The Hunt for Profits Goes South With Purchasing Power Rising, Euro Firms Eye Developing World

Ever on the lookout for tomorrow's customers, Western corporations have set their sights on industrializing economies and developing nations. It's a huge opportunity, but low cost isn't the only important criterion for a vast new group of consumers. Innovations are also important for this growing market.
Von Julia Bonstein

In his quest to explore the markets of the future, Peter Kleinschmidt occasionally investigates Chinese bathroom culture and discusses things like showering habits with Asian consumers. He also spends his time wandering through country stores where lipstick might be displayed next to a rice-cooker. "In Vietnam, I've even seen Nivea products hanging from a nail on a tree," Kleinschmidt says with obvious enthusiasm.

As a member of the executive board of Beiersdorf, the Hamburg-based cosmetics company that owns the Nivea brand, he routinely fits visits with Chinese, Thai or Indonesian consumers into his travel schedule so that he can form an impression of the way they live. Kleinschmidt is convinced that "Asia, as well as Eastern Europe and South America, are among the most important engines of economic growth."

While market shares were divided up long ago in Europe and North America, Western producers are discovering and developing new growth opportunities in newly industrializing economies. In addition to providing them with legions of low-cost workers in these countries, globalization has created a constantly growing number of consumers who can now afford luxury items like skin cream, mobile phones or even a bar of soap.

In their search for customers of the future, Western cosmetics and food giants, wireless companies and even insurance providers have set their sights on countries like China, Brazil and India. "The key to growth lies in the emerging economies," says David Dean of the management consulting firm Boston Consulting. "That's where tomorrow's consumers live."

Dean has identified people with monthly household incomes of between $63 and $700 as the "Next Billion" potential consumers. It isn't the handful of new super-rich individuals but the masses whose economic ascent has only just begun that promise to deliver the true blockbuster market. Of course, Western corporations like Nestlé, German insurance and financial giant Allianz or Beiersdorf have to make allowances for their clientele's meager budgets and, of course, this requires extremely efficient and low-cost production. It is certainly no coincidence that the world's most inexpensive car was unveiled last week not by Toyota, Ford or Fiat, but by India's Tata conglomerate, which comes armed with loads of expertise on how to manufacture and market products for vast numbers of low-income consumers.

But low prices alone are not enough. For Western producers, it is also critical that they manage to sway new consumers in Africa or Asia with solutions precisely targeted to their needs. One example is a seasoning cube containing iodine, which Nestlé hopes to market successfully in Africa. In India, German consumer products maker Henkel sells miniature packages of its "Pril" dishwashing detergent for one rupee apiece, or a little less than two cents. Another innovation is a mobile phone that, though lacking complex functions, contains a built-in flashlight -- a valuable feature in countries were power outages are a daily occurrence. These are all products tailored to the unique needs of the next billion -- consumers worldwide who, though far from affluent, no longer live in poverty and have small amounts of disposable income.

This new, enormous target group includes people like Li Ying. The young Chinese woman who opens the door to her apartment to a group of Beiersdorf market researchers has only been living in Shanghai for a few months. Her tiny, one-room apartment measures only 4.5 square meters (about 50 square feet). She shares a kitchen area and bath with nine neighbors. But Li Ying, 24, is not poor. As an employee of a real estate company, she earns a monthly salary of about €450.

What does a woman like Li Ying need? What does she want? What sorts of answers can marketers provide to questions she hasn't even asked yet? Li Ying has never heard of Nivea products, but perhaps she would buy them if she found the lotion's scent more appealing and if the bottle were small enough to fit onto her night table.

"China represents an enormous opportunity for us," says Beiersdorf executive Kleinschmidt. In 2007, Beiersdorf's Chinese operations grew by almost 50 percent and its sales reached €90 million. The Hamburg-based company expects its Chinese market to grow by leaps and bounds in the future.

Beiersdorf's new factory near Shanghai, slated to open its doors in 2009, will begin its operations at an initial annual capacity of 12,500 tons of personal care products. The German company also plans to move into the Asian hair care market and recently spent €270 million to acquire an 85-percent stake in China's second-largest manufacturer of hair-care products.

Once disregarded because of their poverty, the people of the developing world are becoming attractive consumers for two reasons: their growing affluence and their growing share of the world's population. Eight out of 10 of the earth's inhabitants now live in developing countries, a number that will increase to nine in less than 20 years. By 2025, the Third World will be home to 7.2 billion of a forecast global population of 8 billion.

China's ongoing economic boom is spreading to ever larger segments of the population. Beiersdorf spends a lot of time and money on its market research and development efforts, hoping to win over this potentially vast market for its Nivea products. "It would be a sign of Western arrogance to assume that consumers in China or Brazil have been waiting for generations to finally be blessed with our German products," says Kleinschmidt.

He speaks from experience. In Korea, for instance, Beiersdorf's attempt to introduce a face care product based on a Western recipe was a failure. And a skincare line containing rice and lotus ingredients, a big seller in Germany, where it is marketed as one of the secrets of Asian beauty, was met with derision by an Asian focus groups.

These kinds of experiences have taught manufacturers to spend more time and effort analyzing the needs of their new target audiences. This can lead to the marketing of products in Asia that Western consumers may find perplexing. In Thailand, for example, Beiersdorf has successfully marketed a deodorant that bleaches the skin in the user's armpits when used on a nightly basis.

