Friday, August 20, 2010
Wintel
The end of Wintel
As Microsoft and Intel move apart, computing becomes multipolar
Jul 29th 2010
THEY were the Macbeths of information technology (IT): a wicked couple who seized power and abused it in bloody and avaricious ways. Or so critics of Microsoft and Intel used to say, citing the two firms’ supposed love of monopoly profits and dead rivals. But in recent years, the story has changed. Bill Gates, Microsoft’s founder, has retired to give away his billions. The “Wintel” couple (short for “Windows”, Microsoft’s flagship operating system, and “Intel”) are increasingly seen as yesterday’s tyrants. Rumours persist that a coup is brewing to oust Steve Ballmer, Microsoft’s current boss.
Yet there is life in the old technopolists. They still control the two most important standards in computing: Windows, the operating system for most personal computers, and “Intel Architecture”, the set of rules governing how software interacts with the processor it runs on. More than 80% of PCs still run on the “Wintel” standard. Demand for Windows and PC chips, which flagged during the global recession, has recovered. So have both firms’ results: to many people’s surprise, Microsoft announced a thumping quarterly profit of $4.5 billion in July; Intel earned an impressive $2.9 billion.
So now is a good time to take stock of IT’s most hated power couple. As The Economist went to press, Intel was on track to reach a settlement with America’s Federal Trade Commission (FTC), which would in effect end the antitrust woes that have plagued both firms. And Microsoft has recently strengthened its ties with ARM, Intel’s new archrival. This suggests that the Wintel marriage is crumbling.
Critics have often questioned both firms’ technological prowess. Yet Windows 7, the latest version of Microsoft’s operating system, is excellent, and customers have snapped it up. As for Intel, its manufacturing machine is peerless. Some of its transistors are so tiny that 2m would fit on the “.” at the end of this sentence.
Both firms have often co-operated, despite occasional crockery-throwing. Microsoft has been pushier: in the mid-1990s, for instance, Mr Gates leaned heavily on Andy Grove, Intel’s boss, to stop the development of software that trod on Windows’ turf. Intel backed down.
The Wintel marriage is now threatened, oddly enough, by technological progress. Processors grow ever smaller and more powerful; internet and wireless connections keep speeding up. This has created both centripetal and centrifugal forces, which are pushing computing into data centres (huge warehouses full of servers) and onto mobile devices—businesses that Microsoft and Intel do not dominate.
Other firms have leapt into the gap. Apple is now worth more than Microsoft, thanks to its hugely successful mobile devices, such as the iPod and the iPhone. Google may be best known for its search service, but the firm can also be seen as a global network of data centres—dozens of them—which allow it to offer free web-based services that compete with many of Microsoft’s pricey programmes.
The shift to mobile computing and data centres (also known as “cloud computing”) has speeded up the “verticalisation” of the IT industry. Imagine that the industry is a stack of pancakes, each representing a “layer” of technology: chips, hardware, operating systems, applications. Microsoft, Intel and other IT giants have long focused on one or two layers of the stack. But now firms are becoming more vertically integrated. For these new forms of computing to work well, the different layers must be closely intertwined.
Apple, whose products have always been more integrated, is building a huge data centre and also offering web-based services. Google has developed Android, an operating system for smart-phones. The heavyweights in corporate IT are invading each other’s territory, too. That is the only way to grow, they believe. Also, clients love a one-stop-shop. Cisco, the world’s largest maker of data-networking gear, has started to sell servers. That spurred HP, a vendor of these machines, to push into the networking business. Oracle, which sells business software, bought Sun Microsystems, a computer-maker, last year.
Intel also has to deal with new competitors. For most of its 42-year history its main rival was Advanced Micro Devices (AMD), which makes processors based on a Windows-compatible architecture. Now Intel has to slug it out with ARM, a British firm. ARM does not make its own chips, but its designs are the basis for most of those that go into most mobile handsets.
Trustbusters have made life for the Wintel couple more difficult, mostly by curbing the ways they can defend and expand their near-monopolies. Having lost its battle with the European Commission, for instance, Microsoft must now give Windows users in the European Union a choice of which web browser to install. The commission also went after Intel, fining it €1.06 billion in May 2009 ($1.44 billion at the time) for giving rebates to computer makers if they used fewer AMD chips. The rules governing how Intel can price its chips will finally be settled soon, when negotiations with the FTC conclude.
The Wintel of our discontent
In response to these threats, Microsoft has made big bets on cloud computing. It has already built a global network of data centres and developed an operating system in the cloud called Azure. The firm has put many of its own applications online, even Office, albeit with few features. What is more, Microsoft has made peace with the antitrust authorities and even largely embraced open standards.
In other areas, however, the firm is floundering. It is still losing money on its web services, despite having invested billions. And apart from Xbox Live, the online offering for its game console, its new web services attract few eyeballs. Bing, Microsoft’s search service, still answers only 13% of online queries in America. Worse, Microsoft’s mobile business is in disarray. It recently killed two new smart-phones after just 48 days on the market. A new operating system for smart-phones will only come later this year. And in tablet computers, Microsoft is behind, too. Should the firm fail to catch up fast, Mr Ballmer will surely be tossed through a window.
Paul Otellini, Intel’s boss, is more secure. When Intel started losing its edge against AMD, he quickly cut costs and revised the firm’s goals. (If regulators are right, however, Intel resorted to all kinds of unfair practices to buy time.) Mr Otellini predicts that Intel’s chips will eventually be in every intelligent device with an internet link—which could one day mean just about everything.
He is pinning his hopes on a new family of processors called Atom. Rather than making these chips ever more powerful, Intel is making them ever cheaper and less power-hungry. That way, manufacturers will find it economical to put chips not only in phones but also in television sets, sewing machines, robots and so on. Since such devices tend to need special programmes, Intel has also moved further into the software market. In June 2009 it bought Wind River, which sells operating systems for embedded processors.
Still, Intel faces some high hurdles. Although Atom now powers most netbooks (cheap laptops), its success is hardly guaranteed. ARM’s chips guzzle little power and cost much less than Intel’s, because its licensing fees are low and most customers use foundries (contract chipmakers) to make them. Intel may not be able to sell future generations of Atom at a competitive price without hurting its fat margins.
Intel executives are optimistic, however. Atom will be more attractive for device makers, the firm’s executives argue, because developers can rely on the Intel Architecture and will not have to learn new tricks. More importantly, Intel believes that it can keep making smaller transistors than anyone else and that Atom chips will continue to be as profitable as its other chips. Yet this suggests a long-term problem. Intel’s position seems safe as long as Moore’s Law holds (ie, as long as it can keep cramming twice as many transistors on a chip every 18 months or so). But some people think that will become physically difficult sooner rather than later.
Regardless of whether Microsoft and Intel prosper individually, they will drift apart as a couple. Since Microsoft has yet to deliver a competitive version of Windows for smart-phones and tablets, for instance, Intel has teamed up with Nokia, the world’s largest maker of handsets, to develop Meego, an open-source operating system for mobile devices. Microsoft, by cuddling up to ARM, will be able to build chips of its own.
As the Wintel pair splits, computing will start to look different. Instead of being dominated by two monopolists, the market will be fought over by eight or nine more or less vertically integrated giants. Oracle, Cisco and IBM will vie for corporate customers; Apple and Google will scramble for individuals (see table). IT, like the world, is becoming multipolar.
As Microsoft and Intel move apart, computing becomes multipolar
Jul 29th 2010
THEY were the Macbeths of information technology (IT): a wicked couple who seized power and abused it in bloody and avaricious ways. Or so critics of Microsoft and Intel used to say, citing the two firms’ supposed love of monopoly profits and dead rivals. But in recent years, the story has changed. Bill Gates, Microsoft’s founder, has retired to give away his billions. The “Wintel” couple (short for “Windows”, Microsoft’s flagship operating system, and “Intel”) are increasingly seen as yesterday’s tyrants. Rumours persist that a coup is brewing to oust Steve Ballmer, Microsoft’s current boss.
Yet there is life in the old technopolists. They still control the two most important standards in computing: Windows, the operating system for most personal computers, and “Intel Architecture”, the set of rules governing how software interacts with the processor it runs on. More than 80% of PCs still run on the “Wintel” standard. Demand for Windows and PC chips, which flagged during the global recession, has recovered. So have both firms’ results: to many people’s surprise, Microsoft announced a thumping quarterly profit of $4.5 billion in July; Intel earned an impressive $2.9 billion.
So now is a good time to take stock of IT’s most hated power couple. As The Economist went to press, Intel was on track to reach a settlement with America’s Federal Trade Commission (FTC), which would in effect end the antitrust woes that have plagued both firms. And Microsoft has recently strengthened its ties with ARM, Intel’s new archrival. This suggests that the Wintel marriage is crumbling.
Critics have often questioned both firms’ technological prowess. Yet Windows 7, the latest version of Microsoft’s operating system, is excellent, and customers have snapped it up. As for Intel, its manufacturing machine is peerless. Some of its transistors are so tiny that 2m would fit on the “.” at the end of this sentence.
Both firms have often co-operated, despite occasional crockery-throwing. Microsoft has been pushier: in the mid-1990s, for instance, Mr Gates leaned heavily on Andy Grove, Intel’s boss, to stop the development of software that trod on Windows’ turf. Intel backed down.
The Wintel marriage is now threatened, oddly enough, by technological progress. Processors grow ever smaller and more powerful; internet and wireless connections keep speeding up. This has created both centripetal and centrifugal forces, which are pushing computing into data centres (huge warehouses full of servers) and onto mobile devices—businesses that Microsoft and Intel do not dominate.
Other firms have leapt into the gap. Apple is now worth more than Microsoft, thanks to its hugely successful mobile devices, such as the iPod and the iPhone. Google may be best known for its search service, but the firm can also be seen as a global network of data centres—dozens of them—which allow it to offer free web-based services that compete with many of Microsoft’s pricey programmes.
The shift to mobile computing and data centres (also known as “cloud computing”) has speeded up the “verticalisation” of the IT industry. Imagine that the industry is a stack of pancakes, each representing a “layer” of technology: chips, hardware, operating systems, applications. Microsoft, Intel and other IT giants have long focused on one or two layers of the stack. But now firms are becoming more vertically integrated. For these new forms of computing to work well, the different layers must be closely intertwined.
Apple, whose products have always been more integrated, is building a huge data centre and also offering web-based services. Google has developed Android, an operating system for smart-phones. The heavyweights in corporate IT are invading each other’s territory, too. That is the only way to grow, they believe. Also, clients love a one-stop-shop. Cisco, the world’s largest maker of data-networking gear, has started to sell servers. That spurred HP, a vendor of these machines, to push into the networking business. Oracle, which sells business software, bought Sun Microsystems, a computer-maker, last year.
Intel also has to deal with new competitors. For most of its 42-year history its main rival was Advanced Micro Devices (AMD), which makes processors based on a Windows-compatible architecture. Now Intel has to slug it out with ARM, a British firm. ARM does not make its own chips, but its designs are the basis for most of those that go into most mobile handsets.
Trustbusters have made life for the Wintel couple more difficult, mostly by curbing the ways they can defend and expand their near-monopolies. Having lost its battle with the European Commission, for instance, Microsoft must now give Windows users in the European Union a choice of which web browser to install. The commission also went after Intel, fining it €1.06 billion in May 2009 ($1.44 billion at the time) for giving rebates to computer makers if they used fewer AMD chips. The rules governing how Intel can price its chips will finally be settled soon, when negotiations with the FTC conclude.
The Wintel of our discontent
In response to these threats, Microsoft has made big bets on cloud computing. It has already built a global network of data centres and developed an operating system in the cloud called Azure. The firm has put many of its own applications online, even Office, albeit with few features. What is more, Microsoft has made peace with the antitrust authorities and even largely embraced open standards.
In other areas, however, the firm is floundering. It is still losing money on its web services, despite having invested billions. And apart from Xbox Live, the online offering for its game console, its new web services attract few eyeballs. Bing, Microsoft’s search service, still answers only 13% of online queries in America. Worse, Microsoft’s mobile business is in disarray. It recently killed two new smart-phones after just 48 days on the market. A new operating system for smart-phones will only come later this year. And in tablet computers, Microsoft is behind, too. Should the firm fail to catch up fast, Mr Ballmer will surely be tossed through a window.
Paul Otellini, Intel’s boss, is more secure. When Intel started losing its edge against AMD, he quickly cut costs and revised the firm’s goals. (If regulators are right, however, Intel resorted to all kinds of unfair practices to buy time.) Mr Otellini predicts that Intel’s chips will eventually be in every intelligent device with an internet link—which could one day mean just about everything.
He is pinning his hopes on a new family of processors called Atom. Rather than making these chips ever more powerful, Intel is making them ever cheaper and less power-hungry. That way, manufacturers will find it economical to put chips not only in phones but also in television sets, sewing machines, robots and so on. Since such devices tend to need special programmes, Intel has also moved further into the software market. In June 2009 it bought Wind River, which sells operating systems for embedded processors.
Still, Intel faces some high hurdles. Although Atom now powers most netbooks (cheap laptops), its success is hardly guaranteed. ARM’s chips guzzle little power and cost much less than Intel’s, because its licensing fees are low and most customers use foundries (contract chipmakers) to make them. Intel may not be able to sell future generations of Atom at a competitive price without hurting its fat margins.
Intel executives are optimistic, however. Atom will be more attractive for device makers, the firm’s executives argue, because developers can rely on the Intel Architecture and will not have to learn new tricks. More importantly, Intel believes that it can keep making smaller transistors than anyone else and that Atom chips will continue to be as profitable as its other chips. Yet this suggests a long-term problem. Intel’s position seems safe as long as Moore’s Law holds (ie, as long as it can keep cramming twice as many transistors on a chip every 18 months or so). But some people think that will become physically difficult sooner rather than later.
Regardless of whether Microsoft and Intel prosper individually, they will drift apart as a couple. Since Microsoft has yet to deliver a competitive version of Windows for smart-phones and tablets, for instance, Intel has teamed up with Nokia, the world’s largest maker of handsets, to develop Meego, an open-source operating system for mobile devices. Microsoft, by cuddling up to ARM, will be able to build chips of its own.
As the Wintel pair splits, computing will start to look different. Instead of being dominated by two monopolists, the market will be fought over by eight or nine more or less vertically integrated giants. Oracle, Cisco and IBM will vie for corporate customers; Apple and Google will scramble for individuals (see table). IT, like the world, is becoming multipolar.
Sunday, August 8, 2010
Chinese Railways versus Indian Railways!
http://streamlinesupplychain.wordpress.com/2008/12/14/chinese-railways-versus-indian-railways/#comment-409
All of us have repeatedly heard about the “success” of the Indian Railways under the stewardship of the current railway administration. So much so that the “success” of the Indian Railways has become a fashionable case study in Harvard Business School and the subject of lectures in IIM, Ahmedabad , INSEAD and Harvard Business School.
No doubt the Indian Railways has made progress. But the progress is relative- compared to other government agencies and departments in India– which is not to say much!
But how does the progress of the Indian Railways compare on a absolute scale?
To take an objective look at the “success” of the Indian Railways, let us compare the Chinese Railways and Indian Railways. After all, everyone and everyone’s analysts are comparing China and India.
Let us start at the beginning…..
The first Chinese Railway train was operated in 1876, from Shanghai to Woosung (15 miles) nearly a quarter of a century after the first train in India was run in April 1853 between Bori Bunder and Thane (21miles)
In 1945, China had 27,000 km of rail, of track. In 1947, when India got independence, India had 53596 Route kms of track- thanks to the British! Net, net China had just about ½ the route kilometres of India in the mid- 1940s. And that too for a much larger area.
How do they compare today? Chinese Railways today has 78,000 route kilometres, overtaking India sometime in the mid 1990s making only the rail networks in the USA and Russia larger in size. The total track length is 154,600km. By contrast Indian Railways has stagnated at 63,327 route kilometres of network.
The Indian Railways has suffered from the same neglect and apathy towards creating a solid foundation of infrastructure, as our roads, power, irrigation, airports.
As of 2007, Chinese Railway owned about 578,000 freight wagons, 44,000 coaches and 18,300 locomotives. India had 225000 freight wagons, 45000 passenger coaches and 8300 locomotives.
This vast difference in the number of freight wagons and locomotives explains why Indian railways carries less than a quarter, ~22%, of the freight carried by the Chinese Railways.
In 1950 Indian Railways carried 44 billion freight tonne km, against 39 billion in the case of Chinese Railways.
Last year, India moved 750 Million MT of freight last year while China moved 4. 5 times that i.e 3300 Million MT of freight.
On a global basis, China’s rail transport volume is one of the world’s largest, having six percent of the world’s operating railways, and carrying 25 percent of the world’s total railway workload.
China regularly runs heavy-haul freight transportation speed limit to 120 km/h. The highest speed notched up for a freight train, on the Indian Railways is 100 km/h (62 mph) for a 4,700 metric tonne load.
The Chinese Railways plans to spend US$ 292 billion ~ 15 lakh crore [ 1lakh = 0.1million = 100000, 1crore = 10million = 10000000] over 10 years. This translates to Rs 1.5lakh crore per year spent on the Chinese Railways for Capital Expenditure. In contrast the Indian Railways spends just a quarter (1/4) of what the Chinese Railways spends. The proposed investment for the 2008-2009 fiscal year is Rs. 37,500 cr, which in itself 21% more than for the previous fiscal year.
And passengers? Indian railways moved 6.2 billion passengers while China moved 1.4 billion passengers. What is to be noted is that out of the 6.2 billion passengers that Indian railways carried, 1.1 billion are Mumbai suburban passengers which are short lead passengers and can be considered a different subsidiary.
However the quality of passenger travel in the Chinese Railway is far superior. Chinese has express trains with speeds of 300kms/hr. Maximum speed of a passenger train in India is about half of the Chinese Railways at 160kms/ hr. The pictures of the Chinese High-Speed Railway (CHR) will give you an idea of the qualitative difference in passenger rail travel between China and India.
The Chinese Railways depended on steam locomotives till the 21st century while India phased out their steam locomotives ahead of the Chinese in 1990s. In December 2005, the world’s last regular revenue mainline steam train finished its journey on the Jitong Railway marking the end of steam era. Nevertheless, there are still some steam locomotives used in the industrial railways in China.
The Chinese Railways are organized in a more modern and business-like manner. Five major railway corporations — one each for rolling stock, railway construction, goods and materials, civil engineering, signalling and telecommunications — have been separated from transport enterprises and made autonomous, although state-owned. A number of passenger and freight transport companies have been created to operate on a competitive basis. These enterprises will finally be regrouped into three to five larger, separate companies.
The government has encouraged local authorities to build and operate their own railways up to 2,000 km. By the end of 1999, there were approximately 75 local railways with a total route-length of 4,800 km. About 20 more such projects, totalling 1,800 km, are under construction. To attract foreign capital, Chinese rail enterprises are encouraged to issue stocks on overseas stock markets. In 2001, their ministry of railways (MoR) also approved foreign participation in rail freight transport.
In contrast, as with most things in this country- education system, justice system, government (IAS, IPS …), we have just taken what the British have given us and using them without Indianizing and modifying it to the changing needs and requirements. We have the Railway Board, under the Ministry of Railways – the same structure that the British setup more than 100 years ago!!
Employees Chinese Railways employs 3.18million people while the Indian Railways has employs 1.6millionemployees. This translates to a productivity of 1308 MT/ employee on the Chinese Railways, double that of the 652MT / employee on the Indian Railways.
The Chinese Railways has already linked itself to the Europe and runs regular container trains. This is an alternative to the sea-route to Europe. This is part of the Pan-Asia rail network plan.
The railway to Tibet makes Chinese logistics and supply lines so accessible in case of a conflict with India. While India is just now built a part of the railway line in Kashmir and is just now planning a railway to Sikkim. A railway to Arunachal Pradesh is nowhere close to planning.
So to summarize, here is a table.
Indian Railways
Chinese Railways
Route kms (1945/1947)
Route kms (current)
53396
63327
27000
78000
Freight Carried (Billion MT per year)
750
3300
Passengers carried (billions/year)
6.2 billion
1.4 billion
Investment per year (Rs Cr)
37500
150000
Number of
Locos
Freight Wagons
Passenger Coaches
8300
225000
45000
18300
578000
44000
Employees
1.7
3.18
Maximum Speed (kms/hr)
Freight Trains
Passenger Trains
100
160
120
300
Reminds you of the Hare and the Tortoise story! Except that here, the Hare is way ahead of the Tortoise. And the Hare is moving ever faster all the time while the Tortoise is falling behind!!
All of us have repeatedly heard about the “success” of the Indian Railways under the stewardship of the current railway administration. So much so that the “success” of the Indian Railways has become a fashionable case study in Harvard Business School and the subject of lectures in IIM, Ahmedabad , INSEAD and Harvard Business School.
No doubt the Indian Railways has made progress. But the progress is relative- compared to other government agencies and departments in India– which is not to say much!
But how does the progress of the Indian Railways compare on a absolute scale?
To take an objective look at the “success” of the Indian Railways, let us compare the Chinese Railways and Indian Railways. After all, everyone and everyone’s analysts are comparing China and India.
Let us start at the beginning…..
