Global demographic shifts are changing the size of national markets, impacting consumer behavior and affecting investment decisions worldwide. How are they affecting your markets?

Connecting the Dots

Increasing consumer income in a national market, for example, quickly translates into greater demand for goods and services there. In turn, that country is likely to attract more foreign direct investment. These are but a few of the changes caused by shifting demographics.

A rising median age, for example, affects consumer needs, preferences and tastes, and also impacts demand. As this occurs, companies need to continuously monitor where their markets—or moving targets—are growing and shrinking. In response, many companies are relocating production and service facilities closer to the expanding markets in order to better serve them.

Decisions Resulting from Growing World Population

According to the U.S. Census Bureau, the world’s total population surpassed 6.4 billion in January 2005 and is anticipated to exceed 7 billion by 2013. Where these people live will influence decisions by American companies as to where to build their future production facilities.

For example, companies sometimes choose to produce goods and services in the foreign country in order to eliminate ocean transportation costs, tariff barriers and other costs. Plus, proximity often enables companies to gather better intelligence on changing market conditions so they can quickly adjust. This is why foreign-owned multinationals operate in the United States. And according to Insourcing Jobs: Making the Global Economy Work for America, by Professor Matthew J. Slaughter of the Dartmouth College Tuck School of Business, these foreign companies employed 5.4 million Americans with a U.S. payroll of $307 billion in 2002.

Following long-established geographic and cultural patterns, almost all the net population growth—the difference between births and deaths—will occur in developing countries located in Asia, Latin America and Africa. For example, by 2013, China’s population is expected to reach almost 1.4 billion, followed by India’s, projected at 1.2 billion. Indonesia follows at 268 million, Brazil at 201 million, Pakistan at 190 million, and Bangladesh at 169 million.

Per Capita Income Figures Can Be Misleading

Average per capita income in developing countries is understandably low as compared to developed countries. In 2005, for example, GDP per capita or income is estimated at approximately $41,700 for each American, according to the International Monetary Fund. On the other hand, per capita income is approximately $6,500 in Mexico, $1,340 in China and only $620 in India. Based on these figures, international mangers sometimes conclude that consumers in these countries cannot afford American products or services.

Should U.S. companies subscribe to this logic, they will be at a loss. In terms of buying power, general per capita income figures can be misleading. For instance, India is estimated to have a middle class of more than 200 million people with the same purchasing power as the U.S. middle class. And according to Robert Wu, a consultant who works with Chinese and American firms, “China has 200 to 300 million people living in urban areas with considerable consumption capacity.” For just about all U.S. exporters and investors, a new and relatively affluent market of 200 to 300 million plus consumers is well worth pursuing.

Consumers Are Living Longer

The average life span continues to rise and is projected to increase from 64 years in 2002 to 69 years by 2025, and to 77 years by 2050, according to the U.S. Census Bureau. This increased longevity has contributed to global population growth and is leading to a shifting age demographic characterized by higher proportions of the elderly. As a result, over the next two decades the age structure of world population will continue to shift, with older age groups making up an increasingly larger share of the total. In fact, the number of people age 65 and over is estimated to more than double. The greatest relative increase will occur in developing countries, while the largest absolute change will take place in Asia. The bottom line: by 2020, two-thirds of the world’s elderly will live in developing countries.

As this age shift occurs, the elderly population in the United States and the rest of the developed world will increase by more than 50 percent. Concurrently, demand for products and services designed to satisfy the needs of this group will increase.

For example, Americans over the age of 50 tend to use significantly more pharmaceutical products than any other segment of the population. As the world’s population continues to age in both developed and developing countries, the demand for health-related products, as well as home care, is anticipated to skyrocket. In response, many U.S. companies that produce health related products and services are likely to relocate facilities in proximity to this expanding market.

Rise in Median Age Impacts Consumer Buying Decisions

As the elderly population grows in numbers, the median age of the world’s people will continue to rise as well. Not to be confused with average age, the median means half of the population will be above and half below the age cited. In 1998, the median age was 24 in less developed nations, and 37 in more developed countries. However, by 2025, the median ages will rise to 30 and 43, respectively. Keep in mind: these people will grow up in an increasingly sophisticated age in terms of technology, communications and consumer products. Many of these age groups will be influenced by American culture; as youngsters they will listen to American music, watch American movies and wear American blue jeans. This also is a generation that will be better educated and enjoy a more affluent lifestyle.

What implications does this have for consumer spending? According to Harry S. Dent, Jr., author of The Roaring 2000s Investor, on average, Americans enter the workforce at age 19, get married at age 25.5 (27 for men and 24 for women), bear their first children two years later, and purchase their first homes at age 33 or 34. They trade up to the largest homes they’ll own by 44, and fully furnish them by age 46.5 or 47. Interestingly, the average American also reaches peak spending at about 46, the same time the kids leave home. Dent observes that empty-nest couples then spend more on vacation homes, travel and leisure. They also become prospects for investment services and products as they approach retirement age.

