11 October 2013 10:09 [Source: ICB]
Fewer babies, and more older people, means less consumption. You cannot turn 55 year olds back into 30 year olds. That, in a nutshell, is why today’s globally ageing populations are creating major changes in demand patterns.
Household consumption is more than 60% of GDP in all developed countries, and also the key driver for future growth in emerging economies. So the growth of the New Old 55+ generation, alongside the dramatic drop in the number of babies being born, is creating an unprecedented paradigm shift in the global economy.
In the New Normal, the largest and wealthiest generation is earning and spending less
BABY BOOMERS AND THE SUPERCYCLE
The chemical industry has played a critical role in enabling this increased life expectancy, via the development of a wide variety of products:
In turn, the arrival of the Boomers in their wealth creating years created a 25-year chemical SuperCycle from 1983. Demand grew exponentially at a multiple to GDP, as the drop in fertility rates also freed many women to join the labour force.
High-priced items such as cars and houses became much more affordable as dual-income households became common. New markets also developed as working women with children needed – and could now afford – more labour-saving devices for the home.
But now Western populations are ageing fast. Today’s much-discussed “population explosion” is really better described as a “health explosion” where people live longer but have fewer children. This has two major implications for future demand:
So what does this mean for your business today? It means a complete change in terms of the key profit drivers. A low-cost supply position will no longer be the critical factor.
Instead, the winners will be those companies that best understand the implications of today’s changing demand patterns. The US shale gas market provides an excellent example of the new focus that is now essential.
Amid the excitement, few have noticed that US ethylene production in 2012 was still 7% below its 2004 peak.
Being low cost has not delivered increased sales. This raises a previously unthinkable question: Can the proposed 10m tonnes/year of new ethylene capacity actually find customers?
This highlights how survival in the New Normal requires a laser-like focus on end-users. The key to future success is the development of products that track growth in personal consumption, both by age and income level.
Official data for US household spending illustrates the criticality of age range:
Equally, emerging economy data highlights the importance of small changes in income on demand. The vast majority live on less than $5/day. But the 3 billion earning $1-5/day represent potentially large and profitable markets.
Successful SuperCycle strategies now need fundamental review to make them fit for purpose in the New Normal. Megatrend concepts such as urbanisation and infrastructure development are still relevant. But they need to be reinterpreted from this new perspective.
AGE RANGE AND INCOME ARE KEY
The G20 countries represent 79% of the global economy and the population is clearly divided into three separate groups:
These changes create enormous challenges for even the best-managed companies. But every challenge is also an opportunity. The key is to take the advice of statesman Winston Churchill, who wisely remarked: “The farther back you can look, the farther forward you are likely to see”.
The SuperCycle was fun while it lasted, but sadly it also meant that we became too complacent about the future.
Affordability, not value added, has to be the core focus as we develop new products and services to meet today’s emerging needs in the areas of food, water, shelter, health and mobility.
The transition offers us the chance to reinvigorate our thinking, and refocus on new opportunities. The great companies of the future will be those that best meet this challenge.
TYRE DEMAND IS THE NEW NORMAL
The US auto market demonstrates the way demand patterns no longer relate to GDP growth in the New Normal. People are driving less. The average American drove 6% fewer miles in 2011 than in 2004. The reasons for this change vary with both age and income:
For decades, the average American replaced one tyre per year, or all four tyres every four years. But today, this ratio has already fallen 8% to 0.92, and will probably fall further in the future, no matter what happens to GDP.
These trends are not unique to America and western countries, and are already impacting the emerging economies.
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