Are the profits at the bottom of the pyramid enough motivation for research and development of appropriate technologies?

The back cover of C.K. Pralahad’s book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits says,

One market that’s been overlooked is also the fastest growing market in the world, and it’s where you least expect it: at the bottom of the pyramid. Collectively, the world’s 5 billion poor have vast untapped buying power. They represent enormous potential for companies who learn how to serve this market by providing the poor with what they need. This creates a win-win situation: not only do corporations tap into a vibrant market, but by treating the poor as consumers they are no longer treated with indignity; they become empowered customers… You can learn how to serve them and help millions of the world’s poorest people escape poverty. It is being done—profitably.

Pralahad is right that markets have been ignoring developing nations, but that is because poor people aren’t nearly as profitable as he makes them sound.  In 2001, the income of everyone in Sub-Saharan Africa totaled $336b.  For comparison, that was considerably less than the total income in Michigan that year ($351b) and only a bit more than the state of Massachusetts ($296b).  That means that markets care about all the people in Sub-Saharan Africa less than about the people of Michigan and markets mainly care about the few rich people in Africa more than the masses of poor people who hardly buy anything that isn’t produced in their villages.  Most of the GDP in Sub-Saharan Africa is subsistence production that is produced and consumed locally which international businesses could care less about because there is little money left over to import anything.

A tiny, rich city-state like Singapore exported $409b of goods and services in 2014 which was more than double the $153b exports of all of Sub-Saharan African nations combind.  This is a remarkable inequality because the population of Sub-Saharan Africa was 962m versus 5m people in Singapore.  For comparison, Sub-Saharan Africa’s population is more than double the size of the US whereas Singapore has a smaller population than Wisconsin or Maryland.  The rich residents of Singapore exported an average of $81,800 per person whereas residents of Sub-Saharan Africa only exported $0.16 per person.  Within Africa, the rich controlled most of African exports, and the billions of poor people were mostly bypassed.  That is why markets don’t care much about poor people.  The “fortune” at the bottom of the pyramid in Sub-Saharan Africa has been only a few pennies per person that they have been using to buy our goods.  Markets care more about a small rich country like Singapore or a small U.S. state than about the bulk of Africa, and the poor people in Africa are particularly ignored.  Foreign corporations care more about the hundreds of African millionaires than about the almost 1 billion poor Africans.

Because markets serve concentrations of wealth, not people, manufacturers around the world have invested in more in developing cooking stoves for rich backpackers than for the billions of people cooking with wood in poor nations.  Markets have produced many inexpensive woodburning stoves that serve a tiny niche market for occasional use by backpackers in rich nations rather than developing cheap wood-burning stoves that could dramatically reduce the firewood used everyday by the billions of people who cook with it.  Markets follow the money.  Hopefully some of the new backpacking stove technologies will eventually trickle down to be sold in developing nations where they could revolutionize everyday life and reduce deforestation, but they aren’t practical for everyday use because they are too small and unsteady for cooking for families, and require too much constant attention for busy cooks who aren’t just heating up a ready-made freeze-dried backpacking meal while enjoying a sunset on a leisurely vacation.  One of my students bought this wood-burning backpacking stove on Amazon for $16 for doing the $2/day challenge, but it was a lot of work to use.

cookstove

Some companies are using the backpacking market to help fund work on appropriate technologies for developing nations.  BioLite makes innovative backpacking wood stoves that generate electrical power while you cook and has a parallel mission to adapt these backpacking technologies for poor people.

Fortunately, poor nations have been booming in recent decades and they are rapidly developing their own technologies.  Some of those new technologies will eventually trickle up to benefit rich countries too.  Eric Bellman wrote about this in the WSJ which also has some wonderful photos of the products, but unfortunately, it is all behind a paywall.

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 …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… 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.

For the farmer who wants to save for the future, one Indian entrepreneur has developed what is, in effect, a $200 portable bank branch. For the village housewife, a wood-burning stove has been reinvented to make more heat and less smoke for $23. For the slum family struggling to get clean water, there is a $43 water-purification system. For the villager who wants to give his child a cold glass of milk, there is a tiny $70 refrigerator…. And for rural health clinics, whose patients can’t spend more than $5 on a visit, there are heart monitors and baby warmers redesigned to cost 10% of what they do elsewhere.

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.

…Unexpectedly strong demand for cheap cellphones in recent years revealed …untapped markets… 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 …five years ago.

At the same time, many of the nation’s poor have become aware of material goods available …thanks to a proliferation of television networks, radio stations, newspapers and magazines.

I am more opposed to consumerism than most people, but it probably has had considerable benefit in causing reduced family sizes.  Marketing works and when people are influenced to want to buy more stuff, they have fewer kids because they cannot afford both a lot of stuff and a lot of kids.  In rural developing areas where there is practically nothing to buy, there is less temptation for parents to conserve their resources to buy more stuff and little material sacrifice from having more kids. Commercial marketers change that calculation without trying to reduce fertility by showing lots of beautiful pictures of small, rich families happily enjoying the products they have bought.

