Emerging markets comparison using the Market Potential Index

Market Potential Index

There are eight indicators on the market potential index: market size, market intensity, growth rate, consumption capacity, commercial infrastructure, receptivity, economic freedom and country risk.

The market size is the largest weight. The measures used are urban population and electricity consumption, I guess as proxies for the number of people who have at least the possibility of having money.

Market intensity is based on the gross national income per capita and private consumption as % of GDP, measures that reflect the wealth of the country and presumably telling something about purchasing power.

Growth rate is based on the growth rate in energy use and the real GDP growth rate, looking at how fast the market is growing.

The consumption capacity is measured with consumer expenditure and income share of middle class. This is similar to market intensity, but with a focus on consumers and the middle class, trying to isolate the market for consumer goods beyond industry and the wealthy.

There are several measures to go into commercial infrastructure. These include mobile subscribers, households with Internet access, main telephone lines, # of PCs, paved road density, population per retail outlet, and % of households with a color TV. The category is mostly misnamed -- this is consumer infrastructure. Commercial infrastructure would be about ports, railways and things like that. The use of landlines in this measure is a bit archaic, as most countries stopped even attempting to build those once mobile began to dominate.

Economic freedom is based on the Economic Freedom Index and the Political Freedom Index. So this category is misnamed as well, because it is named after one of the two components. It should be called the Freedom Index. Those two components are not the same at all -- China has good economic freedom but zero political freedom.

Market receptivity is based on per capita imports from the U.S. And trade as a % of GDP. This is a funny measure -- you do want to know how receptive a market is, but using the imports from the U.S. figure as a proxy for that makes the index U.S.-centric, ergo worthless for the rest of the world. Not sure why the researcher developing this would want to specifically invalidate their own index in such a way when it could have been universal. Odd choice of metrics -- the trade as % of GDP is a good starting point and they should have found another trade measure like something based on tariff data that the WTO publishes.

Country risk is comprised of three rankings -- business risk, country risk, and political risk. These are specific rankings compiled by other bodies, which is why they might seem a bit redundant, but getting different opinions on the matter is a good idea. Though it delivers funny results like Hong Kong having low country risk -- it's run by China and could have its entire legal and political system wiped out at any minute, and it gets a better score than Switzerland, which has existed for 700 years. So some of these measures aren't really grounded in reality.

Now, the objective of the index is to determine what the best market is, so you are not supposed to single out one measure as being the only one to look at. The point of the index is to look at all of the different factors taken together. So you look at the overall score, not a single metric. That's the point. No one metric tells the entire story, and to choose just one misses the entire point of the index. As a theoretical exercise, if all other factors are equal - which they never are -- you might want to look at consumption capacity because that indicates the depth of the middle class. Or at least it is supposed to -- it ranks Uruguay's 3.5 million people ahead of South Africa's 7 million-strong middle class among other faults. And it puts PNG and Chile on the same level, which is pretty hilarious. But that's why you don't just look at one indicator in isolation.

Using the MPI, the best market by far is China. This seems reasonable. It's a big market. You can sell a lot of low-end laptops, but Apple does well there also. On the metrics given, it's not even close. There is still room for growth in China, too, which combined with its size I think are driving its score that much higher -- Japan, Canada and the like you're selling laptops at a replacement level but people in China are still buying their first computers. That's assuming you're just using this index and avoiding the market reality that laptops are being bypassed entirely by most Chinese consumers (Koetsier, 2013).