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TWO

The New Revolutionaries

The Rise of the Middle Classes

Who the new consumers are, how they spend their money, and what companies should do to captivate nearly one billion people

GOVIND SINGH SHEKHAWAT does not look like a revolutionary. A hardworking forty-something who holds down two jobs in the sleepy Indian desert state of Rajasthan, he has the broad smile of a man who is happy with life. Ma Guojun does not look like a revolutionary, either. Younger than Govind by about ten years, he is an engineer and teaches at a university in Qinghai province in western China. Yet they unquestionably are part of a revolutionary movement: the rise of the Chinese and Indian middle class.

Throughout history, China and India have been sharply polarized countries, with a small elite of very rich at the top and an overwhelming majority of very poor at the bottom—and nothing much in the middle. Most people, whether in the cities or the countryside, scratched out a subsistence living. Over the past ten years, however, this has been changing, and dramatically so. In the next ten years, these two countries will have a substantial middle class for the first time in their history. In his 1947 speech “Tryst with Destiny,” Jawaharlal Nehru, the first prime minister of independent India, proclaimed that India “will awake to life and freedom.” A mere two years later, in October 1949, Chairman Mao proclaimed, “China has stood up.” In fact, it has taken more than sixty years for Chinese and Indian consumers to wake up, stand up, and start to earn and spend as never before.

As discussed in chapter 1, the number of middle-class households in China will nearly double during the current decade, rising to 202 million by 2020. This will be the largest group of middle-class consumers in the world. Likewise, in India, the number of middle-class households will nearly double to 117 million over the same period. These middle-class consumers will account for nearly half of consumer spending in the two countries by 2020 (figure 2-1). It is their newfound productivity and earning power that is underpinning the dramatic growth in consumer spending and providing people such as Govind and Guojun with their extraordinary ambition, drive, and optimism.

The level of household income defines this group of newly prosperous people—but it is not a homogeneous group. We segment households into lower, middle, and upper class. It is helpful to further segment the lower class into the left-behinds and the next billion, to segment the middle class into emerging middle and middle, and to segment the upper class into lower affluent and upper affluent. The next billion are people in the lower class who have some disposable money in their pockets for the very first time and have the energy and ambition to move up into the middle class—they work hard, they care about their children’s education, and they choose better quality goods.

FIGURE 2-1

How the $10 trillion prize breaks down across classes

FIGURE 2-2

Household income in China, 2010 and 2020

In China, the threshold for entry to the middle class, taking into account the lower cost of goods and services, is an annual household income of $9,750. But we put the threshold for entry to the emerging middle class at $7,300, while the ceiling for the richest members of the middle class is $23,200 (figure 2-2). Guojun, who earns around RMB 80,000, or $12,500, fits squarely into this category.

In India, the middle class has an income range of $6,700 to $20,000 (figure 2-3). We often subdivide this class into two groups: the urban and the rural. Govind is comfortably middle class, earning more than 500,000 rupees, or around $11,000, from his various business ventures.

But if income is a key segmentation factor, it is not the only one. Other factors include education, occupation, and geography—and, as we will see in this chapter, these differences influence consumers’ attitudes and, importantly, their patterns of consumption.

First, though, we should meet the new members of the middle class.

FIGURE 2-3

Household income in India, 2010 and 2020

The Middle (Class) Kingdom: China’s New Bourgeoisie

Ma Guojun is typical of this new class. Born near Xining, the capital city of Qinghai province, he grew up in a poor family, the eldest of three boys. His father worked for the local electricity company and dreamed that his son, if he studied hard, would rise up through the ranks of Chinese society.

As it turned out, Guojun performed only modestly in his gaokao, the national college entrance examination, and secured a place at a university in Shenyang, rather than Beijing. There, he studied for a degree in material science and engineering. But he did so well that he was able to go on to study for a postgraduate degree at a university in Beijing. For him, this was a big turning point.

