in the value chain for emerging Asian markets. For enterprises presently serving primarily developed markets, existing products are likely to be responsive only to a small segment of emerging Asia’s consumers. However, stripping down existing high end products designed originally for developed market users, is not likely to meet the needs of this new type of consumer. The challenge to these firms is to change the basic business model in order to understand and respond to emerging Asian consumers’ particular needs and constraints by creating entirely new products and services. 16 A growing number of multinational enterprises are adjusting their strategies for emerging markets, including GE, Philips, Procter & Gamble and Siemens’ SMART product strategy (Simple, Maintenance-friendly, Affordable, Reliable, and Timely to market). 17 Emerging Asia’s growing economies provide not only local market opportunities, but also the basis for product innovation for global markets, or “reverse innovation”. 18 Serving the region’s consumers can be the starting point for product design and innovation for international markets, rather than the end point for products originating from developed economies, The hand-held electrocardiogram (ECG) and modified ultrasound machine developed by GE in

“Innovation is likely to be needed at virtually every stage in the value chain for emerging Asian markets”

Asia Policy Briefs June 2012


“Reverse innovation originating in emerging Asia may find an expanding market beyond the region”

India and China, primarily for lower income urban and rural Asian markets, but subsequently expanding to lucrative market niches in developed economies, provide examples (see below), as does the rice cooker developed in China by Philips for Chinese consumers that has become the basis for paella and risotto cookers in Europe. Given an era of growing economic constraints and austerity in developed economies, reverse innovation originating in emerging Asia may find an expanding market beyond the region, (provided the product is designed to international standards).

particular needs and constraints, which did not lag those in developed economies, but were quite distinct. For example the Rapoo mouse had much greater range than Logitech’s product in order to be used as remote control with TVs which serve as the central entertainment device in a Chinese household, but with content downloaded from the internet, given constraints on TV coverage and cost. The Rapoo mouse was also designed to shield from frequent interference from other devices (e.g. household appliances, phones), an issue in Chinese homes. And priced at $15, it was far more affordable. • Galanz (China) – microwave ovens 21 : Most Chinese families could not afford microwaves built for developed markets, nor did they have large enough kitchens for such designs. Galanz licensed microwave technology (from Toshiba), built core competence in manufacturing, and invested heavily in R&D and design to develop simple, energy-efficient, low cost, small products. Building on success in the local market, Galanz expanded to international markets, while investing in R&D to adapt the product for the evolving and growing local market, and for international markets. Galanz has played a leading role in innovation for novel applications of microwave ovens building on Chinese customer needs, e.g. for stirfrying, deep-frying, steam cooking. Its worldwide export of home appliance products, mainly microwave ovens and air conditioners, generated over $2 billion in revenues by 2007, when the company's global market share in microwave ovens was more than 40%. • Suzlon (India) – wind power 22 : From an unusual beginning in India, Suzlon is now the world’s fifth largest wind turbine manufacturer with a global market share of 6%, active in 30 countries. The product is aimed at power generation in rural areas, including large-scale manufacturing operations. It was originally developed in response to erratic power supplies and rising energy costs for the owner’s textile business in rural India. Suzlon’s initial strategy was to leverage India’s low manufacturing costs and provide “end-toend” customized solutions to Indian clients, building on an understanding of local market needs and constraints. The firm then expanded into manufacturingrelated machinery, widening its 4

