India s Opportunities in Tomorrow s World

Transcription

1 India s Opportunities in Tomorrow s World Clint R. Laurent CEO and Founder Global Demographics Limited Hong Kong I India s rapidly growing population will not automatically translate into a demographic dividend. The country must address its underperforming educational system and the threat of losing unskilled jobs to robotics. India can succeed by leveraging its low-cost labor force and strategically positioning itself as a global provider of high-quality goods to affluent consumers. ndia has many strengths, but the country also faces significant challenges. India has a rapidly growing population and some favorable demographic trends, yet the lack of education among India s people poses a significant impediment to their employment opportunities. Although India s relatively low cost of labor is a competitive advantage for the country, it is not enough to attract employers. The country must raise its competitive edge by educating its youth and reshaping its labor force. In addition, India must strategically position itself to take advantage of the opportunities outside of the country that are presented by growth in consumer groups with high household incomes. Three Demographic Dynamics India has three major demographic dynamics that will play important roles in the India of tomorrow: population growth, a changing age profile, and the level of education attained in the country. India s population is growing quite rapidly. The population is becoming better educated and more affluent, but unfortunately, India is not benefiting from growth in the same way that China has benefited from its growth. Unlike China, India is not urbanizing. In China, a significant proportion of the labor force is moving from agriculture to manufacturing areas. In contrast, India s urban population is growing at the same rate as the total population. Although India s changing age profile is a positive for the country, the lack of migration to urban areas hinders India s productivity. This situation is a result of India s underperforming education system. This presentation comes from the India Investment Conference: Positioning Portfolios for Turbulent Times held in Mumbai, India, on 13 January 2012 in partnership with the Indian Association of Investment Professionals and the National Institute of Securities Markets. Population Growth. India s population is currently 1.19 billion, and it is expected to surpass China s population by By 2030, India s population is forecast to grow to 1.43 billion. Although India s population is growing rapidly, the birth rate (per thousand females aged 15 49) is declining. In general, families understand that having one or two children rather than four or five improves the family s ability to educate the children and provide health care for them while significantly increasing the ability of the family to save. This reduction in family size is leading to increased education levels and to higher household incomes. Unfortunately, there have been so many young people born during the past 20 years that, even though the birth rate is declining, the number of women of childbearing age is increasing. This increase more than offsets the decline in the birth rate. For the next 20 years, India will have approximately 25 million births every year, which, after netting out deaths, means the population is increasing by 14 million people every year. There is nothing India can do about its huge population growth in the near term. The country s government policies and investment strategies will have to take into account the fact that the population will keep growing every year for the next 20 years. One advantage of India s population growth is that the largest increases are occurring in the most favorable age profiles in terms of discretionary spending. Changing Age Profile. Many people in marketing believe there is a huge youth market in India. Although it is large, marketers must be careful not to make the mistake that was made in China that is, attempting to sell such youthoriented products as running shoes or carbonated soft drinks en masse. The growth in China s population was not in its youth. The growth came 14 JUNE CFA Institute cfapubs.org

2 India s Opportunities in Tomorrow s World primarily from consumers aged or older. China experienced 10 years ago what India is now going to experience for the next years: India s growth is no longer in its younger population. The children s market will actually decline over the next 10 years, and growth in the teenage market will fall to zero over the following 10 years. The growth markets in India over the next years are really in the age group, which is young families, and in the age group. The young family consumer group is expected to increase by 34 million people by 2021 and another 31 million people by The age group is expected to increase by 68 million people by 2021 and another 59 million by This demographic shift is good news. One of the most attractive consumer groups in the world is the age group. In such societies as India, China, Bangladesh, and Indonesia, people who are years old typically married young and have had their children young. Many of these households still have at least one earner but are now child free. Of all the groups in a society, the age group has the most discretionary income. China is experiencing strong consumer demand because this segment of its population has already been growing for years. Now it is evident that demand is beginning to come from India. Companies must realize