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Marketing to and from emerging

markets
Based on the lecture of Prof. Kusum Ailawaidi

Emerging markets as the new Eldorado?

As markets of the developed world mature, emerging market are increasingly

appealing due to the low operating costs, high GDP growth and a growing middle
class. The latter, associated with the second tier of the world income pyramid 1, almost
two third of the world population, represents a huge potential in terms of sales of
products and services. According to Deloitte2, in 2004, the aggregate GDP of the 10
largest emerging economies was roughly US$6 trillion.3 When calculated using
purchasing power parity exchange rates, which take into account differences in the
prices of goods and services across countries, the economic output of the 10 largest
emerging markets was valued at US$18 trillion, larger than the roughly US$11.7
trillion GDP of the United States.4 Many emerging economies are also growing at a
tremendous speed. Real GDP growth in 2005 was estimated to be 9.9% in China and
7.6% in India5.These two countries have become the largest and most dynamic
markets for many products. For example, China and India are the two fastest growing
cell phone markets in the world6.Finally in those markets, the last tier of the pyramid
is shrinking to give rise to an exponentially growing middle class belonging to the
second tier of the pyramid: Exhibit 1 shows the forecasted dramatic increase of the
middle class in India. However, no matter how attractive those markets are, the main
challenge is to determine what it takes to sustain profitability in the rising second tier
of the pyramid.

Indeed, many companies fall short of sustaining competitive advantage in the

emerging markets for lack of knowledge of those markets and for a pursuit of
economies of scale at all costs. This is why most companies make minor adjustments

1
The second tier of the income pyramid represents 2 billion people with per capita income
between US$3,260 and US$20,000, almost 2/3 of the world population
2
“Innovation in emerging market”, Deloitte November 11, 2007
3
The World Bank, World Development Indicators 2005 database, www.worldbank.org.
4
The World Bank, World Development Indicators 2005 database, www.worldbank.org.
5
U.S. Central Intelligence Agency, The World Factbook, June 13, 2006, www.cia.gov.
6
Cris Prystay, “Branding Gains Respect in Emerging Markets,” The Wall Street Journal Asia,
January 3, 2006
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to existing products, reduce prices, and replicate existing distribution. Over the long
term this strategy just cannot work in this segment as it encompasses a population far
from being homogeneous, mostly rural hence difficult to reach and usually quite
traditional and resistant to the western culture. At the same time, this huge market is
neglected or underexploited because of widely held misconception such as “too poor
to deliver a profit”, or “too illiterate to understand or use technology”. Those
misconceptions are indeed opportunities for savvy companies as they leave markets
untapped and widely uncultivated, hiding unidentified needs and demand that often
transform into opportunities in the developed market as well. For instance, it is true
that rural India is computer illiterate but the same can be said of the aging population
above 70 years old in Western population. Any developments easing dramatically the
use of technologies can thus be considered for use at a premium price in the
developed market. Tapping emerging markets means overcoming clichés but also
taking into account a heterogeneous new social and economic landscape where
buying behavior and consumption differ, distribution is to reinvent, infrastructures are
often lacking, and target segments might also have to be educated on some subjects.

The Tata case: a revolution in the 2nd tier of the pyramid?

Tata, with its Nano car sold US$ 2,500 in India (shown in exhibit 2), has in that
respect, pioneered the penetration of the second tier of the pyramid in India. If
successful, I believe that Tata will definitely have created a precedent that will lead
other companies selling goods or services seemingly out of reach for these markets
(appliances, hardware, networks, etc. ) to leverage the same approach.

Tata has started from scratch the design of a car whose requirement was to be
sold at US$2,500, implying a profit of $300 per car at the beginning. This profit
plummeted to US$100 per car when the price of raw material increased. This meant a
breakeven point of roughly 1,1million cars for a production capacity of 350,000 cars.
Considering a car market of only 1,547million cars a year, this could seem unrealistic.
However the low price of the Nano extends the potential market to the three and two-
wheels (7,249 million units sold per year) and to the used car segment while
benefiting from the appeal of a new car presented to the public as cheap and safe.
The distribution was, like the product conception, revolutionary as the car was sent in
kit to the distributors that were assembling them on demand, thus avoiding the units
limitation imposed by the weak volume of car dealers. Marketing benefited from the
word of mouth and leveraged mainly relay of opinions and influencers lowering thus
dramatically marketing costs to a negligible amount. The success of the Nano is still to
be seen and will depend on the ability of the Nano to meet safety standards, an
ongoing demand for several years, the ability of Tata to ramp up production, as well as
the preservation of the already eroded margin.
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Some would say that P&G and Unilever are already exploiting these markets
and Tata’s approach is nothing but revolutionary, and I have to disagree. When
speaking of a population of per capita income between US$3,260 and US$20,000,
selling fast moving consumer goods doesn’t seem so unrealistic; even though I don’t
deny that it requires as well a deep understanding of the needs of the target market
and a brand new approach to marketing in emerging market. However, selling a new
car to this segment seemed definitely out of reach, and succeeding in dividing the
price of the cheapest car of the world by two is definitely revolutionary. Even if it
doesn’t end up to be profitable in the short run, the approach of Tata might get a very
high payoff as they enter a segment in the early stage and could transform this into a
first mover advantage. Indeed, with a growing income, buyers of the Nano such as the
students category for example, might be more inclined to buy later another more
expensive car in the Tata range.

Another benefit beside entering emerging market other than India could be to
enter Western car market. With the current economic crisis and a nice stylish profile,
cuter than the Smart car according to me, an upgraded Nano could have its chances
and might be a serious threat to western car manufacturer if it passes all regulations
and safety requirements. Indeed, even including shipping costs, the Nano could still be
extremely competitive in heavily urbanized area.

