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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


Competing for the Global Middle Class

Momentum in the Middle

The first step toward becoming a leading company for the global middle market is recognizing the pace of development in the countries where you hope to do business. All industrializing countries follow an “arc of growth”: an evolutionary path of economic change. They start as nascent economies (emerging from subsistence, with large numbers of young people). They gradually evolve into mature economies, with relatively flat growth and large numbers of aging people. In between, there is a critical stage of urbanization and economic momentum. During this “momentum phase,” many countries have large, relatively young populations and high economic growth rates. These countries are the seedbed of the emerging middle-class markets.

Three types of corporate players are jockeying for position in these markets:

1. Local upstarts are companies that have traditionally provided low-priced goods for bottom-of-the-pyramid customers in their home markets. They are migrating upward into their domestic middle markets as their customers become more prosperous. These companies now provide products and services with more features, better quality, and increased brand status.

2. Global aspirants are local companies that have already developed products for their domestic middle markets. Now, they seek to expand their geographic reach and power, parlaying their existing capabilities and knowledge into serving the global middle class.

3. Multinational incumbents are mature global companies, often from Japan, Europe, and the United States. They are intent on adapting their existing product lines to capture the attractive growth opportunities in emerging middle markets.

You can see all three types of competitors in most sectors in countries that are in the momentum phase. For example, in China’s automobile sector, local upstarts are represented by players that have traditionally made low-cost cars, such as Chery Automobile Company, Great Wall Motor Company, and Geely Automobile Holdings. They are moving up the product pyramid. In 2010, Geely purchased the Swedish carmaker Volvo from Ford at the bargain-basement price of $1.8 billion and immediately raised production plans to 300,000 Volvos annually, almost double the previous worldwide production.

Global aspirants in China’s middle market include South Korea’s Hyundai Motor Company. Hyundai entered China in 2002 and has since achieved remarkable success in the middle market with a major redesign of its Elantra model.

Among the multinational incumbents are long-established automakers aggressively seeking to carve out significant shares of China’s middle market. These include GM, with its Chevrolet Spark and Buick Excelle, and Volkswagen, with its Polo and Golf models. All of these multinationals pursue this market through joint ventures with Chinese partners. For example, the Guangzhou Automobile Group makes Honda-branded cars for the middle-class market. The Shanghai Automotive Industry Corporation launched the Lavida with Volkswagen and is working with GM on a new-generation small car called the Baojun (Chinese for “treasured horse”).

Incumbent automakers such as Honda, Volkswagen, and GM aren’t simply exporting cars from their home countries to China. Since 2005, they have been modifying and restyling their vehicles to better align them with the needs and tastes of Chinese consumers. For example, Volkswagen installs smaller engines in some vehicles, such as the Polo GTI and the Golf 6. Such changes enable incumbents to offer two types of vehicles. They make low-priced cars for entry-level Chinese consumers who prioritize cost and value, and cars with added features for more affluent mid-market consumers who can pay for the quality and brand status associated with foreign cars. One sign of the value of the Chinese auto market to incumbents is GM’s sales there, which exceeded its U.S. sales in 2010 — the first time sales in another national market eclipsed U.S. sales in the company’s 102-year history.

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  1. Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Harvard Business School Press, 2007): A highly effective approach to global strategy, one middle market at a time.
  2. Vijay Govindarajan, Jeffrey R. Immelt, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009: Describes reverse engineering in GE’s medical systems business.
  3. Ronald Haddock and John Jullens, “The Best Years of the Auto Industry Are Still to Come,” s+b, Summer 2009: The global middle-market opportunity in motor vehicles.
  4. Richard Shediac, Rainer Bernnat, Chadi Moujaes, and Mazen Ramsay Najjar, “New Demographics: Shaping a Prosperous Future as Countries Age”  (PDF), Booz & Company white paper, May 2011: The underlying dynamics that have created the global middle class.
  5. Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): How to successfully enter one of the largest global middle markets.
  6. For more on this topic, see the s+b website at:
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