3.2 Examples of Innovations for Emerging Asian Economies
There are an increasing number of successful innovations and reverse innovations responsive to emerging Asian markets, particularly in China and India. • Tata Swach water purifier 19 : India’s Tata Chemicals developed a water filter, the Swach, that can be used even in remote rural locations. It combines natural materials and nanotechnology to purify water, does not need electricity or running water, costs less than $20, provides safe water for about 0.22 cents a litre, and meets US Environmental Protection Agency standards. The Swach’s cartridge, the key component, is made up of a composite of rice-husk ash (a byproduct of making polished rice), and fine particles of nano-silver, which inhibits bacteria growth, and has a purifying capacity of 3,000 litres, sufficient for a family of five for 6-8 months. Commercial sales of the Swach were launched in January 2010 in selected Indian states, with plans to expand sales in India and emerging markets. • Rapoo (China) “educates” Logitech (Swiss) 20 : Logitech is a leading global supplier of personal computer (PC) accessories, headquartered in Switzerland. Looking to leverage its global brand and competitive advantage, it introduced a PC mouse in China priced at US$50. This product, designed for developed markets, was not successful, especially as compared with its leading local competitor, Rapoo. In addition to its very high price, the Logitech mouse was not responsive to Chinese consumers’

“There are an increasing number of successful innovations and reverse innovations responsive to emerging Asian markets”

Asia Policy Briefs June 2012

“Based on its emerging market product innovations, GE has launched a global strategic initiative”

product/market range. Suzlon expanded internationally, given growing interest in green energy to supplement and/or replace conventional energy sources, with global revenues reaching $3.75 billion in the financial year ending March 2012 23 . • GE’s ultrasound machine 24 : In the 1990s and early 2000s GE served the Chinese and Indian markets with an ultrasound machine developed in the US and Japan. In 2002 the price was $100,000-$350,000; machines were large; and the customers were sophisticated hospitals and imaging centres. Typical uses were cardiology (e.g. measuring the size of passage or blood flow to the heart); obstetrics (e.g. monitoring fetal health); and general radiology (e.g. assessing prostate health). The large and expensive machines did not sell well in China. In 2002-2007 a local team in China leveraged GE’s global R&D and product design resources to develop a product for the local market that was cheap, portable, and used a laptop with special software. The product was launched in 2007, at a price of $15,000; and sales took off in China and the US. GE’s reinvestment in further product development created higher end product innovations priced $15,000-$100,000. Typical customers in China were rural clinics, for locally oriented uses such as spotting enlarged livers and gallbladder stones. Typical customers in the US were ambulance squads and emergency room, for uses such as identifying ectopic pregnancies, and at accident sites to check for fluid around the heart. Global ultrasound revenues grew from $4 million in 2002, to around $300 million in 2011. • GE’s Electrocardiogram (ECG) 25 : GE’s ECG machines sold in Asia (e.g. India), much like in the ultrasound example, were large and expensive. GE’s health care R&D centre and laboratory in Bangalore, India, developed a simplified, inexpensive, small, hand-held ECG machine called the Mac 400 oriented to the Indian (and more generally, emerging) market. It can fit into a small backpack; run on batteries as well as main power source; multiple buttons on the conventional ECG machine reduced to just four; and the bulky printer replaced by the tiny one used in portable ticket machines. This provides portability for widely dispersed rural population; independence from unreliable or limited

power supplies; ease of use, given shortage of medical/technical professionals; and ease of maintenance and repair. The price of the Mac 400 is $800 instead of $3000 for conventional machine; and the cost of an ECG test is reduced to $1 per patient instead of $5$20 per test on traditional ECG machines. Further innovations based on the Mac 400 led to a higher-level version for the Chinese market (Mac 800) priced at $2000; and the Mac 600 for developed economies (at $1200) for rural clinics, visiting nurses and primary care doctors. Since their introduction, the Mac series of products has sold over 15,000 units at margins comparable to GE’s high-end machines, recouping many times over the initial investment. Based on its emerging market product innovations, GE has launched a global strategic initiative, including in the US, called GE Healthymagination focusing on “underserved” or marginal communities. • Haier (China) washing machines – with a difference: As discussed in the Annex, the demand for electrical appliances in emerging East Asia is expected to increase significantly. Haier, the leading Chinese “white goods” manufacturer now with strong international presence, adapted washing machines to particular needs and multiple uses of rural customers in China and beyond. Investigating complaints from farmers that washing machine drainpipes were getting constantly clogged, it found they were being used to wash mud off vegetables. Innovating to turn the constraint into an opportunity, Haier developed a washing machine with large pipes to accommodate vegetables. Through further innovation, it designed a washing machine to peel potatoes; and developed a new model for herders in Mongolia to help churn yak milk into butter. More generally, Haier has been very successful in building on the particular needs and constraints of the emerging Asian market for global competitive advantage, e.g. leading provider of compact refrigerators. 26