The first Chinese Railway train was operated in 1876, from Shanghai to Woosung (15 miles) nearly a quarter of a century after the first train in India was run in April 1853 between Bori Bunder and Thane (21miles)
In 1945, China had 27,000 km of rail, of track. In 1947, when India got independence, India had 53596 Route kms of track- thanks to the British! Net, net China had just about ½ the route kilometres of India in the mid- 1940s. And that too for a much larger area.
How do they compare today? Chinese Railways today has 78,000 route kilometres, overtaking India sometime in the mid 1990s making only the rail networks in the USA and Russia larger in size. The total track length is 154,600km. By contrast Indian Railways has stagnated at 63,327 route kilometres of network.
The Indian Railways has suffered from the same neglect and apathy towards creating a solid foundation of infrastructure, as our roads, power, irrigation, airports.
As of 2007, Chinese Railway owned about 578,000 freight wagons, 44,000 coaches and 18,300 locomotives. India had 225000 freight wagons, 45000 passenger coaches and 8300 locomotives.
This vast difference in the number of freight wagons and locomotives explains why Indian railways carries less than a quarter, ~22%, of the freight carried by the Chinese Railways.
In 1950 Indian Railways carried 44 billion freight tonne km, against 39 billion in the case of Chinese Railways.
Last year, India moved 750 Million MT of freight last year while China moved 4. 5 times that i.e 3300 Million MT of freight.
On a global basis, China’s rail transport volume is one of the world’s largest, having six percent of the world’s operating railways, and carrying 25 percent of the world’s total railway workload.
China regularly runs heavy-haul freight transportation speed limit to 120 km/h. The highest speed notched up for a freight train, on the Indian Railways is 100 km/h (62 mph) for a 4,700 metric tonne load.
The Chinese Railways plans to spend US$ 292 billion ~ 15 lakh crore [ 1lakh = 0.1million = 100000, 1crore = 10million = 10000000] over 10 years. This translates to Rs 1.5lakh crore per year spent on the Chinese Railways for Capital Expenditure. In contrast the Indian Railways spends just a quarter (1/4) of what the Chinese Railways spends. The proposed investment for the 2008-2009 fiscal year is Rs. 37,500 cr, which in itself 21% more than for the previous fiscal year.
And passengers? Indian railways moved 6.2 billion passengers while China moved 1.4 billion passengers. What is to be noted is that out of the 6.2 billion passengers that Indian railways carried, 1.1 billion are Mumbai suburban passengers which are short lead passengers and can be considered a different subsidiary.
However the quality of passenger travel in the Chinese Railway is far superior. Chinese has express trains with speeds of 300kms/hr. Maximum speed of a passenger train in India is about half of the Chinese Railways at 160kms/ hr. The pictures of the Chinese High-Speed Railway (CHR) will give you an idea of the qualitative difference in passenger rail travel between China and India.
The Chinese Railways depended on steam locomotives till the 21st century while India phased out their steam locomotives ahead of the Chinese in 1990s. In December 2005, the world’s last regular revenue mainline steam train finished its journey on the Jitong Railway marking the end of steam era. Nevertheless, there are still some steam locomotives used in the industrial railways in China.
The Chinese Railways are organized in a more modern and business-like manner. Five major railway corporations — one each for rolling stock, railway construction, goods and materials, civil engineering, signalling and telecommunications — have been separated from transport enterprises and made autonomous, although state-owned. A number of passenger and freight transport companies have been created to operate on a competitive basis. These enterprises will finally be regrouped into three to five larger, separate companies.
The government has encouraged local authorities to build and operate their own railways up to 2,000 km. By the end of 1999, there were approximately 75 local railways with a total route-length of 4,800 km. About 20 more such projects, totalling 1,800 km, are under construction. To attract foreign capital, Chinese rail enterprises are encouraged to issue stocks on overseas stock markets. In 2001, their ministry of railways (MoR) also approved foreign participation in rail freight transport.
In contrast, as with most things in this country- education system, justice system, government (IAS, IPS …), we have just taken what the British have given us and using them without Indianizing and modifying it to the changing needs and requirements. We have the Railway Board, under the Ministry of Railways – the same structure that the British setup more than 100 years ago!!
Employees Chinese Railways employs 3.18million people while the Indian Railways has employs 1.6millionemployees. This translates to a productivity of 1308 MT/ employee on the Chinese Railways, double that of the 652MT / employee on the Indian Railways.
The Chinese Railways has already linked itself to the Europe and runs regular container trains. This is an alternative to the sea-route to Europe. This is part of the Pan-Asia rail network plan.
The railway to Tibet makes Chinese logistics and supply lines so accessible in case of a conflict with India. While India is just now built a part of the railway line in Kashmir and is just now planning a railway to Sikkim. A railway to Arunachal Pradesh is nowhere close to planning.
So to summarize, here is a table.
Indian Railways
Chinese Railways
Route kms (1945/1947)
Route kms (current)
53396
63327
27000
78000
Freight Carried (Billion MT per year)
750
3300
Passengers carried (billions/year)
6.2 billion
1.4 billion
Investment per year (Rs Cr)
37500
150000
Number of
Locos
Freight Wagons
Passenger Coaches
8300
225000
45000
18300
578000
44000
Employees
1.7
3.18
Maximum Speed (kms/hr)
Freight Trains
Passenger Trains
100
160
120
300
Reminds you of the Hare and the Tortoise story! Except that here, the Hare is way ahead of the Tortoise. And the Hare is moving ever faster all the time while the Tortoise is falling behind!!
Saturday, August 7, 2010
MNCs in Rural India: At a Turning Point
India Knowledge@Wharton
A "symbiotic relationship" is how Sanjeev Chadha, chairman and CEO of PepsiCo India, describes the work that the food and beverage multinational undertakes with thousands of farmers across India. "We help them with progressive farming techniques and they are of huge benefit to us in securing a reliable supply chain," he says. Some observers would call what Pepsi is doing corporate social responsibility (CSR); others more cynically might say it's simply another example of multinational corporations (MNCs) trying to figure out how to make inroads in India's challenging, but potentially lucrative rural market.
Whatever the words used by executives like Chadha for such initiatives, it is impossible to discuss multinational strategies in rural India without mentioning CSR. In its various forms, it is a critical part of their rural growth plans, often out of sheer necessity. Filling the gaps left by government, MNCs have built roads in rural India that help them deliver their goods, provided education and health care for communities whose workforces they rely upon, and implemented environmental programs to protect precious natural resources needed to keep supply chains running smoothly.
"In some cases, I am sure CSR activities are mostly rhetoric," says Harbir Singh, Wharton management professor and co-author of a new book titled, The India Way: How India's Top Business Leaders Are Revolutionizing Management. "But CSR is more legitimate in India than in the U.S., where infrastructure has been built and government is seen as addressing societal development agendas."
AFP/Getty Images
File photo of a villager drinking a soda in Madhuranthagam village, some 75 kms south of Madras, April 23, 2004. AFP/Getty Images
Yet now there's a shift in how MNCs look at their entire rural India investments beyond CSR. With growth drying up in developed markets and their center of gravity shifting to emerging markets, MNC businesses in India are under pressure to prove that their rural strategies aren't just about doing well from a CSR perspective. They also need to show head office that these strategies are doing well from a business perspective. In short, the strategies must start delivering top- and bottom-line results.
After years of false starts, missed opportunities and flawed strategies, a number of MNCs' India businesses are getting close. Others already are there and are ramping up their rural investments. None can take that fine balance between doing good and doing business for granted, as Nokia, Coca-Cola and Max New York Life -- among the companies profiled in this special report -- show. And it's for that reason that at PepsiCo India, "our rural agenda has been driven by purpose and now is moving into performance," says Chadha.
Spending Power
For many MNCs, there's a lot more riding on their rural India performance than there once was as India's growth story spreads to the heartland. Two-thirds of the country's one billion consumers live in rural India, where almost half of the national income is generated. A report by Technopak Consultants and the Confederation of Indian Industries, a trade body, estimates that the country's rural consumer market generated US$425 billion of revenue, up from US$266 billion the previous year.
The big reason for the growth is that India's rural consumers are steadily gaining more spending power. The number of rural households earning less than US$760 a year is down from 65% to 24% since 1993, while those with an income of US$1,525 have more than doubled from 22% to 46%. Combine these factors with improved roads and other infrastructure in rural India to help products reach their markets, and it's easy to see rural India's attraction.
Special Report
The Wall Street Journal and India Knowledge@Wharton present a special report on Multinational Corporations and Rural India. This reader resource combines specially-commissioned material with recent articles and more from our archives. Click here to read all.
"We are finally beginning to see that rural India has cash and is able to spend at the same time," says Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth College in New Hampshire, who is also the chief innovation consultant for General Electric. "This is a remarkable combination for companies."
But any company coming to India for the first time that thinks it will be easy to take advantage of that combination is mistaken. Rural India is hugely complex, not least because of its diverse pace of development. As a recent study from IMRB International, a research company in Mumbai, notes, some markets are big but not as affluent as other markets (Uttar, Bihar Pradesh) while some are affluent but not very large (Himachal Pradesh, Goa). Experts also say that strategies need to take into account the vast number of languages and cultural differences across India's hinterland, while keeping strategies highly flexible and adaptable.
It can mean developing products and services tailored specifically to the rural market. When LG entered India in the mid-1990s, numerous brands were vying for shelf space with hardly anything to distinguish them from competitors. The South Korean company developed two color television sets for the rural market, Sampoorna (which means "complete" in Hindi) and Cine Plus. At US$65 and US$107 respectively, the sets were priced slightly higher than the black-and-white televisions that other manufacturers were selling in rural markets and that had become obsolete in urban homes. LG was also the first to offer gaming with its cut-price TVs and menus in English and Hindi. Now LG has refrigerators, washing machines and microwave ovens targeted at price-sensitive consumers sold from hundreds of retail and distributor outlets across the hinterland, with rural markets contributing 40% of its revenue.
Much also depends on the sector and products sold. In fast-moving consumer goods, for example, MNC products are capturing a sizable portion of rural consumer spending in a number of areas, with year-on-year increases in rural spending in 2009 on MNC shampoos (70%), washing powder (60%) and toothpaste (112%), say researchers at IMRB. What's more, they say, the average spending on these products is growing faster in rural than in urban markets.
Soap Operas
In the course of ramping up the performance of their rural strategies, MNCs are applying the lessons already learned. One of those lessons is that the benefits of a first-mover advantage are tough to hang on to as rural Indian consumers' tastes change rapidly, with questionable brand loyalty.
That applies even to a groundbreaker like Hindustan Unilever Ltd. (HUL), the country's largest consumer-products company owned by Anglo-Dutch Unilever. It made waves in the hinterland in 2001 when its Shakti Project enlisted self-help groups to develop a network of women -- largely from very low-income households -- into entrepreneurs, selling baskets of HUL products door to door. Today, 42,000 women earn a living by selling HUL products in more than 100,000 villages in 15 states. "India's rural narrative has been defined by HUL," notes Pradeep Lokhande, founder of Rural Relations, a Pune-based consumer-relationship management organization.
In the meantime, HUL has embraced other novel distribution strategies, such as selling products like its Sunsilk and Clinic shampoos in small, inexpensive packets for low-income Indians in the hinterland with little spare cash. Thanks to those efforts, the company has one of the most extensive distribution networks in the country, with 6.3 million retail outlets, including one million that it services directly. Rural India currently accounts for nearly half of HUL's revenue.
But HUL's lead regularly comes under threat. In December, for example, rival MNC Procter & Gamble launched Tide Naturals, which is a 30% cheaper version of its Tide detergent targeted at rural consumers -- a global first for the Cincinnati-based MNC. The launch was part of the parent company's "purpose-inspired growth strategy" to "touch and improve more consumers' lives in more parts of the world." Within weeks of its launch, Tide Naturals shook up India's US$8 billion detergent market by clinching a 0.6% share of the market, according to AC Nielsen.
HUL's response has been to turn to a local court to contest P&G's use of the word "naturals" to promote its new product. With neither side backing down, the case continues.
While other MNCs aren't necessarily going to be airing their competitive grievances in court, they can expect fast, nimble competitors to take them by surprise and grab market share if they don't stay close to their customers -- which is no small feat in a country like India, which has 642,000 villages, some with populations as low as 500.
'Uncharted Water'
Nowhere is that more evident than in mobile telephony. Mobile phone penetration in India jumped from 1.4 units per 100 people in 1995 to 51 units currently. In the 12 months to September 2009, the number of mobile subscribers increased 55% to 142 million, according to the Telecommunications Regulatory Authority of India.
Taking a lead in that growth has been Nokia, the US$55 billion Finnish mobile handset maker, which is one of the companies profiled in this special report. As part of a global emerging market focus since 2006, rural India now accounts for 40% of Nokia India's US$5 billion annual revenue. But it's a crowded business to be in. Along with Samsung, LG, Sony Ericsson and Motorola, there are a number of handset makers not only from China selling cut-price handsets, but also from India's home-grown companies that are chipping away at Nokia's market share lead with hand sets that are cheaper, more practical or both.
Now Nokia, like other handset makers, is branching out and forging alliances with various partners to offer mobile banking and other services along with its handsets. "It's uncharted water" -- as Gerald Faulhaber, a business and public policy professor at Wharton, puts it -- one in which "customers are pushing the companies and taking them out of the comfort zone."
Doing so successfully requires one thing: "listen to people," states Karishma Kiri, a Seattle-based strategy and product management consultant at The K2 Group, who was a director of Microsoft's Unlimited Potential initiative which provides computers, software and IT training in emerging markets. "A lot of companies tend not to listen to [what] rural consumers say they need."
That's not as clear-cut as MNCs might think. The jury is still out on the mobile services launched by news agency Reuters last year and other service providers to deliver agriculture information to farmers' mobile phone. According to Rural Relations' Lokhande, the demand hasn't been strong. "There's a perception mismatch between the farmers and the service provider," he notes. While the companies assert that the service is useful, affordable and personalized, many farmers figure they can get daily rates from their state agriculture marketing boards for two cents, or half the price.
In rural areas, finding the magic price points that don't eat into margins yet boost volume is an ongoing battle, with a lot hinging on distribution. "We have to build, and are building much deeper 'go-to-market' systems in rural India. They have to be extremely cost-efficient, much more so than they are in the urban areas," says PepsiCo's Chadha.
The US$43.2 billion MNC has been in India for more than 20 years and now claims to have overtaken Nestle as the top food and beverage company in the country. Overall, India has indeed been treating the company well, even during the downturn. India revenue at its drinks business grew 40% last year, while volume jumped 32%, well outpacing most other countries in PepsiCo's portfolio.
But it's not resting easy. Last year, it invested US$200 million -- the most ever in any single year -- as part of a US$500 million plan to expand its distribution infrastructure, while increasing R&D and adding four new plants to the 45 it already has in the country.
To make those investments pay off, rural India -- which currently accounts for 20% of PepsiCo India's business -- is taking center stage. "Over the next 10 years, I see rural India forming 40% to 50% of our national business, and in the future, growth will be powered by the rural areas," says Chadha.
Is that a long time to wait? "If any company wants [quick] financial results from the rural initiative, it is seriously mistaken," says Tuck's Govindarajan. "You have to look at the next decade and not the next quarter."
K2 Group's Kiri agrees. "The rural incubation work of multinationals is part of their business," she says. "But they need to be less focused on [year-on-year] success and spend more energy on building innovative solutions and business models for this segment. It's a long haul."
A "symbiotic relationship" is how Sanjeev Chadha, chairman and CEO of PepsiCo India, describes the work that the food and beverage multinational undertakes with thousands of farmers across India. "We help them with progressive farming techniques and they are of huge benefit to us in securing a reliable supply chain," he says. Some observers would call what Pepsi is doing corporate social responsibility (CSR); others more cynically might say it's simply another example of multinational corporations (MNCs) trying to figure out how to make inroads in India's challenging, but potentially lucrative rural market.
Whatever the words used by executives like Chadha for such initiatives, it is impossible to discuss multinational strategies in rural India without mentioning CSR. In its various forms, it is a critical part of their rural growth plans, often out of sheer necessity. Filling the gaps left by government, MNCs have built roads in rural India that help them deliver their goods, provided education and health care for communities whose workforces they rely upon, and implemented environmental programs to protect precious natural resources needed to keep supply chains running smoothly.
"In some cases, I am sure CSR activities are mostly rhetoric," says Harbir Singh, Wharton management professor and co-author of a new book titled, The India Way: How India's Top Business Leaders Are Revolutionizing Management. "But CSR is more legitimate in India than in the U.S., where infrastructure has been built and government is seen as addressing societal development agendas."
AFP/Getty Images
File photo of a villager drinking a soda in Madhuranthagam village, some 75 kms south of Madras, April 23, 2004. AFP/Getty Images
Yet now there's a shift in how MNCs look at their entire rural India investments beyond CSR. With growth drying up in developed markets and their center of gravity shifting to emerging markets, MNC businesses in India are under pressure to prove that their rural strategies aren't just about doing well from a CSR perspective. They also need to show head office that these strategies are doing well from a business perspective. In short, the strategies must start delivering top- and bottom-line results.
After years of false starts, missed opportunities and flawed strategies, a number of MNCs' India businesses are getting close. Others already are there and are ramping up their rural investments. None can take that fine balance between doing good and doing business for granted, as Nokia, Coca-Cola and Max New York Life -- among the companies profiled in this special report -- show. And it's for that reason that at PepsiCo India, "our rural agenda has been driven by purpose and now is moving into performance," says Chadha.
Spending Power
For many MNCs, there's a lot more riding on their rural India performance than there once was as India's growth story spreads to the heartland. Two-thirds of the country's one billion consumers live in rural India, where almost half of the national income is generated. A report by Technopak Consultants and the Confederation of Indian Industries, a trade body, estimates that the country's rural consumer market generated US$425 billion of revenue, up from US$266 billion the previous year.
The big reason for the growth is that India's rural consumers are steadily gaining more spending power. The number of rural households earning less than US$760 a year is down from 65% to 24% since 1993, while those with an income of US$1,525 have more than doubled from 22% to 46%. Combine these factors with improved roads and other infrastructure in rural India to help products reach their markets, and it's easy to see rural India's attraction.
Special Report
The Wall Street Journal and India Knowledge@Wharton present a special report on Multinational Corporations and Rural India. This reader resource combines specially-commissioned material with recent articles and more from our archives. Click here to read all.
"We are finally beginning to see that rural India has cash and is able to spend at the same time," says Vijay Govindarajan, professor of international business at Tuck School of Business at Dartmouth College in New Hampshire, who is also the chief innovation consultant for General Electric. "This is a remarkable combination for companies."
But any company coming to India for the first time that thinks it will be easy to take advantage of that combination is mistaken. Rural India is hugely complex, not least because of its diverse pace of development. As a recent study from IMRB International, a research company in Mumbai, notes, some markets are big but not as affluent as other markets (Uttar, Bihar Pradesh) while some are affluent but not very large (Himachal Pradesh, Goa). Experts also say that strategies need to take into account the vast number of languages and cultural differences across India's hinterland, while keeping strategies highly flexible and adaptable.
It can mean developing products and services tailored specifically to the rural market. When LG entered India in the mid-1990s, numerous brands were vying for shelf space with hardly anything to distinguish them from competitors. The South Korean company developed two color television sets for the rural market, Sampoorna (which means "complete" in Hindi) and Cine Plus. At US$65 and US$107 respectively, the sets were priced slightly higher than the black-and-white televisions that other manufacturers were selling in rural markets and that had become obsolete in urban homes. LG was also the first to offer gaming with its cut-price TVs and menus in English and Hindi. Now LG has refrigerators, washing machines and microwave ovens targeted at price-sensitive consumers sold from hundreds of retail and distributor outlets across the hinterland, with rural markets contributing 40% of its revenue.
Much also depends on the sector and products sold. In fast-moving consumer goods, for example, MNC products are capturing a sizable portion of rural consumer spending in a number of areas, with year-on-year increases in rural spending in 2009 on MNC shampoos (70%), washing powder (60%) and toothpaste (112%), say researchers at IMRB. What's more, they say, the average spending on these products is growing faster in rural than in urban markets.
Soap Operas
In the course of ramping up the performance of their rural strategies, MNCs are applying the lessons already learned. One of those lessons is that the benefits of a first-mover advantage are tough to hang on to as rural Indian consumers' tastes change rapidly, with questionable brand loyalty.
That applies even to a groundbreaker like Hindustan Unilever Ltd. (HUL), the country's largest consumer-products company owned by Anglo-Dutch Unilever. It made waves in the hinterland in 2001 when its Shakti Project enlisted self-help groups to develop a network of women -- largely from very low-income households -- into entrepreneurs, selling baskets of HUL products door to door. Today, 42,000 women earn a living by selling HUL products in more than 100,000 villages in 15 states. "India's rural narrative has been defined by HUL," notes Pradeep Lokhande, founder of Rural Relations, a Pune-based consumer-relationship management organization.
In the meantime, HUL has embraced other novel distribution strategies, such as selling products like its Sunsilk and Clinic shampoos in small, inexpensive packets for low-income Indians in the hinterland with little spare cash. Thanks to those efforts, the company has one of the most extensive distribution networks in the country, with 6.3 million retail outlets, including one million that it services directly. Rural India currently accounts for nearly half of HUL's revenue.
