Wednesday, October 21, 2009

WSJ: Indian Firms Shift Focus to the Poor

A quite fascinating article in the Wall Street Journal based on the premise that while much of our history of development & innovation has been to cater to the best off and then let cheaper versions of said innovations cast down to the poorer; the potential exists for the opposite to happen. Especially with some few billion poor on the globe - many in the fastest growing countries on Earth.
  • Indian companies, long dependent on hand-me-down technology from developed nations, are becoming cutting-edge innovators as they target one of the world's last untapped markets: the poor. India's many engineers, whose best-known role is to help Western companies expand or cut costs, are now turning their attention to the purchasing potential of the nation's own 1.1-billion population.
  • The trend that surfaced when Tata Motors' tiny $2,200 car, the Nano, hit Indian roads in July, has resulted in a slew of new products for people with little money who aspire to a taste of a better life.
  • (this point is the key) Many products aren't just cheaper versions of well-established models available in the West but have taken design and manufacturing assumptions honed in the developed world and turned them on their heads.
  • Such inventions represent a fundamental shift in the global order of innovation. Until recently, the West served rich consumers and then let its products and technology filter down to poorer countries.
  • Now, with the developed world mired in a slump and the developing world still growing quickly, companies are focusing on how to innovate, and profit, by going straight to the bottom rung of the economic ladder. They are taking advantage of cheap research and development and low-cost manufacturing to innovate for a market that's grown large enough and sophisticated enough to make it worthwhile.
  • What is happening today is much different than the so-called "sachet revolution" of the 1980s when Unilever and other consumer-goods companies realized they could sell hundreds of millions of dollars more of their shampoo, detergent, toothpaste and snacks just by selling them in tiny packets.
  • Indian engineers are reinventing products to cut costs and reach the billions of people world-wide who live on less than $2 a day.
  • Everyone from small local players -- looking to go national then global with their low-price inventions -- to the country's biggest conglomerate, the Tata Group, are in the race. They are trying to figure out what the poor want and how much they are willing to pay for it. Then the companies are going back to their research teams and crafting new products and unprecedented price points.
  • Western companies as well as most large Indian companies have long ignored poor markets because any potential profits seemed too slim. It was too expensive to create a distribution system that could serve the consumer who shops from closet-size kiosks or weekly country markets.
  • But instead of using traditional supply chains, many companies are distributing through rural self-help groups and microlenders that are already plugged into villages. And while profit margins are slim, companies are counting on volume to compensate. Many hope to sell to other poor and underserved markets in Asia and Africa eventually.
  • Much of this is possible because engineers are so plentiful and inexpensive in India. It took close to 300 engineers around four years to develop the Tata Nano, which required rethinking everything from the engine to the seats to the supply chain to keep the sticker price at around $2,200.
  • Unexpectedly strong demand for cheap cellphones in recent years revealed the untapped markets in India's villages and slums. Thanks to $20 cellphones and two-cent-a-minute call rates, Indian cellphone companies are signing up more than five million new subscribers a month, most of them consumers no one would have considered serving only five years ago.
Behold our top hope of bringing down Chindia over the coming 3-4 decades - turn them into us! ;)
  • At the same time, many of the nation's poor have become aware of material goods available in developed economies thanks to a proliferation of television networks, radio stations, newspapers and magazines.
Let us hope the foreign masses will be similar to US peasants, and accept usurious credit cards (preferably the minute they turn 18) in return for a free T shirt. This should send them into a spiral of debt and consumption which will dominate their lives for the next 30-40 years and then we can be on an even playing field. Don't tell me I don't look for silver linings... fingers crossed!
  • GE's chairman, Jeffrey Immelt, on a recent tour of Asia, outlined how the global giant is restructuring to take advantage of what he calls "reverse innovation." While in India this month, he said the innovations in medical equipment here could eventually help bring down the cost of health care in the U.S.
  • "The biggest threat for U.S. multinationals is not existing competitors," says Vijay Govindarajan, professor at Dartmouth's Tuck School of Business and chief innovation consultant to GE. "It is going to be emerging-market competitors."
The rest of the story showcases some interesting inventions from a fridge, to a stove, to ... well, even a $200 bank branch. I hear no $5 ATM charges either....
  • To bring banking services to villages, Anurag Gupta, a telecommunications entrepreneur, distilled a bank branch down to a smartphone and a fingerprint scanner. A bank representative goes directly to a village and can set up shop anywhere there is shade. Savers line up and give an identification number, scan their fingers and then deposit or withdraw small amounts of rupees. The transactions are recorded through the phone and the representative later visits a standard branch to pick up or drop off rupees as needed.
  • The running cost of his "branches" is about $50 a month to serve hundreds of people daily. A standard branch or ATM costs thousands to run.
  • "We made this phone into a branch of a bank," said Mr. Gupta, holding up the smart cellphone his system uses to keep data on accounts, depositors' fingerprints, photos and voices.

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