“Haier has been very successful in building on the … emerging Asian market for global competitive advantage”

Asia Policy Briefs June 2012


“Innovation in business systems for emerging markets involves the extensive use of diverse partnerships”

3.3 Innovative Partnerships Emerging Markets


An important dimension of innovation in business systems for emerging markets involves the extensive use of diverse partnerships to outsource key activities in the value chain. These partnerships include businesses, non-government organizations (NGOs), and social networks; and are used to reduce cost, increase efficiency (e.g. through specialized suppliers), and increase flexibility. • Bharti Airtel (India) -- business network partnerships 27 : Bharti Airtel, an Indian cellphone company, has turned itself into one of the world’s largest and most costefficient “asset free” mobile service providers with over 170 million subscribers, by creating innovative partnerships with suppliers and by sharing the costs of infrastructure with competitors. It outsources all activities along the value chain except marketing and branding – with IBM managing its IT infrastructure; and Ericsson and Nokia Siemens Network (NSN) managing its network infrastructure. • MicroVentures’ (Philippines) Hapinoy Community Stores – leveraging a network of grassroots entrepreneurs 28 : This business model makes a wide range of consumer products and services available to low income customers in a fragmented rural market of thousands of villages in the Philippines. It builds on an existing ad hoc logistics network of 800,000 tiny sarisari (mom-and-pop) stores, converting and upgrading these independently owned stores into a branded network called the Hapinoy Program (Hapinoy Community Stores), which as of 2012 includes more than 10,000 stores as members. This innovative partnership allows MicroVentures to reach customers in a fragmented but extensive Philippine rural market; while providing as benefits to its member stores (mostly owned by women) of lower costs for supplies by leveraging network scale, more income from a wider set of products and services, and strengthened managerial skills.

smoke, low-cost stove, powered by rechargeable batteries, that works on pellets – an organic bio-fuel made of processed agricultural waste such as peanut shells and bagasse. This allows for more complete fuel combustion and more efficient heat transfer. First Energy’s typical customer is the rural Indian woman who normally cooks for hours over wood- or kerosene-fired stoves, harmful both to their health and to the environment. First Energy partners with two kinds of NGOs for marketing and distribution of the stove to rural customers: larger NGOs with retail divisions in rural areas, and smaller NGOs that serve more remote locations. A key part of the marketing strategy is close ongoing interaction with women in local communities in order to understand their needs. The NGO partnership provides a wide rural distribution network, and also builds consumer confidence through association with trusted local organizations. So far over 500,000 stoves have been sold to rural households. In 2010 First Energy introduced larger stoves aimed at the urban commercial market such as restaurants and caterers, selling around 3000 stoves to date. First Energy is now aiming at other emerging markets, including Bangladesh, Indonesia, Sri Lanka and Vietnam.