that running shoes may not be the best product for the future consumer of India, but brands and consumer goods that are slightly upscale might show faster growth in the near future. It is useful to look at what has happened in China because it precedes the Indian consumer market by years. Valuable lessons can be learned from knowing which brands worked in China and which ones did not. This information can then influence marketing and sales strategies elsewhere. Education Profile. Education is the most important factor for the India of tomorrow. Of the working age population, 31% have no education, 50% have some primary education or have completed primary education, 13% have secondary education, and 6% have vocational or tertiary qualifications. During the next years, the percentage of the population that is uneducated is expected to decline from 31% to 26% and the percentage of those with vocational or tertiary education is expected to increase from 6% to 9%. But there is little change anticipated in the percent of the population with a primary or secondary education. Education is potentially India s fatal weakness. Figure 1 illustrates how India ranks according to the Education Index developed by Global Demographics using data from 75 countries. The index combines a country s adult literacy rate with the associated enrollment in primary, secondary, and tertiary educational institutions. The graph shows that as a country moves from the left to the right on the Education Index, it gets very little lift in productivity until it gets to about 200. Once a country gets to 200, it gets a huge lift in productivity. India s education situation is quite far away from that lift. China has made it to 200 and will get a productivity lift even though its labor force is beginning to shrink in size. To be competitive, India must invest in education. One solution is online education. Online delivery of education in India presents a huge business opportunity as well as a potential solution to its educational challenges. Table 1 shows the percentage of people 15+ years old and their associated levels of education for India and China. The Education Index in Figure 1 shows that India s ranking at the low end of education corresponds with its low output per worker, a result of its largely rural population. Table 1 answers the question of why that rural population has not moved to the urban areas. India and China are relatively similar in terms of the percentage of the population with vocational and tertiary qualifications 6% and 9%, respectively. These are senior managers or the people hired to set up or run manufacturing operations or businesses. The problem is secondary level education. In China, 60% of the work force has completed lower secondary or higher education, whereas only 13% of India s labor force meets that qualification. These are the employees who handle the slightly more complex jobs or who increase the productivity of a manufacturing operation. In India, employees with a secondary education are in short supply. About half of the population has at least some primary education, but employees with secondary education are needed to raise the quality of manufacturing and increase productivity. Every client of ours at Global Demographics who is doing business in India has difficulty filling positions for middle management. The lack of secondary education is critical. Household Income. The middle class in India is growing. Urban households with incomes of US$7,500 US$15,000 and those with incomes above US$15,000 are growing at about 9% per year. Companies that are focusing on India s market should be focusing on these groups because with that type of growth, a company that penetrates the market now might actually reach a market share of as much as one-third of all Indian households and half of the consumer households in urban India by CFA Institute cfapubs.org JUNE

3 CFA Institute Conference Proceedings Quarterly Figure 1. Education Index Rankings and GDP per Worker for Various Countries GDP per Worker (US$) 100,000 North America Western Europe 80,000 Affluent Asia 60,000 40,000 20,000 0 North Africa/ Middle East India Pakistan South Africa South America Developing Thailand Asia Indonesia Vietnam Eastern Europe Malaysia China Sri Lanka Philippines Education Index Table 1. Percentage of People 15+ Years Old at Various Levels of Education in China and India, as of 2010 Level of Education China India Vocational and tertiary 9% 6% Secondary Some or completed primary None 7 31 The household income of the rural population, however, is not rising nearly as much. The reason for the disparity in income growth is education. The rural population is less educated; therefore, they are not moving into urban or manufacturing areas and are not experiencing the same increases in income. Labor Force Growth and Composition Investors frequently read about India s demographic dividend. As India s population grows, so will the labor force; its economy is thus expected to grow very rapidly. It is true that India s labor force will grow in size. It is also true that India is not using its existing adult population efficiently. Among the people designated as being of working age, 15- to 64-year-olds, just fewer than 50% are actually employed. India has significant human capital that is not being used. Composition. India s spare capacity is a result of the extremely low female participation rate in the labor force. Changing social attitudes is not easy. But if India can change its social attitudes in this respect, then it could grow its labor force faster, assuming the employment opportunities are there. Table 2 shows the participation rates of men and women in the labor force for various economic regions. Again comparing India and China, 73% of working-age females in China are employed whereas only 38% of working-age females in India are employed. A larger percentage of women are 16 JUNE CFA Institute cfapubs.org

