View from Asia: the rise of tier-two cities

The World Bank states that east Asia and the Pacific form the world’s most rapidly urbanising region, with an average annual urbanisation rate of 3%. It also estimates that as of 2018, half of the region’s population was classed as 'urban' – more than 1.2 billion people in all. However, the growth and development between cities is different. Different definitions exist for city tiering, whether by GDP ($68bn to $299bn), population (3 million to 15 million), or administrative hierarchy (prefecture or county level). The most common definition of a tier-two city is one whose population exceeds 1 million. 

Out of China’s 613 cities, both Yicai Global magazine and the South China Morning Post list 30 tier-two cities. India has 26 tier-two cities. Indonesia, Asia’s third largest populated country, has seven cities with a population of more than 1 million and another seven of more than 2 million in population. In Japan, with 47 prefectural governments (similar to a county level), there are 13 cities with more than 1 million people.

Several drivers are causing this growth, including local government policies that offer stimulus packages, investment incentives and tax breaks to investors and entrepreneurs. This is with the aim of lowering operating costs, enhancing the educational and research institutions, facilitating urbanisation by upgrading infrastructure in transport, energy, utilities, IT and housing, as well as attracting talent to foster innovation.

Some sectors expected to do well in Asian tier-two cities include retail and commercial real estate, luxury goods, media, air and land transportation, logistics and manufacturing. But as well as opportunities, challenges exist for these cities. Companies must be prepared to operate outside their familiar tier-one ecosystem and infrastructure. They must be able to invest in basic infrastructure, logistics and training of their workforce in order to gain access to a growing consumer market, cheaper labour and real estate. In many tier-two cities, pollution is high while intra-city bus services and utilities remain poorly developed.

Once such tier-two cities speed up their development and connect with neighbouring tier-one and tier-two cities, the hinterland market attractiveness will improve significantly. For impatient companies eager to gain first-mover advantage, now is the best time to perform a strategic analysis, segment target markets carefully and develop specific go-to-market entry strategies. Why contemplate a blue ocean strategy when the rich red hinterland already beckons?

Lawrence Yeo is founder and principal consultant of AsiaBIZ Strategy, a Singapore-based management consulting firm providing Asia market research, business strategy development and export/FDI promotion services.