New Geography of the Information Technology Industry and the Rising Middle Class in ASIA

The global information technology industry is shifting to a transitional phase of industrial evolution. In transition, there are linkages between product and process innovation that are fundamental to the development of the industry. Asia has played important roles in supporting these linkages over the last two decades:

a) A shift from product to process innovation;

b) Dual focus on cost and quality;

c) Creation of an Asia-Pacific regional technology ecosystem

As producers and customers agree to product features, and as markets expand, a shift takes place in the rate at which products and process innovation occur. Major shifts occur in process innovation that has a dual focus on cost and quality to satisfy a global mass market through large-scale production methods. This requires simultaneous development of leading edge design intellectual property, efficient and flexible technology implementation, low-cost, high-volume manufacturing bases and integration with assembly and testing, world-class product marketing and commercialization in a technology ecosystem.

Electronic manufacturing services (EMS), original equipment and original device manufacturers (OEM and ODM), specialized process equipment, components, modules, systems, test and assembly suppliers, and semiconductor fabrication plants in Singapore, Malaysia, Taiwan, Korea, and now China together with software and business process outsourcing services in India have been instrumental in the formation of a fully operational, regional technology ecosystem that is heavily rooted in Asia. Enabled by better communications networks and the natural outgrowth of the global information economy, this technological-geographical movement is shifting the information technology industry’s centre of gravity to Asia. As rising demand drive industrial evolution and process changes, higher value creation in specific design, development, engineering and distribution will occur.

Innovative companies that are able to leverage science and engineering research in the Asia Pacific regional technology ecosystem can supply process innovations as major global information technology players seek to produce better quality products and services at higher cost efficiencies.

U.S. and European companies, properly positioned, may establish pivotal positions by leveraging and expanding on Asia’s regional core competences in efficient and flexible technology implementation, low-cost, high-volume manufacturing bases, assembly and testing, systems integration, product marketing and distribution.

Amid the IT industrial evolution, a vast consumer base of hundreds of millions of consumers is developing rapidly in China and India. Starved of choice for over 40 years, this rising middle class is hungry for consumer goods and a better quality of life.

C.K. Prahalad and Kenneth Lieberthal, who analyzed the emerging middle class in China and India, found the market structure to be very unlike that of the West. Income levels that characterize Western middle class represent only a tiny upper class of consumers in any of the emerging markets. The active consumer market in China and India has a three-tiered pyramid structure.

At the top of the pyramid, in Tier 1, a relatively small number of consumers who are responsive to international brands and have the income to afford them. Next in Tier 2 is a much larger group of people who are less attracted to international brands. Finally, at the bottom of the pyramid of consumers (Tier 3) is a massive group that is loyal to local customs, habits and often to local brands. Below that is another huge group made up of people who are unlikely to become active consumers anytime soon.

Global brands and multi-national companies, who have brought their existing products and business models to China and India, have mainly been addressing the top tier of consumers. Thus, they are ending up as high-end niche players and missing the real opportunity. Tailoring products and services that addressed price and cultural sensitivities of tier-2 and tier-3 markets require that every aspect of business: product design, manufacturing, marketing, distribution are fundamentally reconfigured to meet with local consumer preferences and usage needs.

Therefore, new venture companies with innovative design capabilities and local market knowledge have an opportunity to introduce ‘low-end’ or ‘new-market’ disruptive innovations. And, by leveraging engineering and low-cost, high volume manufacturing bases in Asia, these companies have tremendous potential to grow rapidly.

Using Shanghai and/or Singapore as focal center(s) to draw local technical and managerial talent for product development and engineering, management and co-ordination, these companies may tap the entire information technology value chain. As improvement cycles begin and product performances improve, they have the potential to gain market leadership in vast, rising middle class markets.