Dinh Tu quit being a monk three
years ago and worked in a yoga studio in Ho Chi Minh City to
cater to a growing Vietnamese middle class who are finding new
outlets for their money. These days, he’s selling insurance, too.
“People in Vietnam have more to spend now,” said the 40-year-old agent for Tokyo-based Dai-ichi Life Insurance Co.
“Because I’m no longer a monk, I have to worry about financial
pressures, too. I can see that insurance is a good business.”
As Tu and millions of other Asians switch from traditional
occupations, farms and factories, the contribution of service
industries to the region’s emerging economies is poised to
exceed 50 percent for the first time, according to data compiled
by Bloomberg from government statistics. The watershed marks
Asia’s shift from its role as the world’s workshop with
countries led by China concentrating on building domestic
economies.
From Japan’s expansion in the 1960s to the Asian tigers of
the 1970s and China’s economic liberalization in the 1980s,
Asia’s postwar growth has been driven by government strategies
that poured investment into producing engineers and factories
that made most of the world’s clothes, toys and electronics.
With Asian wages and currencies rising, the investment-export
model is becoming less attractive, and funds are switching to
domestic consumer markets, increasing the need for banking,
health care and retail workers.
“This is a natural consequence of Asia becoming
wealthier,” said Donghyun Park, principal economist at the
Asian Development Bank who has researched the region’s shift
from manufacturing. “Millions are joining the middle class
every year and demanding more services.”
Changing Map
Rising demand in a region with almost two thirds of the
world’s people is rebalancing the global economic map. As
export-dependent economies led by China shift focus to Asia’s
525 million middle-income consumers, manufacturers such as
General Electric Co. (GE) are choosing to locate factories in Europe
and North America, while service providers including
international law firm Linklaters LLP are sending staff to Asia.
By 2030, two-thirds of the world’s middle class will reside in
Asia-Pacific, Ernst Young estimates.
Services will account for more than 50 percent of
developing Asia’s gross domestic product for the first time
either this year or next, from 48.5 percent of regional output
in 2010, Park said. That ratio is above 60 percent in developing
Europe and Latin America and 75 percent for members of the
Organization for Economic Cooperation and Development.
Less Emphasis
One effect will be less emphasis among Asian governments on
currency levels, which are key to export-based economies.
“Interest rates will become more important than exchange
rates,” said Chua Hak Bin, an economist at Bank of America Corp.
in Singapore. “When an economy gets richer and the trade
component becomes smaller — the likes of the U.S., Japan and
even Australia — they don’t have a problem letting the currency
slide and yet there is hardly an impact on inflation.”
As Asians grow wealthier, they are using their paychecks
less for buying products and more for things like holidays.
Average Chinese household spending on goods will drop to about
60 percent in 2013 from 71 percent in 1993 and decline to 52
percent by 2033, according to Yuwa Hedrick-Wong, global economic
adviser for MasterCard Inc., the second-biggest U.S. payments
network. The pattern is similar in eight Asian economies outside
Japan, he said.
Buy Experiences
“People now want to buy experiences, in terms of traveling
or dining out or going to a concert,” said Hedrick-Wong, who
has written four books on the demographics of Asian consumers.
“Services in the coming decade will really take off as the real
engine of income and employment generation.”
Asia is following the same path the U.S. took in the last
century. At the end of World War II, service work accounted for
10 percent of U.S. non-farm employment, compared with 38 percent
for manufacturing. Now, it represents four out of five jobs and
contributes about 68 percent of the economy, according to
government data.
“Asian countries are no different,” said Joseph Kaboski,
professor of economics at the University of Notre Dame in
Indiana, who has researched the effect of high-skilled labor in
service industries. “They’ll export more technology-intensive
manufacturing goods. They’ll export more high-skilled
services.”
The climb up the technology ladder will help developing
nations in Asia create higher-skilled and better-paid non-manufacturing jobs such as lawyers and bankers to supplement
traditional roles like food-stall hawkers and cleaners.
