Chip and Car Makers Fire Cheap Shots in Low Spending Battle
Monday, January 14, 2008
Intel’s move into affordable computers, and Tata’s launch of the $2,500 car, signal growing recognition that redesigning for currently excluded low-income customers may be the only way to avoid a profit-scrapping scramble for the affluent minority. With disposable incomes threatening to stagnate in industrial countries, and still comparatively low in those newly industrialising, affordability might even displace the currently fashionable drive for sustainability.?
By Alan Shipman
Intel’s move into affordable computers, and Tata’s launch of the $2,500 car, signal growing recognition that redesigning for currently excluded low-income customers may be the only way to avoid a profit-scrapping scramble for the affluent minority. With disposable incomes threatening to stagnate in industrial countries, and still comparatively low in those newly industrialising, affordability might even displace the currently fashionable drive for sustainability. ?
In preparation for a squeeze on the disposable incomes of existing customers, and a need to look to less well-off emerging market clients for future sales, a growing number of companies are producing leaner, cheaper versions of existing goods and services.
At the end of last year Intel announced it was leaving the One Laptop Per Child (OLPC) initiative, a US-based venture aimed at bringing cheap computers and wireless internet within reach of all schoolchildren, in emerging as well as richer economies. But at last week?s Consumer Electronics Show the chipmaker explained that it was pulling out with the intention of overtaking. Intel will build new, cheap chips to go into its own entry-level PC, the Classmate, aimed at the same one billion children whose parents at present struggle to afford the school lunch and exercise book.
In India last week the world?s cheapest car, the Tata Nano, emerged from under wraps that probably cost as much as the machinery underneath it. At $2,500, the four-door car sells for less than the hi-fi systems fitted to some of those it will share the roads with. Tata is taking on first-world carmakers, notably Renault with its Romanian-built Logan, for whom a 21st century ’people’s car’ might be the next big moneyspinner after the fast-commoditising people carrier.
To sell it at half the cost of its nearest Indian rival, and a tenth of many American motors, Tata says it re-engineered its previous models piece by piece to see which could be made for less or eliminated altogether. But the company insists its vehicle will meet European and American emissions and crash safety requirements, and so find a place on rich-country roads as well as bringing motoring to the millions who currently walk or bike.
The common market
’Designing for the poor’ was being flagged as a necessary next step for larger companies, even before the spectre of recession started looming over previously high-growth economies.
But most ’appropriate technologies’ to date have been designed by non-profit companies or charitable foundations, such as Intermediate Technology Development Group in Britain and International Development Enterprises (IDE) in the US. IDE’s Paul Polak has listed aspirations including “a $2 pair of eyeglasses, a $10 solar lantern and a $100 house.”
Profitmaking companies have tended to worry they will cease to be so if they take the product too far downmarket, because an entry-level version priced just above cost could cannibalise higher-margin sales of the upmarket version.
But pharmaceutical companies, under public pressure to make medicines available to low-income households and develop new ones for ’third world’ diseases, have developed ways to produce and price for the poor without eroding their higher-income markets.
Expanding with smaller budgets
Michigan University?s CK Prahalad argues that business must choose between scenarios:
The 1 Billion Market: in which slow growth and exclusion of the poorer households from newer and better products leads to a defensive environment in which “multinational companies find it difficult to expand, and many become risk-averse, slowing investment and pulling back from emerging markets”
The 4 Billion market: in which new products aimed at poorer consumers sustain emerging-market growth and enter a virtuous circle with rising incomes and improved social stability, so that “multinational companies expand rapidly in an era of rapid innovation and intense competition”
Information technology, by spreading knowsledge and reducing transport and production costs, plays a key role in the 4bn scenario, which Prahalad argues can be fulfilled without companies having to dilute their profit focus with charitable concessions.
If Intel and OLPC succeed in making computers as affordable as the paper they save, and Tata can offer four wheels for the price of two, many other companies could soon get the challenge ? or opportunity ? to extend their product range into the neglected four-fifths of the world market.