But HUL's lead regularly comes under threat. In December, for example, rival MNC Procter & Gamble launched Tide Naturals, which is a 30% cheaper version of its Tide detergent targeted at rural consumers -- a global first for the Cincinnati-based MNC. The launch was part of the parent company's "purpose-inspired growth strategy" to "touch and improve more consumers' lives in more parts of the world." Within weeks of its launch, Tide Naturals shook up India's US$8 billion detergent market by clinching a 0.6% share of the market, according to AC Nielsen.
HUL's response has been to turn to a local court to contest P&G's use of the word "naturals" to promote its new product. With neither side backing down, the case continues.
While other MNCs aren't necessarily going to be airing their competitive grievances in court, they can expect fast, nimble competitors to take them by surprise and grab market share if they don't stay close to their customers -- which is no small feat in a country like India, which has 642,000 villages, some with populations as low as 500.
'Uncharted Water'
Nowhere is that more evident than in mobile telephony. Mobile phone penetration in India jumped from 1.4 units per 100 people in 1995 to 51 units currently. In the 12 months to September 2009, the number of mobile subscribers increased 55% to 142 million, according to the Telecommunications Regulatory Authority of India.
Taking a lead in that growth has been Nokia, the US$55 billion Finnish mobile handset maker, which is one of the companies profiled in this special report. As part of a global emerging market focus since 2006, rural India now accounts for 40% of Nokia India's US$5 billion annual revenue. But it's a crowded business to be in. Along with Samsung, LG, Sony Ericsson and Motorola, there are a number of handset makers not only from China selling cut-price handsets, but also from India's home-grown companies that are chipping away at Nokia's market share lead with hand sets that are cheaper, more practical or both.
Now Nokia, like other handset makers, is branching out and forging alliances with various partners to offer mobile banking and other services along with its handsets. "It's uncharted water" -- as Gerald Faulhaber, a business and public policy professor at Wharton, puts it -- one in which "customers are pushing the companies and taking them out of the comfort zone."
Doing so successfully requires one thing: "listen to people," states Karishma Kiri, a Seattle-based strategy and product management consultant at The K2 Group, who was a director of Microsoft's Unlimited Potential initiative which provides computers, software and IT training in emerging markets. "A lot of companies tend not to listen to [what] rural consumers say they need."
That's not as clear-cut as MNCs might think. The jury is still out on the mobile services launched by news agency Reuters last year and other service providers to deliver agriculture information to farmers' mobile phone. According to Rural Relations' Lokhande, the demand hasn't been strong. "There's a perception mismatch between the farmers and the service provider," he notes. While the companies assert that the service is useful, affordable and personalized, many farmers figure they can get daily rates from their state agriculture marketing boards for two cents, or half the price.
In rural areas, finding the magic price points that don't eat into margins yet boost volume is an ongoing battle, with a lot hinging on distribution. "We have to build, and are building much deeper 'go-to-market' systems in rural India. They have to be extremely cost-efficient, much more so than they are in the urban areas," says PepsiCo's Chadha.
The US$43.2 billion MNC has been in India for more than 20 years and now claims to have overtaken Nestle as the top food and beverage company in the country. Overall, India has indeed been treating the company well, even during the downturn. India revenue at its drinks business grew 40% last year, while volume jumped 32%, well outpacing most other countries in PepsiCo's portfolio.
But it's not resting easy. Last year, it invested US$200 million -- the most ever in any single year -- as part of a US$500 million plan to expand its distribution infrastructure, while increasing R&D and adding four new plants to the 45 it already has in the country.
To make those investments pay off, rural India -- which currently accounts for 20% of PepsiCo India's business -- is taking center stage. "Over the next 10 years, I see rural India forming 40% to 50% of our national business, and in the future, growth will be powered by the rural areas," says Chadha.
Is that a long time to wait? "If any company wants [quick] financial results from the rural initiative, it is seriously mistaken," says Tuck's Govindarajan. "You have to look at the next decade and not the next quarter."
K2 Group's Kiri agrees. "The rural incubation work of multinationals is part of their business," she says. "But they need to be less focused on [year-on-year] success and spend more energy on building innovative solutions and business models for this segment. It's a long haul."
Indian companies innovating for consumers
http://economictimes.indiatimes.com/quickiearticleshow/6146364.cms
What is common among Minute Maid Nimbu Fresh, Gillette Vector Plus, Ford Figo and Tata Swach Purifier ? It’s not hard to guess. All these products have been developed keeping the Indian consumers at the centre of the process.
For decades, we have been talking about concepts such as customer-centricity and market orientation, but these concepts existed in the books. But in the last few years, we have had many examples of companies developing products keeping in mind the specific needs of the Indian consumers.
What is common among Minute Maid Nimbu Fresh, Gillette Vector Plus, Ford Figo and Tata Swach Purifier ? It’s not hard to guess. All these products have been developed keeping the Indian consumers at the centre of the process.
For decades, we have been talking about concepts such as customer-centricity and market orientation, but these concepts existed in the books. But in the last few years, we have had many examples of companies developing products keeping in mind the specific needs of the Indian consumers.
Chief Mentor: The Farmer Opportunity in India
By Sandeep Singhal
In the last three years, Nexus has invested in two agriculture-focused companies. Suminter India Organics contracts with small and medium-sized farmers to grow organic produce that it then processes and exports. Sohanlal Commodity Management provides warehousing and logistics services to farmers, commodity exchanges and agriculture processors.
Based on my experience while sitting on these boards, there are a number of opportunities for entrepreneurs and companies that want to build business models aimed at farmers.
Here are some of the encouraging trends I see:
–Corporations want to deal directly with farmers.
Associated Press
There are a number of opportunities to build business models aimed at the farmer
Companies like PepsiCo, ITC and Godrej have been creating integrated supply chains for the last decade but have typically focused on specific products (e.g. Pepsi with potatoes and tomatoes, ITC with wheat.) In recent times, organized retail chains like Reliance Fresh and Food Bazaar have set up integrated procurement systems that directly reach the farmer instead of working through intermediaries. They also have increased the range of products they procure. Global trading companies like Cargill and Glencore have increased their procurement in the Indian market and have set up some presence in mandis, or local markets.
–Farmers are getting more information.
This information ranges from the most current procurement prices at regional mandis to marketing committee locations (provided by the National Spot Exchange and others) to weather reports and forecasts from mobile operators and specialist providers like Weather Risk Management Services. ITC has been providing this information at its eChoupals (kiosks that provide price information) for some time. Others have similar offerings.
–Recent policies aim to increase efficiency. For example, the “Warehouse and Distribution Act” calls for accreditation of warehouses, which will improve post-harvest management and reduce spoilage. It will also reduce the cost of intermediaries in the procurement process by facilitating warehouse receipt financing and by providing subsidies to build warehouses.
The new nutrient-based subsidy policy also helps optimize the use of fertilizers and improve soil quality. The earlier subsidy policy only covered a few products but the new policy gives a subsidy based on the nutrients in the fertilizer. This lowers the price of complex fertilizers and allows the farmer to choose the right fertilizer for their crop and soil type.
Agriculture is a large and disorganized market. So, there are many inefficiencies which require smart solutions. Farmers are increasingly more open to cooperating with private players as long as they are convinced of increased revenue, lower costs, and/or sustainability. The farming community is driven by word-of-mouth marketing and that can help an entrepreneur scale a business over time.
–Sandeep Singhal is co-founder Nexus Venture Partners, a venture firm with $320 million under management. Nexus has an active portfolio of over 20 companies across several Indian industries including technology, consumer services, media, outsourced services, the Internet and mobile, alternate energy and agribusiness.
In the last three years, Nexus has invested in two agriculture-focused companies. Suminter India Organics contracts with small and medium-sized farmers to grow organic produce that it then processes and exports. Sohanlal Commodity Management provides warehousing and logistics services to farmers, commodity exchanges and agriculture processors.
Based on my experience while sitting on these boards, there are a number of opportunities for entrepreneurs and companies that want to build business models aimed at farmers.
Here are some of the encouraging trends I see:
–Corporations want to deal directly with farmers.
Associated Press
There are a number of opportunities to build business models aimed at the farmer
Companies like PepsiCo, ITC and Godrej have been creating integrated supply chains for the last decade but have typically focused on specific products (e.g. Pepsi with potatoes and tomatoes, ITC with wheat.) In recent times, organized retail chains like Reliance Fresh and Food Bazaar have set up integrated procurement systems that directly reach the farmer instead of working through intermediaries. They also have increased the range of products they procure. Global trading companies like Cargill and Glencore have increased their procurement in the Indian market and have set up some presence in mandis, or local markets.
–Farmers are getting more information.
This information ranges from the most current procurement prices at regional mandis to marketing committee locations (provided by the National Spot Exchange and others) to weather reports and forecasts from mobile operators and specialist providers like Weather Risk Management Services. ITC has been providing this information at its eChoupals (kiosks that provide price information) for some time. Others have similar offerings.
–Recent policies aim to increase efficiency. For example, the “Warehouse and Distribution Act” calls for accreditation of warehouses, which will improve post-harvest management and reduce spoilage. It will also reduce the cost of intermediaries in the procurement process by facilitating warehouse receipt financing and by providing subsidies to build warehouses.
The new nutrient-based subsidy policy also helps optimize the use of fertilizers and improve soil quality. The earlier subsidy policy only covered a few products but the new policy gives a subsidy based on the nutrients in the fertilizer. This lowers the price of complex fertilizers and allows the farmer to choose the right fertilizer for their crop and soil type.
Agriculture is a large and disorganized market. So, there are many inefficiencies which require smart solutions. Farmers are increasingly more open to cooperating with private players as long as they are convinced of increased revenue, lower costs, and/or sustainability. The farming community is driven by word-of-mouth marketing and that can help an entrepreneur scale a business over time.
–Sandeep Singhal is co-founder Nexus Venture Partners, a venture firm with $320 million under management. Nexus has an active portfolio of over 20 companies across several Indian industries including technology, consumer services, media, outsourced services, the Internet and mobile, alternate energy and agribusiness.
Saturday, June 5, 2010
COMING SOON: A FOLDABLE IPAD?
You can already find nanotechnology in ski wax, skin cream, tennis rackets and even your khaki pants.
So it's not too hard to imagine this tech bringing us a foldable iPad next.
A team of Duke University chemists say they've perfected a way to mass produce copper nanowires, a technology that could have a wide impact on the electronics industry. The wires are bendable, which means they could be used to produce flexible screens for devices like televisions and even iPads.
Their research is published online in the Advanced Materials.
The scientists actually grew the copper nanowires in a water solution. By adding different chemicals to the solution, they created tiny crystal "seeds," which sprouted individual nanowires. It's a method never seen before, they told Science.
The technology has the potential to revolutionize more than just TV screens. The researchers hope it can be used for the fast-growing solar industry, too. Because the nanowires can be mass produced, average homeowners might be able to finally afford greening their homes with devices like water heaters.
“We think that using a material that is a hundred times cheaper will be even more attractive to venture capitalists, electronic companies and solar companies who all need these transparent electrodes,” Benjamin Wiley, an assistant chemistry professor at Duke, told Science.
Wiley said that because the copper nanowires are flexible, they have the potential to be produced in large rolls. He's already applied for a patent for the process.
So it's not too hard to imagine this tech bringing us a foldable iPad next.
A team of Duke University chemists say they've perfected a way to mass produce copper nanowires, a technology that could have a wide impact on the electronics industry. The wires are bendable, which means they could be used to produce flexible screens for devices like televisions and even iPads.
Their research is published online in the Advanced Materials.
The scientists actually grew the copper nanowires in a water solution. By adding different chemicals to the solution, they created tiny crystal "seeds," which sprouted individual nanowires. It's a method never seen before, they told Science.
The technology has the potential to revolutionize more than just TV screens. The researchers hope it can be used for the fast-growing solar industry, too. Because the nanowires can be mass produced, average homeowners might be able to finally afford greening their homes with devices like water heaters.
“We think that using a material that is a hundred times cheaper will be even more attractive to venture capitalists, electronic companies and solar companies who all need these transparent electrodes,” Benjamin Wiley, an assistant chemistry professor at Duke, told Science.
Wiley said that because the copper nanowires are flexible, they have the potential to be produced in large rolls. He's already applied for a patent for the process.
Friday, May 28, 2010
Coca-Cola India: Winning Hearts and Taste Buds in the Hinterland
India Knowledge@Wharton
After a series of missteps during recent years, Coca-Cola India has had to learn lessons the hard way. In the process, says the company, executives had to recalibrate the old kinks in its supply chain and bust a few myths about winning over Indian consumers, especially in the country's highly promising rural markets.
AFP/Getty Images
File Photo of a villager drinking Coke in Navallur village, some 85 kms south of Madras, April 23, 2004.
Now, the beverages of the $31 billion multinational are back on the shopping lists of Indian consumers, and Coca-Cola India is reaping the rewards. At the end of last year, its sales volume grew more than 30% and it turned a profit for the first time since it returned to the country in 1993 after a 16-year hiatus, according to Atul Singh, who was appointed the firm's Delhi-based president and CEO of Coca-Cola India and southwest Asia in 2005. Much of last year's growth for Coca-Cola -- and its rival PepsiCo -- came from urban and semi-urban markets, but experts note that Coca-Cola's rural push helped it consolidate its overall market leadership.
As in previous years, the tasks ahead for Singh and his team are clear. One of the biggest challenges is introducing a greater number of people to consuming beverages in a ready-to-drink packaged form, he says. That means getting its bottles of fizzy drinks to the right place at the right time at the right price -- a tall order in a country with such a vast hinterland like India.
Cold Drinks, Hot Markets
The reality is that the consumers Singh covets most are in hard-to-reach rural India. "Coca-Cola must realize that the future of its drink will be determined in the countryside because that is where the consumers are," says Z. John Zhang, a Wharton marketing professor. "Today's farmer could be tomorrow's city resident; you better capture that market quickly."
It's a similar scenario in China, a country that Zhang has studied closely, which also has an enormous untapped rural consumer market. Home-grown beverage company Wahaha uses "a guerilla marketing strategy to encircle the city from the countryside, knowing those people will become city residents eventually," Zhang says. "Wahaha also knows the rural markets are where Coke is weak," helping its own beverages gain a bigger share of China's soft drinks market than Coca-Cola's Sprite and Coke, and PepsiCo's Pepsi.
As in China, the dream of capturing rural consumers in India is, of course, not Coca-Cola's alone. But as Coca-Cola and its rivals know, India is a market that makes neither distribution nor inventory management easy, and is hugely diverse in terms of tastes and buying power. Indeed, even established consumer-goods companies in India have covered only about a tenth of the country's 600,000 villages, according to Jagdeep Kapoor, chairman and managing director of Samsika Marketing Consultants, a brand marketing-services firm in Mumbai. Kapoor in the past was head of marketing for a number of popular drinks, including India's biggest cola brand, Thums Up, before Coca-Cola bought it in 1993. Depending on how you look at it, he adds, it's either good news or bad news that "you have the whole rural market up for grabs."
Consumer-goods experts agree that one reason why Coca-Cola's India foray faltered after it re-entered the country was that it did not pay enough attention to refrigeration. In India, consumers – urban or rural – want a "cold drink" and not just a "soft drink," says Kapoor. "For the first three or four years [after its return, Coca-Cola] was grappling with whether it should focus on Thums Up or Coke, and refrigeration took a back seat."
The key to the turnaround, Singh says, is that Coca-Cola India along with its bottlers ramped up its route-to-market strategy. Part of that meant a greater focus on refrigeration. In electricity-deficient areas, such as some of the hinterland in Uttar Pradesh, it now provides shops with coolers that operate with brine solution so its products can stay chilled up to 12 hours without electricity. In other places, it has trade agreements with local ice makers.
Taking a New Route
As for distribution, Coca-Cola India has done what other companies in the hinterland have done, and moved from a centralized distribution model to a hub-and-spoke approach, says CEO Singh. Rather than transporting beverages directly from the bottling plants to retailers, its goods are now sent first to a "hub," and are then parceled out to nearby "spoke" centers when orders need filling. Among the benefits, that approach reduces costs because fewer long-haul journeys in large, uneconomical vehicles are needed, while efficiency increases through more timely, tailored fulfillment.
Gowri Arun, principal consultant at RK Swamy BBDO, an advertising agency in Mumbai that produces urban and rural market indices, adds that although rural India's population is three times larger than in urban areas, "the market is not three times the size and is not homogenous." The larger areas that companies have to cover in rural India disproportionately increase logistics costs, she says.
It wasn't just distribution and refrigeration issues that caused Coca-Cola to stumble in India. The company also erred in adopting the low price-point strategy that many other foreign consumer-goods companies were using at the time to sell their products in rural India. "People think Indian consumers want low-priced products," says Kapoor. "There cannot be a bigger myth. They want good-quality products at a reasonable price."
Kapoor points out that between the time that Coke left India (because of disagreements over government regulations) and its reentry, it was common practice for rural consumers to pay one rupee more for packaged beverages to cover the cost of keeping them chilled. "How can anyone say they are price-sensitive consumers?" he asks.
The High Cost of a Low Price
Yet about seven years ago, Coca-Cola set out to woo rural consumers by halving the price of a 200-milliliter (seven-ounce) bottle to Rs. 5 (11 cents). Rs. 5 is a "psychological price point," according to Arun of RK Swamy BBDO. A price greater than Rs. 5 means a consumer has to "break a Rs. 10 note."
At the time, Coca-Cola claimed the low price spurred sales. Today, a Coca-Cola spokesperson says, "The real thought behind the 200-ml bottle is to get people in rural India used to this packaged beverage."
But among the problems, according to Kapoor, was that Coca-Cola advertised the lower price on billboards and in print media. Indian retailers found themselves arguing with customers, who wanted the drink for Rs. 5 and were unwilling to pay the extra rupee for refrigeration, he says.
Meanwhile, a price war erupted as rival PepsiCo matched the Rs. 5 price. Both firms have since dropped the strategy, however, and let prices for their 200-ml sodas rise up to around Rs. 8, though the rivalry remains as intense as ever: PepsiCo India grew its beverage business more than 32% in 2009, its highest volume growth in recent years, making it the fastest-growing beverage company in the country for the second consecutive year, according to company marketing.
Yet Zhang, who has analyzed priced wars in China extensively, says the Rs. 5 experience shouldn't make Coca-Cola or other companies fear entering into price wars in the future. Despite what many Western companies believe, he says, a price war can be an effective business strategy but must be managed well and works best in fragmented markets in which consumers are price sensitive.
In any case, there seems to be no easy way for Coca-Cola to woo rural consumers with pricing strategies. "The price barrier has definitely been a problem in rural India," concedes a spokesperson for Coca-Cola India. "Soft drinks that come in a glass bottle have to be returned to bottling plants, and no mechanism can provide such drinks at a cheap cost due to freight charges. We are now looking at alternative packaging and how to organize distribution."
Nabankur Gupta helped develop the low-priced Videocon brand of televisions and other white goods in India before becoming CEO of Nobby Brand Architects, a brand consulting firm in Mumbai. He argues in favor of going to a 150-ml bottle to woo rural Indian consumers, arguing that it is consistent with their drinking habits. Lassis, India's popular yogurt drink, are usually consumed in 300-ml or 350-ml tumblers, but tea or soft drinks are served in small glasses, he says. He notes that reducing sizes has worked well for shampoo manufacturers supplying India's rural and semi-urban markets with small sachet packs.
Of Drinks and Dreams
The psychological impact of pricing is just one part of the bigger basket of intangible considerations that MNCs often struggle to manage in rural India. Another one is the power of a brand's image, which might draw consumers to buy one product while making them shun another. Indian consumers are "emotional," according to Kapoor. "Only 50% of what is consumed is what goes in the mouth and in the stomach; the other 50% goes in the mind and heart."
Foreign companies should be particularly mindful of helping their brands appeal to the lifestyle aspirations of up-and-coming Indians, says Wharton's Zhang. "Rural customers aspire to the urban consumers' lifestyle," he notes. "In China, the rural population is already sensitive to the idea that they are not as good as city residents in terms of quality of life. You don't want to treat them like country bumpkins."
What's more, "rural" is a state of mind that can exist in an urban metropolis, according to Gupta. "One of the biggest rural markets in India is Mumbai -- the slums of Dharavi," he says. For a consumer in the "ghetto market" of Dharavi, a cold cola is an "aspiration" and a "status symbol that tells his neighbor that he has arrived."
Thanks to a growing number of Indians with access to television, "you can see the consumer experience of your urban cousins and you want the same experience," adds Kapoor. Armed with that knowledge, he says marketers at companies like Coca-Cola need to increase their investments around educating rural consumers. "In urban India, it is a question of reach. But in rural India, it is about reach and preach," he says. "You have to tell them what a cold drink is, how is it opened, how [to drink it] in a macho manner by holding your head up – you cannot take it for granted."
At Coca-Cola, education initiatives have been more focused on the retailers selling their sodas than on the customers drinking them. In late 2008, Coca-Cola's University on Wheels launched a nationwide training program called Parivartan on 20-seater buses for mom-and-pop retailers. So far, the program has covered more than 30,000 retailers in cities including Agra, Ludhiana, Chandigarh and Lucknow, with courses on such topics as how to display products and improve inventory management. The aim is to train 100,000 retailers in the next two years, according to a Coca-Cola spokesperson.
