DEMOGRAPHIC ENVIRONMENT

FOR BUSINESS

Dewi H. Susilastuti

INDONESIA

With a total population of 235 million as of 2011, Indonesia is the fourth most populous country in the world after China, India, and the USA. During 2006-2011, the Indonesian population grew by 5.9%

Emerging middle income country

Just a few years ago, a major bank predicted that Indonesians would, on average, earn US$3,000 per capita by 2020. At the beginning of 2011, Indonesia hit that mark, beating the prediction by nearly a decade.

Underpinning the rise in consumer expenditure is the rise of the middle class. In 2006, there were 6.6 million households with an annual disposable income of over US$10,000 (in constant terms), but by 2011 this number had risen to 13.7 million households.

IMPLICATIONS

Rising middle class in Indonesia has helped to transform the country's consumer market, with major implications for consumer goods companies:

Companies in a range of industries including tourism, education, healthcare and entertainment can expect greater business opportunities, as middle-class Indonesians are spending increasingly on discretionary goods. Although the bulk of consumer spending in Indonesia is still on essentials (i.e. food, non-alcoholic beverages and housing), the proportion of discretionary spending in total consumer expenditure has been gradually rising, from 49.1% in 2006 to 54.2% in 2011;

Indonesia has a relatively young demographic profile with 60.8% of the population aged below 35 years as of 2011. People aged 30-34 had the highest average gross income in Indonesia, at Rp38.7 million (US$4,199) in 2011, compared to the national average gross income of Rp31.5 million (US$3,422). High earners in this age group will likely buy their first cars as well as having a strong demand for luxury goods;

Like many other Asian countries, the middle class in Indonesia is characterised not only by their purchasing power, but also their generally higher levels of skills and education. Many members of the Indonesian middle class are educated at universities in the West. As a result, multi-national consumer goods companies entering the Indonesian market can capitalise on both the rising wealth and the high skills of the middle-class labour pool.

HOWEVER, AS INDONESIA'S MIDDLE CLASS EXPANDS, THE GAPS BETWEEN RICH AND POOR ARE WIDENING:

In 2006, the richest 10% of households (possessed 24.6% of total annual disposable income. By 2011, their share had risen to 27.9%.

During the same period, the poorest houshold saw their share of total annual disposable income diminishing from 2.5% to 2.1%;

Between 2006 and 2011, Indonesia's Ginicoefficient rose from 33.0% to 37.7%, reflecting greater income inequality. A zero Gini coefficient represents perfect income equality and a score of 100% indicates absolute income inequality;

The widening wealth gap can undermine the business opportunities presented by the emerging middle class in that it can cause social and political discontent, threatening the business environment and economic growth in Indonesia.

PROSPECTS

The number of middle class households is set to increase substantially in the future:

Euromonitor International forecasts that by 2020, the number of households with an annual disposable income over US$10,000 (in constant terms) will reach 31.1 million, up from 13.7 million households in 2011. However, income inequality will likely rise, as decile 10 households are forecast to possess 29.3% of total annual disposable income by 2020 whilst decile 1 households will see their share in total disposable income fall further to 2.0%;

Over the period of 2012-2020, consumer expenditure per household will likely grow by 39.2% in real terms whilst per household disposable income will increase by 40.5% in real terms;

Thanks to strong domestic demand driven by the expansion of the middle class, the Indonesian economy is largely insulated from external shocks of the global economic downturn. Euromonitor International forecasted Indonesia's real GDP growth rate at 6.1% year-on-year in 2012, above the expected real growth rates of some other emerging market economies such as Vietnam (5.6%), Russia (2.8%) and Brazil (2.7%).