Automated Factories
“If you have a bigger manufacturing sector, that does not
necessarily create as many jobs as in the past,” because of
greater use of automation, said Changyong Rhee, the ADB’s chief
economist. “But as an economy develops, the manufacturing
sector can create service-sector jobs.”
General Electric opened the first of a series of innovation
centers in the Chinese city of Chengdu in May 2012 to research
health care, energy and transportation as part of a $2 billion
plan to develop technology partnerships over three years.
Deutsche Post AG’s DHL courier and freight unit said in August
it is adding two offices to its existing seven in Indonesia and
plans more in 2014 and 2015.
The growing wage disparity between the new, more-skilled
employees and lower-paid workers will help spur demand for
services, said the University of Notre Dame’s Kaboski.
Landscaping, Daycare
“When the cost of your time is high, you buy these things
on the market: daycare, landscaping, eating at restaurants
rather than cooking,” he said.
Average pay in Asia almost doubled between 2000 and 2011,
compared with a 5 percent increase in developed countries and
about 23 percent worldwide, according to the International
Labour Organization in Geneva.
Higher salaries lead to increased spending and borrowing,
with a growing number of people able to afford insurance
policies or savings plans for the first time or invest in
property, said Amit Arora, head of consumer banking at Standard
Chartered Plc’s Vietnam unit in Ho Chi Minh City.
“Six or seven years back, credit cards were a new thing in
Vietnam, but today most banks offer them,” Arora said.
“Unsecured loans to the lower- and middle-income segment are
picking up very fast, and about 50 percent of customers are
first-time loan takers.”
The contribution of services to GDP was more than 46
percent in 2011 for developing economies in East and South Asia,
according to Bloomberg calculations from World Bank data. Those
numbers may underreport the full contribution of services
because of the many small businesses in the informal sector that
“have little incentive to respond to surveys, let alone to
report their full earnings,” the bank said. Developing Asia
excludes Japan, South Korea, Singapore, Hong Kong and Taiwan.
World’s Factory
“The world’s factory is turning into an economy driven by
services,” Frederic Neumann, co-head of Asian economic research
at HSBC Holdings Plc in Hong Kong said in an Aug. 29 note.
Service industries are “contributing to roughly 50 percent of
weighted GDP and 45 percent of its labor force. This is a trend
that will shape Asia’s future.”
For some countries, the growth of services is hindered by
structural and policy hurdles. Asia lags behind Latin America
and OECD nations in road networks, phones, railways, power and
clean water, according to the latest United Nations data.
“There isn’t enough infrastructure to support the sector
in many parts of developing Asia, such as unreliable electricity
causing blackouts or no Internet,” said Aekapol Chongvilaivan,
a research fellow at the Institute of Southeast Asian Studies in
Singapore. “That will deter foreign direct investment.”
Hamper Development
Protectionism in the financial sector is also a “serious”
problem for emerging Asia, he added. “That will hamper all
development, not just for the service sector.”
Expansion by international law firms in Asia is
concentrated in the few places such as Singapore, Hong Kong and
South Korea that have opened markets. Linklaters, Sidley Austin
LLP Gibson, Dunn Crutcher LLP and Jones Day won licenses to
practice local corporate law in Singapore in February.
The variations among countries mean the shift from
manufacturing dependence won’t be even. Nations the World Bank
classifies as upper middle-income such as China, Malaysia and
Thailand may see the creation of jobs in insurance, technology
and education. Less-developed countries will add employees at
neighborhood stores, supermarkets and fuel stations.
Low-income Asian economies — those with gross national
income per capita of $1,035 or less like Cambodia and Bangladesh
– may add factory workers as basic manufacturing of clothes,
toys or electronics moves from China and elsewhere in the region.
Economic Ladder
As each country moves up the economic ladder, the wealth
generated will benefit lifestyle, consumer-banking and retail
businesses. Average per-capita disposable income in the Asia-Pacific region grew by more than 19 percent in real terms from
2007 to 2012, according to a report in April by Euromonitor
International. In China, the rate was more than 63 percent.
