MNCs in Rural India at a Turning Point

8/3/2019 MNCs in Rural India at a Turning Point

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MNCs in India working in the rural segment with farmers across the country claim

that the work they do is symbiotic in nature. Companies help them with

progressive farming techniques and in turn get a reliable supply chain. Some call

this Corporate Social Responsibility (CSR), while sceptics claim this is another

way for MNCs to figure out ways to make inroads into Indias lucrative rural

market.

It is impossible to discuss multinational strategies in rural India without

mentioning CSR. Filling the gaps left by government, MNCs have built roads in

rural India that help them deliver their goods, provided education and health

care for communities whose workforces they rely upon, and implemented

environmental programs to protect precious natural resources needed to keep supply

chains running smoothly. CSR is seen as being more genuine in India, where there is

a pressing need for corporates to step in and drive development in the rural belt.

The first and most extensive effort probably was by ITC with its e-Chaupal

initiative, which has been around for quite some time, and whose scope has

expanded to cover not only commodity information and pricing, but also

managing an expanding retail channel. After years of false starts, missed

opportunities and flawed strategies, a number of MNCs' India businesses are

getting close. Others already are there and are ramping up their rural

investments. Out of the countrys over one billion population, two thirds live in

rural India and account for half the national income. Rural household income has

been steadily increasing, and combined with improving infrastructure, it is easy to

see rural Indias attraction.

But any company coming to India for the first time that thinks it will be easy to

take advantage of that combination is mistaken. Rural India is hugely complex,

not least because of its diverse pace of development. Strategies need to take into

account the vast number of languages and social and cultural nuances across the

Indian hinterland, and be adaptable and flexible to changing scenarios.Many lessons have been learned, and some at great expense to the companies

launching them. For example, HUL launched its Project Shakti initiative for women

entrepreneurs in the rural hinterland to improve distribution, while at the same

time pursuing a strategy of smaller less expensive sachets of its Sunsilk and Clinic

shampoos for the rural market where few buyers have spare cash on hand.



However, HUL is facing growing competition from Procter & Gamble, which

launched a cheaper version of its Tide detergent called Tide Naturals.

With rural market penetration for telephony yet to be fully tapped, companies

are keenly fighting to secure their place. Strong tussles are currently underway

between Nokia and Samsung for control of the rural low end handset market,

with competitors from China also stepping into the fray to muddy waters further.

Nokia is now branching out to provide rural specific services as well, in order to

get the additional advantage.

The rural landscape holds a lot of promise to companies, especially after the late

CK Prahlads treatise on low paying customers, Fortune at the Bottom of the

Pyramid. However, in the race to the bottom, many will see their bottom drop out

from under them if they do not take care to better understand the customers

needs.

A "symbiotic relationship" is how Sanjeev Chadha, chairman and CEO of

PepsiCo India, describes the work that the food and beverage

multinational undertakes with thousands of farmers across India. "We help

them with progressive farming techniques and they are of huge benefit to

us in securing a reliable supply chain," he says. Some observers wouldcall what Pepsi is doing corporate social responsibility (CSR); others more

cynically might say it's simply another example of multinational

corporations (MNCs) trying to figure out how to make inroads in India's

challenging, but potentially lucrative(beneficial) rural market.

Whatever the words used by executives like Chadha for such initiatives, it

is impossible to discuss multinational strategies in rural India without

mentioning CSR. In its various forms, it is a critical part of their rural

growth plans, often out of sheer necessity. Filling the gaps left bygovernment, MNCs have built roads in rural India that help them deliver

their goods, provided education and health care for communities whose

workforces they rely upon, and implemented environmental programs to

protect precious natural resources needed to keep supply chains running

smoothly.



"In some cases, I am sure CSR activities are mostly rhetoric," says Harbir

Singh, Wharton management professor and co-author of a new book

titled, The India Way: How India's Top Business Leaders Are

Revolutionizing Management. "But CSR is more legitimate in India than in

the U.S., where infrastructure has been built and government is seen asaddressing societal development agendas."

Yet now there's a shift in how MNCs look at their entire rural India

investments beyond CSR. With growth drying up in developed markets

and their center of gravity shifting to emerging markets, MNC businesses

in India are under pressure to prove that their rural strategies aren't just

about doing well from a CSR perspective. They also need to show headoffice that these strategies are doing well from a business perspective. In

short, the strategies must start delivering top- and bottom-line results.