Soon after completing his studies, Guojun got a job as a researcher at Advanced Technology & Materials Company (AT&M). This manufacturer of metallic products was founded by a state-owned research institute in the late 1990s. His annual salary was RMB 60,000, or about $9,400. This was double his father’s salary and marked him as a member of the urban and emerging middle class. If Guojun felt special, he was not alone—many others were climbing the social ladder. In 2010, those living in emerging middle-class households or higher constituted 26 percent of the population. By 2020, this proportion will have risen to 50 percent. Much of this growth will take place in China’s fast-expanding cities, where 75 percent of the population will enter the emerging middle class or higher by the end of this decade. Today, the emerging middle class accounts for about 15 percent of the general population and 26 percent of the urban population. Guojun fit the bill perfectly. But he was not ready to rest on his laurels.

In Beijing, the middle class has to cut corners and budget tightly in order to live the better life. For instance, workers must sometimes go as far out as the fourth ring—the expressway encircling the city more than five miles from the center—before finding affordable apartments. The commute to work can then take ninety minutes or even longer.

At that time, Guojun did not feel rich, even though he was, by the standards of his family. He lived in a small apartment of just forty square meters, which he rented with a roommate, and it was poorly furnished and miles away from his office. It took him more than an hour to get to AT&M’s offices in the Zhongguancun Science Park, China’s answer to Silicon Valley, and he had to get there on the crowded subway. It meant that there was very little time for recreation. As he put it, “Every day was work, work, work.” Worse than this, he felt that even if he worked and saved for a lifetime, he still would not be able to afford a proper-sized apartment in Beijing.

At the age of twenty-seven, Guojun was lonely. He had fallen in love with a beautiful young woman in Beijing, but his modest financial income, together with the fact that he came from a city 1,250 miles from the capital, did not make him an attractive bet as a husband—or, more significantly, as a son-in-law. The girl’s parents forced the couple to go their separate ways. As he explained, “Her mom said, ‘This guy can’t lead a good life for himself, so how could he give you happiness?’”

Status, as expressed by a nice house and a good job, is a big factor in China, as we will see in chapter 8. “A house doesn’t only mean a place to live. It translates as a statement of affluence: security, health care, identity, and education,” Guojun told us. “A lot of people growing up in Beijing had houses bought for them by their parents. But for me, as someone who had migrated from a rural area, I had to pay for a house myself, and that’s almost impossible because of the high and rising costs of property.”

As he searched for a new direction, Guojun’s moment came when he stumbled across a job made for him: a lectureship in engineering at Qinghai University in his home city of Xining. Offered a comparable salary, he jumped at the chance to escape Beijing and return home. He knew his money would go further, he would stand a better chance of finding a wife and starting a family, and he would have a better life. This common migration pattern is driving the growth of the tier 2 and tier 3 cities in China.

Four years later, he has a wife, a one-year-old son, and an annual household income of RMB 80,000, or $12,500. He owns an apartment that is three times the size of the one he rented in Beijing—thanks, in part, to a gift from his parents—and he has many of the things that he wanted: a TV, a computer, and a new HTC smartphone that he bought on taobao.com, China’s largest online market.

Like many middle-class consumers, he is actively online, spending around two hours a day on the Internet—often sending messages to fellow lecturers on QQ, the instant messaging service. He used to spend more time than this, but his infant son now takes up many of his spare waking hours.

He definitely wants more—more goods, more savings, more comforts. He wants his own car; currently, he travels by train or shares the university’s car pool. He also wants to give his son every chance in life by providing him with the best education. He is busily putting money away to cover the cost of his son’s schooling. In an effort to climb the career ladder and earn a bigger salary, he is studying part-time for a doctorate at Lanzhou University of Technology. Every night after his son goes to bed, Guojun turns to his books, working until the early hours. Periodically, he takes the two-hour train ride from Xining to Lanzhou to meet with his professors. He will earn his degree this year, opening more doors to advancement. When he completes his PhD, Guojun will be one of more than sixty thousand new PhD graduates this year—a sixfold increase in the number of PhD graduates in ten years. He wonders whether an MBA would also be a worthwhile investment to help him stand out from the crowd.

Guojun has, in his words, achieved “the first half of his dreams.” In the decade ahead, he expects to continue to invest in himself and in his career. It is likely that his annual income will continue to rise as he opens more doors for himself and as his city of Xining becomes more prosperous. In so many ways, he is part of China’s middle class in motion—a fast-changing and mobile group that is redrawing society.