Emerging Asian markets in general, and the AEC 2015 single market in particular, present significant opportunities over the longer term, including for SMEs from within and outside the region. The fundamental challenge is to strengthen the capacity for market-responsive innovation in order to take advantage of particular opportunities in emerging Asian markets in general, and the AEC in particular. This, in turn, has important implications for both public and private decision makers. Traditional innovation-related public policy, and enterprise strategy focus on factors related to basic R&D, and science and technology-based innovation (STI). This reflects a generally positive relationship between firms that innovate, and those that invest in R&D in some form, with the emphasis on the creation of new technologies. However, in a global economy characterized by fragmentation

Emerging Asian markets …present significant opportunities over the longer term, including for SMEs

• First Energy (India) – NGO partnership 29 : First Energy’s Oorja stove, selected by the World Economic Forum as a “Technology Pioneer 2012”, is a low-

Asia Policy Briefs June 2012


Innovation is… a broad concept that provides … scope for strengthening … capabilities and … performance of enterprises at every stage along the full value chain

of the production of goods and tradable services 30 , it is no longer clear to what extent investment in basic R&D and leading-edge technology are the best way to capture the economic benefits of innovation. These benefits may be captured anywhere along the innovation value chain, ranging from the creation of leading-edge technologies at one end, to changes in the organization and management of production and the distribution of new products to markets at the other. Innovation is therefore a broad concept that provides a wide scope for strengthening the capabilities and competitive performance of enterprises at every stage along the full value chain. This is particularly the case with respect to emerging markets where consumers with limited disposable incomes look for “good enough” products at a relatively low cost and with characteristics better suited to local user conditions. For SMEs from emerging Asia, the absorption of proven knowledge and technology, adapted to market demand through product development and design, and process upgrading, may provide the most accessible route to commercially viable innovation for emerging markets. SMErelated policies supporting innovation, particularly for new customers in emerging Asian markets, may therefore start less from a focus on high-level research and basic science and technology (STI), and more from an on-going understanding of existing and emerging needs and related product and technology adaptation and development. 31

global population 33 , with almost half of the world’s population in emerging Asia. Emerging market economies grew 66% in real terms between 2000 and 2009, reaching US$7.5 trillion, and estimated at US$8.0 trillion in 2010, to a large extent driven by developing East Asia. 34 Annual gross per capita income in developing economies increased by 26.5% in real terms between 2006 and 2011 and is expected to increase by a further 42.4% by 2020. 35 The number of households with annual disposable incomes above US$10,000 in EMEs is expected to reach 571 million in 2020, up from 269 million in 2010. However, the gap between EMEs and developed economies continues to remain substantial. In 2011, average annual gross per capita income in developed economies was US$38,481 while in emerging market economies it was US$2,803. By 2020 average annual gross per capita income in emerging markets will still only be 9.3% of developed economies at US$4,157. 36 In 2010 China and Brazil were the only two EMEs included in the world's 10 largest consumer markets. 37 The market in China was the largest among EMEs during 2000-2009, estimated to have accounted for 23.2% of total EME consumer spending in 2010. Brazil is the second biggest, with a share of 13.2% of total consumer spending in EMEs (2010), followed by India (10.2%) and Russia (8.6%). However, on a per capita basis, the level of consumer spending in China and India is among the lowest in EMEs. In 2010 India is estimated to have had the lowest per capita spending among EMEs at US$690, followed by Vietnam (US$793), Philippines (US$1,301) and China (US$1,399). Nonetheless, China, India and Indonesia are projected to have the highest growth in per capita consumer expenditure among EMEs, over 80% in real terms between 2010 and 2020. By 2020, in addition to the BRIC economies (Brazil, Russia, India, and China), Indonesia, Mexico, Turkey and Poland will also rank in the world's 20 biggest consumer markets. However, EME discretionary spending levels will remain significantly lower than those of the advanced economies, with per capita expenditure estimated at averaging US$6,313 by 2020 compared with around $28,067 in the G7 economies. Drivers of 7

Annex 1. Emerging Market Economies
It is useful to put the ASEAN market (AEC 2015) in the broader context of emerging market economies (EME). 32 The region shares general characteristics with emerging economies in general, including those outside the region; and these are also expected to be key future markets for ASEAN exports. Between 2006 and 2020 the population of the world's developing economies is forecast to increase by 18.3% while developed economies will grow by 6.6% over the same period. By 2020 emerging economies will account for 86.1% of the