But Santosh Desai, managing director and CEO at Futurebrands, a brand consulting company in New Delhi, says that while education is important -- particularly that of retailers -- expectations need to be managed. "Symbolically, it is both significant and valuable in intent, but in terms of market building, it merely scratches the surface," he says. "Training the retailer is a great idea, but given the scale of India and its number of villages, it will be an extremely long time before you get any significant scale."
Neglecting Thums Up
There are thornier issues involving brand management that Coca-Cola India has had to confront. One involves its failed attempt to let the popular home-grown Thums Up brand fade away in the mid-1990s so that its own Coke brand could gain more market share. "Coca-Cola bought Thums Up when it ruled the market, and as a result Thums Up gave PepsiCo a very hard time when PepsiCo entered the market," says Kapoor. "Initially, Coke neglected the Thums Up brand. Then it started paying attention and Thums Up is still number one in India, with Coke and Pepsi following."
As Desai of Futurebrands notes: "Thums Up is a brand that refuses to die ... although Coca-Cola never intended to let the brand live. There are huge pockets of enthusiasm for it across the country, and it tends to appeal to rural audiences more than other brands. Where it is strong, it has a good rural profile."
With or without Thums Up, being the most visible soft drink brand means Coca-Cola also attracts unwelcome attention. In India, it continues to battle (along with Pepsi) allegations that it has excessive pesticide content in its soft drinks, and that it depletes and contaminates groundwater resources. Coca-Cola made headlines yet again in March, when it faced a US$47 million fine in the southern state of Kerala for alleged groundwater pollution -- a charge it denies. Just as with distribution, pricing and the like, Coca-Cola India now
After a series of missteps during recent years, Coca-Cola India has had to learn lessons the hard way. In the process, says the company, executives had to recalibrate the old kinks in its supply chain and bust a few myths about winning over Indian consumers, especially in the country's highly promising rural markets.
AFP/Getty Images
File Photo of a villager drinking Coke in Navallur village, some 85 kms south of Madras, April 23, 2004.
Now, the beverages of the $31 billion multinational are back on the shopping lists of Indian consumers, and Coca-Cola India is reaping the rewards. At the end of last year, its sales volume grew more than 30% and it turned a profit for the first time since it returned to the country in 1993 after a 16-year hiatus, according to Atul Singh, who was appointed the firm's Delhi-based president and CEO of Coca-Cola India and southwest Asia in 2005. Much of last year's growth for Coca-Cola -- and its rival PepsiCo -- came from urban and semi-urban markets, but experts note that Coca-Cola's rural push helped it consolidate its overall market leadership.
As in previous years, the tasks ahead for Singh and his team are clear. One of the biggest challenges is introducing a greater number of people to consuming beverages in a ready-to-drink packaged form, he says. That means getting its bottles of fizzy drinks to the right place at the right time at the right price -- a tall order in a country with such a vast hinterland like India.
Cold Drinks, Hot Markets
The reality is that the consumers Singh covets most are in hard-to-reach rural India. "Coca-Cola must realize that the future of its drink will be determined in the countryside because that is where the consumers are," says Z. John Zhang, a Wharton marketing professor. "Today's farmer could be tomorrow's city resident; you better capture that market quickly."
It's a similar scenario in China, a country that Zhang has studied closely, which also has an enormous untapped rural consumer market. Home-grown beverage company Wahaha uses "a guerilla marketing strategy to encircle the city from the countryside, knowing those people will become city residents eventually," Zhang says. "Wahaha also knows the rural markets are where Coke is weak," helping its own beverages gain a bigger share of China's soft drinks market than Coca-Cola's Sprite and Coke, and PepsiCo's Pepsi.
As in China, the dream of capturing rural consumers in India is, of course, not Coca-Cola's alone. But as Coca-Cola and its rivals know, India is a market that makes neither distribution nor inventory management easy, and is hugely diverse in terms of tastes and buying power. Indeed, even established consumer-goods companies in India have covered only about a tenth of the country's 600,000 villages, according to Jagdeep Kapoor, chairman and managing director of Samsika Marketing Consultants, a brand marketing-services firm in Mumbai. Kapoor in the past was head of marketing for a number of popular drinks, including India's biggest cola brand, Thums Up, before Coca-Cola bought it in 1993. Depending on how you look at it, he adds, it's either good news or bad news that "you have the whole rural market up for grabs."
Consumer-goods experts agree that one reason why Coca-Cola's India foray faltered after it re-entered the country was that it did not pay enough attention to refrigeration. In India, consumers – urban or rural – want a "cold drink" and not just a "soft drink," says Kapoor. "For the first three or four years [after its return, Coca-Cola] was grappling with whether it should focus on Thums Up or Coke, and refrigeration took a back seat."
The key to the turnaround, Singh says, is that Coca-Cola India along with its bottlers ramped up its route-to-market strategy. Part of that meant a greater focus on refrigeration. In electricity-deficient areas, such as some of the hinterland in Uttar Pradesh, it now provides shops with coolers that operate with brine solution so its products can stay chilled up to 12 hours without electricity. In other places, it has trade agreements with local ice makers.
Taking a New Route
As for distribution, Coca-Cola India has done what other companies in the hinterland have done, and moved from a centralized distribution model to a hub-and-spoke approach, says CEO Singh. Rather than transporting beverages directly from the bottling plants to retailers, its goods are now sent first to a "hub," and are then parceled out to nearby "spoke" centers when orders need filling. Among the benefits, that approach reduces costs because fewer long-haul journeys in large, uneconomical vehicles are needed, while efficiency increases through more timely, tailored fulfillment.
Gowri Arun, principal consultant at RK Swamy BBDO, an advertising agency in Mumbai that produces urban and rural market indices, adds that although rural India's population is three times larger than in urban areas, "the market is not three times the size and is not homogenous." The larger areas that companies have to cover in rural India disproportionately increase logistics costs, she says.
It wasn't just distribution and refrigeration issues that caused Coca-Cola to stumble in India. The company also erred in adopting the low price-point strategy that many other foreign consumer-goods companies were using at the time to sell their products in rural India. "People think Indian consumers want low-priced products," says Kapoor. "There cannot be a bigger myth. They want good-quality products at a reasonable price."
Kapoor points out that between the time that Coke left India (because of disagreements over government regulations) and its reentry, it was common practice for rural consumers to pay one rupee more for packaged beverages to cover the cost of keeping them chilled. "How can anyone say they are price-sensitive consumers?" he asks.
The High Cost of a Low Price
Yet about seven years ago, Coca-Cola set out to woo rural consumers by halving the price of a 200-milliliter (seven-ounce) bottle to Rs. 5 (11 cents). Rs. 5 is a "psychological price point," according to Arun of RK Swamy BBDO. A price greater than Rs. 5 means a consumer has to "break a Rs. 10 note."
At the time, Coca-Cola claimed the low price spurred sales. Today, a Coca-Cola spokesperson says, "The real thought behind the 200-ml bottle is to get people in rural India used to this packaged beverage."
But among the problems, according to Kapoor, was that Coca-Cola advertised the lower price on billboards and in print media. Indian retailers found themselves arguing with customers, who wanted the drink for Rs. 5 and were unwilling to pay the extra rupee for refrigeration, he says.
Meanwhile, a price war erupted as rival PepsiCo matched the Rs. 5 price. Both firms have since dropped the strategy, however, and let prices for their 200-ml sodas rise up to around Rs. 8, though the rivalry remains as intense as ever: PepsiCo India grew its beverage business more than 32% in 2009, its highest volume growth in recent years, making it the fastest-growing beverage company in the country for the second consecutive year, according to company marketing.
Yet Zhang, who has analyzed priced wars in China extensively, says the Rs. 5 experience shouldn't make Coca-Cola or other companies fear entering into price wars in the future. Despite what many Western companies believe, he says, a price war can be an effective business strategy but must be managed well and works best in fragmented markets in which consumers are price sensitive.
In any case, there seems to be no easy way for Coca-Cola to woo rural consumers with pricing strategies. "The price barrier has definitely been a problem in rural India," concedes a spokesperson for Coca-Cola India. "Soft drinks that come in a glass bottle have to be returned to bottling plants, and no mechanism can provide such drinks at a cheap cost due to freight charges. We are now looking at alternative packaging and how to organize distribution."
Nabankur Gupta helped develop the low-priced Videocon brand of televisions and other white goods in India before becoming CEO of Nobby Brand Architects, a brand consulting firm in Mumbai. He argues in favor of going to a 150-ml bottle to woo rural Indian consumers, arguing that it is consistent with their drinking habits. Lassis, India's popular yogurt drink, are usually consumed in 300-ml or 350-ml tumblers, but tea or soft drinks are served in small glasses, he says. He notes that reducing sizes has worked well for shampoo manufacturers supplying India's rural and semi-urban markets with small sachet packs.
Of Drinks and Dreams
The psychological impact of pricing is just one part of the bigger basket of intangible considerations that MNCs often struggle to manage in rural India. Another one is the power of a brand's image, which might draw consumers to buy one product while making them shun another. Indian consumers are "emotional," according to Kapoor. "Only 50% of what is consumed is what goes in the mouth and in the stomach; the other 50% goes in the mind and heart."
Foreign companies should be particularly mindful of helping their brands appeal to the lifestyle aspirations of up-and-coming Indians, says Wharton's Zhang. "Rural customers aspire to the urban consumers' lifestyle," he notes. "In China, the rural population is already sensitive to the idea that they are not as good as city residents in terms of quality of life. You don't want to treat them like country bumpkins."
What's more, "rural" is a state of mind that can exist in an urban metropolis, according to Gupta. "One of the biggest rural markets in India is Mumbai -- the slums of Dharavi," he says. For a consumer in the "ghetto market" of Dharavi, a cold cola is an "aspiration" and a "status symbol that tells his neighbor that he has arrived."
Thanks to a growing number of Indians with access to television, "you can see the consumer experience of your urban cousins and you want the same experience," adds Kapoor. Armed with that knowledge, he says marketers at companies like Coca-Cola need to increase their investments around educating rural consumers. "In urban India, it is a question of reach. But in rural India, it is about reach and preach," he says. "You have to tell them what a cold drink is, how is it opened, how [to drink it] in a macho manner by holding your head up – you cannot take it for granted."
At Coca-Cola, education initiatives have been more focused on the retailers selling their sodas than on the customers drinking them. In late 2008, Coca-Cola's University on Wheels launched a nationwide training program called Parivartan on 20-seater buses for mom-and-pop retailers. So far, the program has covered more than 30,000 retailers in cities including Agra, Ludhiana, Chandigarh and Lucknow, with courses on such topics as how to display products and improve inventory management. The aim is to train 100,000 retailers in the next two years, according to a Coca-Cola spokesperson.
But Santosh Desai, managing director and CEO at Futurebrands, a brand consulting company in New Delhi, says that while education is important -- particularly that of retailers -- expectations need to be managed. "Symbolically, it is both significant and valuable in intent, but in terms of market building, it merely scratches the surface," he says. "Training the retailer is a great idea, but given the scale of India and its number of villages, it will be an extremely long time before you get any significant scale."
Neglecting Thums Up
There are thornier issues involving brand management that Coca-Cola India has had to confront. One involves its failed attempt to let the popular home-grown Thums Up brand fade away in the mid-1990s so that its own Coke brand could gain more market share. "Coca-Cola bought Thums Up when it ruled the market, and as a result Thums Up gave PepsiCo a very hard time when PepsiCo entered the market," says Kapoor. "Initially, Coke neglected the Thums Up brand. Then it started paying attention and Thums Up is still number one in India, with Coke and Pepsi following."
As Desai of Futurebrands notes: "Thums Up is a brand that refuses to die ... although Coca-Cola never intended to let the brand live. There are huge pockets of enthusiasm for it across the country, and it tends to appeal to rural audiences more than other brands. Where it is strong, it has a good rural profile."
With or without Thums Up, being the most visible soft drink brand means Coca-Cola also attracts unwelcome attention. In India, it continues to battle (along with Pepsi) allegations that it has excessive pesticide content in its soft drinks, and that it depletes and contaminates groundwater resources. Coca-Cola made headlines yet again in March, when it faced a US$47 million fine in the southern state of Kerala for alleged groundwater pollution -- a charge it denies. Just as with distribution, pricing and the like, Coca-Cola India now
Rural Calling: Can Nokia Sustain Its First-mover Advantage?
India Knowledge@Wharton
For the past three years, Yellakandula Urmila of Bhongir village, near Hyderabad, has been banking with SKS Microfinance (MFI), India's largest lender. She first bought a loom to weave silk saris with a US$150 loan from MFI in 2007, which helped triple her family's monthly income to US$100. Then three months ago she took out another loan for US$26 to buy a Nokia 1200 mobile phone with a prepaid Bharti Airtel connection, which she will have paid off in June. "It's been a life-changing and time-saving experience," says Urmila, affectionately patting her gleaming silver handset and recalling how she used to have to walk a mile to a wire-line public phone booth to call clients about orders. "Deals are now wrapped up in minutes," she says.
AFP/Getty Images
This file photo shows an Indian farmer talking on his mobile phone as he discusses pricing of oranges at the Kothapeta fruit market on the outskirts of Hyderabad, India.
Wooing rural consumers like Urmila while teaming up with local organizations have been a key part of the global strategy of the US$55 billion Finnish handset multinational since 2006. "Partnering with local stakeholders is a cool thing," says Gireesh Shrimali, professor of information systems at the Indian School of Business in Hyderabad. "It is a neat innovation, which creates buzz and brand equity for Nokia."
That is one of the reasons why India is the company's second-largest market with 2009 net sales of US$3.7 million, putting it behind China (with US$8 million), but well ahead of the UK in third place (with US$2.5 million). In the decade since it first set foot in India, Nokia has captured nearly 60% of the country's US$5.6 billion handset market and has a 62% share of GSM-based phones, according to research firm IDC. India -- and in particular, rural India -- has been good for Nokia.
"We saw the rural opportunities ahead of competition," states D. Shivakumar, Nokia India's vice president and managing director. Though Samsung, LG, Sony Ericsson and Motorola have also been selling handsets in India, telecom observers say Nokia has stood out from the rest by having formally forged a company-wide "social inclusion" policy in 2006 to encompass low-income consumers in its growth strategy, essentially using India as a laboratory for that strategy.
Today, rural consumers account for 25% of Nokia phone sales in India, and the target next year is 30%. With mobile phone penetration in the rural market almost doubling to 20% over the past year -- to approximately 150 million, according to the Cellular Operator Association of India (COAI), a trade association -- Nokia has been aggressively pursuing an even more targeted expansion strategy in smaller towns and villages. "There's an insatiable hunger for mobile phones permeating all layers of society," says Pankaj Mohindroo, president of the COAI. "And Nokia has been developing the rural market with appropriate products for a long time, unlike other players."
But now, Nokia's first mover advantage in rural India is being chipped away. Both home-grown and foreign rivals are muscling in on Nokia's rural territory, beating it down on price. All eyes now are on Nokia, as it rolls out innovative services that can be sold alongside its handsets through a range of partnerships.
New Frontiers
It was a matter of time before the handset market, especially at the lower end, was beginning to commoditize just as service providers were developing the infrastructure to reach consumers in the heartland. "It was a given that the fast-growing telecom market in urban India would reach a saturation point after a decade," says Romal Shetty, an executive director at consulting firm KPMG. "Some companies had the foresight to look at new frontiers."
On the heels of India's rapid economic boom, the mobile revolution had an impact on both urban and rural penetration. Urban teledensity – which refers to the number of phone connections per 100 people -- has exploded from 65% in 2008 to more than 90% today (with cities like Mumbai and Delhi at more than 100%), while teledensity in rural areas grew from 14% to 30% over the same period.
Nokia has been in the thick of this growth. A year after setting up a manufacturing facility in Sriperumbudur, near Chennai, in 2006, Nokia rolled out seven phones in India. Its goal was to target emerging markets at prices ranging between US$45 and US$120. Nokia manufactured 300 million devices between then and October 2009, half of which were exported to 60 countries. "Nokia has been proactive as the market leader," says Anshul Gupta, principal analyst for handsets at research firm Gartner in Mumbai.
Nokia was the first mobile phone maker to set up a satellite R&D center in India as it began tailoring products for the rural terrain. The phones look as sleek as high-end models, but are also sturdy to withstand rough usage. They have seamless keypads to protect them from dust and special grips to make them easier to hold in India's humidity. Some phones -- Nokia 1200 and Nokia 1208 -- also double up as flashlights because of rural India's frequent power outages. Nokia has also embraced the country's plethora of languages, with interfaces in Hindi, Marathi, Kannada, Telugu and Tamil.
Along the way, Nokia has learned important lessons that are crucial to any MNC's survival in the hinterland. One of them relates to customer service. Its after-sales service includes some 700 care centers in urban India. But it's a different matter in rural India. Nokia has more than 300 vans staffed with sales representatives who regularly criss-cross the countryside. It also set up low-cost collection points like chemist shops, where distributors and micro-distributors collect the phones and take them to the nearest care center.
But according to Nokia, customer service in rural markets such as India's can be just as -- if not more -- important before rather than after a sale. "Consumers always worry about anything going wrong with digital products and must always be assured that care or service is just a call away," says Shivakumar. "We needed to build care ahead of sales to provide a sense of trust and peace of mind." Now the vans are divided into two groups -- one to provide support and repairs and others to travel around with Nokia partners, ranging from Idea Cellular to SKS Microfinance, to promote their products and services while catering to novice mobile customers. "The rural market is still an area for a first-time user," says Shivakumar.
Getting Crowded
As all this happens, service providers have been slashing call rates and expanding their networks. That has had a cascading effect on the overall affordability of mobile telephony. Rates have plummeted from 32 cents a minute in 1998 to less than a cent today, cutting the average revenue per user from US$60 to US$4, one of the lowest in the world.
Equipment makers have also felt the squeeze. "It was evident four years ago that revenues would decline for pure-play mobile device companies," says Aditya Sood, CEO of the Center for Knowledge Societies, an innovation-focused consulting firm in India. "The downward pressure on markets and handset costs crashing to less than US$25 were expected."
Nokia is now facing competition across all its product segments, says KPMG's Shetty. The big confrontation is at the low end, where a number of players are wooing entry-level users. Chinese phones costing US$20 have flooded the market, and a slew of local and foreign competitors -- like Simoco, Kyocera, Intex and Karbonn -- are aiming to do the same. Micromax Mobile, too, is a challenger. Since it launched two years ago, it has become the third-largest GSM phone vendor, with 6% market share, after Nokia (62%) and Samsung (8%).
These changes offer Nokia another big lesson -- competing on price isn't the only avenue it can take as pressure intensifies in its rural markets. So rather than discounting prices on existing products, Nokia says it prefers to focus on providing additional services. "Just [selling] a device will not take you into the future," says Vipul Sabharwal, Nokia's national sales director.
This is where Nokia Life Tools comes in. Launched last autumn in India, it bundles a handset with a service for farmers so that they can get access to crop prices and weather forecasts as well as English lessons for a monthly fee beginning at 65 cents. Nokia claims Life Tools has attracted nearly one million users using just one service provider -- Idea Cellular, the telecom arm of conglomerate Aditya Birla Group. It expects faster growth as it expands the tool using other service providers.
The success of Nokia's rural value-added services, according to Sabharwal, is based on a range of key performance indicators (KPIs) including volume, the number of outlets that sell the offering, the returns to the service provider and visibility. But he says there are greater KPIs that might not show up on its top or bottom line. As he sees it, Nokia in rural India is not just a brand, but a "vehicle for social and economic transformation."
Yet partners like Idea Cellular are cautious. Its chief marketing officer, Pradeep Shrivastava, notes that while value-added services like texting, music and caller ring back are popular with consumers, Life Tools has yet to gain traction. "The application currently does not have the 'ecosystem' for consumer education, subscription or servicing," he says. "At this juncture, these solutions are not attracting new subscribers." Another snag came in March when wire agency Reuters called off its partnership with Nokia to provide Life Tools with real-time news feeds.
Nokia has also been caught napping and failed to move with important trends, such as the popular dual Sim-card phones, which lets users move back and forth between providers without having to change handsets. Such phones offer one reason why local player Micromax has been able to gain market share with its product portfolio: 23 of its 26 models offer dual SIM cards. Mohindroo of the COAI says around 25% of all GSM mobile phones offer a dual-SIM today, "but Nokia hasn't yet launched one." A Nokia spokesperson concedes it has been slow on that front, but its own version of a dual-Sim will hit stores later this year, along with a US$10 phone.
With Nokia ramping up its value-added offerings, competitors are readying for a fight. Samsung plans to roll out smart phones that allow users to download maps, games and music, and access interactive features online. LG and Sony Ericsson are expanding their music and games applications.
Perhaps the fact that competitors are being driven back to the drawing board should be looked at as a good thing at Nokia, says CKS's Sood. "In the telecom business, success will be defined when more players start doing what Nokia is doing," he says. That's when Nokia will have to work even harder to find new ways to woo rural India. After all, imitation, as they say, is the best form of flattery.
