On the $30 Trillion Emerging Pot of Gold, and the Okinawan Centenarian Study!

From: aditya rana
Date: Sat, Feb 2, 2013 at 2:23 PM
Subject: On the $30 Trillion Emerging Pot of Gold, and the Okinawan Centenarian Study!

Hi!,

Perhaps the single biggest economic opportunity over the next few decades is capitalising on the rapidly growing consumption demand in emerging markets. However, it is not clear which companies are best placed to capture this opportunity and to shed some light on where specifically the opportunities may lie, and what type of companies are likely to take advantage of them, McKinsey has produced an interesting report titled “Winning the $30 trillion decathlon: Going for Gold in emerging markets” http://www.mckinsey.com/features/30_trillion_decathlon.

They expect annual consumption in emerging markets to reach $30 trillion by 2025 – and call it the “biggest growth opportunity in the history of capitalism”. To summarise:

-China and India have doubled their per capita incomes over 12 and 16 years respectively over the last two decades, and with starting populations of about a 1 billion each, they offer about 1,000 times the economic growth opportunity experienced during the industrial revolution when Britain took 150 years (10 times longer) to double per capita income and had a starting population of only 1% of the current populations of either China or India..

-Large multinationals today, despite greater size, larger capital bases ad superior product technology, are struggling to hold their own against smaller, nimbler and tuned-in local companies.

-This is illustrated by the fact that developed world multinational companies derive only 17% of their revenues from emerging markets, which account for 36% of global GDP and are likely to contribute to more than 70% of global GDP growth until 2025 (see chart below).

-In 1990, the number of people earning more than $10 per day (the threshold for discretionary consumption) was one billion out of a total world population of about five billion. The vast majority of this group resided in the developed world.

-However, over the last two decades the urbanization of emerging markets, supported by long-term trends like higher levels of integration of economies, removal of trade barriers and market-oriented economic policies, has more doubled the size of their consuming class to 2.4 billion. This is likely to nearly double again by 2025 to 4.2 billion, out of a total world population of about eight billion.

-By 2025, the annual consuming in emerging markets will increase to $30 trillion from a current level of $12 trillion (see chart below). About 60% of the one billion households earning more than $20,000 will reside in the developing world.

-Leading the way will be consumers in the 20s to early 30s group, with rising incomes and aspirations and a willingness to spend. They will be in the forefront of the digital revolution, with half of all internet users currently residing in emerging markets and e-commerce and mobile-payment spreading to remote areas.

-The preferences of emerging markets consumers will drive global innovations in a broad variety of areas including product design, manufacturing, distribution channels and supply chain management.

-History suggests that companies which capitalise on the opportunity and build positions of strength are likely to maintain their lead for long periods – leaders of major product categories in the US in 1925 were able to maintain their lead for the rest of the century.

-In terms of specific areas of opportunity, the following are likely to be key:

1)Urban growth clusters: The size of the population in emerging market cities is growing by 65 million a year – over the next 15 years. 440 emerging market cities will generate nearly half of world GDDP growth and 40% of world consumption growth.

-Most of these cities are of medium size and offer better opportunities than the tier-one mega cities where the competition is often brutal and retail margins razor thin.

-Given the diversity of consumer preferences, purchasing power and market conditions in emerging economies, it is critical to have a city or cluster based strategy with common demographics, income distributions and cultural characteristics. These clusters can often provide opportunities which are bigger than entire European countries (see chart below):

-2) Catching moments of explosive growth: Demand for products typically follows an S-curve, with a “warm-up zone” where consumer incomes begin rising, a “hot zone” where consumers have enough income to buy a product, and a “chill-out zone” when demand flattens out (see chart below which illustrates this phenomena). Predicting when and where consumers will move into the hot zone requires a deep understanding of technological, demographic, cultural, geographic, regulatory trends and local distribution networks.

3) Local relevance and global scale: Developing affordable products catering to local tastes and providing an opportunity to achieve a reasonable scale in a timely manner requires a deep understanding of consumer demographics, preferences and behaviour within target segments. Examples are Frito-Lay and Unilever in India, Audi in China

-4) Deployment of resources for the long-term: Being nimble, and willingness to embrace change fast and reallocate resources quickly and rapidly is critical for success – emerging market companies are growing faster than their developed market counterparts, even in neutral third markets where neither is based (see chart below). M&A into emerging markets can accelerate the process for developed market companies.

-5) Innovation to deliver value across price spectrum: Designing and building local products, sometimes with innovative twists on existing products and investing in local design and manufacturing is crucial for success – two examples are LG, Dabur, Tanishq in India, Haier in China.

-6) Build brands that resonate and inspire trust: The outlook of consumers in emerging markets differs from the developed world, partly because they are younger and more optimistic. They are novice consumers, and as they move from rural areas to the cities, their buying preferences are in a state of flux and highly receptive to effective branding strategies, but also far more likely to dump one brand for the next new thing.

