Tuesday, February 26, 2013

The Mystery of Inner Cities And Why Foreign Companies Struggle in India

India seems indecipherable. It is an exciting market, just that it never materialises. I have used one expression - borrowed somewhat from James Kynge's book on China - that while India looks like a huge multiplier effect for businesses from outside, the moment you set foot in the country, the endless game of divisions begins. Also, India is like El Dorado - everyone wants to go there, but no one knows how. After repeated failed efforts, excitements in the world markets, the sentiments are now cooling: The India play is treated with caution, often avoided in favour of more exciting regions, like Brazil, or Indonesia, and now even Burma or Mongolia.

However, it is hard to ignore India. Apart from the fact that it has so many of the new consumers, it is a potential breeding ground for competition in other markets. Leave India to local companies for far too long and a competitor will certainly emerge, who will better the game in prized markets that you wanted to keep your eggs in. It is just one of the most intensely competitive, value sensitive, constantly innovative markets in the world, which must be engaged with.

Companies keep complaining about corruption and red tape and assign the blame to the difficult operating environment. However, there are a number of Indian companies who shun bribery but are still successful. Indeed, it is a difficult, hard fought, competitive environment, but engaging with a market necessarily requires learning the rules of the market. The armchair criticism of India as a jungle is not just lazy and uninformed, it is an admission of corporate stupidity.

I have been studying the market entry failures in India for quite some time. It was triggered by my own professional requirement of creating a business model for India, but soon expanded into a more comprehensive enquiry, and conversations with friends and clients. A number of factors surely emerged: Premature entry, logistical difficulties, personnel issues and inappropriate business models were top culprits. But these were all too common - too many examples of the kind in the graveyard of international business - and such cases do not really explain what makes India such a difficult country to deal with. 

However, there is one key factor which may somewhat explain why India proved such a mirage: A complete misreading of India's growth by most outsiders. Most Western executives see India's growth and relative prosperity in terms of people buying $10 Million houses in Mumbai, and imagine that the great Indian cities have suddenly become prosperous. Indeed, no one can fail to notice the consumption boom in these cities, epitomised by the sprouting up of shopping malls and food courts and the transformation of the middle class life around them. But, this buoyant outlook may not survive any flight's approach to Mumbai airport, as the ubiquitous tarpaulin ceilings of Dharavi slum come into view, and crushing poverty that one would notice as they step out of the air-conditioned surroundings of the airport. Urban India has got richer, but that prosperity has not spread well enough. The markets in Mumbai should not be seen through the prism of its population or its GDP, because the people who can afford western goods at western prices still remain miniscule.

Besides, the middle classes in Mumbai - and this is only an example and the same will apply to Delhi or any other large city - may not feel richer, but in fact poorer, at this time. This is because of the rising inflation (which was always the case), stubbornly high interest rates (which is primarily due to rotten state of public finances), and a huge asset bubble, which makes middle class housing out of reach for most families. So, those companies that counted on the millions of middle classes to climb the consumption ladder, or make extra investments, were hugely disappointed. 

But, despite this, India has got richer. Its per capita income has indeed risen. Its savings rates, despite the squeeze on the urban middle classes, remained stable. One could argue that there is still an El Dorado, a city of Gold, which no one seems to find from outside. This, I shall argue, is the India's inner cities. This is where things have been magical, the transformation real and people richer. Those people who always lived in the family homes in these cities (unlike the large city dwellers in rented or mortgaged homes) has now seen their assets appreciated many times over. Life has remained comparatively cheaper, and manpower plentiful, as Indian affinity to family made sons of the soil often come back to town if a decent job is offered. The vibes of prosperity is very real in Indian small towns. Besides, this has been hugely helped by the rural prosperity in the last decade, when improving transport infrastructure, electrification (which remains uneven) and plain government handouts, have expanded rural consumption many times over. For the small town tradesmen, this was magic.

Indian companies have grown on the back of small towns. All the Indian companies which are suddenly competing with the best in the world have taken advantage of this small town growth. And, this is not just about cheap cars and shampoo sachets: I have indeed worked with NIIT and Aptech in their heydays, when they would sign up 100 small centres in 100 days (or perform supposedly heroic feats of the kind), and they built education businesses, computer education delivered in English language of all things, on the back of the growth of inner cities. Indeed, abilities such as this, to anticipate and harness the growth of inner city growth makes Indian companies the tough challengers that they are. They leverage their inner city constituency to battle out the hard-to-win, marginal, big city consumers with the global companies. And, the global companies in search of easy money indeed turn out to be clueless on how to compete.

This is indeed a classic Christensen-like setting: The global companies focusing on high margin urban consumers, leaving the lower margin but high growth inner cities to Indian competitors, who, in time, leverage their strengths in inner cities with time to compete on everything, and eventually drive out the global companies. A successful Indian engagement strategy can, should be, ground up, global companies creating an India focused product and get into the inner city market first, may be with a JV partner, may be into several of them at the same time. But this is not how global companies still think: Ikea will still plan to do a flagship store in Mumbai, at great cost, and not in Nagpur. The trouble is, indeed, most people in Mumbai will consider Ikea expensive, and those urban middle class movers and shakers Ikea has in mind may consider Ikea too downmarket. However, Nagpur may still lack a decent furniture chain store (I know, wrong example!) and may soon get one from an Indian chain, which makes profits by achieving scale on the back of growing construction of new houses. In time, this chain competes with Ikea in Mumbai and Delhi, then Djakarta and Manila, and may be eventually in Sweden.

This is important because consumer markets in India are just about opening up to the world. It is not just about investment opportunities in retail and aviation, but gathering of momentum in many other sectors, and also the growing consensus about services. The Indian consumers, pampered for choice (a far cry today than the pre-liberalization age when we got three varieties of soap, and Dove soaps were standard gifts from relatives coming from abroad), now want more - and this opens up a window for global providers wanting to provide choice, convenience and high quality. More than ever, they need to unlock the mystery of the inner cities.

1 comment:

Aloka Russell said...

Fantastic illustration of India today...often the bureaucracy, red tape and bribery cause a hindrence or more so a challenge for the rest of the globe trying to get a share of the market. I also believe that the spirit of entrepreneurship in the Indian population is a contributing factor for this competition. Certainly you have made a great observation of the inner city opportunity space which is yet to be borne...

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