13: Small Is Profitable

What will work in the developing world is a focus on inexpensive, downsized, simple-to-use products

Ushaben Patel, a 37-year-old housewife from Navali village in India's Gujarat state, awakens at 5 a.m. each day to milk her cow. A half-hour later, she is at the village milk cooperative center. There, her seven liters of milk are measured and tested. She repeats the routine in the afternoon. Her daily take: $2.80. The money goes a long way. It helps pay for necessities and her two sons' schooling. In fact, the cooperative's impact is visible throughout Navali. In all, 932 of the 6,000 villagers are members, and they have earned enough to help build a new road and housing for schoolteachers. Last year, they even sent money to help earthquake victims elsewhere in Gujarat.

A heartwarming antipoverty project? Hardly. The cooperative in Navali is one of 175 involving 2 million people in villages across India affiliated with the country's biggest dairy-products company, Anand Milk Union Ltd., better known as Amul. The village collection points are just the beginning of a supply chain that otherwise resembles that of any sophisticated corporation. Amul's processing plants and packaging are first-rate. Because it has its own low-cost sources of raw milk, Amul's cheese, ice cream, and chocolates are seizing market share from the likes of Nestle (NSRGY ) and Unilever Group (UL ). With sales of $612 million--growing 25% annually--Amul also has lofty ambitions. It views itself as a budding multinational, and already exports to the U.S., the Middle East, and Africa.

The late E.F. Schumacher would approve. In 1973, the English economist-philosopher wrote Small Is Beautiful: Economics as if People Mattered. Rather than being forced into the industrialized world's rat race, Schumacher thought people in developing nations should be able to get ahead by means of traditional lifestyles. Rather than megaprojects, industries should be "human scale." Rather than believe science will solve all life's problems, there should be "appropriate technologies" that average people can use without poisoning the planet. This ideal was a hit on college campuses, but widely viewed as an impractical model for economic development.

But if Schumacher were alive to write a sequel, it might be called Small Is Profitable. And not just utopians would be treating him as a guru. Companies such as Unilever, Philips, Coca-Cola (KO ), and Motorola (MOT ) are finding that a focus on low prices, miniature sizes, and simple-to-use products may be the secrets to business success in developing nations, where most of the world's population dwells. In finance, banks specializing in micro-loans of as little as $100 are the rage as a means of spurring sustainable, grass-roots development. The approach is drawing praise from U.S. Treasury Secretary Paul O'Neill and the World Bank, and is starting to win the attention of heavyweights such as Citibank (C ) and Standard Chartered Bank. Engineers in research labs from Bangalore to Boston are scrambling to develop cheap wireless phones and computers simple enough to be used by illiterates.

All these efforts are aimed at what could well be the biggest source of economic growth in the coming decades: the two-thirds of the global population now making $1,500 or less annually. Companies like Amul hope to prove it is economically viable to employ the rural poor in a multinational enterprise without destroying their traditional lifestyles. Others see the "bottom of the pyramid" of the global population as future consumers. "Low-income people are a very important market for us," says Antonio Leon de la Barra, global marketing manager for skin-care products for Unilever. The company expects developing nations to account for half its global sales by 2010, compared with 32% now. "There are billions of people who aspire to better brands, but can't afford them yet."

For Unilever, the poor already are a huge market. The $50 billion Anglo-Dutch consumer-goods giant has made an art of selling its products in tiny packages costing a few cents each. The conglomerate's Indian subsidiary, Hindustan Lever Ltd., adopted the concept in 1987. It began selling single-use sachets of Sunsilk shampoo for 2 cents to 4 cents. Now, mini-packages account for half of Hindustan Lever's $2.4 billion in sales in India. And the strategy has gone global. Unilever's Rexona brand deodorant sticks sell for 16 cents and up. They are big hits in India, the Philippines, Bolivia, and Peru--where Unilever has grabbed 60% of the deodorant market. A nickel-size Vaseline package and a tube containing enough Close Up toothpaste for 20 brushings sell for about 8 cents each. In Nigeria, Unilever sells 3-inch-square packets of margarine that don't need refrigeration.

