Investing in India (1 of 3) - Domestic market
Over the last many months, planeloads of VCs have visited
Having grown up in middle-class
I define scale as building billion-$ companies tapping Indian domestic demand. I am sure there are niche opportunities that will profitably reach 10s of million dollars. But, don’t we all want to find the next google (or at least, the next Bharti)! If this is your goal, ALWAYS remember that if you are fortunate enough to be reading business plans, you are most certainly not the representative Indian middle-class (leave alone poor) customer.
So, the 2 obvious home-truths are:
1. Despite the new daily-high that Sensex reached this morning, we are still quite poor
The average Indian earns $2/day (at today’s prices) and spends over 80% of his/her income on necessities such as food, rent & utilities, transport, communication and clothing. The balance is predominantly used for the more longer-term necessities – health, children’s education. The oft-quoted and poorly-understood 300-million strong middle class is somewhat better off, but still has a similar share of wallet. They earn more, but live in proportionately better houses and eat more nutritious food (still, well below western living standards). Even the 300-million number is misleading (will cover this in a later post). Even my eternally optimistic McKinsey colleagues (led by good friend VT Bharadwaj) put this number at under 200 million (see “Winning the Indian Consumer” in the recent McKinsey Quarterly).
2. The labour pool for simple jobs is practically infinite.
The same report estimates over 750 million Indians in the ‘struggling’ and ‘destitute’ segments. Any capital vs. labour allocation decision needs to be viewed in the context of this near-inexhaustible, available and willing workforce, which can perform low-to-moderate skill tasks. 600 million farm labourers each earn ~$1.5/day, that too only in the harvest season. Their actual (or impending) migration to cities keeps wage rates low and inelastic for all low-skill jobs.
The 1st point impacts what kinds of products/services can achieve both scale and profitability. The 2nd point impacts how one should go about delivering these. So, what does this mean for investors and entrepreneurs looking to build billion-$ businesses:
1. Stick to basic needs
It will take us a while to get to self-actualization needs. Health spas, blogging and other self-indulgent pastimes will remain pastimes, not businesses. Billion $ businesses are most likely in food, clothes, basic infrastructure (roads, houses, health, education), communication, transport, household goods.
2. Think utility, not fun
Middle-class Indian households are used to an all-encompassing entertainment budget of $1/month/head for unlimited cricket, news, songs and movies. And this even includes the EMI on the TV (in addition to the cable bill and a newspaper subscription). No one is in a hurry to pay $5 a pop for a mobile phone game.
3. Price rules – but think VFM, affordability, TCO
Necessity makes us smart consumers. I worry whenever entrepreneurs talk of convenience and choice, without mentioning price. Classic example – Indians buy 2 million cellphones a month, compared to under 100,000 PCs (only consumer sales). Why? Greater value-for-money (most small businessmen actually make up for its cost through higher revenues). Low entry cost ($10-20 to go mobile). No other costs that add to TCO (PC ownership cost equation gets messed up by expensive home internet costs).
4. Unorganized sector is here to stay
With plentiful & cheap labor, there will always be an unorganized sector that is extremely efficient. Factory-processed foods will compete against local kitchen-help. The latter can typically deliver better taste, freshness and convenience, at a lower cost (remember, no overhead, no taxes). So, its going to be far harder to create the next General Mills or Campbell Soup in
5. Think hard before substituting capital for labor
Western capital-intensive models are often uncompetitive. Both at home (vacuum cleaners never took off, since maids are inexpensive) and in companies (high-volume flour mills still cannot match local ‘chakki-atta’ costs, in the $15 billion wheat-flour market)