MORE IN BUSINESS
EmailPrinter FriendlyOrder Reprints
For the past three years, Yellakandula Urmila of Bhongir village, near Hyderabad, has been banking with SKS Microfinance (MFI), India's largest lender. She first bought a loom to weave silk saris with a US$150 loan from MFI in 2007, which helped triple her family's monthly income to US$100. Then three months ago she took out another loan for US$26 to buy a Nokia 1200 mobile phone with a prepaid Bharti Airtel connection, which she will have paid off in June. "It's been a life-changing and time-saving experience," says Urmila, affectionately patting her gleaming silver handset and recalling how she used to have to walk a mile to a wire-line public phone booth to call clients about orders. "Deals are now wrapped up in minutes," she says.
AFP/Getty Images
This file photo shows an Indian farmer talking on his mobile phone as he discusses pricing of oranges at the Kothapeta fruit market on the outskirts of Hyderabad, India.
Wooing rural consumers like Urmila while teaming up with local organizations have been a key part of the global strategy of the US$55 billion Finnish handset multinational since 2006. "Partnering with local stakeholders is a cool thing," says Gireesh Shrimali, professor of information systems at the Indian School of Business in Hyderabad. "It is a neat innovation, which creates buzz and brand equity for Nokia."
That is one of the reasons why India is the company's second-largest market with 2009 net sales of US$3.7 million, putting it behind China (with US$8 million), but well ahead of the UK in third place (with US$2.5 million). In the decade since it first set foot in India, Nokia has captured nearly 60% of the country's US$5.6 billion handset market and has a 62% share of GSM-based phones, according to research firm IDC. India -- and in particular, rural India -- has been good for Nokia.
"We saw the rural opportunities ahead of competition," states D. Shivakumar, Nokia India's vice president and managing director. Though Samsung, LG, Sony Ericsson and Motorola have also been selling handsets in India, telecom observers say Nokia has stood out from the rest by having formally forged a company-wide "social inclusion" policy in 2006 to encompass low-income consumers in its growth strategy, essentially using India as a laboratory for that strategy.
Today, rural consumers account for 25% of Nokia phone sales in India, and the target next year is 30%. With mobile phone penetration in the rural market almost doubling to 20% over the past year -- to approximately 150 million, according to the Cellular Operator Association of India (COAI), a trade association -- Nokia has been aggressively pursuing an even more targeted expansion strategy in smaller towns and villages. "There's an insatiable hunger for mobile phones permeating all layers of society," says Pankaj Mohindroo, president of the COAI. "And Nokia has been developing the rural market with appropriate products for a long time, unlike other players."
But now, Nokia's first mover advantage in rural India is being chipped away. Both home-grown and foreign rivals are muscling in on Nokia's rural territory, beating it down on price. All eyes now are on Nokia, as it rolls out innovative services that can be sold alongside its handsets through a range of partnerships.
New Frontiers
It was a matter of time before the handset market, especially at the lower end, was beginning to commoditize just as service providers were developing the infrastructure to reach consumers in the heartland. "It was a given that the fast-growing telecom market in urban India would reach a saturation point after a decade," says Romal Shetty, an executive director at consulting firm KPMG. "Some companies had the foresight to look at new frontiers."
On the heels of India's rapid economic boom, the mobile revolution had an impact on both urban and rural penetration. Urban teledensity – which refers to the number of phone connections per 100 people -- has exploded from 65% in 2008 to more than 90% today (with cities like Mumbai and Delhi at more than 100%), while teledensity in rural areas grew from 14% to 30% over the same period.
Nokia has been in the thick of this growth. A year after setting up a manufacturing facility in Sriperumbudur, near Chennai, in 2006, Nokia rolled out seven phones in India. Its goal was to target emerging markets at prices ranging between US$45 and US$120. Nokia manufactured 300 million devices between then and October 2009, half of which were exported to 60 countries. "Nokia has been proactive as the market leader," says Anshul Gupta, principal analyst for handsets at research firm Gartner in Mumbai.
Nokia was the first mobile phone maker to set up a satellite R&D center in India as it began tailoring products for the rural terrain. The phones look as sleek as high-end models, but are also sturdy to withstand rough usage. They have seamless keypads to protect them from dust and special grips to make them easier to hold in India's humidity. Some phones -- Nokia 1200 and Nokia 1208 -- also double up as flashlights because of rural India's frequent power outages. Nokia has also embraced the country's plethora of languages, with interfaces in Hindi, Marathi, Kannada, Telugu and Tamil.
Along the way, Nokia has learned important lessons that are crucial to any MNC's survival in the hinterland. One of them relates to customer service. Its after-sales service includes some 700 care centers in urban India. But it's a different matter in rural India. Nokia has more than 300 vans staffed with sales representatives who regularly criss-cross the countryside. It also set up low-cost collection points like chemist shops, where distributors and micro-distributors collect the phones and take them to the nearest care center.
But according to Nokia, customer service in rural markets such as India's can be just as -- if not more -- important before rather than after a sale. "Consumers always worry about anything going wrong with digital products and must always be assured that care or service is just a call away," says Shivakumar. "We needed to build care ahead of sales to provide a sense of trust and peace of mind." Now the vans are divided into two groups -- one to provide support and repairs and others to travel around with Nokia partners, ranging from Idea Cellular to SKS Microfinance, to promote their products and services while catering to novice mobile customers. "The rural market is still an area for a first-time user," says Shivakumar.
Getting Crowded
As all this happens, service providers have been slashing call rates and expanding their networks. That has had a cascading effect on the overall affordability of mobile telephony. Rates have plummeted from 32 cents a minute in 1998 to less than a cent today, cutting the average revenue per user from US$60 to US$4, one of the lowest in the world.
Equipment makers have also felt the squeeze. "It was evident four years ago that revenues would decline for pure-play mobile device companies," says Aditya Sood, CEO of the Center for Knowledge Societies, an innovation-focused consulting firm in India. "The downward pressure on markets and handset costs crashing to less than US$25 were expected."
Nokia is now facing competition across all its product segments, says KPMG's Shetty. The big confrontation is at the low end, where a number of players are wooing entry-level users. Chinese phones costing US$20 have flooded the market, and a slew of local and foreign competitors -- like Simoco, Kyocera, Intex and Karbonn -- are aiming to do the same. Micromax Mobile, too, is a challenger. Since it launched two years ago, it has become the third-largest GSM phone vendor, with 6% market share, after Nokia (62%) and Samsung (8%).
These changes offer Nokia another big lesson -- competing on price isn't the only avenue it can take as pressure intensifies in its rural markets. So rather than discounting prices on existing products, Nokia says it prefers to focus on providing additional services. "Just [selling] a device will not take you into the future," says Vipul Sabharwal, Nokia's national sales director.
This is where Nokia Life Tools comes in. Launched last autumn in India, it bundles a handset with a service for farmers so that they can get access to crop prices and weather forecasts as well as English lessons for a monthly fee beginning at 65 cents. Nokia claims Life Tools has attracted nearly one million users using just one service provider -- Idea Cellular, the telecom arm of conglomerate Aditya Birla Group. It expects faster growth as it expands the tool using other service providers.
The success of Nokia's rural value-added services, according to Sabharwal, is based on a range of key performance indicators (KPIs) including volume, the number of outlets that sell the offering, the returns to the service provider and visibility. But he says there are greater KPIs that might not show up on its top or bottom line. As he sees it, Nokia in rural India is not just a brand, but a "vehicle for social and economic transformation."
Yet partners like Idea Cellular are cautious. Its chief marketing officer, Pradeep Shrivastava, notes that while value-added services like texting, music and caller ring back are popular with consumers, Life Tools has yet to gain traction. "The application currently does not have the 'ecosystem' for consumer education, subscription or servicing," he says. "At this juncture, these solutions are not attracting new subscribers." Another snag came in March when wire agency Reuters called off its partnership with Nokia to provide Life Tools with real-time news feeds.
Nokia has also been caught napping and failed to move with important trends, such as the popular dual Sim-card phones, which lets users move back and forth between providers without having to change handsets. Such phones offer one reason why local player Micromax has been able to gain market share with its product portfolio: 23 of its 26 models offer dual SIM cards. Mohindroo of the COAI says around 25% of all GSM mobile phones offer a dual-SIM today, "but Nokia hasn't yet launched one." A Nokia spokesperson concedes it has been slow on that front, but its own version of a dual-Sim will hit stores later this year, along with a US$10 phone.
With Nokia ramping up its value-added offerings, competitors are readying for a fight. Samsung plans to roll out smart phones that allow users to download maps, games and music, and access interactive features online. LG and Sony Ericsson are expanding their music and games applications.
Perhaps the fact that competitors are being driven back to the drawing board should be looked at as a good thing at Nokia, says CKS's Sood. "In the telecom business, success will be defined when more players start doing what Nokia is doing," he says. That's when Nokia will have to work even harder to find new ways to woo rural India. After all, imitation, as they say, is the best form of flattery.
MORE IN BUSINESS
EmailPrinter FriendlyOrder Reprints
Max New York Life's Lesson in Insuring a Rural Foothold
India Knowledge@Wharton
Rajesh Sud, the New Delhi-based managing director of insurer Max New York Life (MNYL), likes targets. This year, he wants his sales team to sell 250,000 Max Vijay products, the insurance line it launched in 2008 designed specifically for low-income households in India. That's a big leap from the 85,000 Max Vijay policies that his team has already sold over the past year.
While MNYL is one of the country's top 10 largest insurers (with $2 billion assets under management), around 80% of all its policies are sold to urban, rather than rural, customers. Of the total 4.3 million policies MNYL has sold since it was set up as a joint venture between Max India and New York Life Insurance Company eight years ago, 650,000 policies have been sold to the country's hinterland in addition to its Max Vijay products. Sud says, "It's a given" that MNYL is "part and parcel" of the rural India story.
However, it's not a given that MNYL -- or any other companies in India's US$13 billion insurance sector, such as SBI Life, Bajaj Allianz and ICICI Prudential -- have an easy time hitting growth targets in rural India. Insurance isn't a product that many of rural India's millions of poor feel they need, let alone can afford. But the insurance companies need them. By law, a certain percentage of the policies that India's insurance companies write -- which is determined by the number of years an insurer has been operating -- must be based in rural India. In MNYL's case, the requirement is 19%.
Thus far, India's insurers have been taking one of two routes. They either fulfill their legal requirements by simply pushing the same stable of products in rural India that they do in the more lucrative urban markets, without expecting to turn much of a profit or build substantial market share. Or they do what MNYL is striving to achieve: Design a robust, profitable rural business model around new, tailored products and services for customers in the hinterland. But to make the latter plan work, as Sud knows, the likes of MNYL are facing a wide range of challenges, including figuring out how to help their rural businesses reach the right level of scale so that products like Max Vijay can be sold economically and efficiently.
Capturing the 'Loose Change'
The Max Vijay story began in 2006, when Rajit Mehta, its current chief operating officer, attended an international executive management program. Impressed by a presentation about how a company developed a number of new products and services within a niche sector, Mehta returned home to apply what he learned to the insurance business, which hadn't had much success reaching the country's millions of rural consumers. "We wanted to capture their loose change, which was being spent on smoking or other non-essentials," says Anisha Motwani, executive vice president and chief marketing officer of MNYL. But how could it do that?
At the time, according to New Delhi-based National Council for Applied Economic Research, 78% of rural Indians were aware of insurance, but less than 19% of rural households owned a policy. Meanwhile, MNYL's own on-the-ground research found that rural consumers were keen to build up their savings for a rainy day but didn't do it for reasons ranging from uncertainty about the documents needed for opening a savings account to the day-to-day challenges that distracted them from taking precautionary measures for their future. The insurer also learned that this new customer base was not averse to buying insurance, provided policies were easy to understand and didn't require regular payments, while allowing them to withdraw their money for emergencies with little or no penalty and giving them investment opportunities alongside guaranteed life protection.
It also recognized the importance of having a local sales force dedicated to these customers, but with the same focus on volume-based incentives as their urban counterparts. Today, MNYL employs 600 rural and 9,400 urban sales managers, with each having about 10 local agent advisers reporting to him. While the advisers work on a purely commission basis, the sales managers have a variable component in their salary depending on the number of policies his advisers sell. Thanks to all this research, "we saw opportunities from the commercial and corporate social responsibility standpoints in serving the underserved," says COO Mehta.
The result is the Max Vijay range of products tailored to the likes of Dhanaraja Thiruchelvam. He owns a small grocery stall selling betel leaves, bidis (local cigarettes rolled in dry leaves), soaps and prepaid mobile phone cards in the Pulivendala district of Andhra Pradesh state. Earning between US$10 and US$22 a month, he bought a Max Vijay policy last year and has topped it up three times. Thiru, as his friends call him, plans to hold off making further payment for a while as he saves up for English lessons for his 10-year-old daughter. "Max Vijay's 'as and when' payment option doesn't stress me out," he says.
Unlike with most other insurance products, Max Vijay doesn't require policy holders to make monthly, quarterly or annual payments. Rather, to accommodate their erratic income flow, customers can invest as little as US20 cents of their surplus cash whenever they can. Among the three offerings – Max Rajat, Swarna and Heera -- the enrollment premium ranges between US$20 and US$50 for 10-year coverage, and at the end of 10 years the customer receives a final balance as a maturity benefit. The life cover is five times the amount invested in case of natural death and 10 times for accidental death.
What's more, the actual process of purchasing and managing Max Vijay products is easy. They are sold over-the-counter at small, local retail stores, much in the same way that units for mobile phones are sold.
The good thing about a Max Vijay product is that "it's designed for a touch-and-feel customer base," says Rohan Sachdev, a financial services partner at Ernst & Young in Mumbai. "It's a simple, tangible product delivered to your doorstep."
For sure, as other companies catering to rural India are learning, "simplicity is always a virtue, but more of a virtue for low-income families," says Jeremy Jacobman, professor of business and public policy at Wharton, who has helped insurers such as ICICI Lombard and non-profit organizations develop micro insurance in India.
Putting the Customer in Control
MNYL's Max Vijay has been a catalyst for "a huge paradigm shift for India, where most insurance companies largely tweak or transplant their urban products for the rural terrain," says S. C. Dash, professor of rural insurance at the National Insurance Academy (NIA), the country's apex training institute in Pune, Maharashtra. "Now it's time for reverse engineering, working backwards from the customer to the product."
Yet as well intentioned as it might be, such "reverse engineering" in rural India can be hard to get right. COO Mehta says Max Vijay's "disruptive business model" was expected to "create a movement where consumers would flock to buy the product." But that hasn't been the case yet. "We overestimated our ability to create 'pull,'" as opposed to the traditional push practice of distributors and suppliers driving consumers to the products. The company initially was aiming for US$33 million of first-year premiums in its first three years, but it's been a struggle. The targets were based on economies of scale because margins for such products typically range from 2% to 4%, compared with the margins of 14% to 16% of unit-linked insurance plans. Mehta declines to say what the revised targets are but notes that Max Vijay is now focused on a four-year break-even.
Part of the reason why Max Vijay missed early targets is that it lacked a substantial distribution network. Its main distribution partners have been local rural banks whose networks are limited. Unlike most major insurance companies in India, MNYL is not owned by a big banking parent, which serves as a distribution springboard as, for example, ICICI Lombard and ICICI Prudential do when they leverage the 1,615 branches of parent company ICICI Bank.
"Often, when you have such low volumes, there is very little money left for distribution," says Jacobman. "My observation is that finding effective partners already working in villages brings down marketing and distribution costs considerably."
MNYL agrees, which is why it initially took a multi-pronged distribution approach. It enlisted the help of a plethora of partners that already had a foothold in the hinterland so it could explore every way of reaching low-income households. "It is a people-intensive business, and choosing the right candidates is critical, particularly for a rural business" whose customers value local knowledge and a familiar face, says Motwani. But MNYL learned that not all of the partners -- such as a milk marketing company and Mahindra Finance, the financial arm of auto and tractor maker Mahindra & Mahindra -- were as focused on the parts of the underserved market as it was.
Things also didn't go smoothly with the non-government organizations (NGOs) it began working with. NGOs typically target people below the poverty line, while Max Vijay wanted to aim its marketing efforts at a customer segment one notch above. The lack of skills among its NGO partners was also a concern. The NGOs "didn't have the capability to train people about when to sell and how to sell the product," says Motwani. "The product was ahead of its time."
Today, Max Vijay has dropped the NGOs from its distribution channel. The brief romance with major retail chains – like Reliance Retail in northern India – was also nipped in the bud. "The low margins didn't justify the effort that went into selling to consumers," says a Reliance Retail manager.
After nearly two years, does MNYL consider Max Vijay a success from a business standpoint? The jury is still out. COO Mehta says at least one more year is needed for the products to gain traction. Still, the challenges do not seem to have dampened MNYL's enthusiasm for rural growth. As tough as the effort has been, MNYL's CEO Sud insists, "It's worth it."
Rajesh Sud, the New Delhi-based managing director of insurer Max New York Life (MNYL), likes targets. This year, he wants his sales team to sell 250,000 Max Vijay products, the insurance line it launched in 2008 designed specifically for low-income households in India. That's a big leap from the 85,000 Max Vijay policies that his team has already sold over the past year.
While MNYL is one of the country's top 10 largest insurers (with $2 billion assets under management), around 80% of all its policies are sold to urban, rather than rural, customers. Of the total 4.3 million policies MNYL has sold since it was set up as a joint venture between Max India and New York Life Insurance Company eight years ago, 650,000 policies have been sold to the country's hinterland in addition to its Max Vijay products. Sud says, "It's a given" that MNYL is "part and parcel" of the rural India story.
However, it's not a given that MNYL -- or any other companies in India's US$13 billion insurance sector, such as SBI Life, Bajaj Allianz and ICICI Prudential -- have an easy time hitting growth targets in rural India. Insurance isn't a product that many of rural India's millions of poor feel they need, let alone can afford. But the insurance companies need them. By law, a certain percentage of the policies that India's insurance companies write -- which is determined by the number of years an insurer has been operating -- must be based in rural India. In MNYL's case, the requirement is 19%.
Thus far, India's insurers have been taking one of two routes. They either fulfill their legal requirements by simply pushing the same stable of products in rural India that they do in the more lucrative urban markets, without expecting to turn much of a profit or build substantial market share. Or they do what MNYL is striving to achieve: Design a robust, profitable rural business model around new, tailored products and services for customers in the hinterland. But to make the latter plan work, as Sud knows, the likes of MNYL are facing a wide range of challenges, including figuring out how to help their rural businesses reach the right level of scale so that products like Max Vijay can be sold economically and efficiently.
Capturing the 'Loose Change'
The Max Vijay story began in 2006, when Rajit Mehta, its current chief operating officer, attended an international executive management program. Impressed by a presentation about how a company developed a number of new products and services within a niche sector, Mehta returned home to apply what he learned to the insurance business, which hadn't had much success reaching the country's millions of rural consumers. "We wanted to capture their loose change, which was being spent on smoking or other non-essentials," says Anisha Motwani, executive vice president and chief marketing officer of MNYL. But how could it do that?
At the time, according to New Delhi-based National Council for Applied Economic Research, 78% of rural Indians were aware of insurance, but less than 19% of rural households owned a policy. Meanwhile, MNYL's own on-the-ground research found that rural consumers were keen to build up their savings for a rainy day but didn't do it for reasons ranging from uncertainty about the documents needed for opening a savings account to the day-to-day challenges that distracted them from taking precautionary measures for their future. The insurer also learned that this new customer base was not averse to buying insurance, provided policies were easy to understand and didn't require regular payments, while allowing them to withdraw their money for emergencies with little or no penalty and giving them investment opportunities alongside guaranteed life protection.
It also recognized the importance of having a local sales force dedicated to these customers, but with the same focus on volume-based incentives as their urban counterparts. Today, MNYL employs 600 rural and 9,400 urban sales managers, with each having about 10 local agent advisers reporting to him. While the advisers work on a purely commission basis, the sales managers have a variable component in their salary depending on the number of policies his advisers sell. Thanks to all this research, "we saw opportunities from the commercial and corporate social responsibility standpoints in serving the underserved," says COO Mehta.
The result is the Max Vijay range of products tailored to the likes of Dhanaraja Thiruchelvam. He owns a small grocery stall selling betel leaves, bidis (local cigarettes rolled in dry leaves), soaps and prepaid mobile phone cards in the Pulivendala district of Andhra Pradesh state. Earning between US$10 and US$22 a month, he bought a Max Vijay policy last year and has topped it up three times. Thiru, as his friends call him, plans to hold off making further payment for a while as he saves up for English lessons for his 10-year-old daughter. "Max Vijay's 'as and when' payment option doesn't stress me out," he says.
Unlike with most other insurance products, Max Vijay doesn't require policy holders to make monthly, quarterly or annual payments. Rather, to accommodate their erratic income flow, customers can invest as little as US20 cents of their surplus cash whenever they can. Among the three offerings – Max Rajat, Swarna and Heera -- the enrollment premium ranges between US$20 and US$50 for 10-year coverage, and at the end of 10 years the customer receives a final balance as a maturity benefit. The life cover is five times the amount invested in case of natural death and 10 times for accidental death.
What's more, the actual process of purchasing and managing Max Vijay products is easy. They are sold over-the-counter at small, local retail stores, much in the same way that units for mobile phones are sold.
The good thing about a Max Vijay product is that "it's designed for a touch-and-feel customer base," says Rohan Sachdev, a financial services partner at Ernst & Young in Mumbai. "It's a simple, tangible product delivered to your doorstep."