4 India s Opportunities in Tomorrow s World Table 2. Participation Rates for Males and Females in the Labor Force of Various Economic Regions, Economic Region Males Female North America 78% 68% Western Europe Affluent Asia Eastern Europe South America North Africa/Middle East China Developing Asia India South Africa involved in productive roles in their economy in China than anywhere else globally. Considering the 2011 global labor market, developing countries in Asia provide a total of 62% of global labor. India s contribution of 17% is relatively small compared with China s contribution of 31%, although India is the second-largest supplier of labor. During the next 20 years, however, India is projected to add 124 million workers to the labor force, more than any other region, whereas China will lose 115 million people from its labor force. Because of the age of China s population half the population is over the age of 40 and the relatively few entrants into its workforce, China s labor force will shrink. China is at full capacity with 73% of females and 86% of males involved in the labor force. China s shrinking labor force is a potential opportunity for India. As China s workforce shrinks, it becomes more difficult for factories and manufacturing concerns in China to obtain labor; these companies and plants are already looking elsewhere for labor. India will be one of the options for alternative labor sources because of its competitive wage rates. But there are other countries in developing Asia on that list as well. Additionally, manufacturing is changing in very significant ways and may not require a large supply of labor in the future. India might look to Japan as an example of a country that has reshaped its labor force. Table 3 shows projected trends in the global labor force in millions of persons. Japan is frequently portrayed as an aging country, lacking a youthful population to care for its elderly. What most people do not realize, however, is that Japan has the lowest number of dependents per worker in the world. More importantly, Japan s labor force will not shrink at all for the next 10 years because Japan has changed its labor laws. In the last 5 years, Japan has increased the retirement age from 64 years to 69 years; this increase will be gradually implemented over the next 5 years. Japan has also changed its pension law, and Japanese companies are changing their strategies to accommodate the new requirement that people work for an additional five years or perhaps even longer. Another change in Japan is that women are returning to the labor force in significant numbers. All in all, Japan will experience no decline in its labor force over the next 10 years and only a marginal decline in years. Japan was able to increase its mandatory retirement age because its population has a good nutritional history and good health services. Japan also surveyed its population to find out whether they would be interested in working longer. The overall response was yes, so there is a lot of social support for this change. This same type of change is also taking place in Western Europe. Western European labor forces are not shrinking; in fact, they are expected to increase by 8 million workers over the next 20 years. The labor force is helped somewhat by migration, but Western Europe s domestic labor forces are growing and they are producing a very highly skilled, highly productive pool of workers. But those economies having the ability to maintain or grow their labor forces while growing total output are still rare. Return on Wages. One positive change for India is that India s return on labor will become increasingly attractive on a relative basis over the next 20 years. For the countries that Global Demographics covers, we calculate a return in U.S. dollars per dollar wage cost by dividing each country s GDP by the average wage, as shown in Table 4. In North America, for every dollar of wages paid, a company receives $1.04 back in productivity. In 2011, China had the highest return on labor at $1.83. It is no wonder that so many companies have shifted their manufacturing there. India s return on wages of $1.36 is competitive with South America, although it is slightly behind North Africa and the Middle East. Eventually, China will stop being competitive. Its wage rates are increasing at 14% per year because of the shortage of labor as well as changes in government policy. The government has raised the minimum wage in China and will continue to do so. Those two factors combined mean that the return on every dollar of wage in China falls from $1.83 in CFA Institute cfapubs.org JUNE