-7)Control route to the market: Managing how consumers in emerging markets encounter products at point of sale is critical as they are much more likely to make purchasing decisions inside shops. Reaching these small outlets often means negotiating bad roads and opaque networks of distributors and wholesalers. Examples of multinationals who do this well are Unilever in India and Coca-Cola.

-8)Localise rather than Globalize: Multinationals typically suffer from a “globalization penalty” and underperform locally focussed companies on key parameters like strategy planning , risk management, talent development and operating efficiency. Some companies like IBM, ABB and Dell are making headways in terms of localisation.

-9) Tap into local talent: Emerging markets suffer from a scarcity of skilled managers who are hard to retain – and increasingly local stars are more willing to work at local employers who can offer them more senior roles. Global companies need bold talent-development targets – only 2% out of the top 200 employees of leading global companies hail from key Asian emerging markets. Some exceptions include companies like L’Oreal in Korea, Unilever and Yum brands in India. Local companies like Reliance Industries, China Mobile and Bank of China are emerging as preferred employers for top local talent.

-10) Support from key local stakeholders: Enlist the support of stakeholders in the government, civil society and local business allies – customers, joint-venture partners, domestic investors and suppliers. An example is Amway in China.

-For all the complexity of emerging markets, they offer global companies the best opportunity for future prosperity. Over the next many decades, the title of “the world’s greatest companies” will surely be given to companies what win in emerging markets .

Fascinating insights, and provides further ammunition to my view that the winners who are better positioned to take advantage of the local opportunities are the local companies domiciled in emerging markets rather than the multinationals (with some notable exceptions). In addition to the reasons outlined above – a big differentiating factor is likely to be cost. While developed market multinationals may have some great products – they are typically priced for developed market income levels and are not compatible with the income levels of emerging markets (which is at about 15% of the developed world taking China and the U.S. as the reference points).

This huge pricing disparity is likely to be addressed over time by higher inflation in the developing world (already in place), emerging market currency appreciation (already in place), higher wage growth in the developing world (already in place but a lot more to go as the note and table below illustrates), deflating of asset bubbles in the developed world (in progress) and increased company bankruptcies in the developed world (just starting to happen-i.e. Panasonic). Meanwhile, the local companies (and some multinationals) are likely to continue to consolidate their leadership position in their (and other) local markets and it is therefore critical to have a core exposure to a broad basket of such companies- either through individual stocks or managed funds.

From the Economist blog: “In spite of the rapid growth of real wages in certain regions (in Asia, real wages have nearly doubled while only increasing by 5 percent in developed economies), the absolute differences in wages across countries is still large. This is reflected in the following chart with wage estimates from the U.S. Bureau of Labor and Statistics. Using a different methodology, the ILO estimated total hourly compensation costs at $1.36 in China for 2008 and $1.17 in India for 2007 versus $23.32 in the US.”

In light of this, I came across an interesting story in Bloomberg which exemplifies the above theme with regard to the smart phone market in China:

“Apple is being outsold in China, the world’s largest handset market, by a company less than 1 percent its size, highlighting how the lack of low-cost products limits the iPhone-maker in emerging nations. China Wireless Technologies is one of four domestic suppliers outselling Apple in China with smart phones tailored to the budget of the nation’s budding middle class. Its Coolpad retails for 619 yuan — or just under $100 — less than 20 percent the price of the cheapest iPhone.

China Wireless expects sales to rise 40 percent this year to 28 million phones, helped by low prices and new products such as fourth-generation handsets. Apple, whose smart phone has made it the world’s most profitable company, slipped to sixth place in China from fourth as it struggled to lure consumers earning an average of $577 a month.

The company is planning a smaller, cheaper version of the iPhone aimed at developing markets. The handset, costing somewhere between $99 and $149, would be introduced late this year at the earliest. Apple “needs to adapt to where the growth is,” former Apple Chief Executive Officer John Sculley said in an interview . “It’s got to learn how to sell products that are priced for the price point that the emerging middle class in Asia, for example, can afford.”

The Okinawan Centenarian Study:

Came across an interesting study which has been ongoing since 1975 – The Okinawan Centenarian Study (“OCS”) which investigates the possible causes behind the high longevity of Okinawans who have one of the highest life expectancies in the world. Not surprisingly, it identifies diet (fruits, vegetables, legumes, seeds and grains) and lifestyle in addition to genes as the main causes. Some excerpts from the study which highlight the key factors behind their longevity:

Genetics, Healthy Aging and Longevity: How much of human longevity is due to genes? Estimates of the heritability of human lifespan vary from 10-50%, with the most common finding being that about a third of human lifespan may be heritable. Does this mean that Okinawan longevity is all genetic? Not at all. We believe the Okinawans have both genetic and non-genetic longevity advantages — the best combination. In fact, we have written extensively that the Okinawan traditional way of life — the dietary habits, the physical activity, the psychological and social aspects, all play an important role in Okinawan longevity.

