The Middle Path to Growth: Riding the Wave of India’s Mid-Segment

STAX INC  |  
Stax explores India's next wave of growth - in the mid-market segment - and discusses what it would take to capitalize on that growth.

India's Next Wave of Growth, Driven by the Mid-Segment.

India's industrial landscape has been dominated by a powerful host of conglomerates—the Tatas and the Reliances—that have steered India’s rapid growth and technological advancement in the past couple of decades. However, just beneath these lies an informal web of small and medium-scaled subcontractors, microenterprise operators and third-party manufacturers; really garage businesses similar to Mr. Shah's. As these firms in India’s mid-segment pass generational hands, a deep set of opportunities arise. The current owners—usually the second or third in line of ownership—frequently do not have the manual expertise or talents that their founders did, and are turning to technological systems to optimize production. This shift in mindset and increase in technology spend among the mid-segment will generate the next wave of growth in India.

India's Mid-Segment is Fragmented and Hard to Reach

The story of India's inscrutable middle-segment businesses is strikingly parallel to China's new industrialism narrative—both feature deep pockets of demand, an elusive clientele, and frankly, puzzling inconsistencies in terms of investment potential. The fragmented industry structure leaves much of the productive business opportunity out of the reach of traditional marketing strategies.

Despite The Complexity, There is a Large "Hidden" Opportunity in the Mid-Segment

The numbers are exhilarating. For instance, take the textiles and apparels sector of India, where estimates show that 95% of establishments are mid-to-small scale providers—cut and sews, niche fabric mills and small back-door dye houses. They are all competing to cater to the needs of the increasingly exacting Indian domestic consumer. The inherent competitiveness within the mid-segment is the key pivot to drive smaller scale firms up and into the wake of automation and mechanization.

Stax Helps Uncover the Opportunity, Quantify It and Develop a Market Strategy to Tap It

So how can this market be served, and what is the underlying opportunity? Stax answered these questions for a European technology client by quantifying and assessing the business opportunity that lay just beyond their core, saturated market. We also provided actionable market data that helped the client to configure a product specifically for the mid-segment. The lessons drawn from that study gave Stax a unique opportunity to understand the true nature of the mysterious SME animal.

Unprecedented and Untapped Opportunity

The premise of our investigation was that there was a sizeable "untapped" opportunity among small and midsegment Indian firms in manufacturing. Our natural first step was to quantify this opportunity and to understand how small and medium enterprises (SME’s) are currently being served. For instance, across a section of three manufacturing verticals, we found that over 60% of firms were considered to be medium-sized—typically firms with less than 400 employees. This was a significant enough opportunity to warrant a scaled assessment of the true spending potential of these firms. distribution_by_employees Stax launched an independent study to understand the market for mid-sized firms' use of a client technology used in multiple industrial applications. Understanding the needs, wants and behavior of firms of this size and obscurity meant that if we were to survey them, we would have to go to them. We sought, through interviews, analysis and a macroeconomic perspective of the market, to size the approximate opportunity in terms of real spending potential. Key areas we explored were usage behaviors, spend, and types of products utilized in the mid-market. We were also keen to understand attitudes towards technology and the types of technology or tools that small-to-mid sized firms would like to purchase in future. Our study of technology adopters and users across Indian manufacturing firms of varying sizes show that mid-segment enterprises have 10x the spending power of large firms. Interestingly, we found that the largest portion of this market was also the least well served by technology. The largest accounts were well saturated with leading international manufacturers' products, including those of our client. However, there was no appropriately priced and designed product that was truly targeted at the mid-market, for just their processes and requirements. This represented a large untapped opportunity, which our clients chose to address based on the actionable solutions we provided. potential_indian_market_for_tech_products

