Standing on the Sun. Christopher Meyer
countries. By 2050, this number will fall to 32 percent.
Today, as Yale's Jeff Garten has pointed out, the globe hosts six billion people, one billion of them living in rich countries. By 2050, there will be nine billion people—and still only one billion in today's rich countries.
It used to be that the rapid growth rates of emerging economies were dismissed because they started from a small base. No longer. In 2005, China alone accounted for no less than 33 percent of the growth in world GDP. We've already seen how much difference that makes in the global economy in this decade's commodity price run-up: new demand from emerging economies drove the prices of iron ore, shipping hulls, copper, and the like to Himalayan levels.
Of the world's twenty-five hundred largest publicly held companies (based on market capitalization), nearly half are now based outside North America and Western Europe. The proportion from emerging economies has grown at a compound annual rate of 14 percent, to the point that in 2010 the headquarters of more than a quarter of these twenty-five hundred companies were in emerging economies.1
Whereas in 2000, the U.S. GDP was about eight times that of China, by 2008 the ratio had shrunk to about four: $14 trillion versus $4.3 trillion.2 Jim O'Neill, Goldman Sachs chief economist, has estimated that China could lead the GDP league by 2027.
We could go on, but here's the real question: why are economists like O'Neill so certain the trend will continue? It's because the conditions exist for both growing consumption and growing production in the emerging economies.
The world's consumption engine for decades has been the acquisitive American middle class. But the planet's population growth has occurred mainly in its poorer countries. As economic conditions have improved in the less-developed parts of the world, whole new middle classes have arisen that, though not proportionately huge in their nations, represent prodigious numbers of eager new consumers. Goldman Sachs analysis claims that roughly 2.4 billion income earners globally will attain middle-class status in the decade 2010–2020. The ratio of those in the BRIC countries (Brazil, Russia, India, and China) to those in the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), it says, will be 2 to 1.
At the same time, it's been recognized that consumption is not only a middle-class activity. There are the upper classes, of course, and it is not immaterial to mention that there are already more than a million Chinese millionaires. Barclays Capital recently released a report showing that China buys 12 percent of the world's luxury goods, and its consumption of them is rising by at least 20 percent per year. (Extrapolating, the country will be snapping up one-third of such goods by 2015.)
But more importantly there are the lower classes to consider. The 2.5 billion people in the world said to live on less than $2.50 per day—the group famously named by C. K. Prahalad “the bottom of the pyramid”—may individually make minuscule purchases, but collectively they represent an enormous demand for basic goods and services. With virtually all the growth of global population occurring outside the high-income world, the fastest-growing segment of consumers is the have-nots, and capitalists increasingly will target that segment.
Income per capita is surely a different-looking number in most of the world than it is in the mature economies of the West: in 2007, India's GDP per capita was $1,050, for example, whereas in Germany it was $40,320. To put this in purchasing power terms, the average Indian has 6 percent of the income of someone living in the United States, and the German counterpart has 76 percent.3
When capitalism is practiced by the comfortable—wealthy managers catering to the tastes of wealthy customers—it takes on a certain character. Priorities and practices may change, however, when capitalism focuses on the bottom of the pyramid. At a macro level, business will perceive that there is less and less money to be made selling diamond-studded cell phones to the elite few, and more and more to be made selling practical provisions to the many. (It was William Randolph Hearst, responding to someone's disdain for his “yellow journalism,” who declared, “If you write for the classes you will eat with the masses. But if you write for the masses you will eat with the classes.”)
Here's our suspicion: when the prototypical capitalist is someone selling cheap cell phones to struggling millions, as opposed to David Yurman watches to the affluent, the nature of capitalism itself changes. Indeed, even if you've been in the business of selling basic cell phones to millions of ordinary folks but in rich markets, your tried-and-true approaches may fail you. Vodafone, the world's second-largest provider of mobile services (after China Mobile Limited), discovered this when it ventured into India and found it could not be profitable with the same business model that had served it well in the developed world. Geared to produce profits at an average revenue per user (ARPU) of about $50 per month, Vodafone foundered when revenues from Indian consumers proved to be less than 10 percent of that, and falling, as new low-usage segments signed up.4 Its need to charge 8 cents per minute minimum to cover costs was wildly out of line with a population whose demand would be almost insatiable at 2 cents per minute.
Tellingly, even as Vodafone was concluding that the market simply could not be served profitably, a homegrown firm called Bharti Airtel was doing just that. Its approach to fulfilling the same basic market need that Vodafone had recognized differed in almost every conceivable respect. Bharti was the first mobile company to outsource everything except marketing and sales.5 It obtained network operations services from Ericsson, business infrastructure from IBM, and transmission towers from an independent company that had grown up to build infrastructure for all the mobile competitors. Bharti also discovered a great way to lower the costs of managing customer relationships: get rid of them, by marketing prepaid phones. By eliminating much of the cost of billing and customer support, by using shared infrastructure, by paying Ericsson by the minute for network operation, and by buying rather than building business systems, Bharti was able to serve customers—131 million of them as of 2010, compared with 427 million for Vodafone across thirty-one countries—with about one-tenth the capital investment of Western providers.
No one would call Bharti's business anything but capitalist. But at the same time, no well-trained and well-practiced capitalist in first world mode would have created it, because it dispenses with scale, capital intensity, and customer loyalty as sources of competitive advantage. Serving large, low-income markets is just not the same.
Grameenphone, a business founded by Iqbal Quadir in 1999, underscores this point. With a mission and model now broadly celebrated, Grameenphone brought phone service to the poorest corners of Bangladesh, today distinguished by the world's lowest ARPU—and did so profitably. Grameenphone is our first case of a mixed-value company, an idea we take up in chapter 7. This means that even though it was designed to turn a profit, it was founded to produce social value. “In Bangladesh, a cell phone is like a cow,” Quadir has said. “An essential piece of capital equipment.” His underlying motivation was to provide a key component of the infrastructure that could help some of the world's poorest people improve their quality of life and begin to lift themselves from poverty.
To do that required the invention of a new distribution system and a new financing apparatus. Quadir created a plan that brought together Telenor, the Norwegian national phone operator, to invest in the network, and Grameen Bank to provide microfinancing for the handsets (not an obvious strategy in 1999). No developed economy provided the model of the “village phone lady,” an entrepreneurial entity on the most humble level imaginable. And none offered the tools of microfinance, which made it worthwhile for lenders to dispense the tiniest of loans for capital equipment, probably because no one with global-scale capital to lend conceived of the handset as a piece of capital equipment. Once you have that perspective, you can imagine that the phone will produce income, reducing the financial risk; that the buyer has an incentive to grow usage in her village, increasing ARPU; and that financing is as appropriate at this scale as it is for any business's capital equipment.
The growth and character of consumption in the emerging economies are only half the story of why capitalism will increasingly be rooted in their soil and compelled to adapt. Production skills and capabilities to meet that demand domestically are also rising rapidly. Pundits love to cite the masses of engineers being churned out by Indian and Chinese