The scale of China's potential consumer market has always fascinated Western companies. Back in 19th-century England, spinning-mill owners were convinced they would reap big profits if they could just get everyone in China to wear one coat-tail or buy one handkerchief. More recently, U.S. and Japanese companies have made similar arguments. For multinationals hoping to gain from China's teeming mass of consumers, though, the country continues to disappoint. Since the global fall in exports, Beijing has been building its way out of an economic slump. Roads, ports, railways: Name anything big and China is likely to be building it. Chinese consumers haven't yet played much of a role in driving the economy's recovery. As a percentage of gross domestic product, Chinese consumption is the lowest of any major economy in the world, at less than one third. In fact, almost all of China's impressive economic growth this year has come from infrastructure spending, as well as investment speculation in assets such as property. Instead, it is India that could provide the greater pot of treasure at the end of the rainbow for multinationals targeting Asian consumers. When it comes to rebounding from the global crisis, India's approach has been different than China's. Indians, including the poor, are looking to consume their way towards further growth. Sure, the demand for handbags, air travel, and fine dining in Mumbai has deflated, but domestic consumption accounts for two-thirds of the Indian economy, compared to less than a third of China's. The problem is that while China is building wonderful infrastructure, its top-down state-led model of development (not to mention the artificial suppression of the yuan) structurally impairs domestic spending. For example, according to China expert Minxin Pei, because three-quarters of the country's capital is reserved solely for the 120,000-odd state-controlled entities and tens of thousands of their subsidiaries, 40 to 50 million privately owned businesses are left to fight for the scraps. This means that a relatively small number of well-connected insiders and their associates benefit. Business profits tend to bulk up state coffers rather than the pockets of the vast majority of Chinese. Wage and income growth, even for China's urban residents, have measured around half the level of GDP growth over the past 15 years. Ultimate gold mine: rural residentsIn contrast stands India's bottom-up private sector model, for all its chaos, unpredictability, and bureaucracy. India badly needs infrastructure, but its consumers are better placed to spend. An approximately 300-million-strong middle class—compared with China's 100 to 200 million, depending on how one defines "middle class"—is overwhelmingly independent of the government. Corporate profits of India's successful large businesses and small- and medium-sized enterprises go to peoples' pockets, rather than to the state. India's consumer driven economy is starkly different from China's capital-investment-dominated one. The differences go beyond the two countries' rising middle classes. For some foreign companies looking to sell to these developing markets, the main game is the hundreds of millions of people located outside the main city centers. Consequently, there's a lot of talk about waiting for China's rural residents to consume. Far less coverage, at least in the Western press and business pages, focuses on India. Half the people in China and two-thirds of those in India still live in rural areas. About 700 million people in each country, most of them poor, are presumably getting richer. Therein lies the potential gold mine for those looking to sell low-end consumer goods. Yet we would do well to look more at India and a little less at China. In China, the urban-rural income ratio was 1.8 times in the mid-1980s, 2.4 times in the mid 1990s, 2.9 times in 2001, and now stands at about 3.5 times. The 1980s constituted a golden period for China's poor, whose incomes rose with the general economic tide. Over 80% of the poverty reduction that has taken place in China occurred during the first 10 years of reform, from 1978 to 1988. (The current state-led development approach began after 1991.) Although per capita incomes have risen since then, an estimated 400 million people, mainly rural residents, have seen net income stagnate or decline over the past decade. Despite so much spectacular growth, research by Yasheng Huang estimates that absolute poverty and illiteracy have actually doubled since 2000. Villagers Buy Bharti, Reliance, TataIn India, both of these have halved. Starting from a lower base, the urban-rural income gap has slowly but steadily declined since the early 1990s. Over the past decade, economic growth in rural India has outpaced growth in urban areas by almost 40%. Rural India now accounts for half the country's GDP, rising from 41% in 1982 and 46% in 1993. In contrast, World Bank studies show that rural China accounts for only a third of the country's GDP and generates only 15% of China's GDP growth. Agriculture in rural India now accounts for merely half of rural GDP—and is falling. Agriculture was responsible for around 72% of rural GDP in the 1970s and 64% of it in the '80s. This means a balanced economy is developing in rural India, with rapid growth in nonfarm sectors such as manufacturing and services. Indeed, rural India is responsible for around two thirds of overall GDP growth and 60% of national demand. In contrast to China's countryside population, rural Indians do not have to migrate to urban areas to earn a better living. Indian companies have long targeted and benefited from the rise of the low-end Indian consumer. Professor Jagmohan Singh Raju at the University of Pennsylvania's Wharton School of Business points out that every major Indian consumer company knows it cannot build a brand presence in India without a strategy for reaching the villages. Having to engage with village-level consumers means that Indian companies arguably lead the world in coming up with innovative products and pricing strategies for the low-income segment. For example, Bharti (BHARTI:IN) has offered the world's lowest calling rates, Reliance (RIL:IN) has sold the world's cheapest handsets, and Tata (TTMT:IN) has offered the world's cheapest car. The marketing and pricing strategies for these products are tailor-made for the rising masses in developing countries. Unlike China's heavily fragmented and poorly branded low-end consumer environment, there is already a well-developed consumer brand marketplace among India's rising poor. For Western brands chasing the luxury market, both China and India offer abundant opportunities. But when it comes to selling to the mass low-end consumer market made up of hundreds of millions of urban and rural residents, it might be a better bet to look to India, rather than China.
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