1. strategy+business
ISSUE 64 AUTUMN 2011
Competing for the
Global Middle Class
Three types of companies are jockeying for position
in emerging economies, seeking to capture the loyalty
of billions of new consumers.
BY EDWARD TSE, BILL RUSSO,
AND RONALD HADDOCK
REPRINT 11309

2. Competing for the
Global Middle Class
by Edward Tse, Bill Russo,
and Ronald Haddock
features global perspective
1

3. Three types of companies are
jockeying for position in emerging
economies, seeking to capture the
loyalty of billions of new consumers.
features global perspective
2
Illustration by TK

4. Edward Tse Bill Russo Ronald Haddock Previous pages:
edward.tse@booz.com bill.russo@booz.com ronaldrhaddock@gmail.com In China’s Sichuan province,
is a senior partner with Booz & is a senior advisor with Booz & is a former partner at Booz & farmers look over Haier’s
Company and the firm’s chair- Company. Based in Company, where he helped flat-screen TVs.
man for Greater China, based Beijing, he has more than companies build businesses
in Hong Kong and Shanghai. 20 years of experience in the in China, India, Korea, Russia,
He is the author of The China automotive industry, most and other emerging markets.
Strategy: Harnessing the Power recently serving as
of the World’s Fastest-Growing vice president of Chrysler’s
Economy (Basic Books, 2010). business in Northeast Asia.
In the 1920s, when Alfred P. Sloan Jr. reorganized population with goods, services, and infrastructure is
General Motors Company, he promised shareholders “a becoming known as the “global middle market.” Com-
car for every purse and purpose.” Sloan tapped into a panies that secure leading positions within that market
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teeming middle-class market of Americans who couldn’t could well become the 21st-century equivalents of Al-
afford luxury cars, but nonetheless wanted product op- fred Sloan’s General Motors.
tions far beyond the “any color so long as it’s black” One such company may be China’s Haier Group.
Model T Ford. This immense U.S. middle-class co- In 1985, Haier was a bankrupt domestic refrigerator
hort propelled GM past Ford into a leadership position manufacturer. Product quality was so bad that general
among carmakers that lasted for the rest of the century. manager Zhang Ruimin (now chairman and CEO)
Today, leaders of multinational corporations have a built his case for change by lining up 76 defective units
similarly lucrative opportunity on a much bigger play- and ordering workers to destroy them with sledgeham-
ing field: a global middle-class market. This worldwide mers. Today, one of the sledgehammers is on display in
economic phenomenon encompasses a huge customer corporate headquarters, and Haier is one of the world’s
base. In 2011, it includes about 400 million people in largest appliance makers — a multinational corporation
the mature middle classes of the U.S., Europe, and Ja- with a reputation for world-class quality and 2010 rev-
pan, and another 300 to 500 million people, depending enues approaching US$20 billion.
on how the middle class is defined, in emerging econo- Zhang put in place three successive strategic initia-
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mies. (The World Bank defines middle class as people tives, aimed, respectively, at improving product qual-
who are above the median poverty line of their own ity, expanding globally, and diversifying the company’s
countries. This might make them poor by the standards product line: for example, offering washers at a range
of Europe or the U.S., but gives them enough purchas- of price points for consumers in different income seg-
ing power to become consumers of manufactured goods ments, just as GM did with its cars early in the 20th
Photograph © Imaginechina via AP Images
and services.) This new global middle class is particu- century. Then, in December 2005, Zhang announced
larly evident in Brazil, China, India, Indonesia, Mexico, a new thrust. Haier would stop shipping products
Nigeria, Turkey, Vietnam, and other countries with from China to the rest of the world; instead, it would
relatively large working populations and rapid economic design and manufacture products elsewhere, custom-
growth rates. izing them for specific national and regional markets.
The middle class in each of these emerging econo- Today, Haier produces extra-large-capacity washers that
mies has its own unique profile of demand. However, can accommodate the robes of Middle East consum-
they all have one thing in common: They are recover- ers; electronically sophisticated washers that can cope
ing from the global recession with an increasingly ur- with the frequent power fluctuations in India; whisper-
banized lifestyle, and their numbers are expanding at quiet, timer-equipped washers for Italians who want to
very high rates, especially compared with the rest of the take advantage of the lower power rates available late at
world. The value chain of companies that provide this night; and other locally targeted variants.

