Opportunities at Many Levels
One of the dangers of talking about the "developing world" or even the "86 percent markets" is that it may seem to imply that a monolithic market opportunity exists. Nothing could be further from the truth. It is overly simplistic to focus on only the very poor or luxury segments of these markets. There is, in fact, a continuum of segments—all of which are moving rapidly upward. The 86 percent market represents a patchwork of very different markets, across countries and within countries, as can be seen in the demand for vehicles from bicycles to automobiles.
Bicycles, Motorcycles, and Automobiles
The head of Daimler Chrysler in India sold just one dozen Mercedes SL500s in 2003, priced around 8.2 million rupees each (US$179,000) That’s an average of just one car per month, but he considers that a good year. At the same time, companies such as Tata Motors are finding opportunities by working with scooter designers to develop an automobile with a remarkable price tag of about $2,000 to make it easy for motorcycle owners to trade up.
But even automobiles do not represent the full spectrum of the market. Some 76 percent of the 40 million vehicles on Indian roads are not cars at all, but two-wheelers, including motorcycles, scooters, and bicycles (see Figure 1-4). Two-wheelers, considered "family vehicles," are cheaper than cars and cost less to run. While slightly less than 1 million passenger vehicles were sold in India in 2003–2004, more than 5.6 million two-wheelers were sold in the same period.5 Why is all the media attention focused on the automobile industry in the developing world?
Figure 1-4 A large market rides on two wheels. (Source: Indian Automobile Manufacturers, 2004)
Bicycles represent a large part of this two-wheeled market, which is dominated by companies from developing markets. China is the world’s largest producer of bicycles. It exports 500,000 bicycles per year to the European Union. Other major bicycle producers come from countries such as India, Vietnam, and Poland. Companies in these countries understand that two-wheeled transportation means something different from the X Games and the Tour de France.
Is focusing on these low-priced two-wheelers worth it? By meeting the needs of this two-wheeler market, Hero Group in India has become the world’s largest manufacturer of bicycles and created one of the top brands in India. Its Hero Honda partnership with Japan’s Honda Motor Company has become the world’s largest manufacturer of two-wheelers, particularly motorcycles. By 2003, Hero Group sales surpassed $1.8 billion, roughly equivalent to the global sales of Pier 1 Imports (801 on the 2003 Fortune 1000 list). Hero has put more than 55 million bicycles and 7 million motorcycles on Indian roads. While car companies were slowly building their businesses in India and China, Hero Group in India rode its humble two-wheelers to 29 percent compound annual growth in revenues and 40 percent compound annual growth in profits between 1998 and 2003. For 2002–2003, it posted nearly 46 percent return on equity. Hero now exports bicycles, cycle components, motorcycles, mopeds, and castings to more than 70 countries and also has branched into services.
As the market for vehicles illustrates, developing markets have diverse segments:
The rich and super-rich—In 2004, a Beijing man paid $215,000 in an auction for the ultimate lucky cell phone number (133-3333-3333). Although the buyer was not identified, even the developing world clearly has people with money to burn. The 2004 Forbes list of billionaires included newcomers from Kazakhstan, Poland, and Ukraine, and Indian steel baron Lakshmi Mittal moved into third place behind Bill Gates and Warren Buffet. While an estimated 400 million Chinese live on less than $2 per day, Asia Money estimates that 50,000 Chinese have fortunes of more than $10 million. Although nearly half of Mexico’s citizens live in poverty, that country had more than 85,000 millionaires in 2004, more billionaires than Saudi Arabia, Switzerland, and Taiwan. Most of Vietnam consists of poor rural areas, but World Bank economists estimate that the average household of four people in Ho Chi Minh City or Hanoi spent the equivalent of $20,000 in 2002 (based on purchasing power parity). It is no wonder that Louis Vuitton tripled its floor space in Hanoi in 2004. In the two decades since the first Chinese golf course was established in 1984, more than 200 have been constructed on the mainland, a figure expected to double in the next decade. Even a luxury yacht factory has set up shop in China, although the domestic market may be years away from emerging. Yet the Mercedes and Bentleys of the developing world are rolling out onto muddy country roads that are often choked with other traffic. Automakers also had to add lights and air conditioning to the backseat because, with low labor costs, these cars are usually chauffer-driven.
The middle class—Sales of consumer durables, cars, and mobile telephones are growing as the disposable incomes and aspirations in emerging markets surge upward. In 2003, the Chinese Academy of Social Sciences concluded that the middle class accounted for 19 percent of China’s 1.3 billion population in 2003, nearly 250 million, and it was expected to rise to 40 percent by 2020. The middle class in China could surpass the middle class in the U.S. within a decade or two. (While other estimates were lower, all indicate that there is a significant and growing middle class.) For this segment, the price-value equation is the most critical factor. The Housing Development Finance Corporation Ltd. (HDFC), founded by Hasmukhbhai Parekh, became India’s top housing finance company by offering loans at minimal rates with low down payments. This made it possible for people to dream of owning their first homes. These growing middle-class markets also have driven demand for automobiles, appliances, student loans, and many other products.
The poor—About 1.1 billion people in developing countries live on an income of less than $1 per day, including one-third of the population of India and Brazil. Rapid economic growth in East and South Asia has helped decrease the number of people living in extreme poverty from 40 percent of the global population in 1981 to 21 percent in 2001. However, the very poor still represent a significant portion of developing markets. Contrary to popular perceptions, these low-income segments still consume products such as potable water, electricity, tea, low-cost laundry detergents, toothpaste, transportation, and communication services. Although prices and margins are low, large numbers can make these very profitable markets, particularly for products that address people’s pressing needs. There are strong opportunities to build markets among the poor, as C.K. Prahalad has demonstrated in The Fortune at the Bottom of the Pyramid.
The rural—By 2004, it was estimated that rural India’s share in total consumption of fast-moving consumer goods (such as toothpaste, cream, and food products) and consumer durables exceeded urban India’s share. A study in smaller towns of India suggested that revenues from rural STD and ISD (booths offering domestic and international phone calls) are greater than for larger towns. Different rural segments present different opportunities. For example, the rich farmer is a good potential market for farm equipment, transport for rural roads, TV sets, consumer durables, gensets (generator sets), and cell phones. There is a need for low-cost housing and information on weather, daily crop prices, and availability of raw materials and other products. Globally, areas known as "teledeserts" are beginning to blossom with high-speed satellite links. Bedouin nomads in the Middle East negotiate deals for their sheep and goats on cell phones. In the West African countries of Ivory Coast and Ghana, shared cell phones are enabling rural coffee and cocoa farmers to call produce markets in the cities and negotiate their own prices. While it can be a daunting task to reach these markets, companies are beginning to unlock their potential.
Companies have built successful businesses by catering to the poorest of the poor, by offering luxury products to the rich, or anywhere in between. Yet all these segments share a common environment and characteristics that shape the opportunities of developing markets. These distinctive characteristics, as summarized next, are the focus of the market strategies discussed throughout this book.