Cars, Caste, and Class in India

The caste system still survives in India. Although it is less defining and rigid today than ten years ago, and an interventionist government is attempting to improve social and economic mobility, it still hangs in the air. Govind is a Rajput—the proud warrior caste that once ruled the princely states of northern India. He wears a dark moustache, a marker of his masculinity and his martial heritage. Yet what really distinguishes Govind are his possessions: for a man who started with nothing, these are the things that really count for him.

Born in 1971, some twenty years before the introduction of the market reforms that would signal India’s reentry to the global economy, Govind was raised in a hut in Jhalana Dungri, one of the most deprived areas of Jaipur. Like Guojun, he was the eldest of three boys and, as such, was expected to help provide for the family from an early age.

His father, a painter, brought home about 50,000 rupees, or about $1,100, per year. Young Govind, offering his services as a day laborer and painter, was soon earning enough to help the family. “I started working when I was fifteen,” he explains. “With the money I made, I was able to put myself through school and support my father.”

He left school at nineteen and started full-time work. Very soon, he was earning around 35,000 rupees ($750)—about two-thirds of his father’s income. His turning point came when he met his wife. “She’s my great inspiration,” he says. She was a student at the local college when a matchmaker first introduced them. She was studying for a degree in education in order to be a teacher. “I realized that being a painter’s helper would not allow me to achieve what I wanted for my family,” he explains. “I wanted to do something more than just be a painter or contractor.”

This was the mid-1990s, and the Indian car market was just opening up. Until then, the Hindustan Ambassador, modeled on the stately 1950s Oxford III from the now-defunct British Morris Motor Company, was the classic Indian automobile—so much so that it was dubbed “King of the Indian Roads.” Govind took a second job as a car-wash attendant, supplementing his income as a painter. “I used to wake up at four a.m. and clean cars for people and then start my day job at nine a.m.,” he recalls. “And then, in the evenings, I learned to drive and earned a driver’s license.”

Handsome, well groomed, and physically fit, he was selected as the chauffeur for a prominent businessman in Jaipur. “I drove a white Fiat in those days,” he recalls, “and I learned all that I needed to know about how cars work.” This knowledge proved to be critical in his journey to prosperity. In his late twenties, he decided to start a small business selling secondhand cars, which he ran alongside his day-to-day work as a driver. “I bought a rundown car and put it into shape,” he says. “I worked on it for nearly two months—working most nights from eight p.m. till midnight. I earned nearly 20,000 rupees ($430) on that deal.”

This was big money for Govind, and he has not looked back since. He started dealing in cars—buying, repairing, and reselling them. Last year, he estimates, he completed as many as twenty such deals. With more money in his pocket, he was able to leave his job as a full-time chauffeur and become a free agent, driving people for special occasions: many Indians drive their car in the city but hire a driver for long-distance trips.

Today, his annual income is more than 500,000 rupees—about $11,000, a tenfold increase in twenty years. Middle-class status symbols of success are all around him: a TV by Videocon, a refrigerator by Godrej, a Suzuki car, and a Honda motorcycle. And then there is his house: a three-bedroom house in a middle-class district. It says a lot about Govind—not only his position in society but also his hunger for more. He is always on the lookout for ways to boost his earnings. At one point in our meeting, he leaned over and offered to buy our car. “I will make you a good deal,” he said. We declined.

About twelve years ago, he bought a small plot of land, paying 100,000 rupees ($2,200). “No bank was willing to give money to a person like me at that time, so I borrowed small amounts from people I worked with and slowly paid them back over six years.” In 2008, he started building, seizing on a time when he believed that the prices of steel and cement were relatively low. He invested in the contents as well as the construction of the house. He is especially proud of the two air conditioners that he had installed. Manufactured by General, among the most expensive brands, they provide cool air in the hot Jaipur summers. “It is the best Japanese brand, so it has to be good quality,” he says. “It also uses less power than other brands.”

Now, the house is worth 6.2 million rupees, or $130,000—a fortune for Govind. But it is not luxurious, at least not in the Western sense of the word. It is a simple, single-story, rust-pink building. The bathroom is basic: there is a faucet, which is used to fill a bucket for a makeshift shower; a small mirror that he uses for shaving; and a basic toilet, but no tissue. Also, the power supply is intermittent—electricity is routinely cut in the afternoon between 1 p.m. and 3 p.m. It is for this reason that he bought a direct-cool refrigerator that can keep food cold for four hours without electricity. He also has a washerman, who comes to his house to hand-wash and air-dry his clothing.