Understanding The Context—A Changing Domestic Landscape

The mid-segment itself is disparate, fragmented and complex.
Its firms are difficult to reach through traditional means. Our best estimate is that no more than 30%–40% of these types of firms have a visible trade directory presence, or are reachable via associations. The little information that is available on SME's is both anecdotal and unreliable. For an honest assessment of the purchasing behaviors of these enterprises, extensive primary research has to be undertaken.
Legacy systems dominate the mid-segment of firms.
Although many mid-segment businesses are currently using outdated equipment, our findings indicate that several firms are ready to move up the technology adoption curve. They have budgets prepared and articulated, but simply do not have enough information to make decisions on the right type of technology, which will enable higher productivity, more streamlined processes, less wastage and shorter turnaround.
Domestic customers are becoming increasingly exacting.
Mid-market competitive differentiation is coming less from and long-established skills and reputations, and more through the kind of technology that can provide the standards required by the new, more demanding Indian consumer. SME's are increasingly relying on better technology to give them an advantage.

The "Technology-Ready" Group

While many firms simply did not have the information, not all mid-segment firms floundered. Even among the traditionalists, select firms had already made significant headway in adopting new technology. This trend was confirmed by several distributors who indicated that the mid-segment was their fastest growing clientele. This is just another indication that the time is now to approach the Indian mid-segment with the appropriate technology. The group that interested us the most constituted of firms "on the cusp" of adoption. These firms were far more receptive of technology as a differentiating factor in their manufacturing and operating processes. We determined that this group would be the best target for a customized product, designed to suit their needs at a price point and service level that would be completely devoted to their unique requirements and operating environment. The actionable data Stax provided enabled our client to do just that. indian_tech_adoption_curve

Technology at the Right Price

Nothing comes easy in India. Technology providers can rarely match the fledgling needs of this market—pricing tolerance is low, there is little flexibility in financing schemes, distribution points are scattered, and servicing requirements are doubly high due to extreme humidity. Several firms are delaying their purchase decisions due to the technology price vacuum. However, India’s mid-segment although sensitive to price, was not overwhelmingly so. Having grown their enterprises to levels where more effective technology was necessary to scale up their operations, many forward-looking business owners are considering such an investment to be worth the cost, and indeed essential, to ensure future success. For our client, the challenge was that their current portfolio of solutions was priced significantly higher than those of domestic and international competitors. In some cases, solutions available in the market were 90% cheaper than the client’s current product. However, the pricing differential narrowed significantly the more advanced the technology. price_point_challenge

Training and Education as a Game Changer

Throughout our exploratory study we uncovered that though workers are literate and semi-skilled, their exposure to technology is limited. Those with spending potential had limited visibility and market access; manufacturers and developers who needed to reach them were often unable to do so. Conservative attitudes towards learning about technology, and careful consideration of trade-offs meant that in the heat of a decision on whether to streamline processes or whether to add to production capacity, firms almost always went for the latter. Thus, they expanded their output, but at the guaranteed risk of diminishing quality returns. We realized that if our client were to tap this opportunity, they would ultimately have to configure, design and develop a new entry-level product for this market. Further, to make a commitment to India meant that they would have to advance their presence from third-party distributors to a gradually built up sales, training and marketing presence on the subcontinent. While all this calls for heavy investment, the rapid growth rate of Indian manufacturing verticals promises ballooning sales in future, which will bring a huge return to those willing to invest today. Our client also understood the need to enter India right now, in order to build client networks and brand loyalty while anticipating future growth in mid-market demand for technology.

How Do You Design an Entry-Level Technology for a Semi-Skilled Industry?

Our client was keen to understand what type of product or solution would serve as a suitable introductory point to India’s mid-segment. To define a configuration, we had to first be certain of the opportunity, then understand how best to serve that need by asking the following questions: designing_entry_level_tech Stax launched a multilingual online survey of over 230 SME's in India, leveraging our field-team in Delhi and throughout the country. With limited access to terminals, poor internet connectivity and the busy festival season around the corner, our team accelerated the fill-rate of the survey through in-person visits. Our survey included an in-depth assessment of the profiles and decision-making behavior of Indian SME's. We also supplemented our survey with a deep-dive to quantify and validate our preliminary estimates of market spend. We segmented our respondents by their indicated levels of interest, purchase drivers, and preferences across a menu of possible product attributes. Ultimately, we sought, through conjoint analysis, to understand the features, pricing, and service levels which would yield the most utility across each of these segments, and to recommend the exact design of a product that would be the best foot-in-the-door to India. Using the comprehensive profiling of the "technologically forward" firm by size, type, and even estimated spend on client technology that we provided, our client is designing marketing and sales strategies and deploying resources accurately to prepare for market entry.

