English: Emerging Markets without China and India (Photo credit: Wikipedia)
A month back the leading generic drug maker CIPLA announced it was dramatically reducing the cost of a range of cancer drugs. So what, you might say? We do seasonal discounts all the time in retail, and in B2B there is no sale without a concession on price. Groupon equals low cost. But what CIPLA did was reduce the cost of cancer drugs by 75%. Full stop. Forever. Lung cancer, kidney cancer, brain tumor treatments. All down around 75%.
The reason, said CIPLA CEO Y.K. Hamied, was to show doctors that good treatments don't need to be expensive. In other words to break the link between brand and perceived value. And to let drug prices find their own level - or, in other words, to shake up the west's ideas about pricing. CIPLA will still make a profit at these levels.
It's not the first time we've seen radical price reductions come out of India - GE now sells a $200 infant incubator there, and developed the first mobile ECG machine on the back of its experiences there and in China. Ultra-low cost product, coupled to minimal losses in product functionality, are part of the new economic transformation story. But that's what American and European companies are still trying to hide from.
Recent recessions have had a habit of disguising such business fundamentals. But it wasn't always like this. In the 1970s it became apparent to Governments across the western world that ships could be built more cheaply in low labor regions like Korea, that coal could be hewn from the ground cheaper, in places where there were richer seams, and steel could be produced more effectively by companies without a long legacy of steel production. The result was that the baton of these basic industries passed to companies in the emerging economies.
The talk at three innovation conferences I've attended in the past three weeks, ISPIM in Barcelona, KIN in Chicago and HYPE in Bonn, has been of a transformation equal to that of the 1970s, a time when the world is fundamentally reorganized, this time around ultra low cost production. From train makers to plane makers and car companies, the story is pretty much the same. We have over-specified our products. The cars we drive are too functionally rich. The speeds we can achieve on rail are impressive but expensive to create. The health systems that keep us ticking over are just too expensive.
The new middle class, in what used to be thought of as the emerging economies, will have a disposable income of around $100 per month and upwards, after all essentials are taken into account. Ironically that would feel familiar to 25% of the population in Ireland who get by on that but who also have to manage a personal debt mountain. There's a fair chunk of the Greek population who would take it too. I guess the 23% of Californians under 30 who are unemployed (many of them with student loans to worry about) will also be wrestling with disposable incomes that skirt around that zone. And if you look at Spain then the 50% of its young people who are now without an income (go here for a critique of these figures) are probably managing on similar amounts.
The big story ahead of us then is not just about jobs that won't come back but how to produce for markets where incomes are permanently below their pre-crisis levels. Here's another irony. Analysts who monitor the real versus virtual economy believe Facebook is not a good model for innovation going forward. It's virtual nature, it's lack of tangibility, seem to make it ephemeral and unimportant in the real economy. Facebook, however, is the perfect affordable design. It costs very little. In fact it costs next to nothing. In the west we need more Facebooks, more instances of products where the cost is low and engagement high.
The CIPLA story is highly relevant to the emerging lower class in western society and the indebted middle class. Much of American society, just like Europe, is built on high margin protected business like pharmaceuticals. The harsh reality for Western companies though is that their products can be produced extremely cheaply, which for a decade now has meant outsourcing to China and India. But we're approaching the point where there is nothing other than a brand name and a design to stop producers from emerged economies serving American and European markets directly.
Well, almost. A lack of experience in global executive leadership is also holding them back. Pharmaceuticals, meanwhile, argue that the need high prices to fund their R&D and to push forward basic disease discovery. Auto-makers try to push the entry barrier up through standards. Telco infrastructure providers argue that their proximity to customers gives them a defensible advantage.
But the truth lies elsewhere. Not only can drugs be created at lower cost. The future of healthcare in fact reflects a new set of fundamentals in the economy. The race for highly specialized and targeted drugs makes scientific sense but their markets will surely be limited to the new rich, the 1%. Everybody else needs affordable health design, like they need affordable cars that will release income for other goods, affordable infrastructure, affordable past times, affordable experiences, a good life at ultra low cost. The coming crisis is a world where we can't afford anything less.
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