high growth markets magazine pdf

Weighing up Nigeria and Ghana Quantifying poverty’s global decline Bull market for frugal engineering Nurturing Africa’s Silicon Savannah Innovations for the entry level Argentina’s illu

Foreword

Is China building a new Africa?

Weighing up Nigeria and Ghana

Quantifying poverty’s global decline

Bull market for frugal engineering

Nurturing Africa’s Silicon Savannah

Innovations for the entry level

Argentina’s illusion

Talking cars with Fiat

The adventurer of emerging markets

………

By Richard Reid, Partner, London Chairman KPMG in the UK.

…

Dear reader,

South-south cooperation has a growing influence on investment flows around the world Yearly FDI statistics show an increasing share of emerging markets activities in other developing markets Importantly, this also changes a historically widespread perception that still these activities are mainly driven by the US and European

markets

Sub-Saharan Africa is at the forefront of this development with several countries attracting billions from flourishing Asian economies, particularly China and India Trade is skyrocketing between both continents – with a rapidly expanding share of industrial and consumer goods, not just commodities Our Focus feature explains the prospects for African markets, but also the consequences for competing US- and

European-based multinationals

Current growth on the continent could easily be overlooked while reports of starvation

in East Africa have been hitting the headlines But there are positive signs too:

Research from two Brookings Institution scholars show that increased global trade – especially by BRIC nations – helped half a billion people escape poverty in the last six years And that one of the prime targets of the UN Millennium Development Goals – to halve the global poverty rate from its 1990 level by 2015 – was probably achieved ahead of schedule

Never before have so many been lifted out of poverty in such a short time That is little consolation to the 1,500 Somalis who have been arriving daily at refugee camps

in Kenya this summer, fleeing drought and famine But in their opinion piece the two

US academics take the long view, and illustrate that the world is being “transformed from being mostly poor to mostly middle class.” At first this may sound a bit like demographer speak, but in a way it’s also the idea behind the UN strategic policy initiative called the UN Global Compact KPMG is a signatory of that compact We are convinced that on the issues of eradicating hunger, increasing accountability, and generating wealth, the private sector can play a vital role

Is China building a new Africa?

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South-south investment is overwhelmingly a story of the Chinese in

Africa From resource deals through investment in manufacturing to

setting up stalls in local street markets, the impact of the Asian

superpower’s scramble for a continent is almost impossible to overstate.

By Tristan McConnell, based in Nairobi, where he contributes to The Times and

other British publications.

…

China is the 21st-century story of Africa It is near impossible to overstate the impact

of the Asian superpower’s drive to invest in the continent, and while Africa’s trade relations with other emerging partners such as India, Brazil, South Korea, and Turkey are growing in importance, south–south investment is mostly still a Chinese game Some estimates say there are now more than 750,000 Chinese living and working in Africa, and the continent’s airlines – Ethiopian, South African, and Kenyan Airways – have been quick to serve this labour migration with regular flights connecting Beijing, Guangzhou, and Shanghai with Addis Ababa, Jo’burg, and Nairobi

For Africa this new relationship has translated into impressive growth According to

the latest African Economic Outlook report, produced by the Africa Development

Bank, the OECD, and the UN, Africa’s total trade was worth US$673 billion in 2009, up from just US$247 billion at the start of the century

In 2008 China overtook the United States as Africa’s biggest trading partner with

imports and exports worth a record US$107 billion Since 2000, China’s share of trade with Africa has grown nearly 300 percent, while the US and Europe’s share has

reduced by 19 and 17 percent respectively, according to the OECD

The US and Europe still account for more than half of Africa’s trade, but their share

“has quickly eroded” according to the African Economic Outlook “Africa’s rebalancing

act turns the page on 50 years of over-reliance on the West Links with the traditional partners face profound changes.”