Spending patterns in other developed nations are similar to those in the United States. As a result, it’s reasonable to assume that as the median age rises and life expectancy increases in developed countries, from 76 years in 2002 to 80 years by 2025 according to the U.S. Census Bureau, consumer spending also will rise. Depending on a company’s products or services, relocating facilities within close reach of these growing markets may be recognized as a sound strategic decision in the business community, but may be labeled as anti-American in the political community.

Incorporate Demographic Data in Your Global Strategic Plans

By studying shifts in world demographics, a company can pinpoint where tomorrow’s major populations will live, identify the fastest-growing age groups (an important indicator of tastes and needs) and predict, based on similar demographics elsewhere, demand for certain products or services. In turn, this will influence where a company’s next factories or service centers will be built.

The tragic London bombings in July 2005 revived a nagging question, "What if terrorists place a bomb in a container headed for a Northeast U.S. port?" Consequently, the next question that comes to mind is, "Are we doing enough to prevent such as attack?" The answers are mixed.

Four years after 9/11, government authorities in the United States and abroad continue to grapple with how to shore up cargo security without hindering efficient commerce. U.S. programs like the Container Security Initiative (CSI) and the Customs-Trade Partnership Against Terrorism (C-TPAT) are still in their relative infancy, yet already they feel the strain of limited resources and a rising volume of trade. Maritime trade is expected to double by the year 2020 or sooner.

What does it all mean for business? Simply put: more cargo inspections, the potential for longer delays and heavier burdens of cost and compliance. As security efforts continue to evolve, importers, shippers and logistics providers should take the following steps to mitigate future delays and costs.

Join C-TPAT To Reduce Inspection Risk

The inspection rate for all containers entering the United States is likely to continue its upward trend as far as U.S. Customs and Border Protection (CBP) resources will allow. Although C-TPAT faces a number of long-term challenges (as detailed in recent reports to Congress), adherence to the voluntary program's standards remains the primary means by which importers can reduce their container targeting risk. Last spring CBP Commissioner Robert Bonner announced an improved plan for tiered benefits, which reward C-TPAT members based on their level of security, validation results and use of best practices.

Divert Trade to Safer Channels

As of July, the number of ports worldwide participating in CSI was 37 and counting. Even though the program faces serious growing pains, CBP hopes to expand it to cover more than 80 percent of all containers shipped to the United States. Containers originating outside the circle of friendly ports, however, will be subject to higher targeting risk, increased inspections and more shipping delays. Early on, trade observers advised U.S. importers working through non-CSI ports to consider diverting shipments to the nearest CSI port. Many have done so already.

Adjust Inventory Management

To maintain supply chain efficiency amid tighter security, firms need to reexamine every aspect of inventory management. These measures might include greater automation of order processing; location of factories, distribution centers and warehouses in areas more strategic for security and disaster mitigation; improved asset visibility and tracking; larger emergency stock levels; and diversion of some supply to stateside sources or at least the plan for such a diversion in a crisis.

Prepare for Broader Reporting Requirements

Carriers currently submit vessel manifests to CBP 24 hours before lading, but the swelling tide of imports and CBP's limited resources may one day push back the 24-hour timeframe. A report by the Government Accountability Office also has suggested that additional trade documents, such as purchase orders, could be used to supplement inadequate manifest data. As a result, importers and foreign shippers, not just carriers, may become responsible for filing advance shipment data. The verification of secure practices in the stuffing, sealing and land transportation of a container overseas may soon play a role in the targeting of suspicious cargo, as well.

Security Goes Global

A fundamental problem behind CBP's duty to protect U.S. trade is the fact that most supply chains are beyond the regulatory capacity of the U.S. government. C-TPAT attempts to address some of these concerns through its standards, although the program still does not include foreign manufacturers (except some in Mexico) that actually pack the containers. Currently C-TPAT covers less than half of containerized imports into the United States, by value, according to CBP.

As a result, U.S. importers and exporters should anticipate the globalization of American security efforts, a trend already underway with the unanimous adoption of the World Customs Organization's (WCO) Framework of Standards to Secure and Facilitate Global Trade in June 2005. Immediately 52 of the WCO's 168 members—CBP among them—indicated their intention to implement the Framework. This should bolster the international reach of programs like C-TPAT and ideally will result in a global "trusted shipper" system. More importantly, its workable standards should eliminate the prospect of a variety of separate C-TPAT-like programs around the world that could clog trade lanes.