After years of false starts, missed opportunities and flawed strategies, a

number of MNCs' India businesses are getting close. Others already are

there and are ramping up their rural investments. None can take that fine

balance between doing good and doing business for granted, as Nokia,

Coca-Cola and Max New York Life -- among the companies profiled in this

special report -- show. And it's for that reason that at PepsiCo India, "our rural agenda has been driven by purpose and now is moving into

performance," says Chadha.

Spending Power

For many MNCs, there's a lot more riding on their rural India performance

than there once was as India's growth story spreads to the heartland.

Two-thirds of the country's one billion consumers live in rural India, where

almost half of the national income is generated. A report by TechnopakConsultants and the Confederation of Indian Industries, a trade body,

estimates that the country's rural consumer market generated US$425

billion of revenue, up from US$266 billion the previous year.

The big reason for the growth is that India's rural consumers are steadily

gaining more spending power. The number of rural households earning



less than US$760 a year is down from 65% to 24% since 1993, while

those with an income of US$1,525 have more than doubled from 22% to

46%. Combine these factors with improved roads and other infrastructure

in rural India to help products reach their markets, and it's easy to see

rural India's attraction.

"We are finally beginning to see that rural India has cash and is able to

spend at the same time," says Vijay Govindarajan, professor of

international business at Tuck School of Business at Dartmouth College in

New Hampshire, who is also the chief innovation consultant for General

Electric. "This is a remarkable combination for companies."

But any company coming to India for the first time that thinks it will be

easy to take advantage of that combination is mistaken. Rural India is

hugely complex, not least because of its diverse pace of development. As

a recent study from IMRB International, a research company in Mumbai,

notes, some markets are big but not as affluent as other markets (Uttar,

Bihar Pradesh) while some are affluent but not very large (Himachal

Pradesh, Goa). Experts also say that strategies need to take into account

the vast number of languages and cultural differences across India's

hinterland, while keeping strategies highly flexible and adaptable.

It can mean developing products and services tailored specifically to the

rural market. When LG entered India in the mid-1990s, numerous brands

were vying for shelf space with hardly anything to distinguish them from

competitors. The South Korean company developed two color television

sets for the rural market, Sampoorna (which means "complete" in Hindi)

and Cine Plus. At US$65 and US$107 respectively, the sets were priced

slightly higher than the black-and-white televisions that other

manufacturers were selling in rural markets and that had become obsoletein urban homes. LG was also the first to offer gaming with its cut-price TVs

and menus in English and Hindi. Now LG has refrigerators, washing

machines and microwave ovens targeted at price-sensitive consumers

sold from hundreds of retail and distributor outlets across the hinterland,

with rural markets contributing 40% of its revenue.



Much also depends on the sector and products sold. In fast-moving

consumer goods, for example, MNC products are capturing a sizable

portion of rural consumer spending in a number of areas, with year-on-

year increases in rural spending in 2009 on MNC shampoos (70%),

washing powder (60%) and toothpaste (112%), say researchers at IMRB.What's more, they say, the average spending on these products is

growing faster in rural than in urban markets.

Soap Operas

In the course of ramping up the performance of their rural strategies,

MNCs are applying the lessons already learned. One of those lessons is

that the benefits of a first-mover advantage are tough to hang on to as

rural Indian consumers' tastes change rapidly, with questionable brandloyalty.

That applies even to a groundbreaker like Hindustan Unilever Ltd. (HUL),

the country's largest consumer-products company owned by Anglo-Dutch

Unilever. It made waves in the hinterland in 2001 when its Shakti Project

enlisted self-help groups to develop a network of women -- largely from

very low-income households -- into entrepreneurs, selling baskets of HUL

products door to door. Today, 42,000 women earn a living by selling HUL

products in more than 100,000 villages in 15 states. "India's rural narrativehas been defined by HUL," notes Pradeep Lokhande, founder of Rural

Relations, a Pune-based consumer-relationship management

organization.

In the meantime, HUL has embraced other novel distribution strategies,

such as selling products like its Sunsilk and Clinic shampoos in small,

inexpensive packets for low-income Indians in the hinterland with little

spare cash. Thanks to those efforts, the company has one of the most

extensive distribution networks in the country, with 6.3 million retail outlets,including one million that it services directly. Rural India currently accounts

for nearly half of HUL's revenue.

