Consumer Power's Big Shift From the U.S. to China and India

A Chinese consumer contemplates a purchase at a grocery. For decades, the world took its cues from American consumers when it came to tastes, styles and prices. But that's no longer the case. The Great Recession has brought a dramatic shift in consumer power from the U.S. to Asia.

During the recession that started at the end of 2007 and ended in mid-2009 (according to many economists, at least), consumption in emerging markets surpassed U.S. consumption for the first time, equaling 32% of the global market share versus 28% for the U.S., according to J.P. Morgan Securities research.

"Purchasing power has shifted very quickly because the largest emerging economies, like India and China, with very large populations, have not only done well economically in the last decade but their personal incomes have risen exponentially, too," says Mauro Guillen, professor and director of the Lauder Institute, which is part of the Wharton School at the University of Pennsylvania.

Even though these markets aren't isolated from the global economy, China and India have decoupled from the U.S. and have managed to grow even as the U.S. went through a deep recession and remains in trouble, Guillen says. "The shift is particularly pronounced now because these countries escaped barely scathed from the U.S. financial crisis, which has in turn led to a dramatic decline in U.S. consumption."

Indicators: Cars, Exports and Earnings

Some examples? China overtook the U.S. as the largest buyer of cars in 2009, with 13.5 million automobiles purchased, compared to 10.4 million in the U.S.

The latest earnings reports from some of the world's largest consumer-focused companies also showcase this shift. Coca-Cola (KO), for instance, reported an increase in fourth-quarter profits based on skyrocketing sales abroad -- 29% growth in China, and 20% in India -- despite sales that declined 1% in North America. In an interview with, Coke CEO Muhtar Kent says his sights are fixed on the overseas market. "Over 80% of our total business is international," he says.

Similarly, international sales have helped boost McDonald's (MCD) results. Earlier this month, the burger and fries giant reported an 11.2% increase in global sales in February. The pop came mostly from a 10.5% jump in sales in Asia, compared to a mere 0.6% gain in U.S. sales.

And H.J. Heinz (HNZ), the ketchup maker, said the Asian emerging markets of Indonesia, India and China led its sales growth of more than 15% in its fiscal third quarter, which ended in January. The company saw U.S. sales fall for much of last year, while emerging markets accounted for 14% of its quarterly sales and almost 70% of its organic sales growth.

Rise of the Middle Class

A key factor behind this runaway consumer growth is the rise of the middle class in these emerging countries. After all, many economists view a thriving middle class as a key indicator of prosperity. A Goldman Sachs global economic report in 2008 described the middle class "as the engine of growth, the bastion of social values and the arbiter of elections."

And the world is in the midst of an "unprecedented explosion" in its middle class, in which China and India are playing the most important roles, the report noted. Homi Kharas, formerly the World Bank's chief economist for the East Asia and Pacific region, wrote in a report for the Organization for Economic Co-operation and Development (OECD) that several Asian countries, particularly China and India, have "reached a tipping point where large numbers of people will enter the middle class and drive consumption."

As it is, developing countries already made up 56% of the global middle class in 2000, according to the World Bank, which predicts that figure will reach 93%, with China and India alone accounting for two-thirds of the growth, by 2030.

The shifts are happening so quickly that it has even surprised some corporations. An unexpected surge of demand for air freight in Asia exceeded market capacity in the fourth quarter, according to UPS (UPS), the world's largest package delivery company. Its fourth-quarter profits increased mostly on the back of international demand, as growth in Asia fueled a 12% increase in international daily volume while U.S. daily volume fell.

Changing World Dynamics

Demand has historically come from middle-class North American and European consumers, while supply has come from low- and middle-income countries in Asia, but that dynamic is changing, according to Kharas's report. In an email interview with, Kharas says the flow of trade could reverse as imports in China, India and other developing countries expand. "Global trade will adapt, with final consumption demand in developing countries becoming more important," he says.

There's already some evidence that this is happening. As demand in emerging countries outpaces demand in the U.S., American exports grew at roughly a 20% average quarterly rate in the second half of 2009, the highest pace in more than three years.

Some companies are gearing up to take advantage of these changes. Coke, for example, sees a growing potential market in the shift. "There will be 1 billion new people entering the urban middle class in the next 10 years, which will create a huge demand for the nonalcoholic ready-to-drink beverages that we are known for," says CEO Kent.

And Ford Motor (F) in September said it would invest $500 million in a regional small-car production center in the southern Indian city of Chennai, and it unveiled the Figo, a new car for the Indian market. The Figo "shows how serious we are about India," CEO Alan Mulally said in a statement. In addition, the company's sales in China grew 45% in 2009 from 2008.

Expect to see more such examples soon as emerging markets become the new kings of consumption. As Kharas, who is now a senior fellow at the nonprofit The Brookings Institute, noted in his report: "There is good reason to be optimistic about a new Asian consumerism emerging at a scale and timing sufficient to replace the forecast shortfalls in U.S. consumer demand growth."

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