Historically, multinationals innovated in rich countries and sold those products in poor countries. We are witnessing a new phenomenon where this innovation paradigm is turned upside down. Breakthrough innovations will next happen first in poor countries and they will flow uphill to rich countries.
This is the essence of reverse innovation. Consider the innovations in transportation, energy, and health care from India. Transportation. India's GDP per capita today is roughly equal to that of the United States in the 1880s, an era in which the horse-and-buggy was the primary mode of transportation. The mainstream consumer in the US waited for a few more decades for cars.
With today's technology at hand, however, Tata Motors has launched the Tata Nano, the world's cheapest car at a price point of about $2500. In doing so, Tata has unlocked a huge untapped market: cars for middle class Indians. The automobile ownership in India is about 10 cars per 1,000 population - in sharp contrast to the US where about 750 Americans out of 1,000 own cars.
The Tata Nano is, of course, lower in quality than even the low-end cars of the rich world, which sell at prices near $15,000. The difference in quality, however, is much less than the difference in price suggests. Tata Motors practised "frugal engineering" to radically rethink the five major areas of costs in an automobile: interiors, engine and transmission, suspension and wheels, electricals, and the body. Tata partnered its suppliers - Bosch for powering the car, Lumax for lights, Sona for steering and so on - in front-end design.
The Nano features a no-frills design with the use of lighter components, simple door levers, single wiper, and so on. Its 624 cc two-cylinder engine not only lowers costs turning in up to 26 km to a litre of petrol but is also appropriate on grid-locked Indian roads where the average speed is 16-32 km per hour. But the real breakthrough is yet to come - it is about taking the Nano global. Already, Tata is preparing to take the Nano to other emerging markets. Even more important, the company plans to scale up the Nano platform and launch it in Europe and the US. Imagine for a moment that Tata Motors invests another $2,500 to make the Nano the world's most intelligent car - with integrated navigation, entertainment, and information. Even at $5,000, the Nano would be the cheapest car and could well take the low end of the US auto market by storm.Energy.
Most of India's population still has no access to the grid. That is nearly 750 million people. India is unlikely to build a US-style infrastructure, with massive central power stations and grids designed for longdistance transmission. It is much more likely that India will leapfrog to the next generation energy infrastructure:
- Renewables. Renewable energy will be a central, not peripheral, part of India's energy solution. It is nearly certain that 10 to 20 years from now, solar and wind will account for a much greater fraction - may be five times greater - of India's energy production than they account for in the US.
- Nano power plants. India is likely to favour thousands of small power generation stations - you have to put a wind mill where the wind tunnels are; you cannot cost-effectively transport wind to a central plant. The country will use natural gas or biogas-powered turbines that are less than one per cent of the size of the rich world's bread-and-butter large gas turbines.
- Energy storage. Power has to be generated whenever there is sun and wind and it has to be stored and released when the customer needs electricity. India, therefore, is likely to invest in cutting-edge battery technologies that can store power economically.
- Smart grid. About 20 per cent of power is lost in transmission in India. India is likely to adopt next-generation smart grid technologies to optimise the delivery of electricity.
- Micro grids. Isolated villages may build self-contained "micro-grids" for power distribution.
Imagine that Tata Motors makes the Nano the world's most intelligent car. Even at $5,000, the Nano would be the cheapest car and could well take the low end of the US auto market by storm
Renewables are the future in the energy industry - in poor and rich countries. India can become a leader in global energy revolution.Health.
About 75 per cent of what is spent on health care goes to benefit only about 15 per cent of the world's population. What about the rest? How should we increase the healthspan, not just the lifespan, in emerging economies? In India, for instance, Narayana Hrudayalaya performs world-class open heart surgery for $2,000, compared to the $20,000 to $100,000 it costs in the US. Aravind Eye Hospitals performs high quality cataract surgery for $30, which typically costs $3,000 in the US. The low cost is achieved not because of the low labour cost in India or due to charitable donations from rich countries. Narayana Hrudayalaya and Aravind Eye Hospitals have used process innovation by borrowing concepts like economies of scale and assembly line from the industrial sector, and applying them in health care to bring down costs without sacrificing quality. There is no reason why such approaches will not work in the West.
The Obama administration's health care reform is anchored on three principles: low cost, increased access, and quality care - precisely the same three principles in India. Since the economic reforms in the early 1990s, many Indian companies have grown by making products for rich countries at a lower cost. The time has come for Indian companies to shift focus on the Indian consumers and solve their problems through breakthrough innovations. India has the potential to become the innovation hub in the next 20 years. I next ask CEOs, politicians, entrepreneurs, and youth in India: Are you ready and prepared to create that future?Buy the Business Today January 9 edition for more such columns by business leaders like Kumar Mangalam Birl, Azim Premji and Nandan Nilekani.