These products have the power to create jobs as well as open new markets. Hindustan Unilever sells its $43 Pureit portable water purification system through its network of 45,000 women who demonstrate Pureit and other products in their own homes and sell door to door around their villages, often from the back of bicycles.
Innovation is a key to enduring competitive advantage. Innovation that can open mass markets becomes an unsurmountable advantage in today’s globalized world.
A Barrier To Entry is defined classically as an obstacle that makes it very difficult for a competitor to enter a market.
When these concepts were discussed 30 odd years ago, poverty in the developing world was considered a curse. There is increasing evidence that poverty, at least in India, is emerging as a trigger & key to product innovation as well as a very strong barrier to entry.
We articulated this hypothesis in our February 7 article titled Will The Indian Market Be To America What The American Market Was To Europe 100 Years Ago.
After all, 100 years ago, America was the emerging mass market. The dominant European companies of that time were focused on making high quality, expensive products for the affluent Europeans & Americans. American companies began making good quality but inexpensive products for the American mass market. These American companies became multinationals because of the competitive advantage of their inexpensive products and dominance of their local large market.
This, we argued, is beginning to take place in India today. We gave examples of the $2,000 Tata Nano car and the often predicted $20 laptop. Such inexpensive products are the only ones that can sell in India’s huge mass market. We also argued that the ability to make such good quality but inexpensive products was certain to become a major competitive advantage for India’s companies and a couple of multinationals who see the same opportunity. These uniquely innovative products had such attractive price points that they could create tremendous domestic and export opportunities for Indian or Indo-focused American companies like GE.
This week Erin Bellman of the Wall Street Journal wrote an article that provides several examples of this trend. In his article Indian Firms Shift Focus to the Poor, Bellman writes “such (inexpensive) inventions represent a fundamental shift in the global order of innovation.” He goes on to say “They (Indian companies) 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 are these innovative products that Bellman describes?
These, according to Bellman’s article, are highly innovative products and not cheap versions of existing products. Consider Bellman’s description of the “Chotokool” (little cool) refrigerator from Godrej, the household products giant in India:
Not all products are from giant corporations. Bellman describes the $23 wood burning stove introduced by First Energy, a start-up company. As Bellman’s article states:
(Banking with fingerprint scanner & phone) (Doctor using GE Heart Monitor – cost $1,000)
(Source – WSJ) (Source – WSJ)
Bellman also describes the Zero system, an invention of a telecommunications engineer Anurag Gupta who distilled a bank branch down to a smart phone and a fingerprint scanner. The Zero System is now being used to help Indian laborers in Bahrain to open bank accounts and send money to their homes.
According to the article, these innovations are possible because engineers are plentiful and relatively inexpensive in India. GE Healthcare has used Indian software engineers to develop an electrocardiograph that costs $1,000, one-tenth the standard models used in the past. GE hopes to sell the technology in the U.S. eventually and elsewhere.
According to the article, 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 in India could eventually help bring down the cost of health care in the U.S.
None of these product innovations could have been conceived or developed in America or Europe. These two societies are simply not poor enough to create such innovation. The poor in India are a huge mass market that can be dominated by such products and the companies that make them.
This is what we mean by Poverty being a Competitive Advantage and a Barrier To Entry. A dominant position in India’s mass market provides the springboard to target other poor markets in Asia & Africa. Urban markets of Europe & America should be next. Europe is already a target market for the Tata Nano.
This story of product innovation and entry into a huge untapped market is the story unfolding in India. This is why we remain long term bullish on investing in India.
Editor’s Note:
It seems Eric Bellman is not a Bollywood fan like us. Otherwise he would have described how Moser Baer destroyed the price levels of Bollywood DVDs, created a mass market and reduced piracy. Bollywood DVDs used to be sold in record stores as Hollywood DVDs are sold in America. The majority of Indian buyers in India and in America could not afford expensive DVDs.
Enter Moser Baer. This company, the world’s 2nd largest maker of optical drives, entered the Bollywood DVD market by licensing the content. Then they began selling original DVDs for less than $1, yes, a single dollar. Instantly, a new marketing channel for DVDs opened up. Every newspaper vendor, every sidewalk vendor began selling Bollywood DVDs. Last year, Moser Baer began selling three-movies in a single DVD for $1. This became a free market solution to eliminating piracy.
Speaking personally, Moser Baer is responsible for the fast growth of our collection of Bollywood DVDs. At these price points, we can buy dozens of DVDs while walking to a meeting or to a lunch in Mumbai.
This innovation can be reproduced in America. We were fortunate to buy a two-film DVD of Silverado and The Quick & The Dead in our local drug store in Manhattan for $6. But that is rare. We hope American studios like Disney, Warner & Universal follow this practice and sell their movie DVDs for say $3 each. After all, isn’t mass marketing the original American concept?
Send your feedback to [email protected]
Poverty – A Formidable Competitive Advantage, A Barrier To Entry Or Both?