Asia Policy Briefs June 2012

consumption in emerging market economies will therefore be centered in emerging Asia, predominantly in China and India; with Indonesia, Vietnam, Thailand and Malaysia, also expected to contribute to growth in Asian consumption, if to a lesser degree. 38

3. Electronics and IT market in ASEAN: 48
Significant aggregate growth in emerging Asia’s demand, primarily in China but also in ASEAN, is expected in the electronics and IT industry. For example in 2000, the value of demand for telecoms and IT equipment in Asia (ex Japan) stood at nearly US$700 billion, or just over 14% of the world market. By 2014, demand is projected to be worth US$4.1 trillion, or 36.8% of global demand. Similarly, demand in Asia (ex Japan) for domestic electrical appliances, such as fridges and washing machines stood at US$18.6 billion, or 10% of the world market. By 2014, demand for these products is expected to reach US$159 billion, or 22% of world demand, (but with a difference – see the Haier washing machine example in Section 3 in the main text). In the household audio and video equipment sector, Asia (ex-Japan) will increase from 12.5% of the world market in 2000 to 29% by 2014. Aggregate growth in the electronics and IT industry will be driven by expansion in both urban and rural consumers. ASEAN’s, and more generally Asia’s population, is still predominantly rural. Of Asia’s 3.7 billion people, almost 61%—or 2.2 billion people—live in rural communities, with many countries having a far higher proportion of rural population, e.g. in Laos and Cambodia around 80%, and in Vietnam, Myanmar and Thailand between 65 and 70%. Although migration to cities will continue, relatively high rural birth rates will keep rural populations high over the medium term. For electronics and IT companies this presents significant potential product market opportunities in both urban and rural areas. For example, Philips is aggressively developing a variety of products for Asia’s expanding urban markets, e.g. air filters, water filtration systems, food safety products, as well as focusing on the particular needs of rural consumers 49 50 – reflecting the broader need and opportunity for innovation serving emerging Asian markets.

2. Measuring Emerging Asia’s “Middle Class”
Much of the discussion of Asian emerging markets has been on an expanding middle class that is to be the key driver of future growth. 39 However, there is no universal definition for what constitutes emerging Asia’s rising middle class, for example in terms of income, market characteristics, and consumption patterns. A number of issues are worth noting. 40 • The usual macro-level data such as GDP per capita can be misleading, particularly for firms aiming at serving these markets. For example, the middle class population in a country can decline even when GDP per capita increases, depending on income distribution. This is particularly relevant in emerging Asia, where income inequality has been growing. 41 • Asian family members, particularly at lower incomes, usually share goods and services such as housing, cars and telephones. Therefore household data is likely a better guide to consumption patterns than per capita income. 42 • There are various ranges suggested for disposable income and expenditures in defining the middle class in emerging markets. OECD uses $10-$100 daily expenditures per person in base year 2005 (using purchasing power parity or PPP 43 ), or approximately $3,650 - $36,500 per person per year. 44 The World Bank suggests an annual disposable income range $4000 - $17,000 in base year 2000 PPP 45 , closer to that used by leading market analysts such as Euromonitor International and Accenture, which use the range $5000 - $15,000. 46 There is general agreement, however, that over the medium term (e.g. to 2020) growth will be concentrated to a large extent at the low end of this range, sometimes referred to as the “early middle class”. 47

For SMEs … absorption of proven knowledge and technology, adapted to market demand, may provide the most accessible route to commercially viable innovation