The IMF predicts continental growth of close to 5 percent at a time when many world economies are struggling Dr Martyn Davies, chief executive of Johannesburg

consultancy Frontier Advisory, says African growth and Chinese investment are now inextricably linked “Chinese demand for commodities is underpinning African GDP growth The robust growth rates of sub- Saharan Africa are due in large part to this new coupling, and in time a component of China’s growth will become dependent on Africa’s ability to supply those commodities,” said Davies

Analysis by Frontier Advisory shows a close to perfect correlation – 92 percent –

between Chinese and African growth since 1999 “If the Chinese are confident in Africa’s growth, perhaps that’s because they are confident of their own commodity demand curve over the next two decades,” Davies says

Matthew Walker, associate director for Global Infrastructure – China Markets at KPMG, agrees “China’s demand for resources will continue as China’s economy continues to grow at 7–10 percent over the next ten years plus,” he says But it is no longer just about resources “The whole of the continent is a frontier market for the Chinese.”China’s trading relationship with Africa is not new Recent archaeological finds in Kenya suggest that Chinese traders reached Africa’s Swahili coast 600 years ago The discovery of Chinese porcelain in a 16th-century cemetery is “evidence of an ancient China-Africa relationship,” says Professor Qin Dashu of Beijing University’s School of Archaeology and Museology

In the mid-20th century, as Africa struggled to break free of colonialism, Mao Zedong supported Africa’s socialist liberation movements In return, African states voted China onto the UN Security Council in 1971 Since then it has continued with the quid pro quo of financial for political support All but four of Africa’s 53 states have

severed diplomatic ties with Taiwan, helping to keep the island nation in the

diplomatic cold while, as a bloc, China-friendly African states can vote down censure

of China at international meetings over its domestic human rights record

Free from the troubled colonial history that blights relations between many European countries and Africa, China and Chinese people have often found a warm welcome on the continent However, a few high-profile missteps have soured the China-Africa relationship and, through the lens of casual xenophobia, individual incidents have come to be regarded by some as “the Chinese way.”

The violent actions of Chinese managers at a mining company in Zambia mean Chinese employers are seen as brutal; the washing away of a shoddily built road (also in

Zambia) and cracks in the walls of a new hospital in Angola mean Chinese construction

is considered slapdash; oil exploration in a national park in Gabon means the Chinese are believed to care nothing for the environment

Chinese willingness to work long hours in tough conditions has spawned rumors of African employees forced to labor like slaves or that Chinese work gangs are really imported prisoners working out their sentences Both the Western and African press have propagated the notion that there is something insidious about China’s

involvement in Africa

Chinese companies must share the blame, partly because of cultural insensitivity and the poor business practices that some undoubtedly do engage in, and partly because they are simply not very good at public relations, a discipline largely ignored in China Davies also points out that culture clashes are to be expected between “two rather non-globalized, rather traditional, indigenous cultures.” The relationship may have deep historical roots, but China and Africa are still getting to know one another

A report commissioned by the office of UN Under-Secretary-General and Special

Advisor on Africa Cheick Sidi Diarra warned of “complementary win-win and

competitive win-lose” relationships as Africa engages with other emerging economies

The concern is that while China has a plan for Africa, Africa may not have a plan for China The UN Conference on Trade and Development (UNCTAD) reinforces this point arguing that African countries must “mainstream” their relationship with emerging economies

“South–south cooperation has the potential to enhance Africa’s capacity to deal with the challenges of poverty, poor infrastructure, development of productive capacity and emerging threats associated with climate change as well as the food, energy, financial and economic crises,” UNCTAD said in its 2010 Economic Development in Africa report “These potential benefits of cooperation are however not automatic They accrue to countries that have taken adequate and proactive steps to exploit them.”

Not every country in sub-Saharan Africa is equally well-equipped or well-prepared to take advantage of south-south investment in general and China’s appetite in

particular But, as economist James Shikwati, director of the Nairobi-based Inter Region Economic Network and author of Geological Resources and Good Governance in Sub-Saharan Africa points out, “The Chinese are not a threat if the right structures are

in place.”