Unilever's success is inspiring companies that aim to meet the basic needs of the poor. A good example is Brooklyn (N.Y.)-based Scojo Vision. Co-founder Jordan Kassalow, an optometrist who ran a river-blindness-prevention program in Africa and other regions, noticed a huge need for simple, nonprescription glasses--but many people can't even afford $30 to visit an eye doctor for a check-up and to buy regular glasses. "There are hundreds of millions of people who have no access to this very simple product," says Kassalow.

So in March Scojo began selling nonprescription glasses in El Salvador, India, Haiti, and Guatemala for as little as $2 a pair. The glasses come in just three strengths. For distribution, Scojo is training dozens of small entrepreneurs and providing them with loans of about $75 so they can buy a kit of eye charts, brochures, and a stock of glasses. Scojo has sold several thousand pairs so far and figures it needs to sell 100,000 a year to become profitable.

Technology companies also are learning to reach low-income people. London's Freeplay Energy Group, for example, has helped pioneer the windup radio. In 1996, Freeplay designed its first radio charged by cranking a handle so that Africans could listen to public-service broadcasts of health and agriculture information and school lessons. Only 30% of sub-Saharan Africa homes have electricity, and since per capita incomes are $100 to $300 a year, many cannot afford to regularly buy batteries.

Since then, Freeplay has sold 3 million radios. In the West, where they sell for up to $100, they are popular among campers. But they're sold at a discount to aid agencies and governments in poor nations. In Rwanda, Freeplay's radios went to 65,000 teenagers who are heads of their households because their parents died in civil strife. By expanding unit sales, Freeplay hopes to drive production costs down dramatically. It also has launched windup chargers for Coleman Co. flashlights and Motorola Inc. cell phones, and hopes to do the same for medical testing equipment. A private company, Freeplay says its radio business is profitable.

Big consumer-electronics companies are joining the fray, too. Royal Philips Electronics (PHG ) retooled a windup radio for mountaineers and in March began selling simple versions for $20 in India. Philips has sold nearly 3,000 windups and hopes to sell 100,000 by yearend. "This will help Philips be a market leader here," says Rajeev Karwal, Philips' India CEO.

Affordability and simplicity are the mantras driving technicians who are searching for cheap ways to deliver wireless telephony and data services to remote villages. "People are just bubbling up with ideas all over the place on this," says MIT Media Laboratory scientist Michael L. Best, who heads several tech collaborations in Asia.

With its army of engineers and enormous population of rural poor, India is a hotbed of such innovation. In Madras, a startup called N-Logue has commercially deployed a system for transmitting wireless services to Internet kiosks and phone centers in 15,000 villages across India. Each line costs $300, compared to $1,000 for a conventional fixed phone line. Although connections aren't as fast as with state-of-the-art technologies, they offer Internet service for just 3 cents an hour and are good enough to provide video-conferencing for hospitals and colleges. And in August, Encore Software Ltd. will role out its Simputer--a handheld device starting at $200 with easy-to-use software interfaces that translate several Indian languages from speech to text and vice-versa. A team from the Indian Institute of Science in Bangalore has designed Simputer software that even an illiterate person can use, says Chairman Vinay Deshpande. The device will also access a Global Positioning System, enabling farm cooperatives to obtain current produce prices and traveling paramedics to send patient data to hospitals.

Some futurists predict that the small-is-profitable movement will bring about a new breed of multinationals. Already, Unilever and Amul have "fundamentally rethought the nature of the large enterprise--as well as the small enterprise," says University of Michigan management guru C.K. Prahalad. Successful multinationals of the future, Prahalad predicts, will have sophisticated global management of marketing and supply chains. But they'll also have roots firmly planted at the village level. "The challenge will be to create large, virtual organizations in developing economies that have the benefits of scale, but the uniqueness of small size," he says.

Amrita Patel, chairman of India's National Dairy Development Board, agrees. She notes that Amul is owned by a network of village milk cooperatives. In fact, last year, Amul dispersed half of its $12 million in earnings to farmers who are shareholders. Such a model could help other rural cooperatives producing everything from fruits to flowers to sell their products around the world.

Village cooperatives. Alternative technologies. They may sound like a blast from an idealistic past. But small is beautiful could well be the wave of the future.

By Manjeet Kripalani and Pete Engardio

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