Francis Gouillart, ECC Partnership Infonavit Forum on Housing Economics Veracruz, September 24, 2007 The ECC Partnership 100 Main Street, Suite 130 Concord,

Francis Gouillart, ECC Partnership

Infonavit Forum on Housing Economics

Veracruz, September 24, 2007

The ECC Partnership 100 Main Street, Suite 130 Concord, MA 01742 cell:1 781 888 0186

The enclosed material is confidential and proprietary to the ECC Partnership and is for the internal use of the addressee only.

Housing opportunities at the bottom of the pyramid

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Infonavit BOP Veracruz – 2007-09-24 © 2007 ECC PartnershipAll rights reserved.

[email protected]@eccpartnership.com

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Outline

Bottom of the Pyramid: the assumptions we make

Pioneers at the bottom of the pyramid

Early pioneers in low-cost housing around the world

Building an eco-system: the e-choupal case

A possible vision for the Mexican low-income housing eco-system: process of co-creation



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What defines the “Bottom of the Pyramid”?

Annual per capita income (1) Population in millions

75-100

1,500 – 1,750

4,000

More than $20,000

$ 1,500 - 20,000

Less than $ 1,500

Source: U.N. World Development Reports

(1) Based on purchasing parity in US $



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Six Assumptions You May Be Making

1. The poor are not our target customers because with our current cost structures, we cannot profitably compete for that market.

2. The poor cannot afford and have no use for the products and services sold in developed markets.

3. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology.

4. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits.

5. Managers are not excited by business challenges that have a humanitarian dimension.

6. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.

Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26

Every single one of those assumptions is wrong.



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Cemex Launched the Patrimonio Hoy Project for the Poor People of Guadalajara (Mexico)

“How can we give poor people access to the home-owning experience faster?”



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The Challenge for Poor People: Building Their Home One Room at a Time

Cement bag “Self-construction” market

“How can we accelerate access to the cement bag for poor people?”



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Patrimonio Hoy Builds on an Existing Community Called a Tanda

Tanda concept A tanda is a traditional Mexican community savings scheme.

• For example, 10 people save 1 peso per month.

Every five months, the accumulated savings is won in a lottery by one of five people, who receives 50 pesos.• All participants win the 50 pesos one time only.

Traditionally, the tanda money goes toward festive events.

With Patrimonio Hoy, the winner receives a bag of cement from Cemex.• The value is in the acceleration of access to the

larger sum, and in the discipline of savings that is created (community peer pressure).

Communities nearly always play a role in solving bottom-of-the-pyramid problems



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A win-win solution for Cemex and tandas

Microcredit lending to the tanda: Based on solidarity of a group of at least 3 people. No collateral required. $4 credit for each $1 saved.

Security of supply: Frozen prices for 70-week periods. Warehousing services to store

materials according to customer needs.

Technical advice: Customized house growth project for

each family, phased one room at a time.



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Results from the customer’s standpoint

More than 75,000 families have participated.

Customers in 23 cities served by 48 Cemex offices.

Families have built the equivalent of 33,000 additional 11-square meter rooms.

Accelerated access to home-owning: 1 room in 16 months vs. 48 months historically.

8 2

222



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Results for Cemex

Results from Cemex’s standpoint Excellent credit results:

• On-time payments better than 99%.

Demand expansion:• Accelerated cement use.• Creation of a new market valued at $500-600 MM.• Growing quickly.

Branding:• Increased brand loyalty.• Brand preference in other segments based on demonstrated socially

responsible programs.

Generating its own growth resources:• Customers become Cemex cement salespeople.



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The Casas Bahia retail chain of Brazil

Casas Bahia: founded in 1952 by Samuel Klein, an immigrant from Poland.

• Still privately held.

Today one of Brazil’s biggest employers, with 52,000+ employees.

In 2007, named one of the 250 biggest companies in the world by Deloitte Touche.

• The only Brazilian company on the list.• Sales of US$4.8 billion in 2005-06.• Highly profitable

Fast-growing: from 250 stores to 540 stores in the last decade.• Department stores selling a wide range of home goods.