According to the WCO, the Framework will:

• Harmonize advance electronic cargo information requirements on inbound, outbound and transit shipments
• Establish a consistent risk management approach to addressing security threats among joining nations
• Require that an exporting nation's customs administration perform an outbound inspection of high-risk cargo at the reasonable request of the importing nation and
• Define benefits that customs will provide to businesses that meet minimal security standards and best practices.

Sound familiar? For companies already dealing with the 24-Hour Rule, CSI and C-TPAT, the Framework in action should appear at first as a convenient outgrowth of those initiatives. Companies not already part of C-TPAT will find more reasons for membership.

While it is impossible to predict exactly where an international cooperative system will ultimately end up—or whether it will eventually evolve into regulations of some kind—clearly the time for thinking of cargo security as a U.S. problem, with strictly a U.S. solution, is long past.

Globalization is a dynamic process that involves the integration of national markets through international trade, foreign direct investment and portfolio investment. Based on free-market capitalism and powered by advances in telecommunications, transportation and finance, globalization enables companies and individuals to establish relationships anywhere in the world. In addition, it provides billions of people worldwide the means to obtain a higher standard of living.

In their book "A Future Perfect," John Micklethwait and Adrian Wooldridge argue that globalization increases people’s freedom to shape their identities and sharpen their talents. It allows consumers to buy the best the world has to offer, while giving producers the tools to find buyers and partners worldwide. As a result, companies and individuals are empowered to generate new wealth in ways undreamed of just a few years ago. But it’s also creating much controversy.

Other trends already have changed the nature of competitive advantage. And in this period of great transformation from a familiar system to an unfamiliar one, new paradigms are emerging as old ones fade. For example, for centuries an abundance of natural resources was known to secure a nation’s competitive advantage. This is no longer the case. Japan, Hong Kong and other countries and regions of wealth with few natural resources clearly have disproved this. Today, knowledge and information have become the new generator of competitive advantage. This is becoming more evident in every industry.

Many of our largest corporations, that for decades dominated the economic landscape, are being pushed aside by leaner, more knowledge-intensive companies. And since knowledge and skill are infinite resources, obtainable by both large and small companies alike, smaller companies are not disadvantaged by their size. As a result, a real sustainable competitive advantage is the ability of a small company’s workforce to learn faster than the competition.

Change, which is often accompanied by fear and disorganization, is not easy. But with change come new challenges and exciting opportunities. For companies and their employees to succeed well into the future, it is necessary for them to grasp the new economic realities that globalization brings, and embrace—not reject—the challenges they present.

Like so many other aspects of our lives, the way goods move into and out of the United States changed forever on September 11, 2001. In just over three years, a layered regulatory framework has descended upon intermodal trade with the dual goal of increased supply chain security and efficient commerce. Given a patient and growing terrorist threat, as well as projected increases in global trade volumes, that dual goal may prove impossible to CBP and other U.S. agencies if current security initiatives don’t evolve to reflect a quickly changing world. Unfortunately, if history is our guide, sole reliance on government bureaucracy and congressional funding debates will make for a slow evolution—perhaps dangerously slow. While security initiatives must achieve the same prominence and untouchability as did our national defense during the Cold War, a slow, methodical buildup of a decades-long defense simply won’t work in today’s environment. The new terrorist enemy working in secret with unknown weapons and capabilities—and with surprise always on its side—is vastly different from our past superpower adversaries.

The prospect of general economic disaster and loss of life from a trade-related attack does place significant responsibility on government agencies for protection. And in the relatively short time since 9/11, CBP and its partners have done a commendable job in putting a system in place that offers one means for safeguarding trade. How effective the system is, however, no one knows for sure. And while it is one means for protecting commerce, it certainly isn’t the only one and may not be the best. At the very least, as outlined in this report, companies must assume responsibility for internal security, then anticipate changes in the current federal system of targeting and inspection to mitigate delays and stay one step ahead of government mandates.

But industry can do better than simply following the federal lead and taking educated guesses about where it will head next. Industry can assume greater control.

Ensuring safe and efficient trade must involve quick, proactive management of risk. Who else but free-market business can best lead such an effort? While CBP will always play an integral role in protecting the nation at its points of entry, initiatives like ATS, CSI, and C-TPAT will have to go global and incorporate all customs agencies and all trading companies around the world if they are to achieve true protection of U.S. interests. Such a grassroots approach can best be directed by the system itself, through its members: the vast number of interconnected businesses around the globe. Like an organism that evolves to survive a harsh new environment, the system—and not its regulators—will find the best way to flourish amid forces that want to destroy it. Market-driven new technologies and risk-managed security not only will provide greater protection. They also will create a network of intermodal trade that, even in the devoutly wished absence of global terrorism, works better than any system the world has ever known.