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Extract from Early to Rise - Investor's Edition
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A Billion Consumers In Search Of a Supplier
Nissan-Renault is finally "getting it." France Telecom figured it out three
years ago. And Tata Motors is riding record-high profits because of it.
What do these three companies have in common?
That all want to be among the first companies to sell to the "forgotten" billion
consumers.
Ten Times Bigger Than the Boomer Generation and Ready to Spend
Nissan-Renault is building the world's cheapest car. They plan to begin selling
it in India in 2012.
And who exactly will be buying their cars?
India's future denizens of the middle class.
These are India's peasants and laborers who are still working their way up to
the middle class but are stopped short of their destination.
They don't have a nifty name like "boomers." Or their affluence. But their
collective buying power is growing by the day and will soon challenge the
boomers.
Caught in the throes of a slow and uneven global recovery, they've stalled in no
man's land.
And these billion consumers are looking for suppliers. Companies that understand
their needs and take into account that their wallets are slightly slimmer than
the typical middle- class consumer.
So what do these billion consumers want? The same thing members of the middle
class want. They want affordable cars, computers, appliances, and houses – in
other words, all the trappings of a middle-class lifestyle.
The challenge suppliers face is to get these to them at a third of the price.
Most manufacturers won't bother. Why?
That's easy. Sheer ignorance.
I've seen this first-hand in my two decades of doing trade with Asia. Western
companies love to push their latest technology... the products with a million
bells and whistles... the up-to-the minute designs.
These products also typically carry the biggest profit margins. It's how Western
companies roll: Push out the old and pull in the bigger profits with the new.
Just one problem, however, when applied to developing countries. It doesn't
work.
Customers get overwhelmed with all the features. And the price tag is out of
their league.
And instead of adapting to the local needs of the market, they shrug their
shoulders and go back home.
'We'll try again in five years or so when the market will have caught up to us,"
they typically say to me.
Meanwhile, they're turning their back on trillions of dollars in potential
sales.
When our own US economy is sputtering, how does that make sense?
An Upstart Company Outmaneuvers Powerhouses Sony and Panasonic
Vizio could teach them a lesson.
They underpriced their competition in LCD TVs by up to several hundred dollars
per set. The result? Their sales are growing at three times the rate of global
LCD sales.
Meanwhile, Sony, Panasonic, and other TV manufacturers are having trouble
reversing losses.
Vizio's TVs are only a half-notch below the highest-quality sets. Their profit
margins are small but they more than make up for that by generating a huge
number of sales.
In India, another company has been busy slashing the price of their cars...
In India, the Numbers Add Up Fast
Tata Motors has been selling its super-cheap "Nano" car in India for two years.
They slashed prices through meticulous design innovations and low-cost labor.
Tata says it was worth the effort.
Right now in India, seven out of every 1,000 people own a car. By selling the
Nano for about $2,500, Tata figures at least another 100 people in 1,000 will be
able to afford a vehicle.
Tata has created a huge market for itself out of previously ignored
"non-buyers." In so doing, it has increased the size of its customer base by 15
times!
And for a couple of more years, it gets to sell its Nanos with no competition
whatsoever.
Tata plans to export the nifty little Nano later on to countries that have big
populations knocking at the door of the middle class. Their market in those
countries will also be 10-20 times bigger than what it is for other car
manufacturers selling more expensive cars.
And, again, Tata can expect little if any competition.
Tata Motors was the trailblazer. Nissan-Renault is following in its footsteps.
And eventually other companies will be joining them. For example, Toyota and
General Motors have said that they intend to sell ultra-low-cost small cars in
India.
Playing "The Price Is Right" Game
In a completely different industry, France Telecom is capturing the huge upside
of selling to these billion consumers.
Instead of sticking to the mature slow-growth markets in Europe, Japan, and the
U.S., it's going after countries where populations are less well-off and growth
is in the double digits.
These are some of the poorest countries in the world, from the Dominican
Republic to the Ivory Coast.
What's next? $49 laptops? $10 cellphones? $12,000 houses? Yes, yes, and yes to
all three. Companies are slowly catching on.
As for the stoves, fridges, and a thousand other things that these one billion
consumers would love to buy, time will tell. It's certainly not too late for
American companies to capture a profitable share of this market.
We already know they excel at upgrading products. But how about designing
cheaper ones? It's not as new a concept as you think...
Time Almost Ran Out for This Watch Company
Once upon a time, watches were made only by skilled workers in technologically
advanced countries such as the U.S., Germany, and Switzerland. They kept great
time and lasted forever.
But then Asia began making watches. They were less accurate and durable but had
more features (because it was so cheap to include them). And they came in all
sizes and shapes.
Almost overnight, companies that made moderately priced to expensive watches
lost a huge chunk of their market to these Asian upstarts. Good ol' Timex, for
example, almost washed out.
But Timex got through the 1970s and 80s and came back with a new game plan. It
now manufactures watches in the Far East in addition to Switzerland, and makes
brands (Guess, Nautica, Ecko, Opex, and Versace) in a wide range of prices.
How to Take Advantage
Keep an eye on manufacturers in China, India, Korea, Brazil and Indonesia. A few
of them should become global powerhouses by simply serving this market. They're
much more attuned to these billion consumers than American companies are.
Respectfully,
Andrew Gordon
Editorial Contributor
Early To Rise - Investor's Edition
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