China and India Are an Opportunity, Not a Threat
An interview with Michael Silverstein, co-founder of The Boston Consulting Group's global consumer practice and coauthor of The $10 Trillion Prize: Captivating the Newly Affluent in China and India.
SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I'm Sarah Green. I'm here today with Michael Silverstein of BCG. He's one of the founders of Boston Consulting Group's global consumer practice, and he's co-author of The $10 Trillion Prize. Michael, thanks for joining us today.
MICHAEL SILVERSTEIN: Thank you.
SARAH GREEN: So Michael, I'd like to start with that provocative title. What is the $10 trillion prize, and how did you come up with that nice round number?
MICHAEL SILVERSTEIN: We were doing research about the development of the Chinese and Indian market. And one of the base pieces of research is a forecast of demand. And lo and behold, if you look at the consumer markets that are growing at roughly 8% per year in China and India and you lay out consumer consumption, in 2020 the combination of China and India equals a $10 trillion dollar consumer business.
SARAH GREEN: Wow. So I want to just ask one question about that before we really dive in, about grouping China and India together that way. And I know that at HBR and in a lot of business publications we tend to do that, even though they're really very different countries. Why do we do that, and what is the usefulness of fusing them together in that way?
MICHAEL SILVERSTEIN: They are the two fastest growing markets in the world. They are the two most populous countries in the world. They have completely different development models. But if you put them in one book, if you put them in one container, it is the two biggest opportunities for global companies in the world, in the history of man.
Both markets are experiencing unprecedented growth. Indians are growing their per capita income from $1,000 to $4,000. Chinese are growing their incomes from $4,000 to $12,000. This book is about the time period from now till 2020. Between 2020 and 2050, it's not clear which one, India or China, ends up on top.
SARAH GREEN: That's interesting. OK. So I'd like to start with China, and then we'll move on to India. And I'd like you to paint the picture for us of what's going on in China. I know there was one really startling number that really grabbed me that a Chinese person born in 2009 will spend 38 times as much as their grandparents did. And as a Westerner, it's almost hard to imagine that rate of growth. So take us there. What's going on?
MICHAEL SILVERSTEIN: If you were a Chinese person born in 1960-- and I met and talked with a lot of Chinese people born in 1960-- life expectancy was 47 years. If you jump forward to a baby born in 2009, life expectancy is 73 years. That is a staggering difference. The China person born in 1960 lived on $100 a year. The China person born in 2009 has $1,429 in spending per capita.
The lifetime consumption for the 1960-born China person is $16,400. The lifetime consumption for the 2009 China-born is $632,000. The difference is 38x. It has to do with health care, education, job classification, earnings potential, moving from being subsistence rural agriculture to being urban middle class, buying packaged food, buying health care services, buying housing, housing that has cement and steel and corn and copper built into the house.
SARAH GREEN: So when you talk about some of those shifts there, I think as a Western person it's easy for me to say, oh, they're becoming more like us, they're becoming more like me. Is that what's happening? Or are they finding their own path to prosperity.
MICHAEL SILVERSTEIN: They are very attuned to Western culture. If you go to China and you go to Shanghai or Beijing or any of the urban markets, there is a huge amount of popular culture that is American origination or European origination. They buy European luxury goods. They buy American music. They watch American television. They are obsessed with what is happening in the United States. But it's their own development.
It is a specific Chinese orientation around what is hip, what is cool, what is with it. They are very consumptive. Every one of the Chinese people that I talked to-- I talked to thousands over the last 18 months-- has a family member that somehow suffered horrible things in the famine, in the post-Communist revolution, that experienced the cultural revolution, that had people taken out into the countryside. They remember a life of misery.
And they're living for today. They are living because they believe that the future is going to be bright. They can consume now, they can consume in the future. They are the most optimistic population on the plant. 80% of the Chinese will tell you that the life of their children is going to be better than their life. In the United States, only 20% of adults say that life for their children is going to be better than their life.