“There is no African Australia,” says Davies, referring to the way that nation has

proactively sought to align itself with China’s economic growth “African countries need to align their developmental requirements with China’s strategic interests and there is a phenomenal confluence between the two.” Some are already doing this, with Ethiopia and Ghana at the forefront, but economies rich in natural resources and especially oil, such as Angola, DR Congo, Nigeria, and Sudan, are still China’s first port

of call

“China’s been investing in Africa for a long time,” says Walker “Historically it was politically driven, but for the last 20 years the focus has been on resources: either direct investment in resources or infrastructure-for-resources deals, but always with one eye on strategic resources.” Traditionally the Chinese government identifies a country rich in a resource that it needs, and offers a loan, often worth billions, with a very low interest rate to be paid back by supply of the commodity in demand The loan is then used to satisfy the African country’s need for basic infrastructure, a road, railway, dam or hospital Chinese companies are given the contract to build the

infrastructure and a flood of expatriate workers complete the job and then go home China’s involvement is often couched in terms of a new “Scramble for Africa” akin to the 19th century carve-up by European nations But the reality is more complex Increasingly, Chinese workers who come to build the infrastructure involved in

resource deals are deciding to stay Simon Freemantle, senior analyst in Standard Bank’s African Political Economy Unit, says that Angola is a perfect example of both the old and the new engagements acting concurrently “Chinese investment has

traditionally followed large-scale, state-led bilateral engagements In Angola, loans totalling US$15 billion since 2002 have enabled a lot of Chinese investment in other sectors,” he says

The first deals were oil for loans, but then Chinese procurement company Sinotrans began supplying the Chinese company CITIC, which is constructing new housing

projects in the capital Luanda, and workers on the infrastructure projects recognized opportunities in the local market “In Angola today you have every strata of Chinese expatriate from a peasant with literally no skills operating as he would in China, to informal traders, salon owners, taxi drivers, right up to the high-level business

executives It represents a shift in the appreciation of opportunities in Africa: China clearly sees opportunities in the consumer class in Africa that a lot of other foreign investors are yet to appreciate.”

China’s interest in Africa is diversifying as the continent is increasingly seen as a place

to all and any kind of business “Africa is still viewed by most Chinese people as a place that offers resources and wildlife, but the increasing Chinese expatriate

community in places like Angola, South Africa, Kenya, Zambia, and Zimbabwe are creating spin-offs in local market understanding and an appreciation of the

opportunities that are filtering back to China,” says Freemantle

It is no longer all about state-owned or even just state-backed companies, China’s private sector is increasingly investing in Africa Technology giant Huawei supplies USB modems to increasingly internet-savvy populations across the continent Telecoms company ZTE provides affordable smartphones and has a growing presence in many African markets

“There won’t be any let up in the desire to do resources deals, rather the perception

of Africa has changed from it being one big mine to being a potential partner in its own right, hence the diversification of the industries in which China is willing to

invest,” says Walker

Davies sees three ways in which China is currently engaging economically with Africa

“First is the big state capital play: typically government-to-government, construction and engineering Second are the very large numbers of Chinese micro-entrepreneurs: traders, wholesalers and retailers who are totally apolitical and coming to Africa to make their fortune Third – and this is starting now – is substantive, sizeable, private sector companies from China coming purely because they see opportunity here.” Freemantle has identified the same trend of Chinese state-owned institutions being joined in Africa by private Chinese firms “Chinese companies are increasingly

operating independent of state funding,” he says

They are focused on construction, telecommunications, and the consumer sector, and

it is the latter that is fast emerging as the new frontier for Chinese investment

Consultancy McKinsey & Co has forecast Africa’s consumer market to be worth US$1.4 trillion by 2020, yet it is a sector that many companies from the West, where Africa is still viewed more as a developmental burden than a commercial opportunity, have yet

to wake up to US retail giant Wal-Mart recently bought its way into Africa with the US$2.4 billion purchase of South Africa’s Massmart but such a deal is the exception not the norm: Chinese investors are leading the charge

President Hu Jintao established the US$5 billion China-Africa Development Fund in

2007 to help fund private Chinese ventures in Africa Although it has been slow to disburse funds – only about US$1 billion had been lent by 2010 – there have been some notable CADF-backed deals such as First Automobile Works’ (FAW) US$100 million investment in car manufacturing in South Africa

The Hazan factory in Nigeria is the biggest shoemaker in Africa In Ethiopia, the

Chinese-owned Friendship Tannery produces leather- goods There are Chinese

agricultural programs in Senegal and textiles factories in Mauritius But not everyone welcomes China’s diversification because, while competition is good for consumers, it’s bad for manufacturers and workers Tanzania’s government has said it welcomes China’s investors but not its “vendors or shoe-shiners.”

