Sucheta Dalal :There is a huge consumer market out there somewhere
Sucheta Dalal

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There is a huge consumer market out there somewhere  

June 16, 2006

The Indian rural market with its vast size and demand base offers a huge opportunity that MNCs cannot afford to ignore. To expand the market by tapping the countryside, more and more MNCs are foraying into India's rural markets. Among those that have made some headway are Hindustan Lever, LG Electronics, Nokia,  Reliance and many others.

 

There is a huge consumer market out there somewhere

 

From The Economist Print Edition: June 1st, 2006

 

ARRIVING before the start of the morning shift at LG's factory in Noida, outside Delhi, is like entering another country. In front of the enormous hangars housing the production lines, workers are doing their physical jerks, finishing with some chanting, clapping and a vicious punch into the air. Everywhere the walls are covered in uplifting mottoes. “Great Customers, Great Products!” “Zero Idle Time!” “My Job, My LG, My Family.”

 

LG has imported a little bit of its South Korean homeland, along with its disciplined work ethic. As LG tells it, the workers here are so pampered that none has even tried to form a trade union. The firm employs 2,800 people in India, in this factory and another one in Pune, and in a nationwide distribution and marketing network. According to Kwang-Ro Kim, the firm's boss in India, the country is now, with Brazil and Russia, LG's “second-equal” market, behind China, accounting for 5% of global turnover.

 

The company has 25-30% of the Indian market in air-conditioning units for homes; 27% of the colour-television market; 35% in washing machines; 30% in refrigerators; and 40% in microwaves. Yasho Verma, an LG director responsible for human resources, puts these achievements down to a combination of Indian brainpower and South Korean focus. “Analytically,” he suggests, “Indians are the best in the world. But execution is poor.”

 

But LG's is also, like most successes in the Indian consumer market, a triumph of adaptation. In most parts of the world, LG appliances built for a 220-volt electricity supply would have a tolerance of 200-240 volts, but in India they are built to operate within a range of 170-340 volts. Its televisions are also tweaked for the Indian market, featuring big speakers with a thumping bass. In India, television is not for a quiet night in.

 

Indian business is full of legendary marketing coups. There is the high penetration gained by McDonald's in a country where most people are beef-shunning Hindus, through its Veggie and Chicken Maharaja burgers. There is the individually wrapped one-rupee biscuit and the one-wash sachet of shampoo, both luxuries for the rural consumer.

 

Nokia, which has a remarkable share of nearly three-quarters of the GSM mobile-handset market, has a similar tale to tell. Its biggest success in India was a purpose-built model, featuring a torch, a dust-resistant keypad and an anti-slip grip for humid conditions, as well as an ability to support Hindi. It became a bestseller despite being 30-40% dearer than the cheapest models.

 

India is already Nokia's fourth-biggest market, behind China, America and Britain. It is expected to be the second-biggest by 2010. But with a 40% market penetration of mobile phones in the biggest cities, and 20% in urban India overall, that will require an expansion of the market in the countryside, where the penetration rate is only about 2%.

 

Despite much excitement in the West about an “Indian middle class” said to be 300m strong, the “consuming class”, with discretionary income to splash about, is much smaller than that. Suhel Seth, a marketing expert and boss of Equus Red Cell, an advertising agency, puts the figure at about 150m. Within that, the relatively well-off are a fast-growing minority. With rising incomes and a consumer borrowing spree, “a nation of hoarders becomes a nation of consumers,” in Mr Seth's words.

 

It is still, however, primarily a nation of farmers. Two-thirds of its people live in the countryside and more than half the labour force works in agriculture. Even pockets of affluence in such a multitude make up an important market. And for basic consumer goods, “the bottom of the pyramid” is vast.

 

Indian business, however, is now looking at the villages not just as a potential market, but as a vital and neglected part of its supply chain. Mukesh Ambani, chairman of Reliance Industries, an oil, petrochemicals and textiles giant and India's largest private-sector company, intends “to bring the world to the Indian farmer”. This is part of an astonishingly ambitious plan to build, in the next four years, a nationwide retail network of 1,000 hypermarkets and 2,000 supermarkets with a distribution system to supply it: an “integrated farm-to-fork supply chain”.

 

So defective is India's cold chain and so arduous its inland transport that, at present, as much as 35-40% of fruit and vegetables grown in the country rot before they can be eaten. Reliance would not enter the farming business itself. Land, says Mr Ambani, is too emotional an issue. Instead, it would be the “off-taker of last resort”, relieving the farmer of risk.

 

Much of the Indian countryside, because it is so poorly connected with the modern world, has been very resistant to change. Might companies such as Mr Ambani's achieve what no Indian government has managed and drag India's villages into the 21st century? R. Gopalakrishnan, an executive director of Tata Sons, India's biggest conglomerate, agrees that Mr Ambani is a “visionary kind of guy” but is sceptical of “megaplans”. “Six hundred million people just don't change like that.” And even a huge venture such as that planned by Reliance would leave most of the 600,000-plus villages untouched. Still, satellite television, mobile telephony and slowly improving roads are nibbling away at the rural-urban divide.

 

Consumer-goods firms, such as Hindustan Lever, a 51% subsidiary of Unilever, an Anglo-Dutch giant, recognise the potential of a market where only 15% of people use shampoos, and are seeking new ways of doing business among the rural poor. Its “Project Shakti” extends its marketing effort by recruiting women to “self-help groups” which are able to offer tiny loans—microcredit—to support a direct-to-home distribution network. It already reaches 80,000 villages, and by 2010 expects to employ 100,000 “Shakti entrepreneurs”, covering 500,000 villages.

 

Businesses, as well as some charities, are also trying to put the villages online. ITC, the former Imperial Tobacco Company still one-third owned by BAT, a British tobacco behemoth, has equipped more than 6,000 villages with a computer and a satellite connection to the internet. This is its “e-Choupal” initiative, part of its agribusiness procurement network. (“Choupal” is the word for the traditional village meeting place.) Farmers can use the computers to check prices for their products and, if they wish, sell online, freeing them from the tyranny of middlemen who have long taken a big cut of farm earnings.

 

Once a commercially viable way has been found of providing a village with an internet connection, it has many other potential uses: government, sales, education, entertainment and so on. In Andhra Pradesh, Byrraju, the family foundation of Satyam's Mr Raju, has even set up two rural BPO operations, employing 100 people each, in tasks such as data entry. Attrition rates, he says, are very low.

 

http://www.tmcnet.com/usubmit/2006/06/02/1667872.htm

 


-- Sucheta Dalal