The Rise of BRICs

StrategySeriesFROMTHEOFFICEOFTHECHAIRMAN3December2010TheRiseoftheBRICsandN-11ConsumerInthenext10-15years,theBRICsconsumercouldbecomeaslargeastheUSconsumer.WebelievethattheBRICsandNext11(N-11)countrieswillbemorethanabletocompensateforanysluggishnessinUSconsumptiongoingforward.IfChinasucceedsinraisingitsconsumption-to-GDPratiooverthenextfewyears,theChineseconsumeralonecouldchallengetheUSinthefirsthalfofthe2020s.WhiletheBRICswilldominate,someN-11countries,suchasIndonesia,MexicoandTurkeymightalsogainsubstantialgravityasmajorconsumptionstories.Theimplicationsforglobalmarketsandconsumer-relatedsectorsinparticular—includingconsumerdurables,luxurygoodsandtravelandtourism—remaindramatic.WhiletheriseoftheBRICsandN-11consumerisahighlycomplexanduncertainprocess,webelieveitwillunderpinthemostimportantinvestmentthemesinallmarkets,bothdirectlyandindirectly.JimO’NeillChairman,[e-mail]+44(20)[e-mail][phone]STRATEGYSERIESTheRiseoftheBRICsandN-11ConsumerGoldmanSachsAssetManagement23December2010ContentsSummary3Introduction4Section1.HowPowerfularetheBRICsandN-11Consumers?51.1ConsumptionToday51.2MappingtheConsumptionPathfortheNextDecade61.3PlausibilityCheck10Section2.ImplicationsforSectorsandAssociatedMarketOpportunities122.1ConsumerDurables13GlobalAutoMarket13N-11andAutos152.2LuxuryGoods152.3TravelandTourism17GlobalAviation19Section3.TheRisingConsumer:AMixedBlessing?203.1OpportunitiesandBenefits203.2RisksandPressures21Conclusion22STRATEGYSERIESTheRiseoftheBRICsandN-11ConsumerGoldmanSachsAssetManagement33December2010SummaryInthepost-crisisworldeconomythepoweroftheUSconsumerhasbecomequestionable.Manyfearitwillbedifficultfortheworldtocopewithoutthiskeyingredient,whichhasbeenthequintessentialglobalgrowthengineoverthelastseveraldecades.WebelievethattheBRICsandNext11(N-11)countrieswillbemorethanabletocompensateforanysluggishnessinUSconsumptiongoingforward.WhileitremainsthecasethattodaytheUSstillconsumesmuchmorethantheBRICs,thedevelopedworldcannotcompetewiththesefourcountriesintermsofgrowthandincrementalconsumptionopportunities—today,inthedecadeaheadandbeyond.WeexpectthattheBRICsconsumercouldbecomeaslargeastheUSconsumerbytheendofthisdecade—bothinrealandnominalterms.IfChinasucceedsinraisingitsconsumption-to-GDPratiooverthenextfewyearsandtheUSratiofallstoitshistoricalaverage,theChineseconsumeralonecouldchallengetheUSinthefirsthalfofthenextdecade.Intermsofincrementalchanges,theBRICstogethercouldaddupto$1trillionofadditionalrealconsumptiononaverageperyearto2025.Innominalterms,theincrementalconsumptionfromtheBRICscouldreach$1.5-2trillionperyear.WhiletheBRICs,andparticularlyChinaandIndia,willundoubtedlydominate,someN-11countriessuchasIndonesia,MexicoandTurkeymightalsogainsubstantialgravityasmajorconsumptionstories.Dramaticexpansionofthemiddle(andhigh)incomeclassesintheBRICsandN-11willbethemaindrivingforcebehindtheriseinconsumptionoverthenextdecadeandbeyond.Aspeopleshiftthroughdifferentincomebands,variousgoodsandservicesbecomeaffordableandthusdemandforthemaccelerates.Weshowtheimplicationsoftheseincomeshiftsinconsumptionpatternsforthreesectors:consumerdurables(inparticular,autos),luxurygoodsandtravelandtourism(inparticular,aviation).Thenext10-15yearscouldseethestartoftheBRICsdominanceintheglobalmarkets,intermsofbothgrowthandabsolutesize.Chinahasalreadybecomethebiggestcarmarketbysales.In10years,itcouldbecometheworld’slargestaviationmarket,and,in15years,itcouldbethelargestluxurygoodsmarket.Whiletheopportunitiesandrisksarenumerousandhighlycomplex,webelievetheriseoftheBRICsandN-11consumerisoneofthemostimportantstrategicstoriesofourtimes.STRATEGYSERIESTheRiseoftheBRICsandN-11ConsumerGoldmanSachsAssetManagement43December2010IntroductionOneofthebiggestfearsofthepost-crisisworldeconomyisthatitwillbedifficultfortheworldtocopewithoutthepoweroftheUSconsumer.Asiswellknown,atalmost$10.5trillion,USconsumptionrepresentsabout70.5%ofUSGDPandsome17%ofglobalGDP.Since2000,inaworldeconomythathasgrownfrom$32trilliontoover$60trillion,theUSeconomyhasincreasedbyaround$4.8trillion—withtheUSconsumeraccountingfor74%ofthisgrowth.Itisfortunate,therefore,thattheBRICandso-calledNext11(N-11)1countrieswillbemorethanabletocompensateforanysluggishnessinUSconsumptiongoingforward.Infact,itisperhapsbecauseofthechallengesfacedbytheUSandtheglobalcrisisthatweareenteringaperiodwhenotherconsumerswilltakeuptheleadanddrivetheworld'sgrowth.Thispapermapsoutthepotentialconsumptionpaths—inaggregateandacrosssomesectors—fortheBRICsandtheN-11fromtodayto2025.Wefocusonthishorizonfortworeasons.First,sincetheBRICconceptcametolifein2001,theGSEconomicsResearchteamhasdiscussedpotentialshiftsinconsumptionpatternsresultingfromtheriseoftheBRICsoveralongerhorizonto2050.Sothelong-termdynamicsarebroadlyknown.Here,weconcentrateonquantifyingshorter-termchangesandopportunities—overthetimespanthatismorerelevantforinvestors—andassessthemingreaterdetail.Second,thenext10-15yearsarelikelytobepivotalintheBRICs’glob