For sure, as other companies catering to rural India are learning, "simplicity is always a virtue, but more of a virtue for low-income families," says Jeremy Jacobman, professor of business and public policy at Wharton, who has helped insurers such as ICICI Lombard and non-profit organizations develop micro insurance in India.
Putting the Customer in Control
MNYL's Max Vijay has been a catalyst for "a huge paradigm shift for India, where most insurance companies largely tweak or transplant their urban products for the rural terrain," says S. C. Dash, professor of rural insurance at the National Insurance Academy (NIA), the country's apex training institute in Pune, Maharashtra. "Now it's time for reverse engineering, working backwards from the customer to the product."
Yet as well intentioned as it might be, such "reverse engineering" in rural India can be hard to get right. COO Mehta says Max Vijay's "disruptive business model" was expected to "create a movement where consumers would flock to buy the product." But that hasn't been the case yet. "We overestimated our ability to create 'pull,'" as opposed to the traditional push practice of distributors and suppliers driving consumers to the products. The company initially was aiming for US$33 million of first-year premiums in its first three years, but it's been a struggle. The targets were based on economies of scale because margins for such products typically range from 2% to 4%, compared with the margins of 14% to 16% of unit-linked insurance plans. Mehta declines to say what the revised targets are but notes that Max Vijay is now focused on a four-year break-even.
Part of the reason why Max Vijay missed early targets is that it lacked a substantial distribution network. Its main distribution partners have been local rural banks whose networks are limited. Unlike most major insurance companies in India, MNYL is not owned by a big banking parent, which serves as a distribution springboard as, for example, ICICI Lombard and ICICI Prudential do when they leverage the 1,615 branches of parent company ICICI Bank.
"Often, when you have such low volumes, there is very little money left for distribution," says Jacobman. "My observation is that finding effective partners already working in villages brings down marketing and distribution costs considerably."
MNYL agrees, which is why it initially took a multi-pronged distribution approach. It enlisted the help of a plethora of partners that already had a foothold in the hinterland so it could explore every way of reaching low-income households. "It is a people-intensive business, and choosing the right candidates is critical, particularly for a rural business" whose customers value local knowledge and a familiar face, says Motwani. But MNYL learned that not all of the partners -- such as a milk marketing company and Mahindra Finance, the financial arm of auto and tractor maker Mahindra & Mahindra -- were as focused on the parts of the underserved market as it was.
Things also didn't go smoothly with the non-government organizations (NGOs) it began working with. NGOs typically target people below the poverty line, while Max Vijay wanted to aim its marketing efforts at a customer segment one notch above. The lack of skills among its NGO partners was also a concern. The NGOs "didn't have the capability to train people about when to sell and how to sell the product," says Motwani. "The product was ahead of its time."
Today, Max Vijay has dropped the NGOs from its distribution channel. The brief romance with major retail chains – like Reliance Retail in northern India – was also nipped in the bud. "The low margins didn't justify the effort that went into selling to consumers," says a Reliance Retail manager.
After nearly two years, does MNYL consider Max Vijay a success from a business standpoint? The jury is still out. COO Mehta says at least one more year is needed for the products to gain traction. Still, the challenges do not seem to have dampened MNYL's enthusiasm for rural growth. As tough as the effort has been, MNYL's CEO Sud insists, "It's worth it."
It Takes a Village: The Rise of Rural BPO
Over the last few years, India's $14 billion business process outsourcing (BPO) industry seemed to have been losing a battle with rising expenses. Urban real estate prices were spiraling out of control. Off-the-charts attrition meant increases not only in salaries but also in training and recruitment expenses. The solution: Set up centers in rural locations, where startup costs are low and employee loyalty is high. Yet, while some rural BPO outfits are showing promise, many obstacles stand in the way of India's next BPO success story, including a lack of electrical and broadband infrastructure outside of urban areas, and lingering market skepticism that rural BPO centers can compete with their more traditional urban counterparts.
"Do you really think women can work on computers?" Men in Bagar genuinely wanted to know the answer to that question when Source for Change – an initiative of the Mumbai-based Piramal Foundation -- set up an all-women BPO (business process outsourcing) center in this small village in India's Rajasthan state. The skepticism didn't end even after Source for Change selected 10 women from 25 applicants in August 2007. Wary men would accompany their wives or daughters to the training center and then wait around until they were ready to return home.
More than two years later, men still drop in unannounced at the remodeled house that serves as Source for Change's combined headquarters and training center. But these are not the same suspicious husbands and fathers. Instead, they are individuals hoping to find jobs for the women in their families. "They realized that we made available the two most valued symbols of social status here: English and computers," says Karthik Raman, head of business development for Source for Change. "Some of the women who work here earn more than the men in their families. They now have a voice at the table."
With state governments and industry supporting the cause, it is clear that village-level BPO is here to stay. No official numbers are available yet -- the National Association of Software and Services Companies (Nasscom) is collecting data now -- but observers agree that more than 100 such units are likely operating around India, most of them less than three years old.
It's a positive development, according to Raju Bhatnagar, vice president in charge of BPOs and government relations at Nasscom. "There is tremendous opportunity for non-urban BPOs in domestic voice [i.e., call centers] and non-voice businesses, and international non-voice work." Nasscom prefers the term "non-urban" to "village" or "rural" because prospective clients may associate rural with "backward." "[It is] semantics, I know, but the change in terminology does seem to help people get over that mind-set," Mr. Bhatnagar says.
Some BPO centers are run from non-air-conditioned buildings that double as schools and marriage halls. Their employees sit on plastic, stackable chairs and rush home to milk the cows when their shifts end. Others are run from modern offices where biometric IDs are required for entry and team leaders hold post-graduate degrees. Their common element is their location far from the big cities, in semi-urban and rural communities such as Ethakota in Andhra Pradesh state, Munnar in Kerala state and Shiggaon in Karnataka state. More than half the employees are women, and all employees are from 19 to 35 years old.
The Bottom Line: Cost
Why are non-urban BPOs on the rise? "To ease some of the pain points that exist in the domestic outsourcing business around cost and reach," says Gaurav Gupta, principal and India head of the Everest Group consultancy.
Over the last few years, India's $14 billion BPO industry seemed to have been losing a battle with rising expenses. Real estate prices were spiraling out of control. Off-the-charts attrition meant increases not only in salaries but also in training and recruitment costs. To curb people costs, many companies cast their recruiting nets further into the hinterland, but found that fewer than one in three short-listed candidates would sign on. The costs of city living did not make the move worth it for many, while family ties held back others. Raman Roy, chairman and managing director of BPO firm Quattro and a veteran industry leader, points out that BPO recruitment has changed over the last few years. "About 60% to 70% happens in smaller towns, where the BPO doesn't have a presence. And of those selected, just 20% to 27% accept; the rest don't move for [a variety of] reasons."
All of this is bad news for an industry whose existence relies on cost-effectiveness. "The main drivers of this industry have been higher efficiency, infrastructural support and available skill-sets," says Rajanish Dass, professor of information systems and strategic management at the Indian Institute of Management Ahmedabad (IIMA). "But the bottom line has been the cost savings that a BPO brings. On average, the cost savings incurred by deploying a BPO is 40% to 50% compared to the originating companies." By that token, organizations with an eye on the cost-benefit ratio will not hesitate to switch operators or even countries if expenses reach a tipping point.
Mr. Dass notes that BPO companies have the option of evolving into knowledge-process outsourcing units, tackling specialized, high-end jobs while shifting low-margin, low-skill data entry projects to rural BPO centers. And by moving jobs to rural areas, companies and clients can take advantage of significantly reduced operating costs. Land prices in India's interior are a small fraction of prices in Mumbai and Bangalore, and even in satellite towns such as Gurgaon and Noida. And salaries in rural set-ups -- about $100 a month for an eight-hour shift five days a week -- are about half of what call centers in the cities pay. "It may not sound like much, but $75 to $85 a month is huge for a rural housewife, especially when it's neither project-based nor seasonal, like agricultural income," say Manoj Vasudevan, CEO of SourcePilani, which runs a 50-seat BPO center in Rajasthan's Pilani district.
Access to female employees is an important reason rural India makes sense. Not only are women equally adept at handling IT tasks, they have proved to be more loyal employees. "The already-low attrition rates can be brought down even further by employing women. They are less likely to move away to urban areas," says Raman of Source for Change.
There's the greater good to consider as well, experts note. Through job creation in villages and semi-urban areas, migration to cities can be reduced. As a result, disposable income among lower-income groups increases and villages are provided a means of sustainable development.
Ambitious Rural BPOs
Most companies setting up BPO operations in rural India operate as third-party service providers to multiple clients. A few, though, are captive back-office centers for big companies. In July 2008, HDFC Bank set up a BPO center at Tirupati in Andhra Pradesh state through its subsidiary Atlas Documentary Facilitators. The center's approximately 550 employees are involved in non-core operations, such as data capturing and indexing of customer details -- work that was previously handled by more than 1,000 employees in Mumbai and Chennai. The center handles 22,000 applications a day at the rate of 100 applications a person in an eight-hour shift.
The Tata Group, meanwhile, aims to hire 5,000 people for rural BPO operations over the next few years. Called Uday, the BPO centers are an initiative of the community services arm of group company Tata Chemicals. Already, more than 200 people are employed at two BPO centers at Mithapur in Gujarat state and Babrala in Uttar Pradesh state. The Babrala call center functions as back office logistic support for Tata Indicom customers in Uttar Pradesh.
The Uday centers and HDFC Bank's BPO branch are exceptions. Typically, rural BPO outlets are small – with 25 to 50 seats -- and don't have the luxury of big clients. Consider DesiCrew: The Tamil Nadu state-based BPO was incubated in 2005 by the Indian Institute of Technology, Chennai's Rural Technology Business Incubator, and used the network created by the Indian government's Common Service Center initiative, which aims to set up one computer in each village across the country. Eight months into the project, though, DesiCrew's founder and CEO, Saloni Malhotra, realized it wasn't working. Security, professionalism and reliable infrastructure had become insurmountable issues.
Next up was a franchise arrangement under which a franchisee was responsible for the infrastructure while DesiCrew brought in the work. That didn't work, either. "It was probably an idea ahead of its time," Malhotra says. "The franchisee wanted commitments on work before investing in the business; the client wanted to see an established unit before offering work." The solution meant investing $55,000 to $160,000 in each center. DesiCrew Solutions was spun off as a commercial entity in February 2007 with three employees each in four units. But it didn't get its first big client until the end of that year. "We took any work that came our way, even if it was worth just $20 or $25," Malhotra recalls.
Since then, the company has grown to employ close to 100 people. The individual units broke even in mid-2008, and the company started making money in 2008-2009. By the end of 2010, DesiCrew plans to expand its workforce to 1,000 people and establish a pan-India presence.
Other rural BPO outfits are equally ambitious. Vasudevan of SourcePilani, for instance, wants to increase headcount to 100 by the end of the year and then sell the franchise to a village cooperative. That way, he will recover the US$100,000 invested in setting up the BPO center, and he will earn a 15% royalty from SourcePilani's future operations. "This is also a great way to bind people to the organization. With a 100-seat unit, each employee-owner should get an extra US$40 every month as their share of the profit," he says.
Surmountable Obstacles
It's not going to be easy, though. Rural BPO centers are dogged by problems that are not going away soon. Foremost is infrastructure. Power in the hinterlands ranges from erratic to nonexistent, with entire villages still awaiting electrification. So, any prospective BPO needs to budget for a heavy-duty diesel generator. To be fair, that's an expense for most BPOs even in urban locations.
Broadband connectivity is another hurdle -- though it, too, can be surmounted. "Bandwidth and connectivity are constraints if you take the country as a whole, but if you're looking to target finite locations, there will be acceptable connectivity within striking distance," says Nasscom's Bhatnagar. Besides, non-voice BPO work has a lower requirement for broadband. Periodic updates of data work are sufficient, so real-time connectivity is less of an issue.
The issue of community acceptance can also be tackled relatively easily if BPO firms partner with NGOs and local government departments familiar with an area. HDFC Bank, for instance, joined forces with the employment generation and marketing mission of the department of rural development in Andhra Pradesh to identify potential employees for its Tirupati BPO. Source for Change got buy-in from locals because of its association with the Piramal Foundation; Bagar is the ancestral village of the Piramal family. And SourcePilani had the backing of the Goenka Foundation as well as the premier Birla Institute of Technology and Science (located in Pilani) to ease its way.
Getting the right people and overcoming market skepticism are much harder problems to solve – but they are more critical to BPO success. Managers at rural BPO centers acknowledge that recruitment is a much bigger deal for them than it is for their urban competitors. "We need really smart people so that our clients have one reason less to go elsewhere," says DesiCrew's Malhotra, who says she takes on board only one in about 45 applicants. Adds Vasudevan, "We need to get the recruiting right the first time; the community may not accept you if you goof up initially."
Naturally, training is more intensive than in urban BPO centers. What is taught also varies considerably. Source for Change's Raman recalls that some women didn't know how to turn on a computer. Most rural BPOs require basic educational qualifications, usually high school graduation. They don't insist on fluency in English, but do seek some proficiency in the language, including the ability to sound out words, even if the meaning is unclear. Where a gap exists in formal qualifications, testing for logic and abstract thinking may occur, since concepts like "file" and "folder" may be difficult to grasp for someone unfamiliar with computers. Immersion training in computer applications, English language comprehension and grammar, and speech and etiquette are now standard practice at most BPO outfits. Still, it may take two to four months before an employee is ready to tackle basic work such as data entry.
Low-hanging Fruit
Typically, rural BPO centers begin by offering basic digitization services such as data entry and data conversion. But even getting that level of business can be an uphill task. NGO connections can help rural outfits tap into extensive networks of companies willing to contract work to these centers as part of their corporate social responsibility initiatives, but it's still not easy. Companies need to constantly pitch for clients -- proving their capabilities, emphasizing their infrastructure (building in redundancies in power and broadband are, therefore, musts) and pushing the cost-value advantage.
Once clients come on board, though, BPO industry observers recommend quickly offering value-added services. Plain vanilla data work may be a starting point, but most clients will soon look for an outsourcing partner who can offer them extras such as data analysis, report preparation, and graphics and layout services. If rural BPO outfits can't build those capabilities in-house, it may be worthwhile to partner with urban centers that can offer the services. "Infrastructure and technology are seen as challenges, but these can be tackled easily. It is more critical to show clients that you have a process that can be repeated, duplicated and scaled up," says Quatrro's Roy.
Because voice work is still somewhat difficult for rural BPOs, many are experimenting with other kinds of services. SourcePilani, for instance, may be the only non-urban BPO that does medical transcription work. DesiCrew has undertaken web site content creation and validation, GIS-based mapping and transcription work. SourcePilani now also offers social media marketing services. It manages accounts for clients on social networks such as Facebook and Twitter, providing regular updates on industry and company events, products and special offers. "There's a huge market for this internationally," says Mr. Vasudevan.
Source for Change is also trying out different avenues. It has done web research projects, transcription and translation work, and is now running a job web site as well. Raman is keen on pursuing Hindi-based voice work and has already done a pilot project for a client.
Will rural BPO centers succeed in India? Everest Group's Gupta is convinced they will be "relevant." IIMA's Dass says the domestic BPO business is large enough to make rural BPOs viable. So why haven't more clients signed on? Nasscom's Bhatnagar believes there may be a herd mentality at work among client companies. "No one wants to be the first [to opt for a rural BPO]. But success stories build on themselves, and there are already successes to be seen."
"Do you really think women can work on computers?" Men in Bagar genuinely wanted to know the answer to that question when Source for Change – an initiative of the Mumbai-based Piramal Foundation -- set up an all-women BPO (business process outsourcing) center in this small village in India's Rajasthan state. The skepticism didn't end even after Source for Change selected 10 women from 25 applicants in August 2007. Wary men would accompany their wives or daughters to the training center and then wait around until they were ready to return home.
More than two years later, men still drop in unannounced at the remodeled house that serves as Source for Change's combined headquarters and training center. But these are not the same suspicious husbands and fathers. Instead, they are individuals hoping to find jobs for the women in their families. "They realized that we made available the two most valued symbols of social status here: English and computers," says Karthik Raman, head of business development for Source for Change. "Some of the women who work here earn more than the men in their families. They now have a voice at the table."
With state governments and industry supporting the cause, it is clear that village-level BPO is here to stay. No official numbers are available yet -- the National Association of Software and Services Companies (Nasscom) is collecting data now -- but observers agree that more than 100 such units are likely operating around India, most of them less than three years old.
It's a positive development, according to Raju Bhatnagar, vice president in charge of BPOs and government relations at Nasscom. "There is tremendous opportunity for non-urban BPOs in domestic voice [i.e., call centers] and non-voice businesses, and international non-voice work." Nasscom prefers the term "non-urban" to "village" or "rural" because prospective clients may associate rural with "backward." "[It is] semantics, I know, but the change in terminology does seem to help people get over that mind-set," Mr. Bhatnagar says.
Some BPO centers are run from non-air-conditioned buildings that double as schools and marriage halls. Their employees sit on plastic, stackable chairs and rush home to milk the cows when their shifts end. Others are run from modern offices where biometric IDs are required for entry and team leaders hold post-graduate degrees. Their common element is their location far from the big cities, in semi-urban and rural communities such as Ethakota in Andhra Pradesh state, Munnar in Kerala state and Shiggaon in Karnataka state. More than half the employees are women, and all employees are from 19 to 35 years old.
The Bottom Line: Cost
Why are non-urban BPOs on the rise? "To ease some of the pain points that exist in the domestic outsourcing business around cost and reach," says Gaurav Gupta, principal and India head of the Everest Group consultancy.
Over the last few years, India's $14 billion BPO industry seemed to have been losing a battle with rising expenses. Real estate prices were spiraling out of control. Off-the-charts attrition meant increases not only in salaries but also in training and recruitment costs. To curb people costs, many companies cast their recruiting nets further into the hinterland, but found that fewer than one in three short-listed candidates would sign on. The costs of city living did not make the move worth it for many, while family ties held back others. Raman Roy, chairman and managing director of BPO firm Quattro and a veteran industry leader, points out that BPO recruitment has changed over the last few years. "About 60% to 70% happens in smaller towns, where the BPO doesn't have a presence. And of those selected, just 20% to 27% accept; the rest don't move for [a variety of] reasons."
All of this is bad news for an industry whose existence relies on cost-effectiveness. "The main drivers of this industry have been higher efficiency, infrastructural support and available skill-sets," says Rajanish Dass, professor of information systems and strategic management at the Indian Institute of Management Ahmedabad (IIMA). "But the bottom line has been the cost savings that a BPO brings. On average, the cost savings incurred by deploying a BPO is 40% to 50% compared to the originating companies." By that token, organizations with an eye on the cost-benefit ratio will not hesitate to switch operators or even countries if expenses reach a tipping point.
Mr. Dass notes that BPO companies have the option of evolving into knowledge-process outsourcing units, tackling specialized, high-end jobs while shifting low-margin, low-skill data entry projects to rural BPO centers. And by moving jobs to rural areas, companies and clients can take advantage of significantly reduced operating costs. Land prices in India's interior are a small fraction of prices in Mumbai and Bangalore, and even in satellite towns such as Gurgaon and Noida. And salaries in rural set-ups -- about $100 a month for an eight-hour shift five days a week -- are about half of what call centers in the cities pay. "It may not sound like much, but $75 to $85 a month is huge for a rural housewife, especially when it's neither project-based nor seasonal, like agricultural income," say Manoj Vasudevan, CEO of SourcePilani, which runs a 50-seat BPO center in Rajasthan's Pilani district.
Access to female employees is an important reason rural India makes sense. Not only are women equally adept at handling IT tasks, they have proved to be more loyal employees. "The already-low attrition rates can be brought down even further by employing women. They are less likely to move away to urban areas," says Raman of Source for Change.
There's the greater good to consider as well, experts note. Through job creation in villages and semi-urban areas, migration to cities can be reduced. As a result, disposable income among lower-income groups increases and villages are provided a means of sustainable development.
Ambitious Rural BPOs
Most companies setting up BPO operations in rural India operate as third-party service providers to multiple clients. A few, though, are captive back-office centers for big companies. In July 2008, HDFC Bank set up a BPO center at Tirupati in Andhra Pradesh state through its subsidiary Atlas Documentary Facilitators. The center's approximately 550 employees are involved in non-core operations, such as data capturing and indexing of customer details -- work that was previously handled by more than 1,000 employees in Mumbai and Chennai. The center handles 22,000 applications a day at the rate of 100 applications a person in an eight-hour shift.
The Tata Group, meanwhile, aims to hire 5,000 people for rural BPO operations over the next few years. Called Uday, the BPO centers are an initiative of the community services arm of group company Tata Chemicals. Already, more than 200 people are employed at two BPO centers at Mithapur in Gujarat state and Babrala in Uttar Pradesh state. The Babrala call center functions as back office logistic support for Tata Indicom customers in Uttar Pradesh.