Asia Policy Briefs June 2012


Endnotes This Brief is based on Abonyi, G., 2011. Private Sector Development Strategy for Thailand. ADB Thailand Resident Mission, Bangkok, June; and Abonyi, George and Atipol Bhanich Supapol, 2012. Getting More Out of the ASEAN Economic Community (AEC) Single Market: Developing Small and Medium Enterprises (SME) Policy Index for ASEAN. Economics and Research Institute for ASEAN and East Asia (ERIA), Jakarta. 2 East Asia is used here to refer to both Southeast Asia and Northeast Asia, as in the related earlier brief -- G. Abonyi, 2012. The Emerging ASEAN Economic Community (AEC 2015) in the Wider Regional and Global Economy – A Macro View (Part 1). Asia Policy Briefs, Maxwell Executive Education Programs, Syracuse University. 3 Abonyi (2012), cited in footnote 2. 4 See for example Freeman, N., G. Abonyi, and Atipol Bhanich Supapol, 2009. Globalization of Production and the Competitiveness of Small- and Medium-Sized Enterprises in Asia and the Pacific: Trends and Prospects. Studies in Trade and Investment 65, United Nations Economic and Social Commission for Asia and Pacific (UNESCAP), Bangkok. 5 Oxford Economics, 2012. “Emerging middle class to drive global growth”. Emerging Markets Weekly Economic Briefing. May 11. 6 Euromonitor (2010) cited in footnote 14. 7 Euromonitor, 2011. “Regional Focus: More Discretionary Spending by Households in Asia Pacific”. July 28. 8 ADB (2012). See also Euromonitor, 2012. “Special Report: Income Inequality Rising Across the Globe”. March 12. 9 See for example Accenture (2011) 10 See for example Accenture (2011); Credit Suisse, 2011. Emerging Consumer Survey 2011. Credit Suisse Research Institute. 11 See for example Abonyi (2011) 12 See for example Radjou et al (2012); See also Bhide, Amar, 2008. The Venturesome Economy. Princeton University Press, Princeton. 13 Radjou et al (2012) 14 This is the basis of “frugal innovation”. See The Economist, 2010. The world turned upside down: A special report on innovation in emerging markets. April 17; also Radjou et al (2012) 15 See The Economist (2010); and Radjou et al (2012). 16 See The Economist (2010), Radjou et al (2012), and Govindarajan, Vijay and Chris Trimbel, 2012. Reverse Innovation: Create Far From Home, Win Everywhere. Harvard Business Review Press 17 For details on these and more examples see The Economist (2010), Radjou et al (2012), and Govindarajan and Trimble (2012). 18 See The Economist (2010); and Govindarajan and Trimble (2012). 19 http://www.tataswach.com/; see also Wall Street Journal, July 6, 2010; and Navi et al (2012) 20 http://rapoo.com/; see Radjou et al (2012) 21 http://www.galanz.com/; see also Hang, Chang-Chieh; Chen, Jin; Subramian, Annapoornima M., 2010. “Developing disruptive products for emerging economies: lessons from Asian cases: four Asian firms show how disruptive innovations tailored for emerging markets can drive global success”. Research- Technology Management, July 1. 22 http://www.suzlon.com/; see also Hang et al (2010) 23 http://www.windpowermonthly.com/news/rss/1134309/ High-debt-cost-hits-Suzlons-2011-profit/ 24 Immelt, Jeffrey, R., Vijay Govindarajan, and Chris Trimble, 2009. “How GE is disrupting itself”, Harvard Business Review, October. 25 See the The Economist (2010); and Radjou et al (2012) 26 Radjou et al (2012); see http://www.haier.net/en/ 27 http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/About+bharti+airtel/ see also Radjou et al (2012) 28 http://www.hapinoy.com/; see also Radjou et al (2012) 29 http://www.firstenergy.in/; See also Shukla, Sachin and Sreyamsa Bairiganjansee, 2011. The Base of Pyramid distribution challenge: Evaluating alternate distribution models of energy products for rural Base of Pyramid in India. Centre for Development Finance, Institute for Financial and Management Research, Chennai, India. 30 See Abonyi, George and David Van Slyke, 2010. “Governing on the Edges: Globalization of Production and the Challenge to Public Administration in the Twenty-First Century”, Public Administration Review, Special Issue on the Future of Public Administration in 2020, edited by Rosemary O’Leary and David M. Van Slyke, Volume 70, Issue Supplement s1, December 2010. 31 See Abonyi (2011) for a detailed discussion of these issues in the Thai context. 32 The data in this section is based on various Euromonitor International reports (cited in footnotes), perhaps the most widely used research source by corporate decision makers and market analysts on the subject. Euromonitor includes 25 economies in its definition of “emerging market economies”: Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, the UAE, Ukraine, and Vietnam. 33 Euromonitor, 2012: “Special Report: Rebalancing Economic Power to Emerging Markets”, March 31.