Caloric Restriction, Metabolic Damage and Aging: One of the most durable theories of aging is the free radical theory. This theory postulates that damage from free radicals (unstable molecules), generated mainly from metabolizing food into energy, ultimately damages vital body molecules. This damage accumulates with time until, like an old car, we fall apart. In support of this theory, one of the most important findings in free-radical research has been that eating fewer calories increases life span The initial evidence that this may work in humans has been indirect and based on observation of the low caloric intake of the Okinawans and their long life expectancy – direct evidence shows that Okinawans following the traditional ways have low blood levels of free radicals.

Cardiovascular Health and Aging: Elderly Okinawans were found to have impressively young, clean arteries, low cholesterol, and low homocysteine levels when compared to Westerners. These factors help reduce their risk for coronary heart disease by up to 80% and keep stroke levels low. Their healthy arteries appear to be in large part due to their lifestyle: diet, regular exercise, moderate alcohol use, avoidance of smoking, blood pressure control, and a stress-minimizing psycho-spiritual outlook. Current research also demonsrates that higher the plasma homocysteine level is, the more people suffer from cardiovascular disease. Homocysteine is an amino acid that causes damage to arterial walls. It is higher in people who don’t get enough folate (e.g. green leafy vegetables) and vitamins B6, B12 but low in Okinawans.

Cancer and Aging: Okinawans are at extremely low risk for hormone-dependent cancers including cancers of the breast, prostate, ovaries, and colon. Compared to North Americans, they have 80% less breast cancer and prostate cancer, and less than half the ovarian and colon cancers. Some of the most important factors that may protect against those cancers include low caloric intake, high vegetables/fruits consumption, higher intake of good fats (omega 3), high fiber diet, high flavonoid intake, low body fat level, and high level of physical activity.

Healthy Cognitive Aging and Dementia: Prevalence surveys suggest that the dementia rate is fairly low among the Okinawan elderly, compared to other elderly populations. Even into their late 90s Okinawans suffered lower dementia rates than reported for comparable populations in the United States and elsewhere.

Osteoporosis and Aging: Okinawans have about 20% fewer hip fractures than do mainland Japanese, and Japanese have about 40% fewer hip fractures than Americans (Protective lifestyle factors that may play a role here include high calcium intake by Okinawans in both food and their natural drinking water, high vitamin D levels from exposure to sunlight, increased physical activity, especially at older ages, and high intake of dietary flavonoids (estrogenic compounds from plant foods).

The Role of Physical Activity in Healthy Aging: Okinawan centenarians have been lean throughout their extraordinarily long lives, with an average body mass index (BMI) that ranged from 18 to 22 (lean is less than 23). The Okinawans have traditionally kept eating a low-calorie, low glycemic load diet, practicing calorie control in a cultural habit known as hara hachi bu (only eating until they are 80% full), and keeping physically active the natural way.

Women’s Health and Aging: Women in Okinawa tend to experience menopause naturally with fewer complications such as hot flashes, hip fractures, or coronary heart disease. Lifestyle determinants include diet, avoidance of smoking and exercise in the form of dance, soft martial arts, walking and gardening. Okinawan women also have a very high intake of natural estrogens through their diet, mainly from the large quantities of soy they consume. Soy contains phytoestrogens, or plant estrogens called flavonoids. The other important major phytoestrogens are lignans, which are derived from flax and other grains. All plants, especially legumes (beans, peas), onions, and broccoli, contain these natural estrogens, but not nearly in the same quantity as soy and flax.

The Endocrine System, Hormones and Aging: Okinawan elders have higher levels of sex hormones, including natural DHEA, estrogen, and testosterone than similarly aged Americans, suggesting that the Okinawans are physiologically younger. DHEA is a steroid produced in the human adrenal gland and DHEA levels decline in direct ratio with age, so it may be a good marker of biological age. Okinawans appear to have higher DHEA levels than similarly aged Americans suggesting that Okinawans may age slower than Americans. As Okinawans age, both sexes maintain remarkably higher levels of estrogen which may help protect against heart disease and osteoporosis. Testosterone is the male equivalent of estrogen. Higher endogenous levels increase our muscle mass and our body hair, deepen our voices, and control our libidos, among other functions. This hormone also appears higher in older Okinawan men.

Will be travelling over the Chinese New Year Holidays over the next two weekends so the next newsletter will be sent on February 26. Wishing my readers a very healthy, prosperous and happy Year of the Black Snake! And don’t forget the daily exercise and the daily helping of fruits, veggies, legumes, nuts and grains!

Regards

Aditya

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