Tech's Future

In recent months, the Andhra Pradesh province in southern India has been the
site of a rash of farmer suicides. Drought

and low-quality seeds have left poor farmers with failed crops and no way to pay
their debts. Many have swallowed lethal doses of pesticides as their only
escape. Government officials estimate the toll since May at more than 60.

Against this bleak backdrop, a ray of hope: Neelamma, a 26-year-old woman,
has found opportunity as a new type of entrepreneur. She's one of a dozen
itinerant photographers who walk the streets of their farming communities
carrying small backpacks stuffed with a digital camera, printer, and solar
battery charger. As part of an experiment organized by Hewlett-Packard, Neelamma
and the others are able to double their family incomes by charging the
equivalent of 70 cents apiece for photos of newborns, weddings, and other proud
moments of village life.

To make this happen, HP had to throw out its notions of how the tech business
works. Anand Tawker, the company's director of emerging-market solutions in
India, and his colleagues wrestled with fundamental questions: Does computing
technology have a place in villages where electricity is fitful? Could it
improve people's lives? How could villagers living in poverty pay for the
latest digital wonders? And they came up with answers. In place of standard
electricity, HP designers created the portable solar charger. Instead of selling
the gear outright, HP rents the equipment to the photographers for $9 a month.
"We asked people what they needed. One thing kept coming up: 'We want
more money in our pockets,"' says Tawker. "So we do experiments. We
launch and learn."

Why go to all that trouble? The answer is fast becoming obvious. During the
first 50 years of the info-tech era, about 1 billion people have come to use
computers, the vast majority of them in North America, Western Europe, and
Japan. But those markets are maturing. Computer industry sales in the US are
expected to increase just 6% per year from now to 2008, according to market
researcher IDC. To thrive, the industry must reach out to the next 1 billion
customers. And many of those people will come not from the same old places but
from far-flung frontiers like Shanghai, Cape Town, and Andhra Pradesh. "The
robust growth opportunities are clearly shifting to the developing world,"
says Paul A. Laudicina, managing director at management consultant A.T. Kearney
Inc.

Tech companies are scrambling to cash in on what they hope will be the next
great growth wave. Led by China, India, Russia, and Brazil, emerging markets are
expected to see tech sales surge 11% per year over the next half decade, to $230
billion, according to IDC. What makes these markets so appealing is not just the
poor, but also the growing ranks of the middle-class consumers. Already, there
are 60 million in China and 200 million in India, and their numbers are growing
fast. These newly wealthy consumers are showing a taste for fashionable brands
and for products every bit as capable as those available to Americans, Japanese,
and Germans.

That tantalizing opportunity is drawing all of tech's big players.
Microsoft is hawking software in Malaysia, Intel is pushing its chips in India,
Cisco Systems is in Sri Lanka, and on and on. IBM says emerging markets are now
a top priority. "We'll be even more aggressive," says IBM Chief
Executive Samuel J. Palmisano. In Brazil, where IBM's revenues just zoomed
past $1 billion, Big Blue plans on hiring 2,000 people and spending an
additional $100 million on market development.

A Rival in Every Port

For tech's giants, this is the equivalent of America's basketball stars
playing Argentina in the Olympics under international rules. The leaders are
just as vulnerable to upset because they're facing companies that grew up in
these markets and know them intimately. Just look to China, where homegrown
Lenovo Group Ltd. has fought off Dell and other invaders to remain the top PC
player. The Western powers may be accustomed to dominating in the developed
world, but as the competition shifts to new terrain, their lock on the future is
far from secure. They face stiff challenges from service companies in India,
online gaming pioneers in Korea, security outfits in Eastern Europe, and network
gearmakers in China. Even mighty Microsoft is vulnerable. Open-source software,
with growing support in developing countries, could stunt its growth.

The closest historical precedent for what's happening now is the PC
revolution of the late 1970s and early 1980s. Before the PC, computers were the
province of technical druids in giant corporations and government offices. Then
with Apple Computer's Macintosh and IBM's PC, the tech industry underwent a
huge market-expanding shift. Computers began to show up on the desktops of
everyone from schoolchildren to small-business owners. The result was seismic
change. Microsoft, Intel, and Dell became the new champions, while dinosaurs
like Digital Equipment lumbered off to the tar pits. Now, with rapid diffusion
of technology into emerging economies, the industry is again reaching a gigantic
new audience. And a new generation of companies will try to kick their elders in
the teeth.