To further boost his income, Govind joined Gold Souk, a marketing firm, as a part-time, commissioned sales rep. In the last three years, he has earned more than 1 million rupees ($21,000) in commissions. For all his newfound wealth, however, Govind is still hungry for more—for himself and for his two children.

He dreams of taking his family on holiday to Dubai and Singapore. He also dreams that his children will achieve more than he has and all that they wish for. “I spend about 5,000 rupees ($100) every month for their education. My son is doing well in school—he got 90 percent in his exams. I hope that he becomes an engineer. I don’t want him to go through the struggle that I had to go through.”

As Govind talks, he chews tobacco. He doesn’t smoke or drink alcohol. A serious man, he is rightly proud of his success, his hard work, and his ability, through his own endeavors, to pull himself up by his bootstraps. “When I was sixteen years old, I never thought that I would one day have a house of my own, a foreign-made car, and a motorcycle. But I’ve learned that with the right effort, one can achieve anything. I work fifteen to sixteen hours a day, seven days a week, and that’s why I have reached this point. But I will still do anything to earn more money. I want to double my income every three or four years. I want to make sure that I am able to buy a better house, send my son to a good college, and provide my family with everything that I never had.” (He does not talk about sending his daughter to college.)

He feels this passionately. When he said “double my income,” he repeated it over and over again, jabbing his finger for emphasis. He is a man on a mission.

Consumption Curves: How Middle-Class Consumers Spend Their Money

Food, homes, household appliances, transport, education, health care, clothing: these are the things that middle-class consumers, enriched with higher incomes, are starting to spend their money on as never before. The number one item on the family shopping list is food. But if this is striking, expect growth that is even more spectacular in other consumer categories as more and more people join the middle class.

The second-biggest item on middle-class consumers’ shopping list is housing and household appliances. In China, household appliances were the number one category that people wanted to trade up to in 2011, according to our annual survey: some 53 percent of consumers registered their intent to spend more on TVs, refrigerators, and computers.

These figures underscore Chinese and Indian consumers’ extraordinary optimism about their future. As described in chapter 1, some 39 percent of Chinese consumers and 34 percent of Indian consumers expressed an intention to trade up. By contrast, only 18 percent of Americans and 16 percent of Europeans did so.

Yet, as they grow richer, they become even more optimistic, and their spending behavior evolves in a distinct way. In years past, the evolution of people entering the middle class and rising to affluence was hard to observe because so few people made the journey from poverty to prosperity. In the last ten years, however, the transition has been dramatic, like a fast-forward video of social transformation.

To monitor this transition, we use a tool we call a consumption curve to help us to establish how consumers change their spending habits as they earn more money. Different types of products have differently shaped consumption curves—which shows that consumer demand for different products changes at a different rate as income changes. Take two types of beverage, for examples: water and fine wine. As people’s income increases, they do not actually consume that much more water, and so the consumption curve is fairly flat. By contrast, as a consumer enters the middle class, there is a tendency to drink better wine every now and then, as a special treat. Then, as the consumer becomes truly affluent, he or she begins to consume fine wine on a regular basis. So the consumption curve for wine is upward sloping, rising as income rises.

Using this tool, our analysis shows that once people have sufficient disposable income to enter the emerging middle class—typically when their household income reaches around $7,500 per year—they start spending on things that they could once only dream of having: fresh fruit and vegetables, manufactured ready-to-wear clothing, better housing.

Our research shows that consumers hit a second important threshold once they start to earn around $12,500 per year. At this point, they begin to invest in a first automobile, dabble with entry-price luxury goods and health foods, and spend more on beauty products, apparel and shoes, entertainment, and alcoholic drinks.

Then, as they become more affluent, with an annual income of $19,000, consumers cross another threshold. They start to spend money on travel, recreation, fancier household goods, and foods that are not everyday commodities, such as yogurt, chocolate, coffee, and wine.

For items such as household goods, the consumption curve is a sharply upward-sloping line, indicating a steady rise in spending as incomes rise (figures 2-4 and 2-5). Other consumer categories that rise steeply, if less so than household-related goods, are transport and communication, as well as education. Expenditures on health, another major category, only start to rise as people reach upper middle or upper class, with only the tail end of the consumption curve bending upward.

