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Emerging economies: outside-in and inside-out

Emerging economies: outside-in and inside-out
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First Published: Fri, May 13 2011. 01 21 AM IST
Updated: Sat, Jul 02 2011. 12 41 PM IST
In 1981, when we founded Infosys, one of the first roles I had taken up was to manage sales in the North American region. I would go out on several meetings with prospective clients to talk to them about Infosys and what we had to offer. As hard as it is to believe, most of my presentations in those days would start with a map of the world on which I used to point out where exactly India was! Back then, India was not known to many as it had not made its mark on the global business landscape yet. A lot has changed over the past three decades. Today, India, similar to several other emerging economies is at the forefront of global economic growth.
The centre of gravity of global economic activity is now shifting East and Western economies and corporations are realizing the enormous potential of the emerging economies. In 2010, the Bric (Brazil, Russia, India and China) nations alone had a GDP (gross domestic product) of approximately $9 trillion (Rs 403.2 trillion today) while the Group of Seven (G-7)—France, the US, the UK, Germany, Japan, Italy and Canada—nations had a combined GDP of around $30 trillion. By 2020, these figures are estimated to grow to $20 trillion and $36 trillion, respectively. By 2030, the GDP of the Bric nations is estimated to rise to a staggering $41 trillion and that of the G-7 nations to around $43 trillion. Clearly, the Bric nations, which are the key players in emerging economies, are estimated to catch up with the G-7 nations over the next two decades.
So what does all of this mean to Western economies and companies? I believe that this new economic order is not a threat, as it is commonly perceived. These are opportunities that need to be leveraged. I believe that emerging markets are the new global hubs for growth, innovation and talent. Western economies and companies need to leverage these opportunities if they wish to stay at the forefront of global economic growth.
Let us look at the growth opportunities. The new growth markets today come from the rising middle-class consumers in tier II and III cities and the farmers in villages—or in other words, the bottom of the pyramid. The estimated size of the “bottom-of-pyramid” market alone is over $5 trillion. Consider the mobile phone industry. India currently has over 791 million mobile phone subscribers and mobile phone penetration is 66%. China is fast approaching a staggering 900 million mobile phone users with the current number being 889 million. Such unprecedented penetration of technology, coupled with rising disposable incomes, is creating new growth markets for products and services.
It is estimated that in terms of numbers, China will overtake the US in scientific output in two years. This is a clear indicator that the innovation potential in these economies is undeniable. China recently filed 977,000 domestic patent applications. Its R&D (research and development) investments are now over $100 billion with a number of MNCs (multinationals) opening up their R&D centres in China and other emerging economies. The numbers clearly show that these countries are becoming the new innovation hot spots.
On closer inspection, there are two types of innovation happening in these economies—outside-in and inside-out.
Products created in developed economies cannot be pushed into these markets. It is important that they are personalized to the consumers specific to these economies. Emerging economies are looking for leaner, affordable and durable products compared with bigger, smarter and faster products. This kind of innovation where existing products are redesigned to suit the needs of emerging markets is what I call, the “outside-in” innovation.
The well-known strategy of FMCG (fast-moving consumer good) giants, which started selling shampoo and washing powder in sachets in India, picking up on local consumer trends in these markets, is a classic example.
The second type of innovation is what I call the inside-out innovation and is driven by the “low resource-intensive” and “cost-effective” mindset that drives innovation in emerging economies. This type of innovation, also known as “frugal” or “reverse” innovation, is giving rise to products and services which are less expensive.
The $35 tablet PC (personal computer) created by experts from the Indian Institutes of Technology and the Indian Institute of Science to increase access to education in rural India is a striking example. This product may not be as feature-rich or as fast as popular products such as the $499-829 iPad. But consider this—in areas such as providing access to basic education, the kind of reach that the product will have in rural India alone, which comprises as much as 70% of the population, it will easily bring about a social revolution. Costlier products such as the iPad can never achieve this impact.
These innovations are fast finding their way into the Western economies. Take a look at GE’s success with reverse innovation. GE’s China development team was able develop a hand-held ultrasound machine for $15,000 as opposed to the bulky $100,000 machines. This helped GE grow its ultrasound revenue from $2 million in 2002 to $278 million in 2008. GE took these products back to developed markets where they were a success as well.
Finally, rapid growth combined with accelerated innovation is bringing emerging economies to the forefront of global economic activity, but there is one more significant opportunity these economies provide and that is a large talent pool.
China and India alone produce over 700,000 engineering graduates each, every year.
Organizations are already looking to increase their operations in emerging markets given the resources and talent available here. For example, a quarter of Accenture’s workforce is in India and IBM employs more people in developing countries than in the US. Organizations such as Boeing and Airbus have entrusted the design of some of their key aeronautical parts to IT companies based in India. Cisco is another example, investing almost $1.16 billion to build its second headquarters in India. It is expected that 50% of their core R&D work will be done from here.
It is evident that emerging economies have moved up the value chain, from being cost arbitrage providers to value arbitrage providers. There is no doubt that these economies will continue to be at the forefront of global economic growth in the next decade.
Enterprises of tomorrow need to respond to these trends quickly and realign their strategies to leverage the growth, innovation and talent hubs in emerging economies if they wish to create significant competitive advantage for themselves and stay at the forefront of global economic growth in the future.
The author is set to take over as chief executive officer and managing director of Infosys Technologies Ltd on 21 August. This is the second in a series of articles he’s writing for Mint on seven strategic themes that Infosys has identified and sees as transforming businesses going forward.
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First Published: Fri, May 13 2011. 01 21 AM IST