Price matters Made in Germany, Sort of

Many German companies that have branched out into emerging markets have found that their high-quality products are too expensive, forcing them to adapt to local tastes.
Vorsprung durch Technik?

Frank Stührenberg uses a photo to demonstrate how his company, Phoenix Contact, has had to adapt to doing business in India.

It shows him at the opening of electrical engineering company’s sales office in a chaotic bazaar in Mumbai. Dressed in a black suit and tie, the German managing director appears out of place in the melee.

“The body language expresses a certain helplessness,” notes Mr. Stührenberg.

His long-established firm, based in Essen in western Germany, chose to court customers in the dusty market rather than in a glitzy office block. At first it was disconcerting for Mr. Stührenberg.

“My colleagues however convinced me,” he said. “That is the most important sales street for electronic equipment in all of Mumbai.”

A company that wants to do business in India can’t afford to not be represented there – and they have to adjust to the local market.

In Europe, Phoenix Contact serves customers in the premium segment, but there aren’t many of those on the Indian subcontinent.

I hardly know a market that is more price sensitive than India. Frank Stührenberg, Managing director, Phoenix Contact

So the German company opened a local development department in Prithla, a suburb of New Delhi. It works on cheaper technology for Indian customers.

“It was not an option to only occupy an expensive niche segment in India,” said Mr. Stührenberg. “I hardly know a market that is more price sensitive than India.”

To succeed in emerging markets such as India, many German companies need to change their ways. They are used to winning business by making products of the highest possible quality. But in aspiring economies, other issues like price matter more.

The Roland Berger consulting firm estimates that about 70 percent of global economic growth will come from emerging countries in the next 15 years – and 95 percent of the world’s population growth.

According to the Organization for Economic Cooperation and Development, the global middle classes will swell from two billion today to 4.8 billion in 2030, with 80 percent living outside Europe and the United States.

To sell middle and lower priced goods to this burgeoning middle class, they must be simple, cheap and robust. In a new strategy paper, Roland Berger consultants recommend that their clients “discuss new market strategies” to focus on cheaper products.

“From the middle class, we are getting many requests for economical goods,” said Oliver Knapp, a consultant from the firm.

Many companies, however, are having trouble implementing the new frugal-minded strategy.

In India, Tata Motors has tried to create the cheapest car in the world with its Nano model. It costs only 100,000 rupees (about €1,400, or $1,570) but the project so far has flopped.

The Nano barely had any storage space, failed in crash tests and was barely more comfortable than a motorized rickshaw. It quickly earned a reputation as a car for poor people.

Volkswagen in Brazil, however, shows the idea can work. Trucks with the VW logo, which belong to its MAN subsidiary, are market leaders in the world’s sixth largest truck market with products that are consciously kept simple.

“You don’t want less – you don’t need more,” is the local advertising slogan.

Ideally, products for emerging markets are developed from scratch.

Seven years ago, Volkswagen developed the Constellation series, especially tailored to the needs of Brazilian customers. Forty Brazilian engineers worked with German colleagues to bring local know-how to the project.

Local expertise was essential to the successful development of the vehicle.

“It is extremely difficult for a developer at group headquarters to slim down a truck to a low emerging-market level,” said Roberto Queiroz, a commercial vehicle expert from Sao Paulo.

Mr. Knapp, the Roland Berger consultant, agrees. If companies want to win customers in emerging countries they first have to understand what they really need.

The biggest mistake is simply to cut away from an existing product. In medical technology, for example, ultrasound equipment made by Roentgen must not only be inexpensive, but also portable – so doctors can bring them to rural regions. Ideally, products for emerging markets are developed from scratch, said Mr. Knapp.

Hansgrohe, the German bath tub and shower fixture manufacturer, is doing just that. The company makes several products in its plant in Songjiang, near Shanghai, which are intended exclusively for the Chinese market.

“Customers here want bigger forms or special surfaces such as gold optics,” said Hans-Jürgen Kalmbach, the sales director for the Asia-Pacific area.

An inexpensive product line, “My First Hansgrohe,” has helped the company achieve double-digit growth in China.

Mr. Kalmbach also wants to expand the company’s product line in India, in order to attract more middle-class customers. Up to now, Hansgrohe has offered mostly higher priced fittings there.

Phoenix Contact director Mr. Stührenberg admits that competing in the lower-price market can shake a company’s ego. “For a company that sees itself as a premium manufacturer, it is an adjustment,” he said.

Starting the Indian development department also required internal discussions. “It is not simple to explain to the development team in Germany that we are now making a part in India,” he added.

But he said it has been worth the effort, and not only to gain a stronger foothold in India. Products developed in India are already being used to expand into the next continent – Africa.

 

Mathias Peer is a freelance correspondent in Bangkok who covers India and Southeast Asia, Alexander Busch is Handelsblatt's correspondent in Sao Paulo, Brazil, covering South America. To contact the authors: [email protected], [email protected]