Gloom is clearly the dominant mood of the times. And not without reason?when growth slows down from around 9% per annum to 6% per annum, there is every reason to feel pessimistic about near term prospects.
However, the situation in India is still vastly different from that in the developed OECD countries which are forecast to contract by up to minus 6% this year?contraction of output on that scale will certainly see firms and individuals scaling down on their ambition. In India, however, we are still growing, and at a reasonable rate. In fact, if one leaves aside the meteoric growth of the previous 6 years, the average growth rate between 1980 and 2000 was 6%?the same rate of growth which is causing us much discomfort now.
That said, entrepreneurs and firms do get lulled into a false sense of security in a sustained period of above trend growth. When an economy is booming, there is a tendency to gather flab (on the costs side), and a tendency to either innovate less?in a booming market there is more room for manoeuvre?or innovate over-ambitiously?say a focus on high margin, low volume goods/services (on the revenue side).
So, for a business, a fall to 6% from 9% is qualitatively different from a rise from say 4% to 6% (what happened in the 1980s). Now, the first challenge for business is to cut the flab?that?s happening. But the second challenge is to adapt on the revenue side?to explore new markets with new products using new business models. And one can be sure that many markets in India do remain either under-exploited or undiscovered.
Let?s throwback to the early 1980s, when growth was just about picking up towards the 5-6% mark. There were two classical cases of product innovation, one which catered to an under-exploited market and the other which discovered a new market altogether?the very different cases of the Maruti 800 and Maggi noodles. Coincidentally both brands launched at around the same time in 1983-84 and both have recently celebrated their 25th anniversaries, still positioned as market leaders.
Maruti was the first firm to tap the vast under-exploited market for cheap, small cars in India. In fact, until the recent launch of the Nano, it was still the cheapest car available in India for quarter of a century. While other bigger, more expensive cars may have done reasonably well during the same period (including the 9% boom years), Maruti has remained the biggest manufacturer and seller of cars in India. The Nano is, by accident, a car for a period of slower growth. Clever entrepreneurs should still be able to sniff an opportunity and compete with both Nano and Maruti?the market is potentially large enough for more than two players.
Maggi noodles, on the other hand, created an entirely new market in India. There was never a market for quick packaged food in India. Maggi was the first to create a product which appealed to the tastes and convenience (who can argue with ?ready in two minutes?) and more importantly the price sensitivity of the market. Through some clever marketing and an under Rs 5 price tag, Maggi noodles soon became a staple diet/snack for children in particular across the country. Maggi was able to, and still does even in the present day (a pack of noodles can still be bought for Rs.10) penetrate the vast market of middle class and even lower middle class India. Like the cola manufacturers, Maggi has also managed to reach out to semi-urban and rural areas, where these is a robust demand for cheap, convenient and quality products.
Interestingly, what is common to both Maruti and Maggi is their focus on low-margin but high-volume products, where profit comes from mass sales of the good. This model ought to witness resurgence in the current downturn. Perhaps the period of 9% growth lured many entrepreneurs into the smaller but more lucrative market of high-margin low-volume products. That market is now taking the brunt of the slowdown?a certain segment of people have seen a lot of their wealth disappear in the stock market crash and falling property prices/rentals. This is the same segment which the high-margins market catered too.
On the other hand, there is plenty of evidence of resilient demand in the middle classes, smaller towns and rural areas. It now needs to be tapped. Unsurprisingly firms which are catering to this market are still doing well?telecom companies for example, which cater to a low-margin high-volume market are showing robust profits.
It isn?t obviously easy to tap this market successfully?competition is brutal and erodes margins quickly, which means that only the most innovative businesses can survive. But Maruti and Maggi have shown that it is possible to survive and thrive. Just the other day, your columnist discovered an Indian company which has patented and is now manufacturing mechanically operated (charged by manually winding a lever) lanterns and torches (with no battery required) for rural areas. The time is ripe for some daring businesses like the one just mentioned to begin tapping on India?s undiscovered and under-exploited markets?it?s called entrepreneurship.
?dhiraj.nayyar@expressindia.com