Shikwati is in no doubt that “competition is a good thing for the growing economies of this region There are complaints from the small and medium-sized enterprises and the old monopolies in manufacturing but we have to ask what are the eventual

benefits for everybody? We should not fear the Chinese but partner with them.”

“You can’t shut the door now, it is too late, so we must tap into their interests,” Shikwati continues “We need clear regulations before allowing the Chinese to enjoy the largesse of our markets Instead of complaining we need to prepare for the flood that is coming because it can sweep us off our feet or we can harness it for own

benefit, but either way it is coming.”

The willingness of Chinese entrepreneurs to engage at every level of Africa’s economic life marks them out as different from Western businessmen “They are geared up for it,” says Walker “China has been an emerging market itself for a long time so they are used to providing the right solutions in those sort of environments.” Freemantle agrees: “There are a lot of similarities between Africa as an emerging market and China’s own domestic market.”

But perhaps the biggest difference is not in business culture or the willingness to get hands dirty in markets that can sometimes have a distinctly Wild West feel, but in access to financing The deep pockets of the China Development Bank (CDB) or the Export-Import Bank of China (EXIM) are enabling multi-billion dollar investments “One

of the most critical differences between China and other investors in Africa is access

to debt finance,” says Walker “Although Chinese banks usually only support projects with major Chinese involvement, their liquidity and risk appetite are currently far beyond that of Western banks, and this is unlikely to change any time soon.”

There are similarities as well as differences between Chinese and European investors Freemantle warns that “the recent unrest in North Africa has had quite a profound effect on Chinese investors in terms of their analysis of the opportunities and the risks that accompany any kind of large-scale investment.”

Tens of thousands of Chinese citizens – laborers, traders, and businessmen – had to be evacuated from Libya earlier this year as the civil war there began, and that shock, says Freemantle, has been the cause of a subtle readjustment China is now taking

another look at closer-to-home Asian markets as well as the emerging markets of Latin America that might offer greater stability, although lesser returns

The point is that this is exactly what a Western company would do “It tells us that Chinese investment does not follow a completely different model, that because of government backing they can go anywhere.”

For now, however, a key focus for China is Africa, and this presents Africa with a rare opportunity for engagement and development “Chinese investment is enabling and disruptive concurrently,” sums up Davies “China is Africa’s single largest trading partner, it is the largest lender to the continent, the single largest financer of

infrastructure and the largest private investor and it’s the only country investing in manufacturing in Africa right now.”

Weighing up Nigeria and Ghana

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Two West African countries are attracting the lion’s share of investor attention – but for dramatically different reasons.

By Paul Kalu, advisor and analyst working for clients in the private and non-profit sectors on investments in Africa He is based in Lagos, Nigeria.

…West Africa is dominated by Nigeria in terms of population and sheer market

potential, but it is only in the last ten years that steady economic growth and an influx of foreign investments has unlocked this potential and brought it to the point where it can now be considered along with other key developing nations as a serious destination for investment by foreign companies

Nearby Ghana with its much smaller population and economy has always been in

Nigeria’s shadow, though it has traditionally received attention and development aid from the donor community But the recent discovery of oil off Ghana’s coast also brings it into the international private investment arena

This is evident in the fact that private sector investments in infrastructure were

barely US$70m over the last ten years of military rule in Nigeria (1990-1999),

compared with US$600 million in Ghana during the same period However, the tables turned in the next ten years as Nigeria saw private sector investments in

infrastructure in excess of US$23 billion while Ghana’s investments rose by a healthy – albeit small in comparison – 500 percent to US$3.8 billion The majority of

infrastructure investment has been in telecoms sector, generating phenomenal growth rates