…the trend could … lead to a new kind of multinational corporation that thrives outside of the developed world. Unilever NV and General Electric Co. are taking notice. GE’s chairman, Jeffrey Immelt… 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.”

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.

This time, Indian engineers are reinventing products to cut costs and reach the billions of people world-wide who live on less than $2 a day… “These are not cheap knockoffs of Western products, they are in many cases very different products,” says Arindam Bhattacharya …of the Boston Consulting Group. “Western companies have not often explored these segments so they are untapped markets.”

…[They] 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. …

Hindustan Unilever spent four years developing its battery-powered portable water-purification system called Pureit. The $43 water-cooler-size system is now in more than three million Indian homes, many in hard-to-reach rural areas, thanks to its network of 45,000 women, who demonstrate the Pureit and other Unilever products in their own homes. They then sell door to door around their villages, …from the back of bicycles.

Some of the products may end up in developed markets. One of the Nano’s first export markets, for example, will be Europe. The European version of the car will have better interiors and safety features and cost more than the Indian version but will still be cheaper than almost anything in Europe.

Note that this is how disruptive innovation works.  New competition begins by selling a lower-quality, but much cheaper substitute in an existing market. Over time technology tends to improve and quality tends to improve which causes the high-end incumbent companies to shrink.  Meanwhile the high-end companies don’t adopt the cheaper substitute because that would cannibalize sales of their high-profit products.

Godrej, one of India’s oldest [companies] wanted in on the action. Fewer than one in five Indian homes has a refrigerator, so Godrej figured it could attract a huge new group of consumers if it could get the price right.

It sent surveyors into village huts for months at a time to discover the needs of farm families. The result: The “ChotuKool,” or “Little Cool” in Hindi, looks more like a cooler. It opens from the top and is about 1.5 feet tall by 2 feet wide. It is tiny because the poor live in small homes and don’t buy food in bulk. It has handles to make it portable for the migrant workers who move a lot. It has no compressor to break or make noise. Instead, it runs on a cooling chip and fan similar to those used to cool computers. It can survive power surges and outages common in the country kitchen and even has the option of running on batteries. While designed with cost in mind, it uses high-end insulation to stay cool for hours without power.

By keeping it small and reducing the number of parts to around 20 instead of the 200 that go into regular refrigerators, Godrej has been able to sell it for only $70, which is less than one third of the price of a regular bottom-of-the-line fridge. It also consumes only half the power… “No one in our family has ever had a refrigerator,” said Sangeeta Harshvardhan, a housewife in Udgir, a remote rural village… “But at this price even we can afford one now.”

While they have only had the fridge a month, her family is already used to the convenience. It allows her to stock up on the cucumbers her husband munches three times a day, put cool water in her son’s thermos before he goes to grade school, and avoid having to boil milk to purify it every time she makes tea.

If you go to the ChotuKool website, they aren’t marketing their products to poor Indian families.  All the pictures show Indian families who would be above the median income in the US!  Even though most of their buyers are probably poor Indians, their marketing shows rich Indians buying it for “partyKool” storage of party drinks, “carKool” use as an expensive picnic basket, “personalKool” use in a dorm room and next to a luxurious swimming pool.  Markets chase money not people.

PoolFridge

But ChotoKool is probably bought by more poor Indians than rich Indians and when they look at the ChotoKool marketing, they see wealthy adults having fun without any children.  These subtle messages are intended to change their priorities towards buying more ChotoKool products which by necessity must mean having smaller families because poor Indians cannot afford both.

A start-up company, First Energy, which was launched with the help of BP… [hoped] to help village women who spend hours a day looking for wood and keeping a fire going to cook for their families, the Pune-based company adopted the gasifier technology used in power plants to make a stove that would burn more efficiently and with less smoke. Engineers… designed a stove with a perforated chamber that uses a small fan to get just the right amount of air to keep a fire burning at a high temperature, meaning less smoke and quicker cooking. It has sold around 400,000 of the $23 stoves across India.

“A lot of innovation has gone into the stove as well as the fuel,” which is dry pellets made of agricultural waste like corn husks and peanut shells, says Mahesh Yagnaraman, head of First Energy. “This is not a gizmo like a cellphone. But it is definitely a life-changing product because the houses will not be smoky.”

To bring banking services to villages, Anurag Gupta …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.

Mr. Gupta named his innovation Zero, after what he says is India’s most important innovation — the number zero — which many believe was invented by Indian mathematician Aryabhata in the sixth century. Indian banks already are using his system to open millions of new accounts. 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.

The Zero system is already helping Indian construction workers in Bahrain open bank accounts and send money home.

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…

The Tata Nano is an amazing accomplishment that gets 55mpg, and costs about $3,000 for the base model.  The Japanese auto companies started with similarly small, cheap vehicles and ended up disrupting the US automobile industry which had been focused on big, profitable gas guzzlers.  The Japanese were ready for the gas-price crises of the 1970s.  Perhaps Tata motors will repeat that story if gas prices skyrocket again.

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