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9.4 Market Analysis Examples: China and India

We use the examples of China and India in our discussion on marketing strategy creation. We do not analyze the details of marketing plans with specific products and services, but rather show the primary direction for strategy in these two emerging countries. The most important thing to consider for companies from advanced nations, including Japan, in terms of a business strategy in emerging countries is the difference in the economy between the home and target countries. An analysis of income levels and purchasing power of customers in target countries is important, particularly from the marketing perspective. However, data on average income levels in countries with great income disparities has little value. Information on household income distribution is important, and companies can use it to segment the market and consider the classes that should be targeted.

Figure 9.2 indicates the percentage of households in China and India with more than USD 10,000 in disposable income. These countries are experiencing rapid economic growth, and the number of households that purchase durable goods such

Fig. 9.2 Share of volume zone in China and India (Source: Author's estimates based on Euromonitor data)

consumer electronics and cars, or those that take regular vacations is witnessing considerable growth. We have set USD 10,000 in disposable income for households as our delineator of the “volume zone.” In the 1990s, 1–2 % of households in both countries featured above this income line, and the numbers grew more rapidly after 2000. Growth in China was particularly significant, with more than 35 % of households reporting more than USD 10,000 of income. However, this graph is in USD; therefore, we must discount for inflation.

Purchasing power parity (PPP) of consumers in both countries must be evaluated. It measures a country's purchasing power while adjusting for international price levels. For example, prices in Japan are relatively higher than those in China. Thus, on comparing household income levels in both countries, the purchasing power of households in China is, in real terms, greater than that in Japan. As of 2012, the purchasing power parity values of Japan, China, and India were 144, 53, and 44 (keeping that of the US at 100), respectively. In other words, while price levels in Japan are 1.44 times that of the US, those of China and India are is 0.53 and

0.44 times, respectively. This indicates that prices in Japan are approximately three times higher than those in China and India, thereby making the purchasing power of a Chinese household with USD 10,000 in annual income equivalent to a household earning USD 30,000 in Japan. However, note that purchasing power parity is a measure of the entire country's average. Products with large differences in domestic and international prices are daily necessities such as personal services or foodstuffs that are difficult to import from overseas; thus, the percentage of these products consumed by households with high income levels is low. On the other hand, goods such as automobiles and high-end consumer electronics have a marginal price disparity among Japan, China, and India. Therefore, companies must note that data income levels that are used to calculate the average purchasing power are too high to be considered in marketing strategies by advanced countries.

Figure 9.3 indicates the distribution of disposable income in Japan, China, and India to better understand the market environments in these countries. More than 70 % of households in Japan have an annual disposable income of greater than USD 45,000, while the percentages in China and India are 3 and 1 %, respectively. Even when accounting for purchasing power, companies must recognize that the Chinese and Indian markets are very different from those in advanced countries. When Japanese companies expanding internationally to the US and European markets, the aspect of “aggregation” of the AAA framework was often used as a strategy. But premium markets, in which it is possible to use this strategy, comprise only a small portion of overall Chinese and Indian markets. However, as seen in Fig. 9.3, average income levels in China and India are rising at a rapid pace. Households above the quasi-advanced level of USD 25,000 in annual income are nearly 10 % of the total households in China, and the total number of such households is approximately the same as that in Japan. In the next 5–10 years, it is likely that these countries will have premium markets as large as those in advanced nations.

However, in the shorter term, companies must analyze the strategies for targeting the middle classes below the volume zone. Among the assumptions of marketing strategies targeting this group, adaptation (for local markets) is required for

Fig. 9.3 Disposable income distribution in China and India (2011) (Source: Author's estimate based on Euromonitor data)

providing products that will be accepted in local markets with somewhat low income levels. Companies must, therefore, reduce the functionality and performance of products in order to sell them at a price which is lower than the price of the same product for domestic market. In addition, companies must review the entire value chain of a product, from materials procurement and the manufacturing processes, through distribution and post-sales service, in pursuing a low price model. Companies might have to form an alliance with a local company to improve their cost competitiveness.

The middle market offered by China and India is often termed as the “good enough market.” When the pace of a product's technological innovation is rapid and a certain level of technology fulfills consumer demands, high-end products do not necessarily sell well even in premium markets with high-income levels. The innovator's dilemma causes destructive innovation, and when products become commoditized, the good enough market makes its appearance regardless of the income levels. According to an analysis of the Chinese television receiver market as of 2005, the shares of high-end market (dominated by foreign firms such as Sony and Panasonic), the mid-market (flat-panel televisions made by Chinese companies), and the low-end market (CRT televisions made by Chinese companies) were 13, 62, and 25 %, respectively, and the mid-market—a good enough market—was rapidly growing (Gadiesh et al. 2007). However, at the end of 2009, Sony introduced a lowcost LCD television into the Chinese market (a 32″ model that sold for CNY 3,000), and by 2010, the premium market had all but dried up. This example indicates that waiting for premium markets to take hold in emerging countries is not an effective strategy.

 
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