Mobile phone penetration in Ghana and Nigeria reached 65 and 50 percent

respectively in 2010, up from virtually nothing in 2000 So although growth in many African countries is hindered by infrastructural constraints such as poor roads and inadequate power supply, the rapid growth in mobile phones have helped overcome some of these hurdles and given many countries the opportunity to surge forward It is estimated that a 10 percent rise in mobile phone penetration can increase the GDP of developing markets by as much as 1.2 percent

All that glitters

Africa’s growth has also come from more traditional primary sector sources, not least due to recent high prices for mineral and agricultural commodities Ghana’s gold mines have been the main driving force of its economy for the best part of a century and its cocoa industry has also contributed its fair share, but in 2008 the country’s long search for that elusive black gold finally paid off with the discovery of a reserve

of 15 billion barrels of oil off the country’s coast, and in 2010 the country produced its first barrel of oil

As a result, Ghanaian GDP growth, which averaged 5.4 percent between 2000 and

2010, is forecast to surge to almost 14 percent in 2011 This is driven by oil-related investments and it is anticipated that Tullow Oil’s US$120 million IPO on the Ghana Stock Exchange in June will be the first of many

Although Ghana was until now often seen as an investment backwater, it is

increasingly on many an investor’s travel itinerary Atose Emmanuel Aguele, managing director of Union Petroleum, a regional leader in the liquefied petroleum sector, maintains that the allure of Ghana is growing “Ghana runs a relatively efficient

refining and distribution oil and gas sector,” says Aguele “When I joined the industry

20 years ago, Nigeria LPG consumption was 150,000 million tonnes per year, Ghana’s was 12,000 million tonnes,” says Aguele “I had visited Ghana with a view to invest in that country, I remember walking away saying the market in Ghana was too small and concentrating my efforts in Nigeria Today the Nigerian market stands at 70,000

million tonnes and Ghana is nearly at 150,000 million tonnes.”

vandalism and aging pipelines, claims it will take 30 years to clean them up But with these high risks come high returns, as Nigeria’s GDP growth of 400 percent over the 10 years to 2009 demonstrates Add to this a young and growing educated population, estimated to hit 250 million by 2050, and a burgeoning middle-class with an increasing appetite for consumer goods and services, investors are overcoming their fear of the country

Confidence in the consumption capacity of Nigeria is well illustrated by significant investments in the cement and drinks industries, alongside the now commonplace investments in telecommunications The Dangote Group, for instance, is pumping US$3.9 billion into new cement plants across Africa with a combined capacity of 50 million tonnes of cement over the next two years More than half of this is being

invested in Nigeria where the company aims to more than raise its production capacity from 8 to 20 million tonnes Dangote’s CEO, Aliko Dangote, once quipped to journalist that, “If I have any money in this life, I would invest it in Africa.” The irony is that

Dangote is already ranked the wealthiest man in Africa by Forbes.

South Africa’s SABMiller has also announced that it is investing US$100 million in a new plant in eastern Nigeria to boost its brewing capacity in the country SABMiller only entered the Nigerian market in 2009 with the acquisition of a small brewery in Port Harcourt; now the company plans to give the current market leaders – Heineken with

70 percent of the market, and Guinness with 20 percent – a run for their money But even they are not resting on their laurels – Heineken announced in January the

acquisition of five existing breweries in the country for an estimated US$750 million,

and Guinness announced in March a US$350 million investment to expand its biggest plants.

Size isn’t everything

For all its size, Nigeria is, on a per capita basis, still on a par with Ghana on many things Both countries have seen GDP per capita virtually triple in the last ten years from less than US$400 per head to over US$1,200, and electricity production in Nigeria may be 2.5 times more than Ghana but amounts to slightly less than 20 watts per person, compared with 50 watts per person in Ghana Hence, Ghana may be relatively small next to its big brother Nigeria, but on a like for like basis, it holds its own

Ghana’s projected GDP growth of 14 percent this year coupled with the relative ease

of doing business (the World Bank’s annual Doing Business report, ranked Ghana at

No.67 in 2011, compared with No.137 for Nigeria) makes this an attractive

combination for some investors

Another oil industry executive with extensive experience of both countries recognizes the attractions of Nigeria in the form of market size, natural resource wealth, and an energetic workforce But he is deterred by the lack of infrastructure and the high levels of fraud and corruption he has experienced in Nigeria “I would invest in Ghana for the short-term while waiting for Nigeria to organize itself,” says the insider, who asked not to be named “But I wouldn’t be there for long, Nigeria still has all the opportunities.”

