Business Case Studies, Executive Interviews, Reuben Abraham on Bottom of the Pyramid

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Executive Interviews: Interview with Reuben Abraham on Bottom of the Pyramid
November 2008 - By Dr. Nagendra V Chowdary

Prof. Reuben Abhraham
Reuben Abraham is a Professor and Director of the Emerging Markets Solutions Initiative (EMSI) at the Indian School of Business.

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  • So therefore, does it make more sense for local companies or for companies which are operating out of one country or does it make more sense for MNCs to reach out to these people?
    I don't think it matters. The question is; is it the core concern of yours or the peripheral concern of yours? If it is core concern of yours, I'd say go in. If it is peripheral concern, I'd say don't go in. So, the reason why I advocate against multinationals going in and facing those customers is, it will always going to be a peripheral concern. For Levers, this market is more or less a poor consumer market and therefore it is always going to be a peripheral concern and never going to be the core market. Whereas, for a vocational skills training company this is their core market. They can't come and offer me skills training because that's not their market. So, I would say if it's your core market, do it. If not, I say think twice about it.

  • In all these when and how does your microfinancing come in, to empower the consumers because ultimately you are looking at the production part of it?
    I personally, don't do any work in microfinance may be I should stay off the topic.

    But, I also strongly believe that to consider microfinance as an economic development tool is a faulty idea. Microfinance at its core is the financial service and as long as it's treated as the financial service it is fine. The trouble is this mythology built on microfinance that it somehow contributes to the economic development at a large scale. While it is true that a woman, who gets two cows, is better off herself, I don't see how that actually is a scalable process. Look at the West, look at Japan or look at any of the countries that have broken through right at $20,000 per capita plus. Are they doing it by a single person getting microfinance to buy one cow at a time? It happens through industrialization. At the end of the day industrialization is the only solution that the mankind has found—for extremely quick economic growth and pulling large numbers of people out of poverty, I don't think there is any short cut around it.

  • Coming back to your initiatives in the emerging markets, in what way is it going to be helpful to the industrialization process?
    Financing is the core part of industrialization. So the fund we have here will contribute to that in a very small way it's a very small fund. The idea is, if you can potentially catalyze the markets, you can set catalytic effect. Effectively, the little money that you have can have a catalytic effect if it can have a demonstration effect on the market. Then that's a positive contribution. I think the greatest contribution thatwe could make actually, lies in making people understand why urbanization is so important to industrialization. There is this tendency in India to romanticize villages and that has got to stop. Everybody who romanticizes a village lives in a city and they don't even realize the irony of that.

    The second part of it is, look at the unit economics of this. Any service that you deliver to rural areas has a high fixed cost component to it. So, irrespective of what your intentions are, a megawatt of electricity costs a $ 1 mn to generate and that's a fixed cost. Now the question is do you want to disperse that fixed cost amongst 1000 people, which is the size of an average Indian village or amongst the 100,000 people. Where does the unit economics work? The unit economics works at a scale you need agglomerations of people.When I say urbanization, I am talking of numbers and it needs agglomerations of people to distribute fixed cost amongst. If you want industrialization, if you want core services, you need core infrastructure. It absolutely has to stem up, from there. It has to come from a process, where you have reasonable number of people at agglomerating responses and that's what it makes feasible the delivery of services, and so that's one part of it. The second part of it is, even people who understand the need for urbanization are talking about incrementally improving Hyderabad or Bangalore. The problem with that of course is, if you improve Hyderabad, you are simply setting yourself up with more trouble because Hyderabad becomes a bigger magnet you just suck in more people. The situation actually gets worse. So paradoxically, the problems of Hyderabad can only be addressed at the back end and not at the front end. So what are we working on with? Two things we are working on: one is new urban clusters, encouragement of building brand new cities. We basically work with real estate companies and developers because they have the strongest incentives to actually go for new development. And the second part that we do is, affordable housing. We got a business model, the pilot scheme of which will be tested in the next six months. The model predicts that we can go for housing between 2½to 3½ lakhs at Rs.60 lakhs an acre. So we have got a reasonable amount of sensitivity built into the financial model and so on.

  • Are models or contracts a part of this emerging market initiative?
    As I said most of what we have done so far is, in financial transaction advisories.

  • Do you also find any stigmas in your research or while preparing a white paper and things like that? I mean atleast some of the people may look at these initiatives with suspicion that somebody is actually coming to them and trying to help them out and that's what initially happened with microfinance institutions?
    Not at all. Mostly because I am not trying to help. I am very clear about that I am not trying to help. I am actually trying to make the market work. As a byproduct, I have been trying to make the market work for a lot of people to get benefit from it. So an education company that creates 20,000 jobs for the low income is the byproduct of a well done business. So, I don't approach it. I have a set of core competencies and I stick with them. In the process, if people get jobs and get other benefits, that's fine with me.

    Otherwise it's basically working with small and medium scale enterprise. That's one part of what we do. We also work with foundations, government, and large businesses as well. On the urbanization front, we are working with extremely large real estate companies and developers.

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