These countries have a thriving middle class; more than a third of humanity, albeit majority poor, should present a great opportunity for companies from the western world. Looking at the Value dynamics, migration to these markets by companies in the western world, particularly India and China, can be considered to have taken place in different waves.
The first wave involved the classical labour arbitrage appropriation- in manufacturing in China and in services in India, a bit later when India opened itself from the so called ‘License Raj’ in early nineties. Companies looked to exploit the cost differences in those countries, leveraging low cost labour and in some cases talent to start with. Here as well, competition started playing a multiplier effect. For instance, in the automotive industry, as the Tier 2 or Tier 3 suppliers went to these countries to appropriate the 25-30 percent (this figure can be contested but in general this is what companies aimed for) cost advantage to produce their products; the OEMs (original equipment manufacturer) were not passed on this advantage instantly, leading to a value appropriation gap in certain cases.
On the other hand; because of the FDI (foreign direct investment) regulations as well boundaries related to investment capacities, local suppliers started thriving and slowly started climbing the value chain. This upward march was in many cases supported by OEMs by MOUs and other multi-year contracts with these local tier 3 and- tier 4 suppliers where investments were made on behalf of OEMs to bring these suppliers up to the level of their global counterparts.
This would increase competition and put a downward pressure on assemblies and other parts which had seen some value appropriation leakage from OEMs. This created an upward spiral, where the local companies started low cost manufacturing / services from the low end of the value chain, but slowly started moving upwards. In the Software as well as IT/ITES sectors (IT and IT enabled services), India observed tremendous growth. In these sectors also, starting from preliminary processes that were outsourced, the momentum picked up to advanced design and animation related development projects.
This momentum brought (and has been bringing) tremendous wealth to these countries. GDP growth rates soared and the Foreign Exchange reserves sky rocketed. This enabled good purchasing power for the rapidly expanding middle class and suddenly these low cost supply hubs in the second wave were started to be percived as key markets where the same products and services were to be offered by these western companies.
There are numerous stories of blatant blunders where large food companies, banks, automotive OEMs were casualties.
In the first part of this wave, products were typically copied and pasted in these markets. There are numerous stories of blatant blunders where large food companies, banks, automotive OEMs were casualties. However companies started to learn and eventually started adopting their products to these markets. However, still the products were given an incremental adaptation with respect to features valued in these markets, the core of the products remaining more or less the same. The products probably did not succeed in many categories, yet they had a very important impact in terms of driving maturity of local customers upwards.
The customers in these countries who were deprived of advanced products and services for a number of years, Indian customers could watch cable television only in late nineties for example, were slowly improving their taste buds for better products. This in turn, put yet even more upward pressure on the local companies, as they were forced to embrace the needs of this newly growing middle class; looking at better product ideas, improved services and radical business models. In other words- the second wave propelled innovation in these countries considerably.
The third wave could be labelled ‘the bottom of the pyramid‘ wave. As C K Prahlad argued, many companies in the west started conceptualising their products or services for the poorest of the poor in these countries. It was argued that mere on the account of scale as well as a life cycle view (some when these poor joining the middle class); companies in the western world should proactively look at using combinations of technology and business model innovation to tap into the markets at the bottom of the pyramid of the income distributions in these countries. When these publications on the idea were emerging, revolution in this direction was already occurring in these countries
Cheap bicycle producers became the world’s largest bicycle producing companies- tapping into the motorbike segments, and now car segments, through joint ventures. The Indian subsidiary of Unilever, did a successful experiment with selling products like shampoos in smaller sized and priced sashes. Another company set up ‘E-Choupals’, using the internet to connect to the farmers- not just enabling better procurement, but striking of intermediaries and also selling them products from ITCs product portfolios.
However, as it is always the case; the business world awakes to buzzword adrenalins. Prahlad’s book was more of an observation than a radical vision. However as soon as it came out, companies from different sectors started toying with product and business model ideas for the bottom of the pyramid. This phenomenon was reinforced by the competition triggered in wave two with the local companies, which were not only aggressively competing in the home turf of local markets with their global counterparts, but also slowly starting to compete at a global level through greenfield investments as well as a string of high tag acquisitions. These local companies started strengthening their presence in the local markets and innovatively looking at products catering to the poor.
The fourth wave is what I called almost a year ago ‘reverse innovation’, while working with a large German manufacturer of health sciences products, looking to enter the Indian market. We presented numerous examples of grassroots radically disruptive business models and product ideas, developed in these emerging markets; which were being taken back to western countries in ways never seen before. I was delighted to read a couple of weeks ago that Prof. Vijay Govindarajan from Tuck business school is writing a book on the same idea with the same name, citing numerous case studies.
When Ratan Tata, conceived the vision of manufacturing a low cost car for the Indian market, inspired by a family of four getting wet in the Indian monsoon rains; the whole world started rushing into the cheap car modus. Not just for these local markets, but for the whole world. Companies in the western world which were accustomed to the so called ‘Performance Overflows’ in their products with gizmos having functionalities that people really never ended up using; this minimalistic approach to solve market problems was a breath of fresh air. Indeed, to my surprise; more than 60% of all parts supplied for Tata Nano came from German automotive suppliers.
The question is, why didn’t the German companies have the same vision- when they had the technological capabilities? Why did they need an orchestrator, a visionary like Ratan Tata to conceive a product like Nano? The answer lies in what Clayton Christensen calls disruptive innovations – radical technologies, coupled with disruptive business models and facilitated networks of the corresponding value chains. One can have the best of technologies which western companies have in plenty. But one needs to be humble enough to pause and understand the real market needs in order to come out of a disruptive business model.
Now, seeing a plethora of practices, services and products developed in these countries taken reverse in the western world or the so called phenomenon of ‘reverse innovation‘; Companies in Europe (American companies were better adapters) are slowly looking at the aspects of business model innovation in a more proactive fashion.
Hopefully, we will also see a Nano, efficient steel manufacturing processes, new ideas in parallel computing, alternative medicines, new e-commerce ideas catering to these emerging markets, yet having the potential to serve the global ones being developed here, in the western world. Let’s tap into these reverse innovations till then, for the good of our customers here, customers who are the ultimate kings!