P&G And Kimberly-Clark Soaking Up Growth In Asia

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Procter & Gamble's ( PG ) brand-new manufacturing unit in China is part of the company's $1 billion investment plan for the country. The plant is expected to start production in 2013, initially focused on the production of diapers under the company's flagship Pampers brand. Meanwhile, Kimberly-Clark ( KMB ) has exited the European diaper market entirely, choosing instead to focus on scaling up its diaper manufacturing capacity in Nanjing, China - an investment of nearly $100 million. This facility is also expected to start production in 2013, boosting the company's plan to push its flagship Huggies diapers in the country.

See our full analysis for Procter & Gamble

So China seems the place to be in the diapers business these days while developed regions such as Western Europe are losing their sheen. This shift in market dynamics has actually been brewing for a long time now, pushed along primarily by demographics and differences in manufacturing costs.

Let's consider the numbers here. China and India have the largest and second largest populations in the world - providing a consumer base that goes into the billions. The two countries also have the highest number of infants in the world. The average fertility rate for India stands at around 2.6 child per woman per year. The same figure for China is at 1.54. In India, there are over 100 million children in the age range of 0-4 years. In China, the same figure stands at just under 100 million.

Contrast this with Europe where fertility rates are well below 1.5 for most Western European countries. The total population base of the entire continent is, of course, much smaller than that of China and India. Combine this with a strong-currency atmosphere driving up prices of raw materials, labor and general production costs, it becomes immediately clear why P&G and Kimberly-Clark are chasing Asian consumers with such enthusiasm.

So what are the key challenges for these consumer goods companies in emerging economies? The straightforward answer is adoption. The penetration of baby care products is still very low in China and India compared to that of developed economies. Parents still stick to traditional methods such as cotton diapers. And the reason is obvious - diaper costs remain significantly high considering the per capita income in these countries. Market penetration rates stand at around 2% for India and 16% in China. Compare this with nearly 100% penetration rates in most developed economies. The good news, however, is that as these countries develop economically, it will provide the necessary boost to per capita income required for fueling demand for more convenient baby care solutions. With a 100% penetration rate, India would be the biggest market for diapers in the world, followed closely by China.

One way the companies are trying to reduce the cost per diaper is to shift the manufacturing base to emerging economies. This will not only help the companies save on transport and related fuel costs, but will also give them access to cheaper labor and resources that are required to fund the future of the business. All in all, our forecast for the global baby care market remains strongly positive. Who is able to carve out the most significant chunk, however, remains to be seen.

We currently have a Trefis price estimate of $70 for Procter & Gamble , which is in-line with the market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AVP , KMB , PG , UL

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