A brand new marketing paradigm is needed to penetrate

those markets

No matter how great opportunities are, delivering value to the emerging

markets still means taking risks, mainly because the profitability can only be achieved
through volume and ways radically diverging from Western market paradigm. And
indeed, entering emerging market and sustain profitability means embracing a whole
new marketing paradigm where companies have to avoid commonly held
misconceptions and start from scratch in order to market their product. Beyond a low
price – most often a prerequisite-, companies have to approach emerging markets
through the framework of buying behavior, consumption, access and disposal.

Understanding buying behavior and consumption is key in developing adequate

products and also imply often to educate the consumer on the product. This was
notably the case for hygienic products using water in India. Solutions for
manufacturers encompassed changing the product so that it doesn’t require water and
educating consumer on germs. Also, consumption doesn’t always means ownership
as shown by TV usage where many people share the usage of a TV, this has wide
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implication in terms of product safety standards that have to be adapted to a heavy
duty usage. For instance, toys have to be developed differently than for developed
markets.

Another concern is to make sure to develop access of consumer to the product,

this implies to adapt to the local distribution system and leverage local resources. As
an example, Pepsi Cola sales team in China travel on motorcycles to bring the
products to every potential outlet from the street stalls to government agencies.

At the same time, companies have to make sure that consumer can use the
product. Disposal refers to the actual possibility for people to use the product bearing
in mind the costs, infrastructure, education and environment. Among those listed,
infrastructure and environmental issues are crucial. Indeed, as profitability relies on
volume, this means more waste. This also means that companies must maximize
recycling capabilities of their products. Pepsi and Coke sells reusable bottles in order
to be able to meet the maximum market price that consumer can afford while at the
same time avoiding product proliferation.

Additionally, infrastructure development such as water, electricity and internet

is still an issue for many products. This issue is increasingly tackled by governments
themselves in order to foster the development of traditional poor rural areas. For
instance Chinese Ministry of Information Industries has pushed heavily for telecoms
access as part of the 11th Five Year Plan. As a consequence, rural Internet users
reached 37,4 million in the first half of 2007 according to the NDRC (National
Development and Reform Commission), meaning that the penetration of Internet use
in rural China has now reached 5.1%.7 Alternatively, strategic changes in products
might also be considered in order to enable product disposal as stand-alone devices.
For instance, HP has developed portable solar panel in India, cell phone manufacturer
have developed battery charger for cell phone and so forth.

Once again, many of these innovation, for instance for cell phone or internet,
are then reverted to the developed market at a premium price for instance for the
travelers segment that ultimately have the same problems. Many other examples of
innovation in emerging market exported to developed market support the thesis that
due to the amount of untapped need and demand, emerging markets are a great
source of innovation for products and services in the developed markets. For instance,
GGE’s portable ECG and ultrasound machines were developed in China to cater to the
need of the Chinese hospitals, Dell’s preconfigured smart PC for China is now part of
its mainstream line in the US.

7
“Internet spreading in China's rural areas”, China Daily, October 6, 2007
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Impacts on the company’s organization

From a marketing standpoint, in order to address the main challenges of emerging

markets, the companies need to completely innovate starting from the buying
behavior and consumption of product, make sure that the product is available to the
consumer and that they actually can use it. At the company level, it implies the
following:

- Decentralize the R&D and marketing functions.

Let aside operations that can be located in various places depending on the cost
structure of the company, R&D and marketing should be present in emerging market
and interact with their counterpart of the developed market to cross fertilize. Locating
R&D and marketing facilities in emerging markets enable not only to reduce the costs
of product development, through lower wages as well as tax credits and other
government incentives, but also and more importantly, to better incorporate local
needs and expertise into product design. As a result of this organization, the whole
marketing mix can be developed specifically to meet the market needs starting by the
cost structure requirement. Reversely, some of the product or service or technology
can be re-exported towards developed market. Notwithstanding the benefits, the
challenge is to effectively integrate and leverage those teams around the world. In
that respect, technology must not only be leverage at the product level but also within
the company.

- Develop an HR strategy to attract and retain key employees in

emerging markets.
Indeed, talent acquisition in emerging market is crucial as those employees will be
more likely to understand and identify opportunities while leveraging the existing
capabilities of the firm. At the same time, this process of hiring local resources ease
the product acceptance among consumers and enable to lobby more effectively the
governments in emerging markets.

- Monitor specific risks and threats in emerging market

While risks are inevitable in any business operation, the additional risks present in
emerging markets must be identified in each country and the company should
implement a comprehensive risk management strategy, paying special attention to
Intellectual property protection, labor laws and taxes. Another risk even more
pregnant in emerging market due to the weak margin is the cost of production.
Systematic hedging of raw material should be preferred in order to avoid dramatic
effects on the profitability. Besides, as in any country but more importantly in
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emerging market due to the small range of maneuver concerning cost structure,
government regulations must be closely monitored and also companies should be
involved in active negotiation with the governments or use any possible leverage.
Pfizer for instance, succeeded in influencing emerging governments concerning IP
protection enforcement. The threat of local competition is quite real and must also be
taken into account as they have the market knowledge and flexibility to mimic while
improving product suitability to the market. According to Deloitte8, some companies
are using “operational hedging”, which means distributing their operations across
different countries in order to minimize the potential impact of political, economic, and
operating risks. For example, when a country accounts for 5% to 6% of sales, Emerson
relocates some key operations to other locations to reduce its risk exposure.

8
“Innovation in emerging market”, Deloitte November 11, 2007
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Exhibit

Exhibit 1

Exhibit 2: the Tata Nano