Tuesday, July 27, 2010

The Great Urbanization: Threats and Opportunities for Floor Covering in China and India

I want to share a recent series of articles about coming changes to the global economy affecting the demand for floor covering  - representing both threats and opportunities. This grabbed my attention and it should yours too. If this doesn’t scare you, it may inspire you; regardless I hope you take some time to read and consider what might bring about a very profound change in the floor covering industry and other construction industries around the world.

Spotting emerging trends
Spotting and acting on emerging trends is how companies take advantage of market opportunities.  After much research,  McKinsey and Company just proposed five areas they see that offer the richest opportunities created by new stresses and tensions in the global economy. You can read the entire article about global forces but here I focus on two particularly important ones to us; they are productivity and emerging markets.  Together, the influence of these two forces will be profound; reshaping the global economy and, by extension I believe, the global floor covering industry in a rather surprisingly direct manner.

The Productivity Imperative explains the urgent need for developed countries of the world to increase productivity in order to sustain their economic growth and the unbelievable productivity potential of some developing countries. Emerging Markets details how we are heading into a time when, for the first time in 200 years, emerging markets will contribute more to the world economy than developed ones.  McKinsey calls it the Great Rebalancing. These two articles dovetail with another recent article that prompted this post:

The Great Urbanization: Threats and Opportunities in China and India

China and India are urbanizing simultaneously and at such a pace that the shift in demand for finished products and raw materials will be unprecedented.  In Comparing Urbanization in China and India,  McKinsey's newest research contains some mind blowing facts. Consider how these changes in the developing markets of China and India will have a profound effect on the world’s economy, the demand for finished floor covering and the raw materials and labor to make it.

The demographic shifts taking place in China and India are creating the largest work forces the world has ever known. Labor productivity throughout Asia is increasing five times faster than in the West, says McKinsey.

•    54 percent of the world’s urban population will live in Asian cities by 2025. In China 64 percent of its entire population will live in cities creating a urban workforce larger than anyone has ever seen.

•    This migration will create as many as 280 million Chinese middle class households with disrectionary income by 2025 (up from 55 million today) and as many as 89 million in India.

The new infrastructures needed to support this shift in urban population will be massive and so will the construction markets required to build and finish them  –  that includes floor covering.

•    India will need to add 700 to 900 million square meters of new floor space a year.
•    In China, the estimate is 1.6 billion to 1.9 billion square meters of new floor space needed yearly.

In comparison, the most recent numbers for the entire US floor covering market in 2009 was 16.80 billion square feet or 1.56 billion square meters (Floor Covering News, June 28, 2010).   The split between hard surface and soft: Hard Surface - 526 million square meters; Soft Surface - 1.0 billion square meters.

According to McKinsey, Asia may need to add as much as 2.8 billion square meters of new floor space a year to support its migrating populations.  This is new floor space and new demand; demand not just for finished products but the raw materials to make them.  And, they will have the workforce needed to do it.

Consider that in China at least 90% of the flooring demand is for hard surface. This translates to a new, yearly demand for hard surface flooring roughly equivalent to 1.5-1.7 billion square meters compared to the entire US hard surface market of 526 million square meters in 2009.

The questions we should be asking
Who will fill the demand?  Who will provide the raw materials? Does it create opportunity for export and should you be thinking about moving a production facility to Asia or partnering with an Asian company?  How will the drain on raw materials affect the world’s supply? Will this mean that European manufacturers will direct their goods to Asia creating new manufacturing needs in the US? Or, will the burgeoning low-cost Asian work force draw all of the manufacturing there? How will prices, innovation and technology be affected?

What McKinsey proposes is that these emerging market economies will go from peripheral players to powerful economies and their urban expansion will "restore the global prominence that Asia enjoyed before the European and North American industrial revolution." This is heavy stuff to consider but something we can’t ignore.

I feel a new urgency to learn more about threats and opportunities implied here. Maybe this explains why Asia’s largest floor covering show (Domotex) is growing so rapidly – now the world’s second largest show, behind only its sister show in Hannover.  Surely it explains why so many Western manufacturers are looking for partners in Asia but I fear that there are many more of us in the industry that haven't yet considered the impact that is coming. I think all of us need to pause and reflect on this; no one can afford to view the market as anything but global anymore.


Jim Gould is President of the Floor Covering Institute

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