When GE CEO Jeffery Immelt signed on to head up the President’s Council on Jobs and Competitiveness, he began encouraging U.S. manufacturers to export their goods as a way to promote U.S. job growth. Trouble is that for most manufacturers, exporting involves a lot more than just finding a distributor and shipping products overseas.
In truth, it might be easy for companies the size of GE to think about exporting, but obstacles in foreign markets can be close to insurmountable for the average manufacturer. To understand the problem, consider reverse innovation, today’s trendy idea for U.S. manufacturers. Its basic premise is that you do the innovating in emerging markets, then somehow morph the resulting technology into something that can be sold here. Manufacturers must take this tack, we’re told, because Indian and Chinese consumers aren’t interested in buying low-end or lightly modified goods that western manufacturers make. If true, that pretty much kills the idea that we can generate jobs in the U.S. just by exporting to emerging markets.
What kind of innovation do you need to sell stuff in places like India? An example is the ChotuKool refrigerator made in Mumbai. It lists for $69 and relies on a Peltier module for cooling, so there is no compressor or plumbing to boost the cost. This technique is only good for cooling to 36°F below the ambient temperature, but thanks to high-quality insulation, it is good enough for the low-income consumers it targets. The fridge can also run on batteries if need be because of the notoriously unreliable grid system in India.
The lesson of the ChotuKool, says Vijay Govindarajan, a business professor at Dartmouth College, is that western appliance makers could undoubtedly come up with similar offerings, but never by customizing one of their existing refrigerators. ChotuKool developers went through several iterations working with rural Indians and Indian financial institutions involved with microfinance to come up with a product appealing to households earning about $5 a day. That sort of collaboration is only possible by having a team on the ground in India. And that’s why it probably seems out of reach to midlevel U.S. manufacturers that can’t fund multiyear expatriate assignments in the developing world for their key employees.
The problem of resources becomes even clearer by considering the effort Deere & Co. had to put into developing an agricultural tractor for India. As Govindarajan reports, all Deere’s machines were too heavy and expensive for Indian farmers. The tractor maker came up with a model having a mere 35 hp, but it was far from being just a low-end knock-off of an existing vehicle. After two years of market research in India — which included disassembling six rival tractors — Deere eventually came up with a design that addressed complaints from Indian farmers about maintenance by incorporating new clutch technology developed for more-expensive models.
More to the point, Deere had to use a product-development process that employed about 120 people with many of them from Deere’s Indian operations. And manufacturing takes place in Pune, India, not here.
The magnitude of these reverse-innovation efforts might seem reasonable to manufacturers the size of Deere or GE. But it’s not clear how any of this will result in U.S. jobs, let alone products useful for U.S. markets. And so it is with all but a handful of reverse innovations, despite the cheerleading by Jeffery Immelt.
— Leland Teschler, Editor