But HUL's lead regularly comes under threat. In December, for example,

rival MNC Procter & Gamble launched Tide Naturals, which is a 30%



cheaper version of its Tide detergent targeted at rural consumers -- a

global first for the Cincinnati-based MNC. The launch was part of the

parent company's "purpose-inspired growth strategy" to "touch and

improve more consumers' lives in more parts of the world." Within weeks

of its launch, Tide Naturals shook up India's US$8 billion detergent marketby clinching a 0.6% share of the market, according to AC Nielsen.

HUL's response has been to turn to a local court to contest P&G's use of

the word "naturals" to promote its new product. With neither side backing

down, the case continues.

While other MNCs aren't necessarily going to be airing their competitive

grievances in court, they can expect fast, nimble competitors to take them

by surprise and grab market share if they don't stay close to their customers -- which is no small feat in a country like India, which has

642,000 villages, some with populations as low as 500.

'Uncharted Water '

Nowhere is that more evident than in mobile telephony. Mobile phone

penetration in India jumped from 1.4 units per 100 people in 1995 to 51

units currently. In the 12 months to September 2009, the number of mobile

subscribers increased 55% to 142 million, according to theTelecommunications Regulatory Authority of India.

Taking a lead in that growth has been Nokia, the US$55 billion Finnish

mobile handset maker, which is one of the companies profiled in this

special report. As part of a global emerging market focus since 2006, rural

India now accounts for 40% of Nokia India's US$5 billion annual revenue.

But it's a crowded business to be in. Along with Samsung, LG, Sony

Ericsson and Motorola, there are a number of handset makers not only

from China selling cut-price handsets, but also from India's home-growncompanies that are chipping away at Nokia's market share lead with hand

sets that are cheaper, more practical or both.

Now Nokia, like other handset makers, is branching out and forging

alliances with various partners to offer mobile banking and other services

along with its handsets. "It's uncharted water" -- as Gerald Faulhaber, a



business and public policy professor at Wharton, puts it -- one in which

"customers are pushing the companies and taking them out of the comfort

zone."

Doing so successfully requires one thing: "listen to people," statesKarishma Kiri, a Seattle-based strategy and product management

consultant at The K2 Group, who was a director of Microsoft's Unlimited

Potential initiative which provides computers, software and IT training in

emerging markets. "A lot of companies tend not to listen to [what] rural

consumers say they need."

That's not as clear-cut as MNCs might think. The jury is still out on the

mobile services launched by news agency Reuters last year and other

service providers to deliver agriculture information to farmers' mobilephone. According to Rural Relations' Lokhande, the demand hasn't been

strong. "There's a perception mismatch between the farmers and the

service provider," he notes. While the companies assert that the service is

useful, affordable and personalized, many farmers figure they can get

daily rates from their state agriculture marketing boards for two cents, or

half the price.

In rural areas, finding the magic price points that don't eat into margins yet

boost volume is an ongoing battle, with a lot hinging on distribution. "Wehave to build, and are building much deeper 'go-to-market' systems in

rural India. They have to be extremely cost-efficient, much more so than

they are in the urban areas," says PepsiCo's Chadha.

The US$43.2 billion MNC has been in India for more than 20 years and

now claims to have overtaken Nestle as the top food and beverage

company in the country. Overall, India has indeed been treating the

company well, even during the downturn. India revenue at its drinks

business grew 40% last year, while volume jumped 32%, well outpacingmost other countries in PepsiCo's portfolio.

But it's not resting easy. Last year, it invested US$200 million -- the most

ever in any single year -- as part of a US$500 million plan to expand its



distribution infrastructure, while increasing R&D and adding four new

plants to the 45 it already has in the country.

To make those investments pay off, rural India -- which currently accounts

for 20% of PepsiCo India's business -- is taking center stage. "Over thenext 10 years, I see rural India forming 40% to 50% of our national

business, and in the future, growth will be powered by the rural areas,"

says Chadha.

Is that a long time to wait? "If any company wants [quick] financial results

from the rural initiative, it is seriously mistaken," says Tuck's

Govindarajan. "You have to look at the next decade and not the next

quarter."

K2 Group's Kiri agrees. "The rural incubation work of multinationals is part

of their business," she says. "But they need to be less focused on [year-

on-year] success and spend more energy on building innovative solutions

and business models for this segment. It's a long haul."

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MNCs in Rural India at a Turning Point