Frugal ideas are spreading from East to West. The first of a series of articles by the Economist that will run on ogilvydo.com throughout 2012.
THE Tata Nano, the world’s cheapest car, became a symbol before the first one rolled off the production line in 2009. The Tata group, India’s most revered conglomerate, hyped it as the embodiment of a revolution. Frugal innovation would put consumer products, of which a $2,000 car was merely a foretaste, within reach of ordinary Indians and Chinese. Asian engineers would reimagine Western products with all the unnecessary frills stripped out. The cost savings would be so huge that frugal ideas would conquer the world. The Nano would herald India’s arrival just as the Toyota once heralded Japan’s.
Alas, the miracle car was dogged with problems from the first. Protesting farmers forced Tata Motors to move production out of one Indian state and into another. Early sales failed to catch fire, but some of the cars did, literally. Rural customers showed little desire to shift from trucks to cars. The Nano’s failure to live up to the hype raises a bigger question. Is frugal innovation being oversold? Can Western companies relax?
Two new books—“Reverse Innovation” by Vijay Govindarajan and Chris Trimble, and “Jugaad Innovation” by Navi Radjou, Jaideep Prabhu and Simone Ahuja—suggest that the answer to both questions is No. Mr Govindarajan, of the Tuck Business School at Dartmouth College, has advised General Electric on frugal innovation and co-written a path-breaking article on the subject with GE’s boss, Jeff Immelt. “Jugaad Innovation” is the most comprehensive book yet to appear on the subject (jugaad is a Hindi word meaning a clever improvisation). The books show that frugal innovation is flourishing across the emerging world, despite the gurus’ failure to agree on a term to describe it. They also argue convincingly that it will change rich countries, too.
Multinationals are beginning to take ideas developed in (and for) the emerging world and deploy them in the West. Harman, an American company that makes infotainment systems for cars, developed a new system for emerging markets, dubbed “Saras”, the Sanskrit word for “flexible”, using a simpler design and Indian and Chinese engineers. In 2009 Harman enrolled Toyota as a customer. GE’s Vscan, a portable ultrasound device that allows doctors to “see” inside patients, was developed in China and is now a hit in rich and poor countries alike. (Mr Immelt believes that these devices will become as indispensable as stethoscopes.) Walmart, which created “small mart stores” to compete in Argentina, Brazil and Mexico, is reimporting the idea to the United States.
The standard worry among Western firms is that this strategy will cannibalise the existing market for expensive technology. Why buy a $10,000 device if the same firm makes a slightly simpler one for $1,000? This is too pessimistic. GE opened up a new market among doctors for its cheap electrocardiograms; previously only hospitals could afford the things. Besides, standing still is not an option. Whether or not Western firms sell frugal products in the West, Asian firms will.
India’s Mahindra & Mahindra sells lots of small tractors to American hobby farmers, filling John Deere with fear. China’s Haier has undercut Western competitors in a wide range of products, from air conditioners and washing machines to wine coolers. Haier sold a wine cooler for half the price of the industry leader. Within two years, it had grabbed 60% of the American market. Some Western companies are turning to emerging markets first to develop their products. Diagnostics for All, a Massachusetts-based start-up that has developed paper-based diagnostic tests the size of a postage stamp, chose to commercialise its idea in the developing world so as to circumvent America’s hideously slow approval process for medical devices.
Entrepreneurs everywhere are seizing on the idea of radical cost-cutting. Zack Rosenburg and Liz McCartney are rethinking house-building from the ground up; they hope to reduce the cost by 15% and the construction time by 30%. Vivian Fonseca collaborated in the development of a system for sending SMS messages to poor and elderly diabetics to help them control their disease. Jane Chen, the boss of Embrace, sells low-cost infant warmers for premature babies in India and several emerging markets.
This trend will surely accelerate. The West is doomed to a long period of austerity, as the middle class is squeezed and governments curb spending. Some 50m Americans lack medical insurance; 60m lack regular bank accounts. Such people are crying out for new ways to save money. A growing number of Western universities are taking the frugal message to heart (at least when it comes to thinking about things other than their own tuition fees). Santa Clara University has a Frugal Innovation Lab. Stanford University has an (unfrugally named) Entrepreneurial Design for Extreme Affordability programme. Cambridge University has an Inclusive Design programme. Even the Obama administration has an Office of Social Innovation and Civic Participation to encourage grassroots entrepreneurs in health care and energy.
Fighting frugality with frugality
Globalisation is forcing Western firms to provide more value for money. Logitech, an American firm, had to create a top-class wireless mouse for bottom-of-the-range prices when it took on Rapoo, a Chinese company, in China. John Deere had to do the same with its small tractors when it took on Mahindra in India. At the same time, globalisation gives Western firms more tools. Some are building innovation centres in the emerging world. PepsiCo, for example, established one in India in 2010. Some Western firms routinely fish in a global brain pool. Renault-Nissan asked its engineers in France, India and Japan to compete to come up with ideas for cutting costs. The Indians won. The Tata Nano may not have changed the world, but frugal innovation will.
From the Economist, published under licence. The original article can be found on www.economist.com Illustrator-Brett Ryder