Pardon me for sounding like a Marxist - which I decidedly am not - but doesn't it seem as though a thriving middle class in the Western world depends on the existence of workers making pennies an hour in some distant, underdeveloped country? Never mind that domestic production was the key to the stunning success of the U.S. middle class in the years following World War II. Today, you don't get everyday low prices at the local Wal-Mart without somebody somewhere toiling in near-sweatshop conditions.

If that's true, then Western consumers are in for a tough time. According to Ernst & Young, the global middle class is set to burgeon from its current level of 1.8 billion to nearly 5 billion by the year 2030. With so many people in the "middle," where will retailers and manufacturers find the cheap labor that's needed to supply them?

Center stage for this stunning debut will, of course, be China, where even now wages are rapidly rising by as much as 30 percent. The Chinese government is encouraging the trend, much to the chagrin of low-cost manufacturers like Foxconn. The goal is to create a powerful middle class that generates local demand and transforms China from an economy dependent on cheap exports to one that makes a variety of quality products for its own people.

But it's more than a China story. The new Ernst & Young report, based on a survey of 547 executives around the world, also locates what it calls "the next three billion" members of the middle class in India, Brazil, Indonesia, Turkey, Eastern Europe and even parts of Africa. One key driver is the high percentage of young people in those developing countries, says Maria Pinelli, global vice-chair of strategic growth markets for Ernst & Young. As they enter consumption age, these citizens will be demanding good, steady paychecks, which will translate into disposable income.

Ernst & Young defines "middle class" as those who spend between $10 and $100 a day. For many in the Western world, that's not much of a bar to clear. But it represents a dramatic increase over current conditions. Depending on how it's calculated, average gross national income per capita today is between $9,000 and $11,000 a year. In 2010, China ranked 121st in the world, at $4,260. (The U.S. was 18th.) Expect that figure to soar in coming years. Ernst & Young predicts that the increase in middle-income consumers will boost global demand from $21tr to $56bn by 2030. Asia, the report says, will account for 40 percent of middle-class spending, versus its current share of 10 percent.

So where will manufacturers go to find cheap labor? According to Ernst & Young, that's the wrong question. Its study suggests that the traditional model of global production - make it cheap there, sell it at a hefty profit here - is on the way out. In years to come, suppliers won't be able to compete entirely on the basis of low overhead. The focus will be on what they make, and where it's sold.

Forget about a global multinational coming in and automatically dominating a newly emerging market, says Pinelli. "That [scenario] couldn't be further from the truth." It's local production, with an intimate knowledge of consumer needs, that will have the upper hand. India has launched what it claims to be the world's cheapest tablet computer, to be sold for around $60. The device is aimed at the nation's huge market of low-income citizens. (Only 10 percent of India's population of 1.2bn currently has internet access, Pinelli says.)

How is it possible to make money on a $60 tablet, when Apple commands hundreds of dollars for its iPad? Putting aside suspicions that Apple is enjoying insanely high profit margins on the basis of its brand appeal, the key could lie in the idea of frugal innovation.  The term describes efforts to serve low-income markets with cutting-edge technology.

It starts, says Pinelli, with understanding the needs of local customers. Traditional analytical tools tend to lack good data for this purpose, because there's little or no history of new products in emerging economies. So much for focus groups and other tried-and-true techniques for assessing consumer sentiment. Of greater value in local markets is the push to assess cultural barriers and design products accordingly, Ernst & Young says.

Companies today are less liable to conduct in-depth research and development in emerging markets. Often they're put off by a lack of intellectual property protection or the rule of law governing foreign investment. Still, a local R&D center, possibly operated as a joint venture with domestic interests, can be key to designing the right product for a given country.

Manufacturers worry with some justification that an item tailored for a narrow, local market will cannibalize sales of their premium products. (Gray market sales can deeply undercut a high-tech producer's worldwide profits.) Perhaps so, says Ernst & Young, but "the added revenue from both the lower-priced and premium products is far greater than the unadapted model (that fails to reach the next three billion)." The greater risk, the firm says, "is to lose out on the giant growth markets of the future."

In any case, Ernst & Young says, a concerted effort to serve specific emerging markets is just as likely to lead to an entirely new product or service, boosting a manufacturer's total revenues.

So are companies waking up to the prospect of a ballooning middle class? Somewhat. Pinelli says about a third of respondents to the Ernst & Young survey are already making use of "frugal innovation" techniques. Another 40 percent are planning to do so, but lip service doesn't capture market share.

Whether these big demographic changes will actually transform the mindset of global manufacturers remains to be seen. But anything that lessens the possibility of work environments that appear to drive employees to suicide is welcome. Maybe there's room in the middle for everybody after all.

Next: More thoughts on rethinking global supply chains.

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