5. Haier produces extra-large-capacity washers
that can accommodate the robes of Middle East
consumers and quiet, timer-equipped washers for
Italians whose power rates are lower at night.
Haier is not the only company that has transformed already developed products for their domestic middle
itself to seek a share of the global middle-class market. markets. Now, they seek to expand their geographic
In a variety of industries — including consumer pack- reach and power, parlaying their existing capabilities
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aged goods, electronics, automobiles, medical products, and knowledge into serving the global middle class.
and agricultural equipment — corporate leaders are dis- 3. Multinational incumbents are mature global com-
covering that they must rethink their product and ser- panies, often from Japan, Europe, and the United States.
vice lines, go-to-market strategies, and operating mod- They are intent on adapting their existing product lines
els to build a presence in emerging economies. to capture the attractive growth opportunities in emerg-
ing middle markets.
Momentum in the Middle You can see all three types of competitors in most
The first step toward becoming a leading company for the sectors in countries that are in the momentum phase.
global middle market is recognizing the pace of develop- For example, in China’s automobile sector, local up-
ment in the countries where you hope to do business. All starts are represented by players that have traditionally
industrializing countries follow an “arc of growth”: an made low-cost cars, such as Chery Automobile Com­
evolutionary path of economic change. They start as na- pany, Great Wall Motor Company, and Geely Automo-
scent economies (emerging from subsistence, with large bile Holdings. They are moving up the product pyra-
numbers of young people). They gradually evolve into mid. In 2010, Geely purchased the Swedish carmaker
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mature economies, with relatively flat growth and large Volvo from Ford at the bargain-basement price of $1.8
numbers of aging people. In between, there is a critical billion and immediately raised production plans to
stage of urbanization and economic momentum. Dur- 300,000 Volvos annually, almost double the previous
ing this “momentum phase,” many countries have large, worldwide production.
relatively young populations and high economic growth Global aspirants in China’s middle market include
rates. These countries are the seedbed of the emerging South Korea’s Hyundai Motor Company. Hyundai en-
middle-class markets. tered China in 2002 and has since achieved remarkable
Three types of corporate players are jockeying for success in the middle market with a major redesign of
position in these markets: its Elantra model.
1. Local upstarts are companies that have tradition- Among the multinational incumbents are long-
ally provided low-priced goods for bottom-of-the-pyra- established automakers aggressively seeking to carve
mid customers in their home markets. They are migrat- out significant shares of China’s middle market. These
ing upward into their domestic middle markets as their include GM, with its Chevrolet Spark and Buick
customers become more prosperous. These companies Excelle, and Volkswagen, with its Polo and Golf models.
now provide products and services with more features, All of these multinationals pursue this market through
better quality, and increased brand status. joint ventures with Chinese partners. For example, the
2. Global aspirants are local companies that have Guangzhou Automobile Group makes Honda-branded

6. Shopping for air-conditioning
units at a Beijing appliance store.
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cars for the middle-class market. The Shanghai Au- and cars with added features for more affluent mid-
tomotive Industry Corporation launched the Lavida market consumers who can pay for the quality and
with Volkswagen and is working with GM on a new- brand status associated with foreign cars. One sign of
Photograph © Imaginechina via AP Images
generation small car called the Baojun (Chinese for the value of the Chinese auto market to incumbents
“treasured horse”). is GM’s sales there, which exceeded its U.S. sales in
Incumbent automakers such as Honda, Volk- 2010 — the first time sales in another national market
swagen, and GM aren’t simply exporting cars from eclipsed U.S. sales in the company’s 102-year history.
their home countries to China. Since 2005, they have The same three types of competitors — local up-
been modifying and restyling their vehicles to better starts, global aspirants, and multinational incumbents
align them with the needs and tastes of Chinese con- — are active in China’s construction equipment mar-
sumers. For example, Volkswagen installs smaller en- ket, probably the most vibrant construction equipment
gines in some vehicles, such as the Polo GTI and the market in the world right now. Local upstarts such as
Golf 6. Such changes enable incumbents to offer two Zoomlion and Longking have been moving into the
types of vehicles. They make low-priced cars for entry- domestic middle-class market in China. Some, like the
level Chinese consumers who prioritize cost and value, LiuGong Machinery Corporation and Sany Heavy In-