But Ghana’s positive factors probably lend themselves better to investors looking to set up and run a business in Ghana, than to those just looking to make a financial investment In Nigeria, the reverse is the case; the market is deep, wide, and liquid enough to sustain significant financial investments For instance, the Nigerian stock market is currently worth US$50 billion and lists 215 equities with a turnover ratio in

2010 of 13 percent; Ghana’s stock market on the other hand lists 35 equities and is currently valued at US$3.5 billion and had a turnover ratio of just 3 percent last year

Quantifying poverty’s global decline

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Is globalization making poverty history? Brookings Institution researchers Laurence Chandy and Geoffrey Gertz argue that the ascent of emerging markets is accompanied by a statistical decline in the planet‘s poorest.

Laurence Chandy is a fellow, and Geoffrey Gertz a research analyst, in the Global Economy and Development program at the Brookings Institution This commentary

is adapted from their recent paper, “Poverty in Numbers.”

…Global poverty is rapidly falling This phenomenon is a natural corollary to the rise of emerging markets witnessed since the turn of the century and augurs the start of a new economic era Official estimates of global poverty are compiled by the World Bank and stretch back 30 years The most recent tally is for the year 2005, at which point the Bank estimates that 1.37 billion people – one in every four people in the developing world – lived below the international poverty line of US$1.25 a day

Of course, a lot has changed since 2005 The economies of the developing world have expanded by 50 percent in real terms, reflected in the take-off of emerging markets

In new research, the Brookings Institution captures how this unprecedented economic growth has transformed the most recent national household survey results with the very latest data on private consumption growth for 119 developing countries, we generate global poverty estimates which bring us right up to the present day

Our analysis suggests that, since 2005, half a billion people have escaped poverty, bringing the global poverty count to below 900 million This means that the prime target of the Millennium Development Goals – to halve the global poverty rate from its

1990 level by 2015 – was probably achieved some seven years ahead of schedule Never before have so many people been lifted out of poverty in such a short period of time

Emerging markets are at the heart of this story, led by the BRICs The two Asian

giants, China and India, can account for a massive four-fifths of the total reduction in global poverty China has long led the global war on poverty and has nearly completed its journey out of destitution with a poverty rate today estimated at only 3 percent India is on a similar trajectory but a decade behind: home to one third of the world’s poor six years ago, it is now driving the global decline in poverty, lifting tens of

millions above the poverty line every year In Russia and Brazil, two economies that are further developed, poverty was already on the way out by 2005 Today, Russia appears to have fully escaped extreme poverty, and Brazil is quickly approaching that point, thanks to an economic rebirth and the delivery of effective social programs at scale

The next wave of emerging markets can also claim a stake in this success story

Collectively, the so-called “N-11” have seen an estimated 50 million of their citizens

climb above the international poverty line since 2005, bringing their combined poverty rate down from 27 percent six years ago to just 20 percent today.

Yet to focus exclusively on those escaping poverty in emerging markets would

understate the role this new class of economic powerhouses has played over the past six years The impact of economic success in emerging markets is spilling across

borders to other poor countries, helping spark development and poverty reduction far afield

First, south-south economic relationships are blossoming as emerging powers deepen their trade and investment ties with the world’s poorest countries, and diversify into new markets Over the past decade, the BRICs’ share of Africa’s exports has more than doubled, stimulating growth and job creation in many of the continent’s fledgling economies As the latest African Economic Outlook notes, China is investing in

infrastructure across the region, India is working in skill-intensive services, and Brazil has established itself as a key partner in agro-processing

Second, the robust performance of many emerging markets through the Great

Recession helped to buoy the global economy and prevent an economic crisis from turning into a human crisis among the world’s poorest countries Emerging markets have not only propped up aggregate demand but have helped spur rising commodity prices which have benefited many low-income resource-based economies With

demand from advanced economies diminished since 2007 and expected to be tepid at best for the foreseeable future, the importance of emerging market growth to the world’s poor has never been greater