The Uday centers and HDFC Bank's BPO branch are exceptions. Typically, rural BPO outlets are small – with 25 to 50 seats -- and don't have the luxury of big clients. Consider DesiCrew: The Tamil Nadu state-based BPO was incubated in 2005 by the Indian Institute of Technology, Chennai's Rural Technology Business Incubator, and used the network created by the Indian government's Common Service Center initiative, which aims to set up one computer in each village across the country. Eight months into the project, though, DesiCrew's founder and CEO, Saloni Malhotra, realized it wasn't working. Security, professionalism and reliable infrastructure had become insurmountable issues.
Next up was a franchise arrangement under which a franchisee was responsible for the infrastructure while DesiCrew brought in the work. That didn't work, either. "It was probably an idea ahead of its time," Malhotra says. "The franchisee wanted commitments on work before investing in the business; the client wanted to see an established unit before offering work." The solution meant investing $55,000 to $160,000 in each center. DesiCrew Solutions was spun off as a commercial entity in February 2007 with three employees each in four units. But it didn't get its first big client until the end of that year. "We took any work that came our way, even if it was worth just $20 or $25," Malhotra recalls.
Since then, the company has grown to employ close to 100 people. The individual units broke even in mid-2008, and the company started making money in 2008-2009. By the end of 2010, DesiCrew plans to expand its workforce to 1,000 people and establish a pan-India presence.
Other rural BPO outfits are equally ambitious. Vasudevan of SourcePilani, for instance, wants to increase headcount to 100 by the end of the year and then sell the franchise to a village cooperative. That way, he will recover the US$100,000 invested in setting up the BPO center, and he will earn a 15% royalty from SourcePilani's future operations. "This is also a great way to bind people to the organization. With a 100-seat unit, each employee-owner should get an extra US$40 every month as their share of the profit," he says.
Surmountable Obstacles
It's not going to be easy, though. Rural BPO centers are dogged by problems that are not going away soon. Foremost is infrastructure. Power in the hinterlands ranges from erratic to nonexistent, with entire villages still awaiting electrification. So, any prospective BPO needs to budget for a heavy-duty diesel generator. To be fair, that's an expense for most BPOs even in urban locations.
Broadband connectivity is another hurdle -- though it, too, can be surmounted. "Bandwidth and connectivity are constraints if you take the country as a whole, but if you're looking to target finite locations, there will be acceptable connectivity within striking distance," says Nasscom's Bhatnagar. Besides, non-voice BPO work has a lower requirement for broadband. Periodic updates of data work are sufficient, so real-time connectivity is less of an issue.
The issue of community acceptance can also be tackled relatively easily if BPO firms partner with NGOs and local government departments familiar with an area. HDFC Bank, for instance, joined forces with the employment generation and marketing mission of the department of rural development in Andhra Pradesh to identify potential employees for its Tirupati BPO. Source for Change got buy-in from locals because of its association with the Piramal Foundation; Bagar is the ancestral village of the Piramal family. And SourcePilani had the backing of the Goenka Foundation as well as the premier Birla Institute of Technology and Science (located in Pilani) to ease its way.
Getting the right people and overcoming market skepticism are much harder problems to solve – but they are more critical to BPO success. Managers at rural BPO centers acknowledge that recruitment is a much bigger deal for them than it is for their urban competitors. "We need really smart people so that our clients have one reason less to go elsewhere," says DesiCrew's Malhotra, who says she takes on board only one in about 45 applicants. Adds Vasudevan, "We need to get the recruiting right the first time; the community may not accept you if you goof up initially."
Naturally, training is more intensive than in urban BPO centers. What is taught also varies considerably. Source for Change's Raman recalls that some women didn't know how to turn on a computer. Most rural BPOs require basic educational qualifications, usually high school graduation. They don't insist on fluency in English, but do seek some proficiency in the language, including the ability to sound out words, even if the meaning is unclear. Where a gap exists in formal qualifications, testing for logic and abstract thinking may occur, since concepts like "file" and "folder" may be difficult to grasp for someone unfamiliar with computers. Immersion training in computer applications, English language comprehension and grammar, and speech and etiquette are now standard practice at most BPO outfits. Still, it may take two to four months before an employee is ready to tackle basic work such as data entry.
Low-hanging Fruit
Typically, rural BPO centers begin by offering basic digitization services such as data entry and data conversion. But even getting that level of business can be an uphill task. NGO connections can help rural outfits tap into extensive networks of companies willing to contract work to these centers as part of their corporate social responsibility initiatives, but it's still not easy. Companies need to constantly pitch for clients -- proving their capabilities, emphasizing their infrastructure (building in redundancies in power and broadband are, therefore, musts) and pushing the cost-value advantage.
Once clients come on board, though, BPO industry observers recommend quickly offering value-added services. Plain vanilla data work may be a starting point, but most clients will soon look for an outsourcing partner who can offer them extras such as data analysis, report preparation, and graphics and layout services. If rural BPO outfits can't build those capabilities in-house, it may be worthwhile to partner with urban centers that can offer the services. "Infrastructure and technology are seen as challenges, but these can be tackled easily. It is more critical to show clients that you have a process that can be repeated, duplicated and scaled up," says Quatrro's Roy.
Because voice work is still somewhat difficult for rural BPOs, many are experimenting with other kinds of services. SourcePilani, for instance, may be the only non-urban BPO that does medical transcription work. DesiCrew has undertaken web site content creation and validation, GIS-based mapping and transcription work. SourcePilani now also offers social media marketing services. It manages accounts for clients on social networks such as Facebook and Twitter, providing regular updates on industry and company events, products and special offers. "There's a huge market for this internationally," says Mr. Vasudevan.
Source for Change is also trying out different avenues. It has done web research projects, transcription and translation work, and is now running a job web site as well. Raman is keen on pursuing Hindi-based voice work and has already done a pilot project for a client.
Will rural BPO centers succeed in India? Everest Group's Gupta is convinced they will be "relevant." IIMA's Dass says the domestic BPO business is large enough to make rural BPOs viable. So why haven't more clients signed on? Nasscom's Bhatnagar believes there may be a herd mentality at work among client companies. "No one wants to be the first [to opt for a rural BPO]. But success stories build on themselves, and there are already successes to be seen."
Growing Interest: Why Banks Are Reaching Out to Rural India
In the western Indian state of Maharashtra, in the Mann Desh region, lives 39-year-old Lakshmi Shellar. She spends a typical day in the field tending to her crops; she also rears buffaloes and sells their milk in the village door to door. A widow since the age of 17, Shellar got in touch with Mann Deshi Mahila Bank, a cooperative bank in rural Maharashtra, a few years ago, where she learned the basics about banking products. Now she runs a financial literacy school by night, attended by 20 women from her village.
Women such as Shellar act as business facilitators to India's banks. Some work directly for the bank, others through banking correspondents (BCs) such as microfinance institutions and nongovernment organizations. Each facilitator is connected to hundreds of people. On behalf of the bank, they create awareness about savings and other products, identify potential borrowers, collect and verify loan applications, monitor borrowers' repayment and follow up for recovery.
Shellar's story is told whenever Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), delivers speeches on financial inclusion across the country. Subbarao hopes more women like Shellar will help to promote banking deep within the country. It will be crucial for an organized financial system to find its roots in rural India.
A December 2009 RBI report, "Financial Inclusion: Challenges and Opportunities," points out that the country has 600,000 habitations -- clusters where the population is 100 or more -- but only 30,000 have a commercial bank branch. Less than half the population has a bank account, with the disparity greater in the northeast. Only about 10% of the people have life insurance, and less than 1% have other types of insurance. A full 37% of the population still lives below the poverty line.
It is here that Subbarao sees opportunity. As incomes grow and awareness increases, aspirations rise among the poor. Moreover, rural savings deposits tend to remain in customers' accounts. In the long run, this reduces a bank's dependence on bulk deposits, minimizing the risk posed by sudden large withdrawals. Subbarao stresses that some bankers will need to convert "what they see as a deadweight [social] obligation into an exciting opportunity, and move aggressively on financial inclusion."
No-frills Accounts
Indian banks, especially those in the public sector, have made substantial efforts to tap the country's rural population. But expanding through branches has been a costly -- and largely unsuccessful -- endeavor. Out of 50 public sector and private sector banks, 26 have therefore appointed BCs, through which eight million no-frills accounts have been opened as of March 31, 2009.
Using banking correspondents in such a way is gaining in popularity globally. A recent RBI directive added six more types of correspondents -- including shop owners and public call office operators -- to the existing categories of microfinance institutions and nongovernment organizations. In Brazil, several banks have adopted the correspondent banking model, acquiring more than 15 million accounts this way. In the networks of two of the largest players, half of account holders earn less than $4 a day.
In India, few banks have been as active as State Bank of India (SBI), India's leading public sector bank, which has 2.5 million no-frills accounts. It has expanded through 24,000 direct agents, including thousands of nongovernment and microfinance organizations. "From 12,000 villages in 2008, we now have a presence in 50,000 villages," O. P. Bhatt, SBI chairman, told business publication Business India recently. The goal, he added, is to double that number by March.
Migratory labor is a target, as remittances through banks make it easier to send money home. Huge sums are remitted across India, predominantly from migrant labor, and more than 90% occurs through informal channels.
Banks have also added more sophisticated and diverse products. SBI, for instance, has a product where a customer deposits up to $21 at any one time for one to five years. At the end of the term, the customer gets principal plus interest at a fixed deposit rate of 6% to 8%.
In the insurance space, SBI has Grameen Shakti, a dual-benefit life insurance product. For a five-year term with a US$520 benefit, the premium is about $6 a year. Upon the group member's death, the beneficiary receives the benefit. Upon maturity, the group member recovers half of the premiums paid over the five years. SBI also has launched Chota SIP (Systematic Investment Plan), an equity-based mutual fund plan with a minimum monthly investment of $2 over at least five years. Chota SIP funds are invested in bigger funds, including a blue-chip fund, a balanced fund and a growth fund with a small value component.
The Price of Growth
Despite banks' success with informal channels, reaching rural customers comes with a price tag. The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. The faster users of banking services learn of the benefits, the shorter will be the bank's gestation period in recovering its investments.
In response, financial literacy centers are being set up across India. Members of SEWA Bank -- a cooperative bank established in 1974 by 4,000 self-employed women -- have held three-day financial education camps in the state of Orissa. Such centers provide individual counseling services on responsible borrowing and early savings. "There are advantages to being connected to the financial sector, and there is a need for the people to understand that," points out Haseeb Drabu, managing director at J&K Bank.
Likewise, establishing a more highly functioning banking infrastructure will require increased investment. "There is a lack of supporting infrastructure, like credit bureaus, penetration of mobile banking and biometric cards, and a national identification system," says a November 2009 McKinsey report titled, "Banking – Crisis and Beyond."
Technology is expected to be one enabler. SBI's Tiny Cards concept, initiated in 2006, is a big step forward. A microchip in a smart card stores a customer profile, including photograph, fingerprint and transaction details. Says Anup Banerji, deputy managing director of rural business and national banking at SBI: "This scheme has been rolled out in 19 states in India. In 2008-2009, the number of cards issued rose from 270,000 to more than 2 million. In that same period, the number of no-frills accounts has doubled to 2.5 million."
SBI's Tiny Cards are connected to the network through a mobile phone or point-of-sale machine. They are used along with handheld devices with fingerprint-scanning facilities, made available to women like Shellar. If used through the banking-correspondent route, nongovernment organizations such as Zero Mass Foundation and Little World, and technology providers such as Financial Information Network and Operations (FINO), bear the cost of the devices. They, in turn, recover costs by working with banks around predefined service agreements.
In the state of Andhra Pradesh, for instance, 350,000 people receive money from the government through such programs as the National Rural Employment Guarantee Scheme, social security and pensions. Of the 2% commission SBI receives from the government for distributing these funds, it passes on 1.5% to the correspondent or facilitator.
Bringing Life to Accounts
For a bank the size of SBI, acquiring new accounts is not the problem. The real issue, across the industry, is deriving revenues from these accounts. "We are still a country with over a billion people where nearly half the nation is unbanked," says M.D. Mallya, chairman and managing director at Bank of Baroda. At a recent Indian Merchants' Chamber conference in Mumbai, Mallya called for the inclusion of a small charge on the customers' end, to make the banking correspondents' route more viable. "The challenge for the bulk of the poor is financial services, not affordability," he says.
Funds distributed through government programs, for instance, are rolled out into 400,000 accounts in Andhra Pradesh, while the total number of no-frills accounts acquired has crossed 1.8 million in the state. There is little or no life in accounts acquired outside such schemes; the average balance in such accounts hovers around 50 cents. Meanwhile, costs to maintain the accounts continue to rise. BCs keep up servers that interact with point-of-sale machines. The BC servers interact with a server at the bank (which can cost up to $141,000 upfront). This server, in turn, connects these accounts to the bank's core operations.
According to Pradeep Kulkarni, deputy general manager at SBI, "There are also operational issues -- like the facilitator's travel expense from branch to home and the security of funds while at residence -- that have yet to be resolved." Expenses mount as new accounts register, and there is already a mismatch between revenues earned and costs incurred in undertaking BC operations. Banks charge BCs interest for the temporary overdraft provided to them. This adds to operating costs. Further training of BC staff involves even more outlays.
T.S. Ramakrishna Rao, associate dean at ICFAI University, says the commission paid by banks to the BCs is not adequate for a viable business model. "A majority of BCs have reported losses, and some of them have even suspended their operations. This, in turn, affects the banks [since] it becomes difficult for banks to [find substitutes for them]. Financial inclusion, however, is not an end by itself. It is a means -- the end being social inclusion. Banks play the role of financial intermediation and, therefore, are an important catalyst in attaining inclusive growth."
The government has been active in this area. The National Bank for Agriculture and Rural Development (Nabard) launched two financial inclusion funds in 2007-2008 with about $100 million each. These funds have equal investments by the government and the RBI, and an additional 20% by Nabard. The latter disburses these funds annually to Indian banks. One fund actively invests in developmental and promotional activities in backward regions and unbanked areas. The second promotes the use of technology in similar places. Yet bankers say greater support will be required to make the BC route a success.
A recent RBI meeting with bankers and the Boston Consulting Group addressed concerns about financial inclusion. Many left with Subbarao's firm view about the opportunity at the bottom of the pyramid: The only way to reduce costs is to increase volumes. As the country grows at 8%, job opportunities grow. As people start earning, Subbarao reasons, their incomes will provide a growing source of bank deposits -- and banks that are ahead of the curve in establishing a presence in the hinterlands will likely have a first-mover advantage.
Women such as Shellar act as business facilitators to India's banks. Some work directly for the bank, others through banking correspondents (BCs) such as microfinance institutions and nongovernment organizations. Each facilitator is connected to hundreds of people. On behalf of the bank, they create awareness about savings and other products, identify potential borrowers, collect and verify loan applications, monitor borrowers' repayment and follow up for recovery.
Shellar's story is told whenever Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), delivers speeches on financial inclusion across the country. Subbarao hopes more women like Shellar will help to promote banking deep within the country. It will be crucial for an organized financial system to find its roots in rural India.
A December 2009 RBI report, "Financial Inclusion: Challenges and Opportunities," points out that the country has 600,000 habitations -- clusters where the population is 100 or more -- but only 30,000 have a commercial bank branch. Less than half the population has a bank account, with the disparity greater in the northeast. Only about 10% of the people have life insurance, and less than 1% have other types of insurance. A full 37% of the population still lives below the poverty line.
It is here that Subbarao sees opportunity. As incomes grow and awareness increases, aspirations rise among the poor. Moreover, rural savings deposits tend to remain in customers' accounts. In the long run, this reduces a bank's dependence on bulk deposits, minimizing the risk posed by sudden large withdrawals. Subbarao stresses that some bankers will need to convert "what they see as a deadweight [social] obligation into an exciting opportunity, and move aggressively on financial inclusion."
No-frills Accounts
Indian banks, especially those in the public sector, have made substantial efforts to tap the country's rural population. But expanding through branches has been a costly -- and largely unsuccessful -- endeavor. Out of 50 public sector and private sector banks, 26 have therefore appointed BCs, through which eight million no-frills accounts have been opened as of March 31, 2009.
Using banking correspondents in such a way is gaining in popularity globally. A recent RBI directive added six more types of correspondents -- including shop owners and public call office operators -- to the existing categories of microfinance institutions and nongovernment organizations. In Brazil, several banks have adopted the correspondent banking model, acquiring more than 15 million accounts this way. In the networks of two of the largest players, half of account holders earn less than $4 a day.
In India, few banks have been as active as State Bank of India (SBI), India's leading public sector bank, which has 2.5 million no-frills accounts. It has expanded through 24,000 direct agents, including thousands of nongovernment and microfinance organizations. "From 12,000 villages in 2008, we now have a presence in 50,000 villages," O. P. Bhatt, SBI chairman, told business publication Business India recently. The goal, he added, is to double that number by March.
Migratory labor is a target, as remittances through banks make it easier to send money home. Huge sums are remitted across India, predominantly from migrant labor, and more than 90% occurs through informal channels.
Banks have also added more sophisticated and diverse products. SBI, for instance, has a product where a customer deposits up to $21 at any one time for one to five years. At the end of the term, the customer gets principal plus interest at a fixed deposit rate of 6% to 8%.
In the insurance space, SBI has Grameen Shakti, a dual-benefit life insurance product. For a five-year term with a US$520 benefit, the premium is about $6 a year. Upon the group member's death, the beneficiary receives the benefit. Upon maturity, the group member recovers half of the premiums paid over the five years. SBI also has launched Chota SIP (Systematic Investment Plan), an equity-based mutual fund plan with a minimum monthly investment of $2 over at least five years. Chota SIP funds are invested in bigger funds, including a blue-chip fund, a balanced fund and a growth fund with a small value component.
The Price of Growth
Despite banks' success with informal channels, reaching rural customers comes with a price tag. The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. The faster users of banking services learn of the benefits, the shorter will be the bank's gestation period in recovering its investments.
In response, financial literacy centers are being set up across India. Members of SEWA Bank -- a cooperative bank established in 1974 by 4,000 self-employed women -- have held three-day financial education camps in the state of Orissa. Such centers provide individual counseling services on responsible borrowing and early savings. "There are advantages to being connected to the financial sector, and there is a need for the people to understand that," points out Haseeb Drabu, managing director at J&K Bank.
Likewise, establishing a more highly functioning banking infrastructure will require increased investment. "There is a lack of supporting infrastructure, like credit bureaus, penetration of mobile banking and biometric cards, and a national identification system," says a November 2009 McKinsey report titled, "Banking – Crisis and Beyond."
Technology is expected to be one enabler. SBI's Tiny Cards concept, initiated in 2006, is a big step forward. A microchip in a smart card stores a customer profile, including photograph, fingerprint and transaction details. Says Anup Banerji, deputy managing director of rural business and national banking at SBI: "This scheme has been rolled out in 19 states in India. In 2008-2009, the number of cards issued rose from 270,000 to more than 2 million. In that same period, the number of no-frills accounts has doubled to 2.5 million."
SBI's Tiny Cards are connected to the network through a mobile phone or point-of-sale machine. They are used along with handheld devices with fingerprint-scanning facilities, made available to women like Shellar. If used through the banking-correspondent route, nongovernment organizations such as Zero Mass Foundation and Little World, and technology providers such as Financial Information Network and Operations (FINO), bear the cost of the devices. They, in turn, recover costs by working with banks around predefined service agreements.
In the state of Andhra Pradesh, for instance, 350,000 people receive money from the government through such programs as the National Rural Employment Guarantee Scheme, social security and pensions. Of the 2% commission SBI receives from the government for distributing these funds, it passes on 1.5% to the correspondent or facilitator.
Bringing Life to Accounts
For a bank the size of SBI, acquiring new accounts is not the problem. The real issue, across the industry, is deriving revenues from these accounts. "We are still a country with over a billion people where nearly half the nation is unbanked," says M.D. Mallya, chairman and managing director at Bank of Baroda. At a recent Indian Merchants' Chamber conference in Mumbai, Mallya called for the inclusion of a small charge on the customers' end, to make the banking correspondents' route more viable. "The challenge for the bulk of the poor is financial services, not affordability," he says.
Funds distributed through government programs, for instance, are rolled out into 400,000 accounts in Andhra Pradesh, while the total number of no-frills accounts acquired has crossed 1.8 million in the state. There is little or no life in accounts acquired outside such schemes; the average balance in such accounts hovers around 50 cents. Meanwhile, costs to maintain the accounts continue to rise. BCs keep up servers that interact with point-of-sale machines. The BC servers interact with a server at the bank (which can cost up to $141,000 upfront). This server, in turn, connects these accounts to the bank's core operations.
According to Pradeep Kulkarni, deputy general manager at SBI, "There are also operational issues -- like the facilitator's travel expense from branch to home and the security of funds while at residence -- that have yet to be resolved." Expenses mount as new accounts register, and there is already a mismatch between revenues earned and costs incurred in undertaking BC operations. Banks charge BCs interest for the temporary overdraft provided to them. This adds to operating costs. Further training of BC staff involves even more outlays.
T.S. Ramakrishna Rao, associate dean at ICFAI University, says the commission paid by banks to the BCs is not adequate for a viable business model. "A majority of BCs have reported losses, and some of them have even suspended their operations. This, in turn, affects the banks [since] it becomes difficult for banks to [find substitutes for them]. Financial inclusion, however, is not an end by itself. It is a means -- the end being social inclusion. Banks play the role of financial intermediation and, therefore, are an important catalyst in attaining inclusive growth."