Asia Policy Briefs June 2012


See Euromonitor, 2010. “Spending power in emerging market economies grows rapidly”. September. US$ constant terms, in 2009 fixed exchange rates, in Euromonitor papers cited. 36 Euromonitor (2012), cited in footnote 5. 37 Data in this paragraph is primarily from Euromonitor (2010), cited in footnote 9. 38 See for example pwc, 2011. The World in 2050: The accelerating shift of global economic power: challenges and opportunities. London, January. 39 See for example Euromonitor, 2010. “Emerging Focus: Rising middle class in emerging markets”, March 29; Oxford Economics (2012); Silk Road Associates, 2012. The rise of Asia’s middle class. Hong Kong, April; Accenture, 2011. Destination South East Asia: A Joint Pathway to Future Growth? Opportunities for Regional Business Expansion. Prepared by Grant Powell, Vedrana Savic, and Amy Chng, Accenture, Singapore; and Kharas, H., 2010. The Emerging Middle Class in Developing Countries. Working Paper No. 285, OECD Development Centre, Paris. 40 See Mirae Asset Global Investments, 2011: The Global Middle+ Class in the Emerging Markets: The Growth Has Only Begun. Emerging Market Insights, July. 41 See ADB, 2012. Asian Development Outlook 2012 – Confronting Rising Inequality in Asia. Manila. 42 In this context, it may be noted that the size of Asian households seems to be declining with rising incomes. See Euromonitor, 2011. “Regional Focus: More Discretionary Spending by Households in Asia Pacific”. July 28. 43 The usual measure for emerging market growth and consumption is purchasing power parity or PPP as compared with market exchange rates (MER). GDP at PPP is seen as better indicator of average living standards or volumes of outputs or inputs, because it adjusts for price differences across countries at different levels of development. Although GDP at MER can be seen as a better measure of the relative size of the economies from a business perspective in the short term, over the longer term it is generally suggested that adjustments be made for the likely rise in real market exchange rates in emerging economies towards their PPP rates. For a discussion of the difference and implications see for example Callen, T., 2007. “PPP Versus the Market” Which Weight Matters?”, Finance and Development. Vol. 44, Number 1, March. See also the World Bank data base rationale for the use of PPP at http://data.worldbank.org/about/faq/specific-data-series. 44 Kharas (2010) 45 World Bank, Global Economic Prospects, 2007. See also Ravallion, M., 2009. The Developing Worlds Bulging (but Vulnerable) Middle Class. Policy Research Working Paper 4816, Development Research Group, The World Bank, January. 46 See for example Euromonitor reports cited; see also Accenture (2011). 47 See for example Deloitte, 2011. Consumer 2020: Reading the Signs. Deloitte Touche Tohmatsu Ltd. 48 See Economist Intelligence Unit Limited, 2011. Rising consumption, rising influence How Asian consumerism will reshape the global electronics industry. 49 Rocchi, Simona, 2006. Unlocking new markets. Philips. http://www.newscenter.philips.com/pwc_nc/main/design/resources/pdf/Unlocking_new_markets_PDesign_SRocchi_230606.pdf; see also Radjou, Navi, Jaideep Prabhu, and Simone Ahuja, 2012. Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth. Jossey-Bass.


Asia Policy Briefs June 2012


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