Executive Interviews: Interview with Reuben Abraham on Bottom of the Pyramid
November 2008
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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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