By contrast, the consumption curve for food follows a gentler upward trajectory and actually flattens out, as people get richer. You can only spend so much on food and consume so many calories.

Consumption Patterns in China

In China, people rising to emerging middle-class status focus on three core needs: food, clothing, and the household. When they were poor, they bought their clothes from street vendors, bartered for basic food, and endured subsistence-level living conditions. With more money, they visit modern retail stores to buy apparel; they go to supermarkets to select a broad mix of fruit, vegetables, meat, and dairy products; and they invest in basic household goods. In urban areas, more than 95 percent of households have a washing machine, a refrigerator, and air-conditioning units.

FIGURE 2-4

BCG consumption curves for different products in China

As people enter the middle class, they switch their focus to consumer goods that enhance their quality of life far beyond subsistence. Food, clothing, and the home remain important, but they look for sophisticated products with advanced functionality and instantly recognizable international brand names. They also look for definably healthy products: juices, bottled water, vitamins, and other food supplements. This is a growing trend. For instance, we noted an increasing appetite for bottled water in China, with the purchase incidence rising from 67 percent in 2007 to 86 percent in 2011. Fearful that tap water may be polluted, the Chinese devote more of their income to safe products.

FIGURE 2-5

BCG consumption curves for different products in India

When Chinese people enter the upper class, their shopping behavior evolves as they trade up to premium products such as luxury items and prestige cars, as well as to life-enhancing activities such as dining out, going to the movies, playing sports, and going on overseas trips, especially long-haul flights to the United States and Europe. Today, these richer Chinese are buying a record quantity of fine wine from the vineyards of Bordeaux. In doing so, they are starting to appreciate, and not just consume, wine—a reflection of their growing sophistication.

As they become wealthier, Chinese consumers look ever more closely for branded products: some 70 percent say they trade up because of brand, a higher percentage than for consumers in most other countries (figure 2-6). In the United States, just 30 percent trade up to brands in this way, and in Europe, it is an even lower proportion, at just 19 percent. Chinese consumers emphasize brand mainly because they see it as an indicator of quality and functionality.

For some consumer categories—notably baby products (such as infant formula), luxury products, and designer labels—brand plays an especially important part in the purchase decision. For other categories, such as home decoration and entertainment, brand is less significant. There are also some categories for which foreign brands are coveted and others for which local brands are preferred. When it comes to clothing and consumer electronics, foreign brands are favored—notably Nike, Adidas, and Nokia. By contrast, for home appliances, local brands, which offer trustworthy products with good after-sales services, are preferred. For instance, twice as many consumers are aware of Haier refrigerators than of other brands, including famous international manufacturers of white goods.

Consumption Patterns in India

We segment the Indian middle class into emerging middle and middle, with particular focus on urban and rural distinctions. At the lower end, there is some overlap with the next-billion category, which includes some of the emerging middle class, while at the upper end, particularly with the educated professionals, there is some overlap with the rich or affluent classes.

Today, the middle class—including teachers, junior executives, factory managers, and village doctors—accounts for 28 percent of households and some 44 percent of consumption.¹ As might be expected, the urban class has relatively higher spending, accounting for 8 percent of households and 11 percent of consumption. Educated professionals, a distinct group whose members include graduates working as managers and executives and whose income overlaps with the richer middle class, will see their share of household consumption increase from 16 percent in 2010 to 26 percent in 2020.

FIGURE 2-6

Consumers’ reasons for trading up, by country

We estimate that the discretionary spending of the urban middle class is about 32 percent of their overall income. For the rural middle class, it is slightly lower, at 28 percent. For educated professionals, it is substantially higher, at 48 percent.²

Most Indians, even those with income of $3,000 or lower, consume basic products such as cooking oil, bathing soap, washing powder, and tea. As they get richer, they start to purchase durable goods, with the typical hierarchy being a TV, then a gas cooking stove, then a music system, then a refrigerator and washing machine, and then an air conditioner. Also, most will buy a two-wheeler, such as a scooter or a motorbike, for getting around.