7. dustry, have become global aspirants. In 2008, LiuGong sires. As Pankaj Ghemawat, professor of global strategy
opened a factory in India. In 2009, Sany announced it at IESE Business School, notes in World 3.0: Global
would invest €100 million ($144 million) in an R&D Prosperity and How to Achieve It (Harvard Business
and manufacturing center in Germany; it also has ma- Press, 2011), there are
jor plants under construction in the U.S. and Brazil.
Incumbent construction equipment makers, such numerous casual examples of cultural differ-
as South Korea’s Doosan Infracore, Japan’s Komatsu, ence [in consumer products]…. The Czechs
and U.S.-based Caterpillar, are aggressively targeting drink way more beer than people in Saudi Ara-
the Chinese middle market as well. Caterpillar’s stated bia, and even more than the Irish, who come in
goal is to become the top brand in its sector in China by second. Pakistanis google sex more often than
2015. In the 1990s, the company was focused on devel- any other national population, just slightly
oping government relationships to facilitate sales of its more than the Vietnamese and far more than
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features global perspective
existing product lines. But as the middle market heated the Irish and Czechs. Eritreans google god the
up, Caterpillar found its market share squeezed by Japa- most as well as figuring in the top five nation-
nese and Korean competitors and rising local players. In alities searching for sex. India and China are
the late 2000s, Caterpillar’s leaders recognized that the so close geographically that they still haven’t
company’s traditional product line and business model resolved their territorial disputes, but couldn’t
were not adequate for China. It lowered its cost base display more distinct food cultures, particu-
through the establishment of local R&D centers and larly around which animals and parts of ani-
through the acquisition of Shandong Engineering Ma- mals should or shouldn’t be eaten. Argentines
chinery, a leading Chinese wheel loader manufacturer. see psychotherapists more than other nationali-
Just as countries evolve over time, so do companies. ties, and Brazilians spend a higher proportion
Many of today’s local upstarts will be global aspirants of their income on beauty products than the
tomorrow; today’s global aspirants often become multi- citizens of any other major economy.
national incumbents. The differences among them ap-
pear primarily in the way they choose to compete, and To successfully serve middle-market customers,
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in the level of resources that they use to enter a market. companies must identify which product attributes the
The more intelligent they are about their approach, the customers in a specific market value and don’t value.
more likely they are to move to the next level. Unfortu- Then, they must either add those attributes to or cull
nately for the incumbents, local companies are increas- them from their existing products. Ghemawat uses the
ingly intelligent about the way they make the transition, examples of McDonald’s, KFC, and Coca-Cola, all of
using joint ventures or regional expansion to gain the which vary their products geographically: Coke, for in-
experience they need to compete on a larger scale. stance, uses cane sugar as sweetener in some countries
and corn syrup in others. This type of variation adds
A More Complex Market complexity across product and marketing mixes, and in
The world is far from homogeneous. The buying power, all the operations and functions related to them. It can
needs, and desires of the middle classes vary by nation require much extra expense and attention from com-
and region. In developing nations, for example, middle- panies, especially those with heavily centralized, scale-
market customers are seeking products that have some driven business models.
of the premium features and quality that customers in But companies that seek leadership positions in
developed nations are used to, but at lower price points. their industries may have little choice but to pursue the
Furthermore, customers in each geographic market are global middle market. The developed middle markets
drawn to buy products that fulfill local needs and de- are a huge and indispensable source of sales volume,

8. In emerging economies, producers tend to rely
on a simpler value chain, with more of it
located in low-cost countries, which reduces
costs and boosts margins.
and market share can decline precipitously as local emerging economies.
upstarts or global aspirants redouble their efforts. In Reality: It may already be too late. The competi-
most of these markets, competition is already intense: tive collisions between local upstarts, global aspirants,
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Companies track their market share gains and losses and multinational incumbents are occurring at differ-
in tiny increments — a point or even a fraction of a ent speeds in different industries, and some industries
point at a time. In addition, most developed middle are already becoming saturated with competitive rivals.
markets are driven more by the rise and fall of mac- In major appliances, for example, most countries now
roeconomic cycles than by underlying fundamentals, have offerings from Haier (which not long ago was
such as an unusually fast-growing customer base. This an upstart); South Korea’s LG and Samsung (which
means that during the stable parts of the cycle, the gains were recently considered global aspirants, but now
that new players make will come out of the pockets operate as full-fledged global incumbents); and GE,
of incumbents. Whirlpool, and Electrolux (multinational incumbents
The global middle market is also spawning game- trying to win share in emerging middle markets and
changing new products that can migrate to and even- defend their shares in the mature middle markets of de-
tually threaten the status quo in developed markets. veloped nations).
Tuck School of Business at Dartmouth College profes- The fortunes of companies will be made or lost de-
sors Vijay Govindarajan and Chris Trimble have coined pending on the timeliness of their entry into the emerg-
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the phrase reverse innovation to describe the process ing middle markets. If the current pattern holds true,
by which products designed for developing economies those that fail will likely become the acquisition targets
become hits in developed economies because they fill of global aspirants. This has already happened to some
undiscovered needs and desires of customers in those carmakers, such as Volvo and Saab. Midsized domestic
nations. (See “How to Be a Truly Global Company,” by companies in developed markets will also become tar-
C.K. Prahalad and Hrishi Bhattacharyya, s+b, Autumn gets as new competition enters their home markets and
2011.) their home markets become an ever-smaller percentage
of the global middle market.
Myths and Realities Myth: We can’t make money in the middle markets
Because the case for pursuing the global middle mar- of emerging economies.
ket is compelling, and the complexities are daunting, it Reality: Yes, products aimed at the middle classes of
is understandable that many senior executives at major developing nations are usually priced 20 to 40 percent
strategy+business issue 64
consumer and industrial product companies are am- lower than their counterparts in developed nations. But
bivalent about — or even resistant to — the idea. Their in emerging economies, lower prices do not necessar-
resistance, however, should be reconsidered. It is usually ily mean lower profits, because the sales volume is po-
based on one or more of the myths below. tentially two to three times greater than the volume in
Myth: It’s too early to enter the middle markets in more mature markets. Multinational incumbents need