In this way, Western corporations' enthusiasm for the world's newly industrializing nations creates both new markets for well-known products and innovations.

Blurring Business and Development Aid

Philips, the multinational electronics conglomerate, in a departure from its normal corporate activities, has developed a household water purification system for the Indian market. The filtration device, which operates using ultraviolet light, is used to disinfect water.

"The market for this device would be limited in Germany. But in India millions of people have no access to clean drinking water and can clearly benefit from these sorts of solutions," says Gottfried Dutiné, CEO of Philips Consumer Electronics. The electronics giant wants to build early awareness of its brand among Indian consumers and is betting on rapidly growing affluence in India. "We assume that in India, the number of people who can afford to buy our shavers, irons and TVs will grow by a hundred million in the next two to three years," says Dutiné. His reasoning shows that the lines between development aid and pure business have become blurred in countries like India.

Chip manufacturer Intel's sudden interest in developing a low-cost computer is another example of the same calculation. As recently as late 2005, Intel President Craig Barrett dismissed the $100 laptop the nonprofit organization One Laptop Per Child (OLPC) planned to develop as child's play. But when the project began scoring initial successes within only a few months, the giant US chipmaker quickly developed a competing product. With the result, the $250 "Classmate PC," Intel hopes to enter a market worth billions of dollars in emerging economies.

Meanwhile, the food industry is exploring business opportunities at the lowest end of the prosperity pyramid. This so-called "Bottom of the Pyramid," or BOP, includes more than 4 billion people, or about 60 percent of the world's population. Many of these people have only about $2 a day in disposable income, but their sheer numbers translate into immense purchasing power, especially for the food industry.

"The market potential of the BOP is gigantic: four to 5 billion underserved consumers and an economy consisting of $13 billion in equivalent purchasing power," writes Indian economist C.K. Prahalad in his book "The Fortune at the Bottom of the Pyramid." Prahalad describes the advantages that result from upgrading the world's poor into customers. Manufacturers are already dreaming up the relevant business models.

"We need affordable food products for poorer markets," says Nestlé CEO Peter Brabeck. The company's Maggi seasoning cubes are already being reformulated to suit African palates. In Ghana, Nestlé sells shrimp-flavored instant soup cubes for 2 cents apiece. In other African countries, according to Nestlé, the flavor of fermented beans is in great demand. The Central and West African region has already become the world's second-largest market for Maggi products -- behind Germany and ahead of France.

In the long term, the Swiss company expects to increase its annual sales in emerging economies and developing countries to roughly €10 billion -- and it will even contribute to the welfare of its customers in the process. The Maggi seasoning cubes the company sells in Africa are iodine-enriched to address the problem of iodine deficiency in areas where there is little iodine in the diet. In Peru, nutrition counselors travel through individual regions dispensing tips on how to eat a balanced diet -- and selling Nestlé products.

The boundaries between providing aid and conducting marketing campaigns, between a bad conscience and good business, are often indistinct. Aid workers would rather help the world's poor develop the necessary skills to become local food producers than encourage them to consume Western products.

Micro-Insurance and Mobile Phones for the World's Poor

Despite these concerns, the new corporate enthusiasm for the world of the poor also results in productive partnerships with aid organizations in developing countries. In southern India, for instance, the German insurance and financial services conglomerate Allianz is involved in a joint program with CARE, an aid organization that once distributed packages in Germany to help survivors of World War II, to introduce a new type of micro-insurance. The monthly premiums of about five cents are designed to be affordable for the very poor who, in India, are often left destitute by the injury or death of a family's breadwinner.

It took a tragedy to draw Allianz's attention to this gap in the market. After the Indian Ocean tsunami in late 2004, staff at the company's Munich headquarters noticed that they were receiving very few claims from the region -- and realized that most of the victims in Southeast Asia were uninsured.

The notion that necessity is the mother of invention has been especially beneficial to the mobile phone industry in the developing world. The availability of mobile phones has already led to a minor revolution in Asia and Africa. In India alone, more than 7 million people sign new mobile phone contracts each month. The industry is gearing up for an expected 2 billion new customers worldwide in the next five years, 80 percent of them in the developing world.

Companies have been successful in developing countries by employing business models tailored to local conditions. Nokia, for example, has developed a mobile phone with a dust-resistant keypad for the Indian market.

In Africa, some wireless companies are already competing with banks by offering similarly innovative solutions. M-Banking is a technology that allows users to transfer money with a mobile phone. Wireless customers use text messaging to transfer money to another user's phone. The recipient can then go to a shop and convert the credit into cash.

M-Banking is a promising service in a country like Kenya, where there are only 500 bank offices but 10 million mobile phones. Poor people in remote areas of the country have no access at all to banks. Mobile phone banking now enables them to transfer money.

As in the case of India's new inexpensive car, local companies have been pioneers in offering the new service. But now they have new competition from the Vodafone Group, which has discovered the market's potential. In a period of 18 months, Vodafone sold 200,000 contracts for its M-Pesa service in Kenya, and the British company now plans to expand the service to other countries, including Afghanistan and Tanzania. One of its key target groups consists of guest workers who earn money in places like London and send some of their earnings home to their families -- a transaction that could just as easily be performed with a mobile phone.

What began as a good idea in Africa could soon be imported into affluent countries. Executives at wireless companies are convinced that the concept has international potential.

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