Beyond this, their priorities are things relating to the family, especially children. We have calculated that 37 percent of the middle-class household’s expenditure is devoted to children, mainly food and education. One young couple we met in Mumbai earned about 15,000 rupees ($300) a year and lived in a one-room chawl (a ghetto-like apartment). The couple spend nearly 1,000 rupees ($20) per month on school fees for their only daughter. “We want the very best we can afford for her,” they explained.

By buying a private-school education, they are buying a branded product—one with quality assurance. Indeed, our research shows that, as with Chinese consumers, 70 percent of Indian consumers consider the brand to be an important criterion when making a purchase, with 64 percent saying it is a reason for trading up.

This buying habit affects a range of consumer categories and is becoming more widespread: for instance, since 2005, the number of households buying coffee, milk powder, biscuits, ketchup, toothpaste, washing powder, and even toilet cleaner from large or national brands has risen to well over 50 percent. According to one study, the top three brands in the country are Amul, a farmers’ milk cooperative; LIC (Life Insurance Corporation of India), a state-run insurance company; and Nokia, the Finnish mobile phone manufacturer. D. Shivakumar, head of Nokia’s newly formed India, Middle East, and Africa region, told us, “Rich people buy brands for vanity and poor people buy brands for security. India is a brand-led market, and the guy with the lowest price is not always the market leader.”

Although there are broad buying habits shared by all of India’s middle-class consumers, there are subtle differences in the way that the urban and the rural middle class spend their money. Overall, as we have seen, middle-class consumers spend the largest part of their budget on food; for the rural middle class, this eats up 35 percent of total consumption spending, compared with 31 percent for the urban middle class and 17 percent for educated professionals.³

For educated professionals, the largest category of spending is housing and consumer durables, accounting for a fifth of their budget. It is also a major outlay for the urban middle class, accounting for a fifth of their budget, too. For the rural middle class, the second-biggest priority after food is the education of their children, which accounts for 13 percent of this group’s disposable income.

These spending priorities explain some striking differences in consumer attitudes about the future. Some 88 percent of educated professionals expect their lifestyle and finances to be even better in the next two years. The next-most-optimistic group is the urban middle class, with 70 percent reporting that they think they will be better off in the next two years. Behind them, some 64 percent of the rural middle class are optimistic about the future.

Their material wealth also reflects this abundant confidence. About half of the rural middle class have basic durables—a television, a DVD player, a pressure cooker, a refrigerator, and a scooter. An even higher proportion—66 percent—of the urban middle class have these necessities of modern life.

When it comes to more advanced durables, however, the numbers are much lower and they indicate significant room for growth. Only 28 percent of the urban middle class and 13 percent of the rural middle class own a modern oven, a dishwasher, a microwave, a camera, a plasma TV, or a car. By contrast, 42 percent of educated professionals possess these types of products.

There is also room for greater connectivity, as will be shown in chapter 10. Just 15 percent of the urban middle class use the Internet. Among the rural middle class, it is even lower, at just 4 percent. Moreover, nearly a fifth of the urban middle class and nearly half of the rural middle class do not have a bank account.

The data indicate that the middle class in India, as in China, is far from a homogeneous group—and different from the middle class in the United States and Europe, as well. But, in their voracious appetite for a Western lifestyle, albeit with Indian or Chinese characteristics, middle-class consumers from both these countries are unrivaled.

Upwardly Mobile: The Lifestyles of the Middle Classes

Much is made of the migration from the rural districts to urban centers. But an even bigger migration is taking place from the lower reaches of the social pyramid to the next level of the pyramid. As you will see in part II, this migration is having a transformative impact on the demand for food and beverages, housing and household appliances, luxury goods, digital products, and education. But it is also having an impact on consumers’ recreational lives. After generations of living at a subsistence level, millions of people are engaging in definably middle-class pursuits.

Take, for example, the new passion for driving on the newly built expressways that fan out from Beijing and other main cities. It used to be that only people who could afford chauffeurs owned cars. Now, however, there is a fast-emerging car culture, and proud owners are eager to sit at the wheel and take to the open road.