5 CFA Institute Conference Proceedings Quarterly Table 3. Current and Projected Trends in Total Labor Force (in millions) for Various Economic Regions Economic Region Change 2011/31 CAGR 2011/32 North America % Western Europe Eastern Europe South America North Africa/Middle East South Africa Affluent Asia (ex Japan) Japan Developing Asia India China Developing Asia, India, and China 1,572 1,656 1, % Share 61.6% 60.7% 59.9% Global 2,553 2,727 2, Notes: Numbers are millions of persons. CAGR is the compound annual growth rate. Table 4. Current and Projected Returns in U.S. Dollars per Dollar Wage Cost per Worker for Various Economic Regions Economic Region North America $1.04 $1.04 $1.04 Western Europe Affluent Asia Eastern Europe South America North Africa/Middle East China Developing Asia India South Africa Global average to $1.47 in 2031 (see Table 4). If India is able to improve its educational situation and increase its productivity by 2031, India s return on labor will be equivalent to China s return on labor. India will become an attractive proposition for manufacturers, although it will still face challenges attracting employers and industry. Among other Asian competitors, Malaysia will offer better returns on wages at $1.62 and Indonesia will be very competitive at $1.34 $1.39. India is performing quite well against Thailand and Vietnam, but these countries are still close enough to be competitors. This comparison reinforces my earlier point: Education is critical. If India can increase the education level of its population, it will increase its return on wages and become more attractive to employers. Factories can be built without the worry of whether they will be properly staffed. Employment opportunities will be provided for India s large youth population, and a shift in population from rural areas to urban areas may occur. This shift is important; it is one reason why China is now doing very well agriculturally. Over the past 10 years, China s urban population grew from 36% to 63%, thus freeing up 18 JUNE CFA Institute cfapubs.org

6 India s Opportunities in Tomorrow s World the rural land that could be aggregated into commercially viable farms. China is increasing the productivity of its land. This kind of development is what India must do if it is going to maintain its own food supply. It has to be able to turn farms into more commercial propositions, which means moving population from the rural areas to the urban centers. Global Consumer Demographics Perhaps one thing people do not realize is that India s market is actually not that big, but India has some amazing strengths that may help grow the market. Various demographic changes have taken place in the world, and there are ways India can take advantage of these changes. The bad news is that a huge shift toward older populations will occur throughout the world over the next 20 years. The good news particularly in the more affluent parts of the world, such as Western Europe, affluent Asia, and North America is that the population is expected to be stable in the age group and to grow in the 65+ age group. These two groups are the consumer groups that have discretionary money to spend; they are also the people in Japan, Hong Kong, Britain, Germany, and so on who are going on holidays and spending money on wellness. Generic drugs, for example, will perform incredibly well in this particular segment. These groups are interested in enhancing their lifestyles, so a huge amount of consumer spending is occurring. The people in these countries are actually living quite well, despite how bad their economies might appear and what is portrayed in the newspapers. An enormous opportunity exists within these consumer groups, and Indian companies must learn to take advantage of it. The New Consumer. Table 5 shows why the consumption habits of aging populations are changing. In affluent Asia and Western Europe, two out of every three households are currently childless. This figure is expected to increase. There is at least one wage earner, perhaps two wage earners, in these households and no dependents. One can see how the discretionary income of these households can be quite substantial. India can profit from demographic change by targeting the consumers in these affluent regions. Of the global population, the affluent regions North America, Western Europe, and affluent Asia add up to 17% of the world s population. India is 23% of the world s population, China is 20%, and developing Asia is 17%. But when one considers household incomes, a very different picture emerges. The three affluent regions account for about two out of every Table 5. Percentage of Childless Households in Various Economic Regions, 2011 and 2031 Economic Region India 13% 12% Developing Asia 9 20 China North Africa/Middle East Eastern Europe South America Affluent Asia Western Europe North America Global Total three dollars earned in the world. In contrast, India collectively earns 2% of global household income and China earns 7%. By 2031, India is projected to account for 3% of dollars earned and China is projected to account for 13%. Positioning India s Brand. Companies in India should begin to think about how they can leverage the discretionary income of Western Europe, North America, and affluent Asia. The affluent households in these areas earn more than $100,000, and they account for $1 out of every $3 earned in the world. India cannot afford to ignore these markets; Indian companies should explore ways to access these markets and profit from them. India s future does not lie in selling a lot of cheap products to other developing countries or to developed countries. India s future lies in targeting consumer groups with high discretionary incomes and selling them high-end or luxury products. Another trend India should be mindful of is a change in consumption behavior. Consumers are spending more dollars on quality rather than volume. They are buying fewer items but purchasing items of better quality that will last longer. This trend can be seen in the shirt industry, for example. People are shifting from having a wardrobe of many inexpensive, cheaply made shirts to a wardrobe of fewer, higher-quality shirts that last longer. For India to gain from exporting to wealthy populations, it must not position its products as cheap or low-priced brands. That type of strategic positioning would be a disaster for India s brands. India should focus on its skilled labor force at the top end and work very hard at building its labor force from the middle upward. India s surplus of skilled workers will enable it to attend to detail much better than other countries because it can supply a much larger pool of workers at a lower 2012 CFA Institute cfapubs.org JUNE

