NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, March 14, 2008

By Joshua Weissburg ?Spring 2008

How do you go about delivering reliable energy to poor, off-the-grid villages in India? If you’re an established energy company, you don’t.

Enter Decentralised Energy Systems (DESI Power), a young, India-based power company that built a biomass gasification plant that runs on inexpensive agricultural residues such as ipomoea, a weed plentiful throughout the Indian countryside. DESI’s power plant in the village of Baharbari provides a cheap, clean source of electricity that the village uses to meet local microenterprises’ and agricultural laborers’ needs, such as pumping water and charging batteries. Indeed, the driving idea behind DESI Power is to make a profit from designs that fall outside the standard power generation model, and in doing so to create worthwhile jobs and economic growth in places that the government has all but forgotten. DESI does make a profit: The company generates a 10 percent return on its investment by building, owning, and operating the power plants before eventually turning them over to local power producers.

But DESI Power is the exception. Though there is literally a world of opportunities for firms to meet basic demand for housing, water, energy, medical insurance, legal and financial services, and much more in developing markets, few are doing so. According to a recent Ashoka report, large companies have tapped only about 20 percent of new markets.Corporations often draw workers from these populations, but rarely do they flip the equation and develop products, services, and brands that target the poor’s basic social and infrastructure needs.

Why is serious investment in bottom- of-the-pyramid (BOP) markets the exception rather than the rule? What keeps companies from building lines of business by meeting the needs of the poor in developing markets?

First, and perhaps most fundamentally, these new markets look awfully different from the standardized markets of the West. Even firms that recognize opportunities in developing markets sense that going about business as usual in these places is like trying to fit a square peg into a decidedly round hole.

Weak infrastructure creates challenges to product distribution that range from uncertain to insurmountable. Some Indian companies have gone so far as to build their own roads, power systems, and phone networks – powerful signals that developing markets are worth the hassle, but not exactly a siren call to entice eager new entrants. Income – particularly the disposable kind – is low, and cultural differences make certain products or services unsuitable. For example, because the Koran prohibits interest, paid or received, banks pursuing Muslim customers need alternatives to loans.

This leads us to the second barrier: Most companies don’t know how to package products for poor people, and they don’t know what products and services the poor prefer. Too often, bottom-of-the-pyramid business plans simply repackage consumer goods popular in developed markets to fit the price range of emerging market customers. Retail-focused companies such as Unilever have, indeed, earned new customers with this strategy: Unilever’s Lux soap, Sunsilk shampoo, and Lipton tea are becoming household staples in India and South Africa. But consumer goods are, in many cases, peripheral to a more substantial opportunity with a wider potential customer base in developing markets – namely, meeting the basic demand for housing, clean water, medical insurance, and legal and financial services that fit local needs, customs, and income.

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