Driving clubs are popular, with many organizing self-drive tours. For instance, the Beijing Target Auto Club runs a seven-day excursion from Beijing to Hubei province in central China, and arranges visits to the Three Gorges Dam, one of the controversial wonders of modern engineering, as well as to a mountain forest famous for its fabled race of hairy ape-men.⁴

In India, too, the car trip has become a popular weekend activity. Rising incomes, together with much-improved roads between the regional capitals, have paved the way for the new passion for driving. As Govind, who spends his life with cars, told us, “It used to take me three days to drive from Mumbai to Jaipur, and the roads were terrible. Now the National Highway 8, which links Mumbai and Delhi, is a pleasure to drive on—and it takes me only eighteen hours to complete the 1,200-kilometer journey.” And better roads are attracting a bigger variety of cars, he said. “A few years ago, all I would ever see were Ambassadors and Fiats. But now, I often spot Camrys, Accords, Skodas, and even the occasional Mercedes Benz and Audi.”

Another sign of middle-class affluence, and one linked to the popularity of the self-drive tour, is the dramatic growth of the travel and tourism business. According to our analysis, Chinese travelers made sixteen million overseas trips in 2010, two million more than the number of foreign trips made by Japanese travelers.⁵ Over the next decade, we project that the number of overseas trips made by Chinese travelers will swell to fifty-three million. These travelers will account for 9 percent of foreign tourists in North America by 2020, compared with 3 percent today, and they will represent 19 percent of foreign tourists arriving in the European Union. Spending by Chinese tourists is surging by 19 percent a year and will reach nearly $120 billion annually by 2020.

Middle-class and affluent consumers, most of whom have never traveled overnight, are spearheading this travel craze. Today, around two hundred million urban Chinese consumers have taken an overnight leisure trip. But with an average of twenty-five million people taking their first-ever such trip every year, this number is likely to more than double by 2020.

If Western tourists typically go to see the sights, Chinese travelers go to shop. We have calculated that 40 percent of the money they spend abroad is spent on shopping—around twice the share that Japanese and U.S. tourists devote to the same activity. Affluent Chinese, in particular, buy luxury items abroad. For Chinese travelers of all income levels, hotels tend to be places to sleep, not experiences in themselves. When choosing a hotel, they look for cleanliness and the hotel environment—these are as important as price. Customer service, location, and brand matter much less to them. Hotel quality is more important for affluent Chinese, but even these travelers dislike spending lavishly on just a name.

Indian travelers are similar to Chinese travelers—with a focus on value. Yet even the ongoing global economic crisis has not reduced the readiness to travel far and wide. Destinations such as Switzerland, Dubai, New Zealand, and Singapore generate significant revenues from Indian tourists. As an example, the Singapore Tourism Board reported that Indians spent more than any other nationality on shopping in Singapore. Interestingly enough, the tourism boards of these countries have realized the power of the Indian film industry and provide incentives to Indian movie makers to film in their countries in order to generate tourist demand. Switzerland has seen thousands of Indian tourists make their way to Zurich, Geneva, and Interlaken to see the sights that they saw on the silver screen. Jungfrau, one of the top tourist destinations in Switzerland, with a cog railway and panoramic views of the Alps, now has an Indian restaurant—aptly called Bollywood.

If there are many other things that the new middle-class consumers are doing now that they have more money in their pocket, no coverage of this theme would be complete without some mention of the growing popularity of blogging—something covered more fully in chapter 10. The Internet is a craze, with people spending hours surfing the Web, and for newly affluent, property-owning consumers, it is a new channel for speaking out against corruption, incompetence, and the misuse of power.

This new political outspokenness is the other side of the demand coin. Better educated than before, and more confident, too, consumers feel entitled to articulate their views on everything from products to public policy. As property owners, they are angered by anything that threatens the value of their property; as consumers, they are angered by anything that threatens the affordability of their newly acquired lifestyles; as increasingly well-informed parents and children, they are angered by less-than-satisfactory access to health care and education; and as citizens, they are pushing for greater accountability and better governance. Pushing the boundaries, and raising expectations, these new middle-class consumers are on the march—and they do not want anything to get in their way, let alone push them back.

Implications for Business

The rising middle class is the most important consumer segment in China and India. In our work with companies, we have identified three strategies that should be mastered to achieve success with this consumer group.