SARAH GREEN: Wow. For a country that is supposed to be based on the American dream, that's very surprising.
MICHAEL SILVERSTEIN: The American dream is alive and well in China. The American dream is perhaps a nightmare in the United States right now.
SARAH GREEN: Well, let's put that to one side for just a moment and just contrast that with what's going on in India. Because I'd be interested to know how that's similar and where it differs.
MICHAEL SILVERSTEIN: The most interesting thing about India is if I try and just repeat back what I said about China. Life expectancy in India for a child born in 1960 is 42 years versus 47 in China. Life expectancy for a child born in 2009 is 64 years, so a dramatic increase.
In 1960, the Indian consumed at a rate that was twice the Chinese. So they were actually much more affluent than the Chinese. In 2009, the Indian-born is going to consume about $800 worth of goods, roughly 55% or 60% of the Chinese.
Indian incomes are growing at about the same rate, but from a much smaller starting base. And so what we would expect to see in India, which is still largely a rural country-- a rural agrarian country-- 70% of the population living on the farm. We would expect to see lifetime consumption increasing for the baby born in 1960 from $14,000 to $184,000, an increase of 13x.
But again, India comes into its own as a country in the time period from 2030 to 2050. In the timeframe 2030 to 2050, India becomes the most populous country on the planet. It still is populated by very young people with ambition, energy, and drive. It has created a university system that delivers literally tens of millions of graduates. And India has a history of English that gives it advantage in the world market.
SARAH GREEN: So this is interesting. With this kind of background, I almost see it as a chessboard with three pieces on it. And you've got China, in one sense, growing very fast now. But then you've just mentioned a number of things that would give India an advantage. And then you're also talking about some of the challenges America is facing. How do you see this all playing out over the next 20 or 50 years? I know you say it's sort of hard to tell.
MICHAEL SILVERSTEIN: No, I know exactly how it's going to play out. I don't think it's hard to forecast at all. I think the demographics are perfectly clear. So population fertility rates are pretty stuck. And we know that the average Indian family is bigger than five children. We know that the average Chinese family is one or 1.1 children. We know that the US population will grow 0.9%. The Chinese population will slightly decline. We know that the Indian population will grow at about 1.8%. We can count the bodies.
And then the question is, who will get the jobs? And the ones that will get the jobs are the ones that are motivated, ambitious, hungry, and educated. And that will be a colossal competition. That will be something that is unheard of, that there's no reason to do legal work with a US lawyer. So if your dad is a lawyer and you're in the United States and you want to be like your dad, don't expect to make his kind of money. Expect to see anything that can be transported to a low-factor cost country to have that happen.
And that doesn't say that there aren't going to be a lot of opportunities, because the world's going to need a lot more food. The world is going to need really good engineers. The world is going to need great computer scientists. And where they grow up and where they come from, they can come from anywhere.
And what's very interesting is that this competition is not a zero sum game. We do not expect that US incomes will decline in real terms. We expect that US incomes will actually grow in real terms. We believe that Chinese incomes will grow faster than US or Indian incomes over the next 10 years.
So it's a wonderful thing. It's a great thing for humanity. It will require people to save water and save energy and be less consumptive and be more environmentally sensitive. And I believe that the net result is good.
SARAH GREEN: I know some people have looked at these demographics and looked at these trends and written a very depressing story for America, one of decline. But clearly your view of it is very positive, and that's why the book is more of a seizing opportunities book then a ringing the alarm bell type book.
MICHAEL SILVERSTEIN: One of the things I would say is that there are going to be depressing stories in the United States. If you do not finish high school in the United States, you are pretty much doomed to life of poverty. If you graduate from college with the wrong degree, you're going to find it very hard to make as much money as your parents. But if you decide that you're going to study mathematics or high science or engineering or computers, there'll be lots of jobs. And the unemployment rate for you will be just transitive, very low.