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Selling to poor people

The company’s name is a reference to Bahia, a Northeastern state of Brazil that is homeland of most migrants who move to the big cities of the wealthier Southeast in search of jobs.• Samuel Klein originally immigrated to Bahia.

Most stores are located in poor parts of big cities.• Klein first sold blankets and linens door-to-door in

poor sections.

• When expanding his business, Klein realized that he had to sell goods in a way that poor people could pay for them.

“My father’s vision was to fulfill the needs of the poor population. But how could they pay for it? The answer was simple: financing.” – Michael Klein

Casas Bahia starts with customer empathy.



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Customer profile

70% of Casas Bahia’s customers have no formal, consistent income.

• They are primarily maids, cooks,

construction workers and independent

street vendors.

• Average monthly income: R400 ($200)

• They live mostly in favela shantytowns.



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The credit process

1. If merchandise costs less than R600 ($300), then no proof of income is required, only a permanent address.

2. If merchandise costs more than R600, then Casas Bahia uses its proprietary credit scoring system. Based on income (both formal and informal), occupation and calculated expenses. Electronic scoring takes less than 1 minute.

3. If the customer is rejected by the IT system, then he or she meets a credit analyst. The analyst sizes up the person to determine trustworthiness. The analysts are considered the linchpin of Casas Bahia’s success.

4. The customer receives a credit limit. The credit limit increases when loans are paid back.

5. Loans are paid monthly. They must be paid in-person at a store. Financing accounts for about 90% of Casas Bahia’s sales.

The key: a “co-created” approach to credit with each customer.



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Profits from financing

Most of Casas Bahia’s profit comes from financing.

Average finance term: 6 months (range 4-12 months).

Average interest rate: 4.13%/month• Ranging from 2.5%/mo. for 4-month sales to 6%/mo. for 12-month sales.

• Company motto: “Every loan installment fits the size of your pocket.”

Average sale: R440 ($230)

The monthly interest rate is low compared to financeiras who traditionally serve Brazil’s low-income population.• Financeiras charge up to 14%/month interest.

On a per unit basis, bottom-of-the pyramid solutions are often more expensive than middle- or top-of-the pyramid solutions (and it is O.K.!).



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Low default rates

Casas Bahia’s default rate from financing: 8.5%• Default rate for competitors serving the bottom of the pyramid: 16%• Default rate for all retail: 6.5%

“Finance here is totally different from what one learns in school. First, the informal market is twice as big as the formal market, especially in the lower-income population.

Most of my customers do not declare income. I have to believe what they are telling me. Here, several multinational retailers did poorly because they were not able to understand local needs, for example, Sears and Wal-Mart.” – CFO Michael Klein

What would it take for Mexico to generate Casas Bahia-like builders of low-income houses?



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Bottom-of-the-pyramid car: the Logan

The Logan is an inexpensive car produced jointly by Renault and its Romanian subsidiary Dacia. • Manufactured at Dacia’s plant in Romania.

• Marketed as Renault, Dacia or Nissan depending on the existing presence of the Renault brand in a country.



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Designed for developing countries

Versions of the Logan take into account road and climate conditions in developing countries. • The chassis sits high so that the car can negotiate dirt roads and potholes.

• The engine can handle lower-quality fuel.

• Air conditioning is powerful enough to lower temperature several degrees cooler than is necessary in Europe.

The original sales strategy was to create a car for people in emerging markets who have never owned an automobile – about 80% of the world’s population. • The Romanian model was designed to hold “four adults, a pig, a sink, and

100 kilos of potatoes.”



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Demand from unexpected quarters

“A strange thing happened when French auto maker Renault last fall [in 2004] rolled out the no-frills Logan, a midsize sedan was designed to sell for as little as 5,000 euros ($6,000) in emerging markets like Poland. Western buyers clamored for the car.

“So this June [2005], Renault began delivering the roomy, unpretentious five-seater to France, Germany, and Spain. • “The West European version sells for a base price of $9,300 – about half

that of the Ford Focus ($17,250) and the Volkswagen Golf ($18,264).” – BusinessWeek, July 2005

The Logan was launched in India in June 2007 in a joint venture with Indian manufacturer Mahindra & Mahindra.• Made in India.

