Basic Needs Present a Near-term Opportunity

With $40 billion in annual sales, Royal Philips Electronics is one of the largest consumer electronics companies in the world, with an already healthy footprint in most countries. But lately the Dutch company has been touting its efforts to win emerging markets. In India, for example, Philips has acquired a locally-focused medical equipment company, designed more efficient, healthier wood stoves, partnered with local development organizations, and worked with women’s self-help groups on distribution and financing schemes.

The variety of approaches suggests Philips has figured out that there is enormous (and growing) unmet demand in developing countries for a wide range of home appliances. However, labeling efforts to engineer better stoves “philanthropy by design” shows a fundamental misunderstanding of the near-term market opportunity. Vital Wave Consulting research indicates that, among people who earn over $2 per day, ownership of appliances like washing machines, dishwashers, vacuums, refrigerators and stoves is relatively common. That is, despite their limited means, low-income consumers are finding ways of purchasing durable goods. However, far more people own similarly-priced mobile phones, radios and televisions, suggesting that home appliances with the right design, functionality and price could be adopted in greater numbers.

There is considerable growth potential for companies that treat basic needs like lighting, cooking, cleaning, and learning as immediate rather than long-term opportunities. The greatest growth will come to companies that effectively manage the transition from innovation to business development. Products and services aimed at emerging-market consumers must be supported by a solid business case with reliable projections of sustainable profits to win the support of company executives. Though the end result may be improved lighting, safer homes and better health, the savvy business manager will see these efforts more as solid growth opportunities than philanthropic endeavors.

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A Sharp Focus on China’s High-end Consumers

Japan-based Sharp Corporation announced this week that it plans to expand in the already-large-and-still-growing Chinese handset market. Sharp enjoys a 40% market share in the dynamic and lucrative Japanese market, but the company sells few handsets outside the country. In China, Sharp is aiming for the high end of the market with multifunctional handsets selling for almost $600. The company hopes to sell five million handsets a year in China in the next few years. Sharp sold only 15.5 million handsets worldwide in the fiscal year that ended March 2008, so an additional 5 million handsets would have a significant impact on its bottom line.

Vital Wave Consulting likes Sharp’s timing: Apple has not yet entered the China market with its iconic iPhone, and 3G services were rushed to market in several of China’s largest cities just before the summer Olympics. A phone that offers mpayment capabilities – standard in Japan – might also attract China’s wealthy elite. According to one report, Chinese mobile phone users led their counterparts in India, Taiwan, Singapore and Australia in storing music, playing games, making payments, and accessing the Internet. Chinese Internet users do not fit the same usage profile as many Western (or even other emerging-market) users. According to a Chinese government study, the Web is not necessarily perceived as a means of finding information or shopping; rather, it is seen as a highly customizable entertainment medium. Over 70% of Chinese Internet users are under 30, and tend to be avid gamers, social networkers, and “fanzine” subscribers. Handsets that allow Chinese users to access these services outside the Internet café could be highly sought-after.

The high end of the market (for handsets, computers, and many other consumer electronics) is a particularly good opportunity in China and in other large emerging markets such as India. The percentage of the Chinese population that constitutes the high-end market may be relatively small, but in a country with more than one billion people, the total opportunity is still ample and justifies the expense of forging new marketing and distribution channels that target the country’s elite.

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Brand Name Power

Sales fell 19% last quarter for the top three local PC brands in South Africa including Sahara and Mustek's Mecer. Strong global brands such as Dell and HP recently decreased their prices to levels that are comparable to local brands. Distributors have found that when local and global brands are priced competitively, consumers chose the well-known globally-branded PCs over local hero PCs.

Global brands have traditionally struggled to compete with local companies, which often sell at lower prices. With savings in labor and distribution, local companies can maintain thin margins and pass on those savings to the consumer. However, with value chain efficiencies and falling PC prices, larger global brands such as Lenovo, Dell, HP and Sony have begun to reach a similar price-point to local brands. While competitive pricing may not assure the premiums that multinational corporations are accustomed to, they do lead to a greater market share. Success in emerging markets has kept the PC industry healthy in spite of a weakening economy in the US and Europe. Companies that have previously invested heavily in building their global brand are beginning to reap the rewards in these growing markets.

Strong growth in emerging markets is quickly becoming essential to a global technology company’s health. With global brands becoming viable competitors to local hero brands, multinational corporations would do well to expand their marketing and build brand awareness among a wider and more diversified customer base in emerging markets. As costs come down for consumer electronics and global brands become more competitive, brand awareness and perceived quality could tip the scales.

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Innovation on the Desktop for Emerging Markets

A continuous stream of leaks this week has kept the imminent launch of Dell’s Inspiron 910 top-of-mind in the press. Dell will join the likes of HP, Lenovo, Acer, Asus and MSI with its entry into the sub-notebook market. This week also saw a rebranding of Intel’s Classmate PC by MPC for US-based education markets. This recent barrage of sub-notebooks in the press is part of a confirmed trend. An upcoming report by Vital Wave Consulting found that of low-cost computing devices (including desktops, thin-clients, handhelds and notebooks) announced in recent years, 60% were sub-notebooks.

Sub-notebooks have dominated media attention. The early low-cost sub-notebook craze initiated by the One Laptop Per Child initiative placed the focus squarely on computing technology for developing countries. Since then, the focus has shifted to second (or spare) PCs for accessing the Internet, primarily for consumers in mature markets. While some of the sub-notebook innovations such as extended battery life and ruggedized exteriors are important in an emerging-market context, one could argue that desktop PCs are a more appropriate design for professional or educational environments in emerging markets. The lack of easy portability provides additional security; the larger screen and a stationary setting is more conducive to a shared-use environment common in developing-country educational institutions; and, plug and play components enable usage of inexpensive or existing peripherals (monitor, keyboards), which keeps costs down. To date, however, desktop innovation has focused on cloud computing, which relies on regular and high-speed Internet access - still uncommon in most regions in developing countries.

While major PC manufacturers remain focused on sub-notebooks and cloud computing, the market is ripe for desktop innovations for emerging markets. A ruggedized desktop PC with lower power demands and the ability to withstand temporary power outages, built-in physical security features, bundled software solutions that are not dependent on Internet access, and compatibility with older model peripherals could find a growing demand among technology buyers who have not succumbed to the sub-notebook craze.

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