Some yoga instructors in Vietnam are earning as much as
four times what they would have made about five years ago, said
Tu, the monk-turned-insurance agent.
“People are buying more and more, and the types of things
they want are different now,” he said. “It’s not just shopping
at grocery stores.”
Retail sales in Asia-Pacific will be worth about $11.8
trillion by 2016, compared with $4.4 trillion for North America
and $3.1 trillion for Western Europe, PricewaterhouseCoopers LLP
said in a January report.
Job Seeker
“Chinese people are gradually improving their living
standards and that means a huge demand for high-quality services,
not cheap manufactured products,” said Shen Zhong, 28, as he
scanned help-wanted ads at the government-run employment
exchange in downtown Changsha, the central Chinese city of seven
million people where Mao Zedong went to college.
“Most of the jobs offered here are in service industries:
restaurants, karaoke clubs, cinemas and pubs. I’m looking for a
sales position, selling services that people want, like
education,” he said.
China’s education and training industry surged to 955.4
billion yuan ($156 billion) in value last year, from 610 billion
yuan in 2008, according to market-data company Research in China.
New York-traded shares of Beijing-based TAL Education Group (XRS) have
risen 24 percent this year, while New Oriental Education
Technology Group (EDU), China’s largest educational company, has
climbed 9 percent.
The 192-year-old Heriot-Watt University in Edinburgh last
year opened its second international campus in Malaysia’s
administrative capital of Putrajaya. When completed next year,
the buildings around a man-made lake will accommodate as many as
5,000 staff and students.
“It’s a huge opportunity to grow and it was better for us
to come in as a full-fledged branch campus,” said Robert Craik,
provost of the Malaysian school. “It’s part of the growing
trend across Asia.”
To contact the reporter on this story:
Shamim Adam in Singapore at
sadam2@bloomberg.net
To contact the editor responsible for this story:
Stephanie Phang at
sphang@bloomberg.net
Cafe in Hanoi
Justin Mott/Bloomberg
A customer uses a computer at a cafe in Hanoi. As Asians switch from traditional occupations, farms and factories, the contribution of service industries to the region’s economy is poised to exceed 50 percent for the first time, according to data compiled by Bloomberg from government statistics.
A customer uses a computer at a cafe in Hanoi. As Asians switch from traditional occupations, farms and factories, the contribution of service industries to the region’s economy is poised to exceed 50 percent for the first time, according to data compiled by Bloomberg from government statistics. Photographer: Justin Mott/Bloomberg
Aug. 29 (Bloomberg) — Andrew Economos, head of sovereign and institutional strategy at JPMorgan Asset Management in Hong Kong, talks about emerging economies and financial markets.
Economos also talks about Federal Reserve monetary policy. He speaks with Rishaad Salamat and Susan Li on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)
Rooftop Bar in India
Kuni Takahashi/Bloomberg
A waiter serves cocktails and a bottle of beer at the Aer rooftop bar at the Four Seasons Hotel in Mumbai. “People now want to buy experiences, in terms of traveling or dining out or going to a concert,” said Hedrick-Wong, who has written four books on demographics and Asian consumer markets.
A waiter serves cocktails and a bottle of beer at the Aer rooftop bar at the Four Seasons Hotel in Mumbai. “People now want to buy experiences, in terms of traveling or dining out or going to a concert,” said Hedrick-Wong, who has written four books on demographics and Asian consumer markets. Photographer: Kuni Takahashi/Bloomberg
Tourists in Hong Kong
Jerome Favre/Bloomberg
Tourists look at photographers’ stalls set up at Golden Bauhinia Square in Hong Kong. As Asians grow wealthier, they are using their paychecks less for buying products and more for things like holidays.
Tourists look at photographers’ stalls set up at Golden Bauhinia Square in Hong Kong. As Asians grow wealthier, they are using their paychecks less for buying products and more for things like holidays. Photographer: Jerome Favre/Bloomberg
Asia Services Set to Exceed Manufacturing as GDP Share
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