• Marketed as “India’s first wide-body car.”

• An instant success: nearly 3,000 cars sold in the first month.



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Modular manufacturing

The Logan is made with reusable elements, no expensive design elements and few electronics.• Logan production costs: $1,089 per car, less than half the $2,468 for an

equivalent Western auto – Deutsche Bank. • Less than half the number of components of other cars.

• For example, a single-piece molded dashboard.

• “The Logan is the McDonald’s of cars. The concept was simple: Reliable engineering without a lot of electronics, cheap to build and easy to maintain and repair.” – Logan designer Kenneth Melville

Renault is ramping up production of the Logan in different low-cost countries: first Romania and India, soon Russia and Morocco.• Low manufacturing investment.• Therefore the factories don’t have to produce huge volumes to be

profitable.



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Rising production

Sales from the beginning of production in 2004 through 2006: 321,284 Dacia Logans.• Dacia sales for 2006 were over $2.1 billion.

• Up 19.6% from 2005.

Annual production: 175,000 in 2005, 200,000 in 2006.• Half for exports.

• Prediction of 1 million vehicles globally by 2010.

Other Logan models launched in 2006-07: 4-door sedan, wagon, pickup truck and hatchback.

Dacia Logan MCV station wagon



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Low-cost cars

Tata (India) will launch a R1 lakh ($2,500) car in 2008.• The vehicles WILL be produced primarily in kit form for assembly at

several places around India, to create local employment.

“It will look like a car and have proper seating – stretched canvas seats would not, for example, be acceptable.”

“It will be all right for it to be a bit more noisy than an ordinary car, but it has to be both simple and safe.” – Tata CEO Rajan Tata

A model at the 2007 Geneva Motor Show

If it works for cars, can it work for houses?



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The need for low-cost housing around the world

2006 United Nations estimate: 750 million people live in urban areas without adequate shelter and basic services. • 65% of the need for inexpensive housing is in

the Asia-Pacific region.

• 16% in South America and the Caribbean.

• 11% in sub-Saharan Africa.

• 8% in North Africa and the Middle East.

The need for low-cost housing is often tiedto the movements of workers in developing nations from rural to urban areas.• “…cheap housing [is] vital to the city’s

[Beijing’s] huge pool of migrant workers. China does not like to admit it has slums. But it does…” – The Economist



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Major constraints in the delivery of low-cost housing

United Nations report:

1. Lack of security for squatters and even renters.

2. Lack of adequate land for urban development.

• The #1 problem, particularly in countries with weak property laws.

3. The high cost of infrastructure and services.

• Subsidies often are misdirected.

4. Limited scope of housing finance programs.

• Most poor people rely on informal credit.

5. The use of imported building materials and technologies.

• Despite the presence of abundant natural resources.

6. Over-reliance on government housing programs.

• “…provision of ready housing units by governmental agencies to the needy households have failed almost everywhere. This approach is simply not sustainable and cannot reach the scale.”

It takes an eco-system of partners to co-create the solution with customers.



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The problem of high-cost materials

“The construction industry in the developing economies is facing an immense and apparently worsening problem of required materials shortage aggravated by rising prices.

In most countries, frequent shortages have often led to further increases in prices and profiteering, thus marginalizing more and more people beyond the affordability level.” • In developing countries, imported building materials often cost 70% of the

total.

“One strong option is to promote use of innovative composite materials based on local resources from forestry, agriculture, natural fibres, plant materials, and other local resources like agricultural and industrial wastes…”– “Managing Low Cost & Innovative Housing Technologies” conference, India

2004

How can we involve Mexican material suppliers?



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Building a whole village

Necessity Housing offers a plan for a village of 736 houses, ranging from 37m2 to 111m2.• Average cost per house: $9,180

• Use of local materials.