The government has been active in this area. The National Bank for Agriculture and Rural Development (Nabard) launched two financial inclusion funds in 2007-2008 with about $100 million each. These funds have equal investments by the government and the RBI, and an additional 20% by Nabard. The latter disburses these funds annually to Indian banks. One fund actively invests in developmental and promotional activities in backward regions and unbanked areas. The second promotes the use of technology in similar places. Yet bankers say greater support will be required to make the BC route a success.
A recent RBI meeting with bankers and the Boston Consulting Group addressed concerns about financial inclusion. Many left with Subbarao's firm view about the opportunity at the bottom of the pyramid: The only way to reduce costs is to increase volumes. As the country grows at 8%, job opportunities grow. As people start earning, Subbarao reasons, their incomes will provide a growing source of bank deposits -- and banks that are ahead of the curve in establishing a presence in the hinterlands will likely have a first-mover advantage.
Going Rural: Tourism Focuses on India's Hinterland
ndians believe in holidays: The country has among the largest number of public holidays in the world. Yet the most common reason for getting away is to "visit a native place." Migrant workers return to their family farms at harvest time. Others return to their villages (and extended families) for an annual pilgrimage. The concept of a holiday where you let your hair down and relax has been accepted only in recent years.
The idea of rural tourism is, therefore, a bit of a puzzle for many Indians. They go back to their village every year; why should they pay good money to go to some other village? Rustic charms hold greater appeal for foreign tourists. Concerted government and travel industry efforts to sell India abroad with campaigns such as "Incredible India" began only this decade, but rural tourism as a product is still evolving.
A national tourism policy was introduced in 2002, with rural tourism identified as a focus area to generate employment and promote sustainable livelihoods. "As a part of the National Tourism Policy 2002, the Ministry of Tourism is developing and promoting rural tourism sites which have core competency in art, craft, culture, heritage, handloom, etc.," Union Ministry of Tourism Secretary Sujit Banerjee said recently in a statement. According to the 2002 policy, "Special thrust should be imparted to rural tourism and tourism in small settlements, where sizable assets of our culture and natural wealth exist."
Just what is rural tourism? The government has taken a broad view. "Any form of tourism that showcases rural life, art, culture and heritage at rural locations, thereby benefiting the local community economically and socially as well as enabling interaction between the tourists and the locals for a more enriching tourism experience, can be termed as rural tourism," says a Ministry of Tourism policy paper. "Rural tourism is essentially an activity which takes place in the countryside. It is multifaceted and may entail farm/agricultural tourism, cultural tourism, nature tourism, adventure tourism and ecotourism. As against conventional tourism, rural tourism has certain typical characteristics: It is experience-oriented; the locations are sparsely populated; it is predominantly in natural environments; it meshes with seasonality and local events; and it is based on the preservation of culture, heritage and traditions."
Not everyone applies such a broad definition. Ecotourism – which concerns itself with the preservation of the environment while offering the best to tourists – is more fashionable these days. And some in government and the tourism industry would like to focus on ecotourism rather than rural tourism, which could have a down-market, rough-it-out connotation. "Ecotourism and rural tourism are not exactly the same but can be clubbed together for greater benefits," says Md. Jawaid, a former minister in the eastern state of Bihar who has promoted the website ecotourismindia.com. "This is just an information site now," Jawaid says. "It is a small effort on my part to promote tourism in the rural areas of India. But we have big plans. The potential is huge."
Rajesh K. Aithal, assistant professor of marketing at the Indian Institute of Management, Lucknow, has another definition. "Rural tourism is a form of tourism in which the guests get to enjoy the unique culture of village life through participation in events, or experiencing the local cuisine, or buying ethnic goods, and in the process also improve the welfare of the local people."
Two Types of Tourism
Mandip Singh Soin, president of the Ecotourism Society of India, a group of tourism professionals and environmentalists formed with the Ministry of Tourism's backing, says the concept can be confusing. "Rural tourism is understood differently in different parts of the world," he notes. "Ecotourism and rural tourism are the same only in a sense. They are cousins really. Rural tourism may not necessarily be the protector and enhancer of conservation. It is much more community-oriented. Ecotourism is more holistic; all responsible tourism actions come into play."
The difference is best illuminated by a couple of examples. As part of its 2002 plan, the government partnered with the United Nations Development Program (UNDP) for an Endogenous Tourism Project. Some 30 rural sites were selected in 20 states to develop as destinations for rural tourists. The UNDP pumped in an initial US$2.5 million. The government asked the states and union territories to submit proposals. Those that were selected were entitled to assistance up to US$100,000.
One of the project's success stories is Hodka village in Gujarat. A village tourism committee owns and operates the Shaam-e-Sarhad ("Sunset at the Border") Village Resort. The accommodations are simple. Tourists can stay in tents or traditional mud huts, known as bhungas. All have attached bathrooms, Western toilets and showers. The resort can accommodate up to 30 people. Staying in tents costs around US$40 a night, while the bhungas are more expensive, around US$60 a night. Among the attractions: specially organized workshops in embroidery and leather work; interactions with other artisan communities; wildlife including flamingos, pelicans, foxes and leopards; and nearby archaeological sites of the Indus Valley Civilization. In January 2008, there was even a pashu mela -- a cattle fair. All this activity has had to be organized, packaged and sold.
Far away from Hodka, in the northeastern state of Meghalaya, is Mawlynnong. Neither the UNDP nor the government of India has been involved with this ecotourism effort's success. Rather, a community effort has made it the poster child of rural tourism in India. In 2003, Discover India (a magazine published by Media Transasia along with the Union Ministry of Tourism) anointed it the cleanest village in Asia. It has retained its charms. "Mawlynnong's reputation for cleanliness has even earned it a place on the state's tourism map," according to a report by the BBC. "Hundreds of visitors from all over India now visit the village throughout the year." Mawlynnong also attracts tourists from around the world.
Both Mawlynnong and Hodka demonstrate a key prerequisite for the success of any rural tourism project: community involvement. "Going by our experience in setting up community-owned companies in the rural sector, the outcome depends on a number of factors, and host communities should be encouraged to play a pivotal role in the development of rural tourism," says William Bissell, managing director of Fabindia and author of the recently published Making India Work. Fabindia is a novel experiment in which rural artisans -- the suppliers to this private retail platform -- are shareholders in the company. (See "The Poor as Stakeholders: Can 'Inclusive Capitalism' Thrive in India?")
Community Involvement
The point about community involvement is also made by Mott MacDonald, a global management, engineering and development consultancy that the Ministry of Tourism asked to evaluate the rural tourism scheme. Its report, submitted in June 2007 after five years of operation, says: "In order to make the scheme more meaningful, it is very important that the sustenance issues be discussed with the community before the start of the project." Fear of the unknown once was common, but it has disappeared in the projects undertaken. "Xenophobia has been removed from the minds of the local people," the report notes.
Before the Ministry of Tourism became involved, this fear of foreigners was just one of the basic issues that hindered the flow of tourists to the sites chosen by the government and the UNDP. From the start, the sites had the advantages of historical importance, craft, culture, cuisine and natural beauty. But hindrances included a lack of basic infrastructure including sanitation, drinking water and wayside amenities; a lack of accommodation and food facilities; and a lack of awareness about site importance and the need for local guides.
Most of the issues have been addressed. "With the intervention of the Ministry of Tourism, there has been considerable change," the Mott MacDonald report notes. "The rural tourism scheme has been a valuable vehicle to bring the ultimate rural stakeholders in touch with the tourism sector to increase employment." The report continues: "Rural tourism is not the end, but the means to stimulate economic growth, to increase the viability of underdeveloped locations, and to improve the living standards of local populations." Adds Bissell of Fabindia: "With proper training and the infrastructure in place, rural tourism certainly has the potential to generate large-scale employment. What we need is commitment and a long-term view."
"The development of a strong platform around the concept of rural tourism is definitely useful for a country like India, where almost 74% of the population resides in its seven million villages," the Ministry of Tourism's policy paper notes.
A Nod to the Bottom Line
Yet increasing the bottom line for tourism is equally important. After all, there is a limit to the number of tourists you can pack into the Taj Mahal and Khajuraho. Today, with exports plummeting amid the global economic slowdown, tourism has become a key foreign-exchange earner. According to Ministry of Tourism figures, foreign-exchange earnings from tourism in 2008 were around US$11 billion, an increase of 14.4% from 2007. A total of 5.37 million tourists visited India in 2008, an increase of 5.6% from 2007. But in the first nine months of 2009, foreign tourist arrivals were down 7.7% from the same period a year earlier. Earnings will also be down, though those numbers are not yet available.
The government is doing all it can to boost these figures. In October, at a Dubai road show for its Visit India 2009 tourism campaign, Pronab Sarkar, secretary of the Indian Association of Tour Operators (IATO), unveiled some highlights for foreign tourists. Among them: an IATO-sponsored complimentary one-day rural eco-holiday in the country.
Tour operators are businessmen. Would they be bothered about the larger picture of rural employment and sustainability? Yes, says Soin of the Ecotourism Society. The society was set up last year because "we feel we needed to have our tourism sector do the right thing in terms of responsible tourism actions that would allow for a smaller tourism footprint ecologically. At the same time, we wanted to look at how tourism can get its dollars to flow down the supply chain more equitably and involve the local communities to be partners in tourism operations. We also want to be the watchdog of tourism in the country."
Soin responds to criticism that rural tourism exploits poor people in the villages and damages the environment. "This is not correct," he says. "Most revenues are being earned and kept at the village level so it goes into the pockets of the villagers either as direct individual earnings or collective cooperative efforts. In fact, in areas like [the northeastern state of] Nagaland, where the ecology was being damaged by village lads hunting rare pheasants, the trend got reversed when they saw the opportunity for earning money as guides showing these pheasants to bird watchers." Adds Aithal of IIM: "A well-executed rural tourism project has the potential of becoming a win-win proposition both for the tourist and the villagers."
There is a lot of potential for rural tourism in India, Aithal notes. "'Rural' as an entity is fast disappearing, especially in the developed world. Even for young urban Indians, rural would be something that they would want to connect to." Adds Jawaid of ecotourismindia.com: "Both Indians and foreigners can be targeted." For the moment, however, it's the foreign tourist who is being wooed. "Initially, the target will be foreigners as this is a novelty for them," Soin says. "It may not be that novel an experience for Indians. Indians demand more comfort in lodging and are less prone to roughing it out."
"Rural tourism is in its nascent stage in India," Aithal notes. "But it will grow. There is a huge market out there. The experience of many countries shows that rural tourism can be seen as an alternate source of livelihood and employment. The main problems with rural tourism are the same as with any rural development project. Can you scale up these projects? Can you replicate them? And how do you make these projects stand on their own without money being pumped in from outside? For this you need very strong village-level institutions, which can take up the execution once the project has been initiated."
According to Fabindia's Bissell, "If sites are selected with care, on the basis of potential and core competency, and the project implementation focuses as much on the 'software' aspects of human development along with the 'hardware' of capacity building and infrastructure development, there is every reason to anticipate a positive outcome. As a multi-sectoral activity, using multiple services provided by a range of suppliers, rural tourism is an area where a strong public-private partnership is of prime importance, particularly given the number of ministries beyond tourism – for example, rural development, culture, environment and tribal welfare – that could be involved."
The idea of rural tourism is, therefore, a bit of a puzzle for many Indians. They go back to their village every year; why should they pay good money to go to some other village? Rustic charms hold greater appeal for foreign tourists. Concerted government and travel industry efforts to sell India abroad with campaigns such as "Incredible India" began only this decade, but rural tourism as a product is still evolving.
A national tourism policy was introduced in 2002, with rural tourism identified as a focus area to generate employment and promote sustainable livelihoods. "As a part of the National Tourism Policy 2002, the Ministry of Tourism is developing and promoting rural tourism sites which have core competency in art, craft, culture, heritage, handloom, etc.," Union Ministry of Tourism Secretary Sujit Banerjee said recently in a statement. According to the 2002 policy, "Special thrust should be imparted to rural tourism and tourism in small settlements, where sizable assets of our culture and natural wealth exist."
Just what is rural tourism? The government has taken a broad view. "Any form of tourism that showcases rural life, art, culture and heritage at rural locations, thereby benefiting the local community economically and socially as well as enabling interaction between the tourists and the locals for a more enriching tourism experience, can be termed as rural tourism," says a Ministry of Tourism policy paper. "Rural tourism is essentially an activity which takes place in the countryside. It is multifaceted and may entail farm/agricultural tourism, cultural tourism, nature tourism, adventure tourism and ecotourism. As against conventional tourism, rural tourism has certain typical characteristics: It is experience-oriented; the locations are sparsely populated; it is predominantly in natural environments; it meshes with seasonality and local events; and it is based on the preservation of culture, heritage and traditions."
Not everyone applies such a broad definition. Ecotourism – which concerns itself with the preservation of the environment while offering the best to tourists – is more fashionable these days. And some in government and the tourism industry would like to focus on ecotourism rather than rural tourism, which could have a down-market, rough-it-out connotation. "Ecotourism and rural tourism are not exactly the same but can be clubbed together for greater benefits," says Md. Jawaid, a former minister in the eastern state of Bihar who has promoted the website ecotourismindia.com. "This is just an information site now," Jawaid says. "It is a small effort on my part to promote tourism in the rural areas of India. But we have big plans. The potential is huge."
Rajesh K. Aithal, assistant professor of marketing at the Indian Institute of Management, Lucknow, has another definition. "Rural tourism is a form of tourism in which the guests get to enjoy the unique culture of village life through participation in events, or experiencing the local cuisine, or buying ethnic goods, and in the process also improve the welfare of the local people."
Two Types of Tourism
Mandip Singh Soin, president of the Ecotourism Society of India, a group of tourism professionals and environmentalists formed with the Ministry of Tourism's backing, says the concept can be confusing. "Rural tourism is understood differently in different parts of the world," he notes. "Ecotourism and rural tourism are the same only in a sense. They are cousins really. Rural tourism may not necessarily be the protector and enhancer of conservation. It is much more community-oriented. Ecotourism is more holistic; all responsible tourism actions come into play."
The difference is best illuminated by a couple of examples. As part of its 2002 plan, the government partnered with the United Nations Development Program (UNDP) for an Endogenous Tourism Project. Some 30 rural sites were selected in 20 states to develop as destinations for rural tourists. The UNDP pumped in an initial US$2.5 million. The government asked the states and union territories to submit proposals. Those that were selected were entitled to assistance up to US$100,000.
One of the project's success stories is Hodka village in Gujarat. A village tourism committee owns and operates the Shaam-e-Sarhad ("Sunset at the Border") Village Resort. The accommodations are simple. Tourists can stay in tents or traditional mud huts, known as bhungas. All have attached bathrooms, Western toilets and showers. The resort can accommodate up to 30 people. Staying in tents costs around US$40 a night, while the bhungas are more expensive, around US$60 a night. Among the attractions: specially organized workshops in embroidery and leather work; interactions with other artisan communities; wildlife including flamingos, pelicans, foxes and leopards; and nearby archaeological sites of the Indus Valley Civilization. In January 2008, there was even a pashu mela -- a cattle fair. All this activity has had to be organized, packaged and sold.
Far away from Hodka, in the northeastern state of Meghalaya, is Mawlynnong. Neither the UNDP nor the government of India has been involved with this ecotourism effort's success. Rather, a community effort has made it the poster child of rural tourism in India. In 2003, Discover India (a magazine published by Media Transasia along with the Union Ministry of Tourism) anointed it the cleanest village in Asia. It has retained its charms. "Mawlynnong's reputation for cleanliness has even earned it a place on the state's tourism map," according to a report by the BBC. "Hundreds of visitors from all over India now visit the village throughout the year." Mawlynnong also attracts tourists from around the world.
Both Mawlynnong and Hodka demonstrate a key prerequisite for the success of any rural tourism project: community involvement. "Going by our experience in setting up community-owned companies in the rural sector, the outcome depends on a number of factors, and host communities should be encouraged to play a pivotal role in the development of rural tourism," says William Bissell, managing director of Fabindia and author of the recently published Making India Work. Fabindia is a novel experiment in which rural artisans -- the suppliers to this private retail platform -- are shareholders in the company. (See "The Poor as Stakeholders: Can 'Inclusive Capitalism' Thrive in India?")
Community Involvement
The point about community involvement is also made by Mott MacDonald, a global management, engineering and development consultancy that the Ministry of Tourism asked to evaluate the rural tourism scheme. Its report, submitted in June 2007 after five years of operation, says: "In order to make the scheme more meaningful, it is very important that the sustenance issues be discussed with the community before the start of the project." Fear of the unknown once was common, but it has disappeared in the projects undertaken. "Xenophobia has been removed from the minds of the local people," the report notes.
Before the Ministry of Tourism became involved, this fear of foreigners was just one of the basic issues that hindered the flow of tourists to the sites chosen by the government and the UNDP. From the start, the sites had the advantages of historical importance, craft, culture, cuisine and natural beauty. But hindrances included a lack of basic infrastructure including sanitation, drinking water and wayside amenities; a lack of accommodation and food facilities; and a lack of awareness about site importance and the need for local guides.
Most of the issues have been addressed. "With the intervention of the Ministry of Tourism, there has been considerable change," the Mott MacDonald report notes. "The rural tourism scheme has been a valuable vehicle to bring the ultimate rural stakeholders in touch with the tourism sector to increase employment." The report continues: "Rural tourism is not the end, but the means to stimulate economic growth, to increase the viability of underdeveloped locations, and to improve the living standards of local populations." Adds Bissell of Fabindia: "With proper training and the infrastructure in place, rural tourism certainly has the potential to generate large-scale employment. What we need is commitment and a long-term view."
"The development of a strong platform around the concept of rural tourism is definitely useful for a country like India, where almost 74% of the population resides in its seven million villages," the Ministry of Tourism's policy paper notes.
A Nod to the Bottom Line
Yet increasing the bottom line for tourism is equally important. After all, there is a limit to the number of tourists you can pack into the Taj Mahal and Khajuraho. Today, with exports plummeting amid the global economic slowdown, tourism has become a key foreign-exchange earner. According to Ministry of Tourism figures, foreign-exchange earnings from tourism in 2008 were around US$11 billion, an increase of 14.4% from 2007. A total of 5.37 million tourists visited India in 2008, an increase of 5.6% from 2007. But in the first nine months of 2009, foreign tourist arrivals were down 7.7% from the same period a year earlier. Earnings will also be down, though those numbers are not yet available.
The government is doing all it can to boost these figures. In October, at a Dubai road show for its Visit India 2009 tourism campaign, Pronab Sarkar, secretary of the Indian Association of Tour Operators (IATO), unveiled some highlights for foreign tourists. Among them: an IATO-sponsored complimentary one-day rural eco-holiday in the country.
Tour operators are businessmen. Would they be bothered about the larger picture of rural employment and sustainability? Yes, says Soin of the Ecotourism Society. The society was set up last year because "we feel we needed to have our tourism sector do the right thing in terms of responsible tourism actions that would allow for a smaller tourism footprint ecologically. At the same time, we wanted to look at how tourism can get its dollars to flow down the supply chain more equitably and involve the local communities to be partners in tourism operations. We also want to be the watchdog of tourism in the country."
Soin responds to criticism that rural tourism exploits poor people in the villages and damages the environment. "This is not correct," he says. "Most revenues are being earned and kept at the village level so it goes into the pockets of the villagers either as direct individual earnings or collective cooperative efforts. In fact, in areas like [the northeastern state of] Nagaland, where the ecology was being damaged by village lads hunting rare pheasants, the trend got reversed when they saw the opportunity for earning money as guides showing these pheasants to bird watchers." Adds Aithal of IIM: "A well-executed rural tourism project has the potential of becoming a win-win proposition both for the tourist and the villagers."
There is a lot of potential for rural tourism in India, Aithal notes. "'Rural' as an entity is fast disappearing, especially in the developed world. Even for young urban Indians, rural would be something that they would want to connect to." Adds Jawaid of ecotourismindia.com: "Both Indians and foreigners can be targeted." For the moment, however, it's the foreign tourist who is being wooed. "Initially, the target will be foreigners as this is a novelty for them," Soin says. "It may not be that novel an experience for Indians. Indians demand more comfort in lodging and are less prone to roughing it out."
"Rural tourism is in its nascent stage in India," Aithal notes. "But it will grow. There is a huge market out there. The experience of many countries shows that rural tourism can be seen as an alternate source of livelihood and employment. The main problems with rural tourism are the same as with any rural development project. Can you scale up these projects? Can you replicate them? And how do you make these projects stand on their own without money being pumped in from outside? For this you need very strong village-level institutions, which can take up the execution once the project has been initiated."
According to Fabindia's Bissell, "If sites are selected with care, on the basis of potential and core competency, and the project implementation focuses as much on the 'software' aspects of human development along with the 'hardware' of capacity building and infrastructure development, there is every reason to anticipate a positive outcome. As a multi-sectoral activity, using multiple services provided by a range of suppliers, rural tourism is an area where a strong public-private partnership is of prime importance, particularly given the number of ministries beyond tourism – for example, rural development, culture, environment and tribal welfare – that could be involved."
Subscribe to:
Posts (Atom)