Third, emerging markets have convincingly demonstrated to the poorest economies the invaluable role markets and good economic governance play in development These ideas are hardly new, having been advocated by the World Bank, IMF, and WTO for years Yet there is a difference when prescriptions emanate from Washington or Geneva, too often compromised by condescending tones and divisive ideologies, and when lessons are conveyed in examples of real-world success by developing country peers

The remarkable fall in poverty achieved over the last six years is a heartwarming story and a significant achievement for humanity But it is much more than that Progress in poverty reduction is part of a broader transformation in the global economy that will create a wellspring of new business opportunities worldwide As poverty declines, the global middle class – defined as those living on between US$10 and US$100 a day – will balloon, from under 2 billion today up to 5 billion by 2030 We are on the cusp of an age of mass development, which will see the world transformed from being mostly poor to mostly middle class Those same millions who are pulling themselves out of absolute poverty today will soon emerge as the producers, consumers, innovators and investors who will drive the economy of the 21st century

Bull market for frugal engineering

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A fundamental rethink of product design is striking gold in emerging markets.

By Jeremy Gray, journalist now based in Berlin, Germany His work has appeared

in publications as diverse as The Financial Times and Condé Nast Traveler.

…The dust swirls as a bullock cart stops in Osnamabad, a small town in the western Indian state of Maharashtra Dressed in saris, a bright and flowing traditional garb, two village girls jump down off the cart to demonstrate the latest product – a mini-refrigerator The sales banter is clear: no frills, no worries, easy financing

Their mundane-looking cargo is in reality anything but ordinary Resembling a designer ice chest from a western department store, the cheerful 43-liter Chotukool (“little cool”) weighs just nine kilos, has a fancy cooling chip similar to those in PC fans, and happily continues to keep everything chilled on batteries whenever there is one of India’s all-too-frequent power outages The manufacturer, Indian appliance giant Godrej, helps arrange a purchase of the US$75 unit through microfinancing

Meanwhile, some 235 kilometers west in the city of Pune, Mahesh Yagnaraman is poring over the sales figures for a pint-sized stove that has been designed for

housewives First Energy, a start-up Yagnaraman runs together with BP, stops by

villages such as Osnamabad to show off the Oorja, a snip at US$23 This is the country

of the jugaad (pronounced joo-gaar), a low-cost, jerry-built vehicle “Jugaad” has also come to mean “ingenuity,” something that companies are adopting in large numbers

As India’s relative wealth grows, a spirit of invention is being applied to

mass-produced goods – with startling results

Adapting products to the needs of customers in emerging markets is, in itself, nothing new Multinationals such as Unilever and Procter & Gamble have been selling single-use bags of shampoo and detergent for decades Samsung introduced a sari cycle in washing machines to simiprevent the long, traditional garment from tangling with other clothes

But these companies are doing more than just stripping features and costs from

established products They are taking a closer look at the needs of consumers and designing products from the bottom up This “clean sheet” approach means

engineering processes are broken down and reassembled in the most cost-effective manner and geared to that emerging market

This is “frugal engineering,” a term coined by Renault’s chief executive Carlos Ghosn

in 2006 to describe Tata Motors’ Nano, the famously spartan car GE’s chief executive, Jeff Immelt, and Vijay Govindarajan of the Tuck Business School call the trend

“reverse innovation,” the idea being that frugal products will likely “trickle up” to the industrialized world The approach also trashed the notion that mature-market

products are good enough to fulfill the needs of emerging markets

This trickle may easily become a flood Tata plans to sell a Nano-like car in Europe and North America Haier of China came up with a compact washing machine that has been marketed to 68 countries including the developed world Galanz makes a low-cost, energy-efficient microwave oven small enough to fit into cramped Chinese

kitchens, but also good enough in price and basic quality for advanced economies What these items lack in bells and whistles, they make up in fulfilling the basic needs

of a broad consumer base Less than two decades on, in an erstwhile top-end, volume business, Galanz now controls 60 percent of the global market for microwave ovens

low-Steep inflation for raw materials in countries such as China and India is eating into their competitive edge, but – so far – few policymakers question their ability to

produce more mind-boggling, highly frugal efficiencies to adjust

The trickle-up phenomenon is a well-known feature in services, as scores of call

centers across the globe will confirm But the “Made in India” label has also won respect for goods, thanks in no small measure to the country’s booming economy Because India has now become the world’s largest consumer market after the United States and China, the potential rewards have lured the kind of investment that makes possible the mass output and marketing of such products