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Traditional home types at HUDCO’s Rural Building Centre

Himalayan house Karnataka mud house North-East bamboo house

Sikkim house Wardha adobe house Kutch stabilized mud block house



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Habitat for Humanity

An American-based housing ministry that relies on volunteers to build “simple, decent, affordable” houses around the world.

• 225,000+ houses built around the world, providing housing for 1 million-plus people in 3,000+ communities.

• Not free housing – paid for with no-profit, no-interest loans.

• Present in 90 countries.

• Houses built to local tastes with available materials.

Habitat for Humanity does remarkable work ….



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Habitat for Humanity builds below local costs

Sri Lanka – average house cost: $2,436

Papua New Guinea – average house cost: $2,304

Guatemala – average house cost: $2,100

Romania – average house cost: $24,843

Hungary – average house cost: $25,516

… but in the end, the problem is best solved by private sector builders searching for a profit.



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New building technology: Moladi

Moladi is a South African building company that sells a proprietary building technology.• A plastic injection-molded method for producing

cast-in-place mortar structures.

The mortar dries within 24 hours and is then ready to receive the top structure, plumbing, conduit window and door frames.

The process allows unskilled laborers to use indigenous materials to

quickly and cheaply construct high standard permanent buildings.

“Moladi addresses six key challenges embodied in the housing shortage facing developing countries: lack of resources, shortage of skills, time constraint, controlled work flow, waste and insufficient funds.” – Moladi founder Hennie Botes



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Assembly line techniques to lower cost and improve quality

Cost of a house built using Moladi technology: about $95/m². Cost of a typical “affordable housing” house using cement building

blocks: between $175/m² and $225/m².

“In order to be a contender when it comes to delivering 50 or 1,000,000 houses, it should be viewed as a ‘production line,’ similar to that of the automotive industry. By applying a disciplined approach, logistics, management and a reliable technology such as Moladi, a project can be completed on time, in budget without forfeiting quality.” – Moladi founder Hennie Botes

Bottom-of-the-pyramid solutions typically require scale and technology.



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Moladi exports its idea

Most of Moladi’s business comes from outside South Africa.• Projects in Mexico, Panama, Angola, Botswana, Brazil and Kenya.

Moladi does not build the houses, instead selling the concept to local contractors.

Moladi’s molds are manufactured at a plant near Port Elizabeth and exported from the city’s harbor. • Project managers travel from South Africa to transfer know-how.

• Moladi then sells the building mold to the builder.

• Available only to builders planning to build 50+ houses.

An 800-house project currently being built in Los Mezquites, Mexico, with Moladi technology.



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E-choupal ITC case in India: can we learn from what they did?

Local marketcalled mandi

FarmerInput suppliers (seed, fertilizer,

etc.)

Grain processor(ITC)

How to know when to sell

for best price?

How to avoid being cheated at the mandi?

What inputs to use?

How can I get more high-

quality grain?

• The problem from the perspective of the farmer and of ITC



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Using information technology to create a more efficient exchange

ITC is one of India’s leading private companies.• Annual revenues of US$2 billion.

• ITC stands for Indian Tobacco Company.

• Also a grain processor.

ITC created the e-Choupal program in 2000 in an effort to capture more of the soybean crop.• Choupal means “gathering place” in Hindi.

ITC set up PCs in rural farming villages to create an e-commerce hub.• ITC installed solar panels to power the PCs.

E-Choupal allow ITC and farmers to bypass the mandis.• Farmers can check prices in near-real-time and decide whether to sell.

ITC created e-choupal to make money.



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First, ITC set up a new market to compete with the mandi

Local market(originally mandi,

now e-choupal/ITC)

Farmer

E-choupal / ITC

Input suppliers (seed, fertilizer,

etc.)

Grain processor(e-Choupal/ITC)



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How the farmers benefit

Farmers selling directly to ITC through an e-Choupal usually get a higher price for their crops than they would through the mandi system.• About 2.5% higher (approximately $6 per ton), on average.

Other benefits:• More accurate weighing.

• Faster processing time.

• Prompt payment.

The e-Choupal system has had a measurable impact on Indian farmers’ activities:• In areas covered by e-Choupals, the percentage of farmers planting soy

has increased from 50% to 90% in some regions.