Challenges of Going to Middle Market in India

Unfamiliarity with social and political landscape.
There is a bewildering array of social and cultural nuances that are part and parcel of doing business in India. Whereas large Indian firms operate in a business culture that is familiar to Westerners, SME's are wholly Indian in their outlook and operations. Capturing the interest and trust of this mid-market segment without being familiar with local mores can be near impossible. Although the "license raj" of Indian bureaucracy is far more lax than it used to be, navigating the layers of local, state and federal bureaucracy and regulations, and how they do or do not apply to SME's—who may or may not be in the informal sector—can be challenging.
Price points.
They will need a migration path from entry level products to the higher priced solutions typically sold in the global marketplace.
Product Configuration
Designing a product for the more fiscally and technologically conservative Indian mid-market can be complicated. A key complaint made by owners of SME's in our interviews was that products in the global marketplace did not understand their specific needs. By virtue of serving a very different type of market on a very different scale, the products they needed for value addition in their businesses also tended to be very different.
Distribution
The fragmentation of the mid-market segment means that establishing effective channels of distribution will be hard. While infrastructure is improving rapidly in India, delivery scales and timetables will have to factor in the difficulty of accessing some of the less developed areas SME's operate in.

Strategies to Enter the Mid-Market in India

Stax can help clients navigate through the general challenges of doing business in India, and the specific hurdles of capturing share in the growing mid-market segment. Through an honest assessment of the mechanics and processes operating in both demand and supply chains, we can offer our client companies actionable advice and a range of strategies to engage with the Indian mid-market. Stax is uniquely positioned to help Western clients enter the Indian mid-market segment because of our regional and industry expertise in India as well as our understanding of Western client needs:
  • Engaging for the long haul. Real success will be likely for those companies that are willing to engage with this market for the long haul through an evolutionary roadmap of price points and products. Even though the adoption of technology solutions will be at a basic level now, we expect these enterprises to scale up quickly and demand more sophisticated and expensive products within a short period of time. Furthermore, the regulatory landscape in India is becoming increasingly more favorable toward foreign investment. This trend is projected to continue, bringing a flood of investors and Western competitors into the market. Thus, early movers will be at a distinct advantage in capturing market share and establishing brand recognition and loyalty.
  • Embracing product adaptation. The winners in the mid-market segment are likely to be those companies that are willing to adapt their products and innovate, in order to better suit the true needs of Indian SME's, and to commit the resources to develop clients. Stax can help in product configuration by mapping out the mid-market’s true technological needs and wants. For instance, the European client that Stax conducted the initial mid-market survey for will be launching an entrylevel device designed exclusively for the Indian mid-market segment in 2011. Having heard Stax's insights, the client decided that investing in an adapted device at the present time would reap rich rewards for them in the future by capturing market share.
  • Exploring new distribution patterns. There are opportunities for players in the distribution space to answer the need for better networks within the midsegment. An early mover will be able to establish a platform of distribution for products across multiple technologies, and can expect the volume of traffic to grow rapidly in the next decade. Despite the difficulty of contacting some of these businesses, our research team was able to access them for interviews. Companies wishing to capture the mid-market segment can establish successful distribution and sales networks, if they are willing to invest some field time in a similar manner. Smaller enterprises already use the connections they have made with medium or large enterprises to access new products. With our on-the-ground presence, Stax will be able to assess the most cost-effective distribution platform that will help channel a client's products to elusive SME's. We can help identify ways to leverage such partnerships, as well as ways to use natural nodal points as distribution centers for a variety of technology needs.