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 transition from manufacturing. “Millions are joining the middle class every year and demanding more services.”
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:US) 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.
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.
“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.
“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.
“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.
“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.”
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.
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.
“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:US) have risen more than 25 percent this year, while New Oriental Education & Technology Group (EDU:US), China’s largest educational company, has climbed 10 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 firstname.lastname@example.org
To contact the editor responsible for this story: Stephanie Phang at email@example.com