Thursday
Oct202011

The BRIC Inside

REGARDLESS of how one feels about it, the Occupy Wall Street protest that’s grown in both size and geographic scope in the US (and internationally) is focusing a bright light on an issue that’s been actively obscured in US politics for a decade, and which has passed some critical markers in terms of severity: US income levels—and opportunities to generate income—have fallen, and continue to fall, alarmingly. New US census data indicates that median incomes fell by 6.7% from June 2009 to June 2011 alone. Poverty rates have climbed, and unemployment remained stagnant, pouring more cold water on Americans at the end of a so-called "lost decade".

One of the key drivers of decline that many politicians point to is the export of manufacturing jobs that have been at the heart of the US economy over the past century or more, as well an increasing slice of service sector jobs that have powered it for the last 20 years. America’s loss has been a gain for China, India, Mexico, Vietnam and a host of other emerging markets whose new middle classes have grown while America's own has not. And now that the world’s largest economy has been sufficiently hollowed out, some economists and consultants are flagging what they view as the beginnings of a reversal.

A combination of sliding manufacturing wages, weak union protection, an increasingly anti-regulation mood among legislators in the US,  inevitable wage inflation in China and high costs of maintaining long supply chains across the Pacific, are creating conditions wherein companies are considering repatriating factories back to the US. In the analysis of the Boston Consulting Group (BCG), which has studied this phenomenon, the made-in-China savings are negligible enough to merit bringing some industries back onshore. BCG has recently gone so far as to name key industries that could be first in line: transportation goods, computers and electronics, fabricated metal products, machinery, plastics and rubber, appliances and electrical equipment, and furniture.

In short, the core of American industry is effectively becoming almost as Chinese as China, in economic terms, but with marginally better quality control. It’s not necessarily a new thesis. Tom Friedman raised the spectre of global economic equilibrium in “The World is Flat,” and financial writer Michael Lewis takes it a step further in his new book, “Boomerang,” which places the US economic calamity in the same context as those of Ireland, Greece and Iceland, though these are largely dealt with at a macro level. The emerging downside of globalization is that it flows both ways. The US may have benefited from low-cost foreign production and cheap labor elsewhere, but that benefit has, in net terms, raised other nations' standard of living while sapping America's own, due to overleveraging.

Some large corporations have seen this leveling and taken advantage of it to bring to the US market lower-cost design and innovation picked up in emerging markets, often without the end consumer being any the wiser. Most American buyers of inexpensive sedans made by companies like Honda and GM, for example, wouldn’t know their vehicles were optimized first to suit the tastes of Chinese consumers, and only then exported to the US -- a reversal of the historical trend that “what’s best for America is best for the world.”

It’s a strategy adopted by a wider range of global companies, as well. GE, for example, has touted its bottom-up innovation strategy of sourcing from developing markets new ideas for lightweight, inexpensive approaches to technology development. Numerous other global brands have sent specialists into the field to see what could be learned from innovation under constraint to use in developed markets where margins are tight and money newly scarce.

Economics isn't my field, but observing and analyzing how economics and other forces change our behaviors is—in particular, how these forces change our use of technology. On this point, an interesting cluster of signals has been emerging recently that points to growing similarities among the growing US “underclass” of low-income individuals and families, to their global, lower middle-class counterparts in the BRICs (Brazil, Russia, India, China) and beyond. Even as they are layering up, we are stripping down, so to speak.

Take for example, a new set of data released by the Pew Internet & American Life Project this past summer (and recently refined) which indicates an unwiring of lower income consumers. Pew’s earlier research showed that, amid the deleveraging that American households are undergoing, Internet and mobile connectivity have largely been protected from the chop, as they provide both low-cost entertainment and communication. Now the fixed-line Internet connectivity is going to an increasing number of homes, and mobile Internet is protected as critical infrastructure. As a single investment, the mobile phone can deliver the greatest number of functions, at a sufficiently high level, at the least cost.

As an economic and social tool, an Internet-connected mobile phone is seen as a critical possession for   people and families on the downward economic escalator, and for newcomers to the US on their way up. I saw the latter phenomenon in field research over five years ago among immigrants living in US cities. A prepaid mobile is an early acquisition, and sometimes even a group resource. It enables access to jobs, contact with families, acquisition of other utility services, and so on. And with the availability of prepaid smartphone services that don't require established credit history, low-cost smartphones have penetrated these growing lower economic tiers.

This might sound familiar if you’ve kept up with the spread of mobiles and smartphones in the developing world. Emerging middle classes and those at the bottom of the economic pyramid have graduated up to higher levels of sophistication in mobile devices. In a study we recently completed of almost 50 countries worldwide, we found that one of the key trends in technology uptake is no longer the spread of mobile phones in general, but the boom in smartphones, even at lower economic levels. For emerging markets, first contact with the Internet is increasingly coming not through PCs but via a hand-held or pocket-sized device. A new study of rural China shows what this looks like: copious quantities of modern media, piped in via a 3G connection, consumed by that country’s lower middle class. Similar research results are becoming apparent in countries such as Indonesia, India, and across the emerging world.

So what does this mean in the context of the US economy? Underneath the stereotypical American tier of multi-device, high-speed households choc-a-bloc with the newest Apple devices, games consoles, flat-screens and fibre connections, is a growing layer of pragmatic technology users for whom utility is a higher priority than entertainment or convenience. For them, a mobile is a life tool, a means of staying both connected and afloat. If one factors in the possibility that US incomes could remain flat for the next decade, as just forecasted by a Wall Street Journal panel of economists, this layer will grow to be a more substantial part of the technology audience, looking much more like the lower middle classes in the BRIC economies than the more economically mobile top tier.

A recent Gallup poll indicated that fewer Chinese than Americans reported struggling to afford food or shelter for their families. That's a fairly stark data point at the current juncture. Technology usage is just one indication of how the lives of both country’s middle classes are starting to converge in alternately worrying and surprising ways. Should these two economies continue along similar trajectories to what they have been doing for the past five years, we may soon need to consider not just how to capitalize on BRIC growth abroad to grow the US economy. We may also need to adjust to the development of a similar economy within the US—the development of our very own BRIC inside.

--
Scott Smith is the author of Discontinuities, CI's monthly column on disruptive technology and innovation in emerging markets. He is founder and principal of Changeist, LLC,  foresight and strategic design consultants advising organizations as they navigating complex futures.

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