Business News and Articles
StockNewsLine.com

Don't Overlook India's Market for China's

The scale of China's potential consumer market has always fascinated Western companies. Back in 19th-century England, spinning-mill owners were convinced they would reap big profits if they could just get everyone in China to wear one coat-tail or buy one handkerchief. More recently, U.S. and Japanese companies have made similar arguments.

For multinationals hoping to gain from China's teeming mass of consumers, though, the country continues to disappoint. Since the global fall in exports, Beijing has been building its way out of an economic slump. Roads, ports, railways: Name anything big and China is likely to be building it. Chinese consumers haven't yet played much of a role in driving the economy's recovery. As a percentage of gross domestic product, Chinese consumption is the lowest of any major economy in the world, at less than one third. In fact, almost all of China's impressive economic growth this year has come from infrastructure spending, as well as investment speculation in assets such as property.

Instead, it is India that could provide the greater pot of treasure at the end of the rainbow for multinationals targeting Asian consumers. When it comes to rebounding from the global crisis, India's approach has been different than China's. Indians, including the poor, are looking to consume their way towards further growth. Sure, the demand for handbags, air travel, and fine dining in Mumbai has deflated, but domestic consumption accounts for two-thirds of the Indian economy, compared to less than a third of China's.

The problem is that while China is building wonderful infrastructure, its top-down state-led model of development (not to mention the artificial suppression of the yuan) structurally impairs domestic spending. For example, according to China expert Minxin Pei, because three-quarters of the country's capital is reserved solely for the 120,000-odd state-controlled entities and tens of thousands of their subsidiaries, 40 to 50 million privately owned businesses are left to fight for the scraps. This means that a relatively small number of well-connected insiders and their associates benefit. Business profits tend to bulk up state coffers rather than the pockets of the vast majority of Chinese. Wage and income growth, even for China's urban residents, have measured around half the level of GDP growth over the past 15 years.

Ultimate gold mine: rural residents

In contrast stands India's bottom-up private sector model, for all its chaos, unpredictability, and bureaucracy. India badly needs infrastructure, but its consumers are better placed to spend. An approximately 300-million-strong middle class—compared with China's 100 to 200 million, depending on how one defines "middle class"—is overwhelmingly independent of the government. Corporate profits of India's successful large businesses and small- and medium-sized enterprises go to peoples' pockets, rather than to the state. India's consumer driven economy is starkly different from China's capital-investment-dominated one.

The differences go beyond the two countries' rising middle classes. For some foreign companies looking to sell to these developing markets, the main game is the hundreds of millions of people located outside the main city centers. Consequently, there's a lot of talk about waiting for China's rural residents to consume. Far less coverage, at least in the Western press and business pages, focuses on India.

Half the people in China and two-thirds of those in India still live in rural areas. About 700 million people in each country, most of them poor, are presumably getting richer. Therein lies the potential gold mine for those looking to sell low-end consumer goods. Yet we would do well to look more at India and a little less at China.

In China, the urban-rural income ratio was 1.8 times in the mid-1980s, 2.4 times in the mid 1990s, 2.9 times in 2001, and now stands at about 3.5 times. The 1980s constituted a golden period for China's poor, whose incomes rose with the general economic tide.

Regions : Asia

More articles on this topic: