1. Our presentation today is on the future of enterprise in India. This slide summarises the main points of our presentation. According to the dominant narrative, India’s growth is premised on its rising urban middle-class and rural consumer growth on the back of infrastructural improvements. We believe it’s more prudent to remain skeptical of India’s ability to improve its infrastructure significantly over the next 15 to 20 years. Moreover, there are barriers to India’s rate of urbanisation that could hinder the growth of its middle-class. Instead, we argue that it is the rural market that will preoccupy enterprises in India. In order to capture the rural market share, such enterprises will have to innovate around India’s limitations. This improvisational approach towards innovation goes by the name of jugaad . 2. India’s rural market acts as a test-bed for knowledge, and successful jugaad innovation there will enable enterprises to scale up. Firstly, this is achievable if companies succeed in creating and providing for rural demand. Secondly, innovation will enable companies to create a wide-range of products that can be exported not only to other emerging markets, but to the developed economies as well. As Indian enterprises globalise, we are likely to see increased M&A activity.
One clear indicator of the growth of Indian enterprises is the increasing amount of outbound mergers & acquisitions from India. The deal value of outbound M&A activity reached a peak in 2006 and 2007, with levels of US$22 billion. Indian enterprises are also directing their gaze away from Western developed economies to the East. Outward FDI from India dropped from 21 percent to 11 percent in the US and six percent to two percent in the UK between 2008 to 2009. Outward FDI to Singapore, however, increased over the same period by 10 percent. In March 2010, for instance, the Indian hospital chain Fortis Healthcare agreed to buy 23.9 percent of Singapore healthcare provider Parkway Holdings for US$685 million.
The consensus within business and consultancy circles is that India is poised for rapid growth over the next 15 to 20 years. McKinsey forecasts that India’s GDP will grow at a rate of 7.3 percent annually. This means that by 2025, India’s GDP would roughly equal to China’s in 2006. Anil Gupta and Wang Haiyan are even more optimistic and state that India is 12 to 14 years behind China, which implies that India will grow at an average of 8 to 9 percent annually. One of the drivers of this projected scenario is urbanisation. Given that India’s urban population on comprises 28 percent of its total population, there appears to be much potential for growth. According to a 2008 Metropolis Congress report, Delhi is projected to have 25 million people and Mumbai 14 million residents by 2020. This will be more than London and New York combined.
But India has significant barriers to social mobility that can constrain growth. One telling indicator is that India’s urbanisation rate has lagged behind other emerging countries. This graph compares the annual rate of change of percentage urban in India with China. From the mid-1970s throughout the 1980s, China experienced a burst of urban growth. This occurred despite the hukou restrictions on rural-urban migration implemented in 1958, probably as a result of economic reforms implemented by Deng Xiaoping. In contrast, India’s urban rate of growth declined from 1.5 percent in the mid-1970s to less than one percent in 2005. Even though the rate has since picked up, the UN forecasts that India’s rate of change of percentage urban will not reach China’s peak, and might begin to decline again in 2025. . India is unique among emerging economies for its low urbanisation rate. Besides China, Indonesia also started off with a lower percentage of urban population in 1975 than India, but surpassed the latter by the year 2000. One possible explanation, according to Kaivan Munshi from Brown University and Mark Rosenzweig from Yale, is that the rural caste system acts as a strong disincentive against marrying outside of one’s village caste network. They show that the rate of marriages out of one’s caste in the rural areas remained at a constant low of less than 6 percent from 1950 to 1999. With such strong pressures to keep individuals within the rural caste community, urbanisation fell behind. The majority of India’s population is likely to remain in the rural areas for the next 15 years. If India’s annual rate of change of percentage urban over this period averages at 1.5 percent, the urban population will comprise just 35 percent of the total in 2025. A key goal for future enterprises in India will be to unlock this huge rural market that currently numbers to some 700 million people. As the rural market develops, its consumption and demand for goods will grow. In 2007, for instance, the Indian Associated Chambers of Commerce and Industry forecasted that the market for fast moving consumer goods (FMCG) in urban areas will drop by 25 percent by 2010 because of market over-saturation. On the other hand, it predicted that the rural market for FMCG would grow by 10 percent over the same period.
India also lags behind in infrastructural development. According to the 2009 Global Competitive Index (GCI), it ranks the worst among the BRIC countries for infrastructure (89th). Where it does relatively well at, however, is in innovation. It came in 30th out of 133 countries for innovation as measured by the GCI, a close second behind China. In this slide, we plotted the position of China and India on a 2X2 matrix based on GCI data. The vertical axis is the quality of infrastructure in the country, with infrastructure getting better as we go up the axis. The horizontal axis is a qualitative assessment of the type of innovation, ranging from duplication of technology and processes on the extreme left to breakthrough innovations on the extreme right. Infrastructure is not necessarily correlated to innovation, although there are studies that indicate it to be so. Rather, our emphasis is on the positive correlation of both variables to GDP growth. We project that China over the next 15 years will likely follow the trajectory of the Asian tiger economies. India, on the other hand, is likely to follow a different path. Although the Indian government has been trying to attract FDI into infrastructure construction, such herculean efforts might not even have the desired output. A 1996 NBER paper showed that new infrastructure construction might even have a negative effect on economic growth if it diverts resources away from maintaining the effectiveness of existing infrastructure. Despite these infrastructural limitations, enterprises in India have shown themselves to be capable of creating innovative products that cater to both emerging and developed markets.
The specific kind of innovation that has emerged out of India is called jugaad . This is a colloquial Hindi word that means “work around”. It was commonly used whenever vehicles had to be fixed in innovative and unorthodox ways due to a lack of resources. The philosophy, however, has resulted in a particular kind of Indian innovation. In its modern incarnation, jugaad refers to innovation that works around constraints to deliver first world goods and services at third world prices. Jugaad modifies the traditional profit equation. Entrepreneurs usually set the price of a product based on the cost and expected profit margin (Price = Cost + Profit). Jugaad innovation, on the other hand, emphasises the design of a product or service and ensures that the core functions are delivered at the highest possible quality. An affordable price is fixed, and unnecessary frills are removed. The embodiment of this design philosophy is the Tata Nano, where the metaphorical price of a typical autorickshaw is paired with the performance of a high-quality car without all of the frills. In doing so, the rural and urban poor can access and purchase high quality goods and services. Such a business model, as CK Prahalad notes, can be scaled up and exported out of India.
Jugaad innovation can be regarded as a knowledge commodity. Dr Prahalad’s quote can be read in two ways: firstly, India’s huge rural market is a test-bed for the development of innovative business models and products; secondly, if jugaad -engineered goods and services successfully tap India’s huge rural market, then the innovation can be re-exported overseas to both developed and emerging markets.
As mentioned earlier, India is unique among emerging economies in that the rural population is likely to be a significant majority in the years to come. It has the lowest percentage urban among the BRIC countries. Compared to the emerging economies in Southeast Asia, it lags behind Indonesia (46 percent), Thailand (32 percent) and is barely ahead of Vietnam (26 percent). This huge rural market thus represents a potential goldmine for overseas firms. One initiative to tap the rural market is by the Swiss pharmaceutical company Novartis. In late 2006, Novartis launched its Arogya Parivar outreach program to provide healthcare and medicine to villagers. From two states – Uttar Pradesh and Maharashtra – the initiative now stretches across seven states and 25 million villagers. Novartis plans to double this catchment area by 2010.
Although the specifics of Novartis’ business model differs from its competitors, nevertheless jugaad innovation is the common factor that enables rural villagers to receive healthcare and drugs despite the lack of infrastructure. In Novartis’ case, the traditional “four Ps” (The 4Ps are?) of marketing are replaced with the “four As” – affordability; awareness; availability; acceptance. It adopted a decentralised cell distribution model to provide an integrated healthcare service from educating villagers about symptoms to diagnosis to the delivery of medicine. By end-2008, Novartis had 170 such cells. It also packaged its drugs in smaller quantities so that they could be sold at more affordable prices.
As enterprises overcome local constraints in India, they develop and obtain technology, product knowledge, and supply-chain networks that give them a competitive edge in other emerging markets. The case of PepsiCo’s entrance into India is one example. In 1989, PepsiCo faced considerable obstacles in setting up its business in India because of the specific conditions that the Indian government required of the company. According to Vivek Bharati, PepsiCo India’s executive director of agriculture, the government wanted to make a political case that PepsiCo’s entry into the Indian market would be beneficial to farmers. PepsiCo, for one, had to operate through a joint venture with the Punjab government. It had to export goods worth half its turnover for 10 years, and had to invest in food cultivation. PepsiCo innovated around these restrictions. It experimented on rice and managed to increase farmers’ yields significantly. PepsiCo’s involvement in rice has actually resulted in new ways to grow more rice for less water, which has been very beneficial to Indian farmers.
India is a learning-lab for MNCs like PepsiCo to develop new products for export. By adopting the jugaad spirit and working around government constraints, PepsiCo now manages an extensive supply chain of contract farmers in India. Some 15,000 farmers provide PepsiCo with 75,000 tons of potatoes for exports worth US$44 million. Experiments with flavours to appeal to the local market led to the creation of indigenous products like Nimbooz, a lemon-flavoured drink. The technology behind these new flavours was subsequently exported to other emerging markets, such as a hibiscus-flavoured drink PepsiCo created for Egypt. In 2009, it formed a baked-snack unit and launched Aliva, a savoury cracker for the Indian market. PepsiCo India’s experience has enabled it to diversify away from soft drinks, with 37 percent of its US$1.2 billion revenue coming from snack foods.
The power of Jugaad innovation to provide first world services at third world prices is evident in the example of healthcare provider Narayana Hrudayalaya (NH). Based in Bangalore, NH provides world-class heart healthcare at a fraction of the cost, compared to US and Indian hospitals. To do so it relies on the jugaad innovation of telemedicine to diagnose patients in out-of-reach rural areas. Most ailments need not be operated on and just require treatment. If operation is required, NH has an innovative cost-saving model. It gains economies of scale through the volume of surgeries per day. Doctors are self-motivated, however, and are helped by nurses from the villages who learn by doing specific tasks repeatedly. Cost savings are also achieved by maximising the utilisation rate of machines that are tailor-made to only provide core functions.
By providing high quality, affordable healthcare through jugaad innovation, NH has successfully tapped India's bottom of the pyramid. It turned in a respectable after-tax profit of 7.7% according to a 2009 report. True to CK Prahalad's prediction, NH has been able to export its BoP model, not only to other emerging countries but to developed economies as well. It is opening hospitals near Miami and in Malaysia, and its telemedicine network extends to Africa and soon Indonesia. Medical tourism has also emerged as an emerging industry in India. 1 million tourists from 55 countries come to India for treatment every year. In 2005/06, medical tourism in India was valued at US$310 million and is predicted to grow to $2 billion by 2012.
In this presentation, we have put forth the case that India’s rural market will continue to comprise a significant majority of its total population in the next 15 to 20 years. As such, enterprises in India – both foreign and domestic – will seek to capture the demands of the rural consumer. Furthermore, successful enterprises in India will be those that manage to innovate around infrastructural constraints. This form of jugaad innovation comes in various forms, but it is most marked in the value-proposition of providing high quality goods and services at affordable prices, particularly for the bottom of the pyramid. More importantly, enterprises that successfully capture this BOP market can export their business models and technology to emerging markets and developed economies. The enterprise landscape that could emerge in India as a result of these processes will be a synthesis of workaround solutions, affordable technology, and pragmatic products. To move up the value chain, new sectors will be created as old ones combine with each other. Telemedicine and medical tourism are two examples of sectors which will experience unprecedented growth in the next few years. Possible enterprises could include firms selling DIY-assembled modular vehicles, portable hygiene such as easy-to-transport water purifiers, and sophisticated mobile apps that do not rely on smartphone technology. Given the increasing energy needs of India’s rural population, the development of clean technology would likely occupy a big part of India’s future enterprise landscape. The question is how Singapore can tap on the knowledge and jugaad innovativeness of India-based enterprises and the Indian diaspora.
Future of Indian Enterprise
Future of Asian Enterprise: India 2025?
Indian firms are rapidly globalizing via Financial Times, March 9, 2010. Examples of M&A Indian Outbound M&A Outbound FDI Kuwait Telecoms (US$ 10.7 billion) Singapore Healthcare (US$ 683 million) Source: RBI Bulletin, January 2010
Stumbling Tiger, Leaping Dragon? GDP growth in Central provinces [Chongqing, Sichuan, etc] outpace coastal regions [PRD, YRD] Rapid GDP growth in Tier I – II provinces [Gujarat, Karnataka, Maharashtra, New Delhi] 46% Urban 54% Rural 28% Urban 72% Rural INDIA = CHINA – 12 Years INDIA
Rural areas will drive innovation in India CHINA INDIA Why China is 12 years ahead India 2025: 35% Urban
Will India’s poor infrastructure impede its growth? Good Infrastructure Back Office Copycats Poor Infrastructure Breakthrough Innovation Source: Global Competitive Index Growth Trajectories: China and India
Jugaad Innovation Price Profit (Frills) Design JUGAAD INNOVATION: Constraint-based innovation that relies on ingenuity in terms of product, process, and people to serve customers at the base of the pyramid. It is “ First World goods and services at Third World prices.”
Innovation Flows DEVELOPED EMERGING Challenge and change the price performance equations. If we can satisfy 500 million (poor) customers in India by producing world-class quality, then that can become the biggest export opportunity in the world. - CK Prahalad, author of ‘The Fortune at the Bottom of the Pyramid.’
Innovation: Business Strategy DEVELOPED EMERGING
Arogya Parivar: Business Strategies for the BoP The traditional four P’s of marketing (Product, Price, Place and Promotion) have been replaced with the 4A’s (Affordability, Awareness, Availability, Acceptance).
Innovation Flows: Products DEVELOPED EMERGING EMERGING
India as the world’s post-recessionary consumer lab From Pepsi to PepsiCo: Learning from India to export overseas Business Today Initial entry conditions turned into strategic advantage Indigenous products helped PepsiCo diversify out of soft drinks. The technology behind Nimbooz, a lemon-flavored drink, was used to launch a hibiscus drink in Egypt. PepsiCo uses India as a benchmark for low-cost-high-quality products , reinforcing India’s status as a lab to determine post-recession demand.
First World Surgeries At Third World Prices Source: Wall Street Journal
2025: Indian Enterprise Landscape DIY and Modular Vehicles Portable Hygiene Clean Technology Mobile Commerce How can Singapore capitalize on the disruptive innovation from India? In what ways will disruptive innovation from India affect Singapore?