“Emerging markets will be not only a source of significant revenue growth for companies but also a source of talent, true innovation and ground-breaking approaches to business, which they will leverage on a global scale.”Emmanuelle Roman, Global Consumer Products Markets Leader, Ernst & Young

Once attractive only for their natural resources or as a source of cheap labor and low-cost manufacturing, emerging markets are now seen as promising markets in their own right. Rapid population growth, sustained economic development and a growing middle class are making many companies look at emerging markets in a whole new way

As the emerging markets rise, so do their companies.

Many companies that had previously posed no competitive threat to multinational corporations now do so.

These emerging market leaders represent a major shift in the global competitive landscape —a trend that will only strengthen as they grow in size, establish dominance and seek new opportunities beyond their traditional domestic and near-shore markets.

Estimates show that 70% of world growth over the next few years will come from emerging markets, with China and India accounting for 40% of that growth.

The forecasts suggest that investors will continue to invest in emerging markets for some time to come. The emerging markets already attract almost 50% of foreign direct investment (FDI) global inflows and account for 25% of FDI outflows.

The brightest spots for FDI continue to be Africa, the Middle East, and Brazil, Russia, India and China (the BRICs), with Asian markets of particular interest at the moment

These emerging market companies will continue to be critical competitors in their home markets while increasingly making outbound investments into other emerging and developed economies.

Working to serve customers of limited means, the emerging market leaders often produce innovative designs that reduce manufacturing costs and sometimes disrupt entire industries.

A case in point: India's Tata Motors' US$2,900 Nano, priced at less than half the cost of any other car on the market worldwide. A version is set to go on sale in Europe this year.

Many emerging market leaders have grown up in markets with "institutional voids," where support systems such as retail distribution channels, reliable transportation and telecommunications systems and adequate water supply simply don't exist.

As a result, these companies possess a more innovative, entrepreneurial culture and have developed greater flexibility to meet the demands of their local and "bottom-of-the-pyramid" customers.

RISING POPULATION AND PROSPERITY DRIVE NEW

CONSUMER GROWTH AND URBANIZATION

Most of the world's new middle class will live in the emerging world, and almost all will live in cities, often in smaller cities not yet built. This surge of urbanization will stimulate business but put huge strains on infrastructure.

Physical infrastructure, such as water supply, sanitation and electricity systems, and soft infrastructure, such as recruitment agencies and intermediaries to deal with customer credit checks, will need to be built or upgraded to cope with the growing urban middle class.

Addressing such concerns in Asia alone will require an estimated US$7.5 trillion in investments by 2020. Meeting these needs will likely entail public-private partnerships, new approaches to equity funding and the development of capital markets.

Of course, it would be a mistake to see economic growth in the emerging markets as a winner-take-all contest, with developed countries on the losing side. Billions of new middle-class consumers in the emerging markets represent new markets for developed-world exports and companies based in developed countries.

MIDDLE CLASS

The middle rests between the top and the bottom

The key indicator for economic progress is how big the middle-class has become and how rapidly it is growing.

Most people would readily agree that household possessions represent a family’s aspirations for a better quality of life.

For the purpose of defining “middle class” in a “developing economy” >>the combination of a television set, a refrigerator and some form of mechanized wheels: a scooter, a motorcycle, or even a second-hand car.

Anywhere in the world, that trio of possessions owned by the same household would place it above the bottom-end of that society’s socioeconomic pyramid.

By that token, Indonesia is making amazing progress.

DATA FROM FEBRUARY 2012

Just five years ago ending December of 2006, only 25 percent of households had the defining trio of worldly possessions.

In just five years, that number has catapulted upwards to 42 percent. That transformation of millions of homes in so short a timeframe is perhaps unparalleled anywhere in the world.

Five years ago, only 35 percent of the population had a refrigerator gracing the kitchen. Now that number has jumped to 50.

Five years ago, 51 percent of homes had a set of wheels standing outside, either two or four. Today, 73 percent of families have at least a motorcycle, or a car.

Even that everyday ‘essential’, the TV set, has moved up from 96 to 97 percent of homes. By any standard, this is a noteworthy achievement for all Indonesians, collectively.