9. to develop the capability to profitably address consum- that can rapidly turn middle-market customer insights
ers in these price segments, because that is often where into products and services is another key to success.
emerging competitors gain their initial foothold. The manufacturing footprint will likely expand in
Moreover, the cost of making products tends to be many companies as the number of products designed for
lower in emerging economies than in mature markets. specific middle markets begins to grow. In lower-income
These products usually have fewer premium features markets, manufacturing processes may need to empha-
and often, as with the smaller engines in Volkswagen’s size volume and efficiency over customization. Farther
Polo and Golf, have less-expensive parts. The produc- back in the value chain, suppliers will be rewarded for
ers of these goods tend to rely on a simpler value chain, minimizing complexity and meeting the value and cost
with more of it located in low-cost countries, which also expectations of middle-market customers.
reduces costs and boosts margins. Finally, companies Marketing will need to identify distinct middle-
earn additional dividends in shareholder value as they class markets and gain an intimate understanding of
expand into new, higher-growth markets. the customer segments within each one. It will have to
Myth: We don’t need to alter our products — we craft and effectively communicate tailored value propo-
just need to educate our customers. sitions that don’t undermine more expensive offerings,
Reality: In the near term, many newly minted mid- especially when they bear the same brand names. Sales
dle-class consumers cannot afford developed-market and service will need to be rightsized for each market
products no matter how much they might value them. — often, this will entail more of a self-serve approach
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As the middle classes mature and their purchasing that keeps costs low.
power grows, this will change. Nonetheless, custom- For executives of multinational corporations, it
ers in countries such as India, Brazil, and Turkey will may take a change in the conventional business mind-
continue to want distinctive features and options. Many set to tap into global middle markets effectively. The
of their needs, wants, and tastes stem from unique cul- most successful companies are establishing new busi-
tural or environmental conditions, and are unlikely to ness units; rethinking their decision rights and other
change soon. practices; and giving their leaders the freedom, author-
Too often, companies try to create middle-market ity, financial resources, and talent needed to develop
variants of higher-priced products by subtracting a few and run these businesses. The opportunities in the
features and pushing them through the existing busi- global middle market are worth the effort. +
ness model and value chain. This results in compro- Reprint No. 11309
mised products at overly high prices. The better alterna-
tive is to rethink the value chain entirely. For example,
Resources
the papermaking machinery industry in China is a
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rapid-growth, low-margin sector with many local up- Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World
start competitors. Multinational incumbents that want Where Differences Still Matter (Harvard Business School Press, 2007): A
highly effective approach to global strategy, one middle market at a time.
to enter this market must provide integrated manufac-
Vijay Govindarajan, Jeffrey R. Immelt, and Chris Trimble, “How GE
turing packages, including fiber systems, environmental Is Disrupting Itself,” Harvard Business Review, October 2009: Describes
solutions, automation, and rolls and fabrics. To accom- reverse engineering in GE’s medical systems business.
plish this, they often build their capabilities through ac- Ronald Haddock and John Jullens, “The Best Years of the Auto Industry
quisitions and partnerships. Are Still to Come,” s+b, Summer 2009, www.strategy-business.com/
article/09204: The global middle-market opportunity in motor vehicles.
Myth: Entering the global middle market will be
too disruptive to our operations. Richard Shediac, Rainer Bernnat, Chadi Moujaes, and Mazen Ramsay
Najjar, “New Demographics: Shaping a Prosperous Future as Countries
Reality: Companies need a business model suited Age,” Booz & Company white paper, May 2011, www.booz.com/media/
to the task. The R&D function, for example, should uploads/BoozCo-New-Demographics.pdf: The underlying dynamics that
avoid innovation races and the creeping elegance associ- have created the global middle class.
ated with sophisticated and expensive products. Instead, Edward Tse, The China Strategy: Harnessing the Power of the World’s
Fastest-Growing Economy (Basic Books, 2010): How to successfully enter
take a more local approach to innovation, designing
one of the largest global middle markets.
products for specific markets. The products can then
For more on this topic, see the s+b website at:
flow elsewhere, finding support and additional markets www.strategy-business.com/global_perspective.
wherever they strike a chord. Investing in local R&D

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