Before the Indian economy opened up in the 1990s, local products tended to be of shoddy quality and had the unfortunate habit of breaking down How times have

changed Disposable income in India is rising rapidly, and people have started

demanding products that are better suited to their tastes – not just big-ticket items such as cars and household appliances, but also food, clothing, and consumer

electronics

Frugal products are hitting the Indian market in droves Telecoms engineer Anurag Gupta came up with Zero System, a mobile-phone bank account that uses a fingerprint scanner for ID verification Tata Swach’s water filter produces 3,000 liters of purified water, enough to supply a family of five with drinking water for a year VLS rollaway laundry booths will wash, dry and iron clothes for US$0.40 per pound, and have a self-contained water supply – crucial in neighborhoods that lack running water

Frugal does not mean poor quality, either The Chotukool mini-fridge has high-end insulation, and the usual compressor has been replaced by a state-of-the-art cooling chip The First Energy stove has a perforated chamber that sucks in the exact amount

of air needed to keep the fire burning at optimal cooking temperature, and is virtually smoke-free

Indians would happily claim frugal engineering as their very own contribution to new management thinking In reality, various other emerging markets have also hopped onto the frugal bandwagon Brazilian-manufactured dental devices, for instance, are simply designed but rank among the most sophisticated in the world They are also relatively inexpensive to make and operate

Companies in China are proving remarkably adept at this game BYD, a maker of

rechargeable batteries, sharply reduced the price of lithium- ion cells through using less expensive raw materials and manufacturing at room temperature instead of in specially heated dry rooms Brivo, Medtronic, and Weigao are among the nimble

upstarts who slashed the cost of medical equipment and supplies, frequently

undercutting their larger, better-funded competitors

These companies aren’t simply relying on cheap labor to get ahead But they

definitely work longer, if not harder Galanz, the world’s largest maker of microwave ovens, employs three shifts of workers to keep production lines running 24 hours a day, seven days a week – at least three times longer than a typical plant in the US or Europe “Outsiders thought our advantage came from lower labor costs,” says Yu Yaochang, a group vice-president of Galanz, which is based in the southern province

of Guangdong, a hotbed of economic activity “Actually it comes from improved labor productivity,” he says

This understates the incredibly lean structures that Galanz already has in place Long before a new model pops out, the company brings key players in the supply chain to heel As it was reorganizing its microwave efforts in the early 2000s, Galanz asked – and then demanded – that makers of electrical converters for its microwaves shift their production lines to Galanz Some balked, but many were lured by prospective profits from high volumes In a jiffy, the company learned how to make converters more efficiently, and repeated the trick in vast sections of its supply chain This is a key element of what Galanz means by “integration” – effectively bringing other

suppliers under its control – and the benefits of controlling the classic means of

production

Not surprisingly, multinationals are boosting research and development spending in emerging markets, particularly India and China Over the past three years, German engineering giant Siemens has increased the number of employees working in its research and development departments in emerging markets by 6,900 to 15,500 Much of that extra brainpower is to be used for launching new products in India Though Siemens is tight-lipped about prototypes, the product roster is believed to include road traffic management systems, solar-powered X-ray machines, fetal heart monitors, wind power generators, and a smart camera Like many of its competitors, Siemens formally calls these “entry-level” products aimed at the “bottom of the income pyramid”

Siemens currently generates about 30 percent of its revenue in emerging markets, and has added 31 manufacturing facilities in China and India over the past five years

alone

GE cuts one of the highest profiles Its Welch R&D center is its biggest and most

generously funded outside the US Here, the signature product is an

electrocardiograph that costs $1,000 – about one-tenth of standard models of the past