First, it is imperative that products deliver technical, functional, and emotional benefits. Although the new middle-class consumers are optimistic and ready to spend money, they still have a natural inclination to keep their cash in their pockets. They worry that their newfound wealth could disappear as quickly as it arose—not least because there is no Western-style social safety net. This means that companies have to develop convincing products offering real value: products with technical and functional innovations. These consumers will become mini-experts in the finer points of the products, typically reading the lists of ingredients, studying the product manuals, and asking store clerks for more information. In the end, this is how they justify their purchases to themselves and to their friends. When consumers are able to articulate the functional benefits to their friends, they ladder up emotionally. They become advocates and apostles.

In India, for example, Maggi, a brand of instant noodles owned by Nestlé, the Swiss food company, has come to understand the technical, functional, and emotional needs of mothers. Nestlé has built up the Maggi brand over a decade. It started with “two-minute convenience” positioning for a quick snack for the child, but that did not resonate with mothers. To rethink its strategy, Nestlé engaged with mothers to determine their needs with regard to nutrition and local taste. It then created a variety of Indian flavors and offered whole-wheat nutrition—along with vegetables, as suggested by the mothers—to make a hearty snack. The result is that Maggi is now a $500 million brand with an 80 percent share of the instant noodle market.

Second, the full range of products offered should include aspirational items. Companies should price their products in a way that makes some items in the line just out of reach. Pricing that embraces the good, better, best range works well in the Chinese and Indian markets. In India, for instance, LG, the South Korean consumer electronics and handset manufacturer, has taken market-leading positions in a number of consumer categories, even though its products can cost more than a local branded product.

In an example of aspirational products in education, V. K. Bansal, an unemployed engineer with a passion for science and a need for money, decided to start tutoring young men for the entrance exam to the Indian Institutes of Technology in the early 1990s. He began with a small group of six in Kota, a medium-sized industrial city in the northwestern state of Rajasthan. Five out of the six earned a good rank on the exam, and very quickly Bansal’s fame started growing. Slowly the numbers increased, from six to sixty and then six hundred students. Bansal Classes became renowned in nearby cities and soon all over India. Over a fifteen-year period, the program grew to more than five thousand students, and imitators started similar training academies. Kota now provides more than 25 percent of enrollment in the Indian Institutes of Technology (IIT), drawing test preparation candidates from as far as fifteen hundred miles away. Students now must take entrance exams to get into the top-rated preparatory classes. Middle-class parents who send their children to Bansal Classes (and others) and to live away from home for as long as two years dream about an engineer in the family.

As the third and final strategy, every product must have perfect safety, reliability, and quality assurance. Once poor, but now better educated and relatively well off, these new consumers will not tolerate shoddy products. They want to buy products that will stand the test of time. This is a large contributor to their preference for branded products: a good name is a guarantor of quality. The quickest way to a rapid market decline is to provide consumers with low-quality, unreliable, inconsistent, or health-threatening products.

The revolutionary middle class—320 million newly affluent households by 2020—represents the core growth market in China and India. Without them, there is no $10 trillion prize. They are consumers with incredibly high aspirations, irrepressible energy, and great confidence in themselves and in their children’s future. There have been “I want more” generations before—notably the postwar baby boomers in the United States and Europe. But the new consumers in China and India are an “I want more” generation the likes of which has never been seen before. Most started life experiencing poverty and deprivation, and they can recount the stories of their parents’ or grandparents’ suffering through famine, war, or political repression. Most were born in rural communities and migrated to cities, where they found factory or service jobs and received enough education to capitalize on lucky breaks. Today, they have critical mass, recent memory of hardship and denial, hunger for the back story about brands and goods, and low levels of debt.

Right now, Chinese consumers have more disposable income than Indians do. In India, where the families are large and women are not encouraged to work, consumers have less money in their pockets for goods and services. But in both countries, consumers are more vocal than ever before—going online to blog about their hopes, dreams, and fears. In a political setting, this is revolutionary, especially in China. But it is revolutionary in a commercial setting, too. These consumers really do want it all: aspirational products that offer comprehensive and advanced features at a value price.

Companies will need to do everything possible to satisfy the needs of these nearly one billion consumers and grab the first-mover advantage. The consumers are careful purchasing agents—open to buying better food, better housing, better education, better cars, and all the trappings of the middle class. Companies that listen to their hopes, dreams, and needs and respond with products that elevate and certify the consumer’s taste can expect to win a disproportionate share of the prize, garnering loyalty, advocacy, market share, and profits.