7 CFA Institute Conference Proceedings Quarterly price. Indian companies should aim for highquality and high-priced products but should leverage their lower-cost labor force to yield very strategic advantages. Another advantage to targeting the high-end consumer group is the amount such consumers spend per capita. It is very hard to make money out of a target market in which the average household income is $7,500 or less. A company might achieve great volume, but it will not actually make a profit. Many nondomestic companies discovered this problem in China. They looked at the size of the rural market, were enticed by its size, and decided to enter the market. They did and then found that they could not sell at a profit. India of Tomorrow I have two final thoughts that I believe are important for India. The first is to explore China s consumer market as an opportunity. By 2031, China will have 47 million households earning more than $50,000. Companies can profit from selling to households with incomes at that level, particularly when they are in China. The household size is small, and the per capita spending is actually quite high. China could be particularly profitable for India because India s cost of wages is very competitive compared with China s. India s return per dollar wage, and thus its cost of wages, is as low as or lower than China s. The high-end consumer product segment in China is going to grow even if China s economic growth slows. If China s growth slows to our projected figure of 4.5% over the next decade, it will still have 47 million households earning more than $50,000. This change in sociodemographic characteristics is a huge opportunity for India. The second thought is one that is worrisome for India: robotics. Do not underestimate the impact of robotics on India s future. For example, 28 years ago, no one working in an office had a computer on their desk a major difference from today, when offices and people are dependent on computers, tablets, and mobile phones. It would be impossible for an office to operate efficiently without these devices in today s world. I owned a market research company 28 years ago and employed a person to manually color in the charts in my presentations. Today, if I want to color an Excel chart, I click on blue and it is done. That is how much technology has changed productivity over the past 28 years. In my opinion, robotics is where computing was 18 years ago, when computers would cause huge frustrations. Computers would break down all the time, and the internet was of limited use. People were frustrated with the technology, but it improved and society progressed. Robotics is moving in that direction, and it is moving into cheap manufacturing as well. Japan is an example of a society that has a vested interested in promoting robotics. It has the money to invest in the technology and it has an aging population. Japan is aware of the fact that it will have to deal with a declining labor force at some point in the future. The impetus is there. Conclusion India must face two main challenges to succeed: education and robotics. Regarding education, India should be looked at it in terms of the opportunities it creates. If technology can be used to deliver lessons to a classroom in an efficient manner such that the number of people with a secondary education increases from 13% to 50%, then that is an incredible business opportunity. This type of educational model would also work well in India to actually change the capability of the labor force and thus change the future. The advent of robotics may cause low-level manufacturing jobs to be relocated from Asia and its low-cost labor forces to Europe, where the high-value consumer is. India needs to consider the effect of these types of threats on its workforce and determine ways to counter them or leverage them in a productive way. India s largest issue for the next 20 years will be to keep all those young people who are arriving at working age gainfully employed in a manner that leverages their interests, skills, and capabilities. Robotics is a threat to the youth in India s workforce, just as the lack of education is a threat. Despite these challenges, India can benefit from its growing middle class and the international opportunities presented by the growing affluent classes in other parts of the world. These affluent households are looking for things to consume, and they have the money to pay for them. India should remain aware of its strategic strengths, such as a low-cost labor force, that make it competitive compared with China. India can also profit from opportunities presented by the growth of the affluent in China by becoming a low-cost labor provider of choice. I do not know what the India of tomorrow will look like, but I do know that these are the choices that will emerge in India over the next years. This article qualifies for 0.5 CE credits. 20 JUNE CFA Institute cfapubs.org