SARAH GREEN: Yes, you are talking here to a recovering English major. So I know what you're talking about there. I'd like to talk a little bit about some of the ways that you went around finding out this information and thinking through what the opportunities are here and what consumers in these markets would want.
I know that one common problem businesspeople have when they're thinking about the opportunity of China or India is that they make assumptions about what people would want, or they don't do their due diligence, and so they end up stereotyping. How did you get around doing that with the book? And then how would you suggest that people who want to capture that $10 trillion dollar prize do the same?
MICHAEL SILVERSTEIN: The major message would be upfront and personal. And let me tell you what I mean by upfront and personal. First, BCG, Boston Consulting Group, has more than 1,000 people on the ground in China and India. We've been in both countries for more than 20 years. My coauthors are Abheek Singhi, who is an Indian graduate of IIT, and Carol Liao, who's a graduate of the University of Peking, and David Michael, an American who moved to China 15 years ago to open up our offices in China.
Upfront and personal is qualitative and quantitative. I've spent a serious amount of time in the last 18 months in both China and India meeting with consumers in their homes in major urban markets and in rural markets. That gave us a qualitative understanding of ambition, drive, and energy. We then had $2 million of BCG casework in China and India that we devoted [INAUDIBLE] book, quantitatively understanding the consumption habits of Chinese and Indian consumers at lower, middle, and upper incomes, in-depth understanding of their consumption by category, their purchase patterns now, and the purchase patterns of the future.
If you want to get into these markets, you need to get to know them. You need to understand hopes, dreams, wishes. You need to understand category usage, habits, and practices. And you really have to be inside their head.
A great example in the book is Kraft's story in China and Kraft's story in India. In China, Kraft in 2006 had a $100 million business. In China it was losing money. They decided that they were going to fix that. The fix had three steps. The first step is they had to get to scale. So they bought Danone biscuit business in China and around the world. It's called LU Biscuit Business. It doubled their size.
The second step was they needed to get their cost structure right. So they dramatically reduced cost. And the third step, and the most important step, is that they needed to focus by brand and category. And they decided the category that was going to be their growth vehicle. It was going to be biscuits, and within biscuits it was going to be Oreo cookie.
They customized the cookie to the Chinese market. They made it smaller and less sweet. And if you were to listen to the analyst reports for Kraft very recently, they'd be saying that their business in China is just about $1 billion, and very profitable.
They decided they also wanted to be in India. And to get into India they bought Cadbury and got the market-leading chocolate position-- 70% share in India, a business that is 50 years old and growing at 30% a year. So you need a plan. If you want to get into these markets, it's not going to happen by accident. It's not going to happen with a little amount of resources.
You're going to have to make an upfront commitment to understanding, and then a follow-up commitment of investments. And then the senior management team of the multinational is going to have to really stay on top of it. Businesses in China and India are not easy to create. But once they're created they're worth an enormous amount of money.
SARAH GREEN: I like how we've talked about on the individual level what people need to be doing in order to compete successfully with rising talent in India and China and America. And now we've talked a little bit about what businesses need to do in order to capitalize on the opportunity of that growing middle class. Could I ask you just to speculate a little bit about what you think we ought to be doing at the national level?
MICHAEL SILVERSTEIN: I'm a big follower pf the current election. And I think the $10 trillion prize is an election topic. Both Romney and Obama have it wrong. They have it flat-out wrong. They have attempted to demonize China, and to a less degree, India. They have tried to make it a conflict as opposed to an opportunity. They have both deemed it to be a zero sum game.
And what they have and what they will get is something that they, as the campaign speech says, is being taken away from America. That is not a fact. It is in fact an opportunity for American businesses and American consumers to enter China, to learn about China, to learn about India, to participate in this $10 trillion prize. It is about Western companies deciding that they're not going to have their place of origin on their sleeve.
SARAH GREEN: Well, Michael very provocative thoughts there, and I know many more insights and good provocations in the book. Thanks so much for sharing some of them with us today.
MICHAEL SILVERSTEIN: You're very welcome. It's really nice to talk to you.