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The Rediff Business Special

New survey puts middle class at 425 million

Those who remain "will have to sweat it out," says Ramesh Chauhan, while CII Deputy Director-General M Roy says pointedly, "They have to restrategise in terms of demand." Small signs are there. A big Western breakfast cereal maker saying with much machismo it would change Indian tastes in ten years dropped prices on one of its mainline products.

All of last month, Mercedes Benz's advertisements for 151 of its unsold unfashionable E-220/E-250D models carried a paragraph introducing the new E-class. No one would buy the old with the new coming, so the quarter spread could be deemed a marketing disaster.

But its servile tone also showed how humbling the Indian market could be for a proud automobile giant and how it had to bow.

Motorola's Raman won't grovel. "The challenge," he says, "lies in protecting our brand name in a handset market that has become highly commoditised. Brands have lost their identity. People are going for price. They are looking at a deal. We will not allow our brand to die."

What's he doing? Being the market leader, he speaks about gaining some control or leverage over handset distribution that operators entirely handle themselves now. "Operators," he says, "are beating down our prices for subscribers who end up not paying them. So there is a big loss there. It is a chicken-and-egg situation. It is hurting us all."

Mukesh Pant, who heads Reebok India, thrills telling you that he sold all 1,500 pairs of the most expensive sports shoes made here, the Rs 4,490 DMX 2000. "Bata of India," he says, "is not our driver." You also hear Reebok is playing around with EVA or ethyl vinyl acetate (car tyre) soles for some of its shoes that ran green honeycomb cushioning NASA uses on spaceship-landing pads.

Have prices come down? "Yes," rues Pant.

Most foreign television manufacturers (except Sony) have reduced prices with Akai leading (its new 29-inch is Rs 30,000 less than Sony's). Two men from Daewoo Economic Research Institute visiting FICCI about making a small car were advised to keep it cheap and fuel-efficient, which could be financed at low interest. About washing machines, they were told fuzzy logic and other sophisticatedsystems had few buyers. Siddhartha Dasgupta of FICCI says, "We said, 'Sell a semi-automatic system costing below Rs 9,500 to Rs 10,000 and you can beat BPL. The Indian market is very price-sensitive'."

Bonfire of vanities

But there are limits to downpricing. Adidas joined with Bata some yeas ago and NCAER's Natarajan remembers that for Bata's customers it dropped prices. "Quality and sales slipped," he says. Start with low prices and you stay down-market too. "Maruti will find it very difficult to sell a luxury car," says Tara Sinha.

That is why Samsung advertises its top-of-the-line models though its cheaper brands sell better and the cause for Sony's consistent refusal to drop prices. It is the reason for the anxiety of Motorola's Raman about the "commoditisation" of the cellular handset market and also explains the pains Mukesh Pant takes convincing you that Reeboks "are top-end shoes".

But vanity, so far, has been unable to break the iron grid of price-sensitivity. Will things get better? Or might they turn worse?

The new class

Many multinational companies pin their hopes on a new NCAER survey segmenting the market into 'The very rich', 'the consuming class', 'the climbers', 'the aspirants' and 'the destitute'. Natarajan, who compiled the survey, says, "The very rich are gluttons for quality products while the consuming class purchase much of even indifferent quality whereas the climbers are restricted buyers."

He puts the number of the consuming class and climbers -- his middle class -- at 425 million or nearly half the population. This exceeds the 250 million to 300 million figure multinationals came in believing, now reckoned to be vastly exaggerated. Is Natarajan sure?

He is. He goes further to say that in five to 10 years the consuming class will treble and the climbers increase one-and-a-half times. This looks like a windfall but is it, well, real? Will these figures go the way of other figures? Gurcharan Das is sure they won't while Ramesh Chauhan still holds the "200 million figure for the middle class is horse shit."

The truth, according to the cash register, probably lies not in between but in the extremities. More people than ever before are buying bigger 29 to 53 inch televisions. At the same time, the 21-inch model costing about Rs 20,000 sells the most. Reebok's pricy DMX 2000 model was a sell-out. But a third of almost all sports shoes Reebok sells are its cheapest, the Rs 1,100 Classic.

It will be good news for Motorola if its new, high-end StarTAC 70 handset costing about Rs 20,000 sells well. Just now, Motorola D, priced around Rs 10,000, tops sales. "Nothing in between works," says Motorola's Raman.

You could perhaps except the automobile industry because Maruti 800, that is a cross-industry equivalent of a standard 21-inch television or the Reebok Classic, still has monopoly of the economy segment while the Mercedes Benz, the only car maker so far in the Rs 2 million-plus luxury division, has damaged itself putting out an older model.

Yet, the general principle applies because Maruti 800 sells the most and the so-called mid-sized segment of such cars as Daewoo-Cielo, Peugeot 306, Opel Astra and Mahindra Ford has shown negative growth. Further, the bottomline of the economy-car market could be threatened, like those of low-end cellular handsets or televisions, once TELCO and Daewoo introduce their small cars.

Now what picture do you get fitting NCAER's figures to these facts about consumption? Roughly speaking, it is that the 'very rich' buy top-end products while the 'consuming classes' and the 'climbers' are content with low-end products. Nothing revolutionary there. Mid-range products, such as they sell, would then appear to be bought more by the 'very rich' than the 'consuming classes'. Should MNCs be pleased?

Unlikely. The market for top-end products, by definition, is small. "It's like that even in America," says Tara Sinha. "We are saved by the sheer volumes of Maruti 800s," says a Maruti manager. All handset manufacturers are making losses on their low-end products. And if Akai persists with its exchange scheme, making a 21-inch television could become unprofitable. It is the market for mid-range goods, where price and volume satisfy, and where big monies are to be made, that is not growing. This worries multinationals.

'The Indian consumer revolution is a long way off'

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Kind courtesy: Sunday magazine