• The volume of soy marketed through mandis has dropped as much as half.



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ITC also set up a whole information system for the village community

Local market(originally mandi,

now e-choupal/ITC)

Community of farmers

Farmer

E-choupal / ITC

Input suppliers (seed, fertilizer,

etc.)

Global markets(Chicago Board of Trade)

Grain processor(e-Choupal/ITC)



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E-Choupal has set up new interaction platforms within the village

• The village expert or sanchalak plays a key role.



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The community brings additional value to farmers

Sense of dignity and respect.

Better price realization through information access.

Personalization of knowledge and expertise in farming practices.

Active learning through community of farmers.

One sanchalak followed Chicago Board of Trade commodity prices for a month and arrived at a correlation with local market prices. He then shared this information with other farmers to decide when to sell.– World Resources Institute

What interaction platform could we put in place for the low-income housing community in Mexico?



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Second phase of e-Choupal: rural superstores

ITC opened Choupal Sagar in 2005.

• India’s first private-sector superstore in a rural area.

• Occupying 2 hectares with a warehouse space of 929 m2 (for storing 9,000 metric tons of grain), plus a gas station, food court and training center.

• 30 more superstores planned in

2005-07.

ITC calls the stores “the second avatar of the e-Choupal network.”

• “A deeper penetration into the rural areas is required for the second phase of the farm-based Internet intervention [i.e., e-Choupal].” – The Hindu Business Line newspaper



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The future expansion of e-Choupal: “the Wal-Mart of India”

Through e-Choupals, ITC has the means to reach into many of India’s 600,000 villages, where 72% of the country’s people live.• Most companies do not venture to villages with fewer than 5,000 people.

ITC plans to sell everything from microcredit to tractors via e-Choupals, thereby becoming “the Wal-Mart of India” – ITC chairman Y.C. Deveshwar

“…the company behind e-Choupals, ITC Ltd., has done as much as anyone to bridge India’s vast digital divide…E-choupals may offer a model for all developing countries.” – The New York Times• In 2006, ITC won the prestigious Stockholm Challenge Award, which

recognizes initiatives that leverage IT to improve living conditions and increase economic growth in all parts of the world.

Together, could we build in Mexico an eco-system like e-choupal for low-income houses?



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Co-creation is the process that underlies successful solving of bottom-of-the pyramid issues

CustomerCompany

EXPERIENCE

Points of customer interaction

Back room

NetworkResources

Customer Communities

Communities are particularly active at the bottom of the pyramid.



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As builders, you have a unique opportunity to co-create a bottom-of-the pyramid housing solution …

CustomerBuilders



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…but this will require that you develop a co-creation eco-system with your customer communities and other parties

Community of

customers

CustomerBuilders

Community of

customers(labor)

Customer as laborer

Materials suppliers

Municipalities, state governments



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Infonavit can play a role in orchestrating the co-creation

Community of

customers

CustomerBuilders

Community of

customers(labor)

Customer as laborer

Infonavit

Materials suppliers

Municipalities, state governments



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Suggestion on how to get started: organize a series of co-creation workshops

Pick one or two development pilots where you can test the co-creation approach.

Run co-creation workshops with parties interested in developing a new approach to the bottom of the pyramid in Mexico, perhaps hosted by Infonavit:• Small group of builders interested in playing• Materials suppliers• Customers at bottom of pyramid, coming both as individuals and as

members of their community.• Local township management and relevant NGOs• Materials suppliers.

At the conference, create mix of “big tent” and “small tent” working sessions, using co-creation techniques to design the future interactions.

This is how most “bottom-of-the pyramid” efforts got started.

Best of luck in co-creating your future.

Francis Gouillart, ECC Partnership Infonavit Forum on Housing Economics Veracruz, September 24, 2007 The ECC Partnership 100 Main Street, Suite 130 Concord,

Documents

pyramid slide

infonavit bop veracruz

housing economics veracruz

pyramid early pioneers

tanda tanda

developed markets

housing opportunities

business challenges