The challenges of succeeding in emerging markets are forcing the Western
powers to come up with bold new strategies. They're under pressure to innovate
like crazy, pioneer new ways of doing business, and outmaneuver their feisty new
competitors. "The pattern in the past was to sell the same stuff to the
same kind of customers. But that won't work, and it has to change," says
C.K. Prahalad, business professor at the University of Michigan Business School
and author of The Fortune at the Bottom of the Pyramid, a book about commerce in
the developing world. "What's required is a fundamental rethinking of how
to design products and make money."

The result is an outpouring of innovation, from both the old guard and the
up-and-comers, that could rival that of the PC era. The Indian photographer's
setup is just the start. New innovations designed for the developing world range
from the Simputer, a durable handheld being sold in India, to e-Town, a package
of all of the products and services rural Chinese towns need to provide Net
access for their residents. And who would have thought up a cell phone designed
for the world's 1.4 billion Muslims? Nobody-until now. Tiny Dubai-based
Ilkone Mobile Telecommunication has just started selling a phone that not only
comes loaded with the Koran but also alerts people at prayer times and, with the
help of a compass, points them toward Mecca.

Developing countries require new business strategies as well as new products.
Most families in rural China or India can't afford a PC. In many instances, a
handful of computers have to be shared by a whole village to be economically
feasible. A new class of businesses-tech kiosk operators-is emerging to
provide computing as a service. With cash often in short supply, pay-as-you-go
programs are not only boosting cell-phone usage but are catching on with
computers and Web access as well.

When these technologies cycle back into the mature markets, it could change
everything from pricing to product design. To succeed in the developing world,
devices and software have to be better in many ways: cheaper, easier to use,
extra-durable, more compact-and still packed with powerful features. The
resulting improvements will ultimately benefit everybody from New Delhi to New
York. One possibility: HP is testing a solar fabric with itinerant photographers
in South Africa that costs 80% less than the traditional solar panels that they
use in India and won't crack. If this works out, people around the world could
recharge their portable electronics by dropping them into carrying cases made of
the material.

Creating Consumers

For tech's powerhouses, this shift to emerging markets cuts both ways.
They have a chance to round up many new customers, but only if they're smarter
than their new competitors. They'll have to invest substantial sums of money
up front. Yet, for many products, prices will of necessity be very low. While
the first billion customers produced an industry with more than $1 trillion in
annual revenues, sales for the second billion won't be anything close to that.
And ultimately, lower prices in the emerging markets will put pressure on prices
everywhere. You could end up with an industry that, while it delivers a lot of
value to a lot of people, it won't be able sustain the revenue growth rates or
the profit margins of its glorious past.

On the brighter side, tech's spread into emerging markets could have a
snowball effect on the world economy and the tech industry's fortunes.
Investments in technology stoke national economies - boosting productivity,
gross domestic product, and consumption of all sorts of products, including more
technology.

Strategic Rethinking

Cintia Arantes and Eduardo Severino de Santana are the embodiment of that hope.
The Brazilians, both 22, grew up poor in Recife, on the country's northeastern
coast. But both are climbing the social ladder thanks to a local program that
trains disadvantaged Brazilian youths in computer skills. De Santana, who had
been unemployed last year, quickly turned one computer course into a job helping
to manage the tech facilities at a national law firm.

Arantes' trajectory could take her even higher. Her laborer father doesn't
have steady work, so she helps support the family of six by working nights at a
phone company call center. Thanks to a tip from a teacher at a school where she
was an administrative assistant, she started taking computer courses last year.
Now she's an intern at a local software company in the mornings, takes courses
in the afternoon, and hopes to enter a university computer engineering program
next year. Her goal: to become a programmer. "I'll keep on battling until
I get there," she vows. In the meantime, she's trying to save up the $700
or so it would cost to buy a PC.

In many cases, tech companies will only succeed in emerging markets if they're
willing to ditch the strategies that made them successful in the developed
world. Take Dell. In 2000 it introduced a consumer PC in China, called SmartPC,
that was different from any it had sold before. It came preconfigured rather
than built to order, and it was manufactured not by Dell but by Taiwanese
companies. At less than $600, the SmartPC has helped Dell become the top foreign
supplier in China. Its share of the PC market there rose from less than 1% in
1998 to 7.4% today.

Cultural Customization

There's no easy formula for selling in emerging markets. Some corporate or
government customers in Russia and Brazil are as big as any in the US, and their
needs are just as sophisticated. Russian Railways, with 1.2 million employees,
spent $2 billion over the last three years building a modern data communications
system. "We're very proud," says Anna Belova, deputy minister of the
railway. "We have a huge scale of tasks, and we find creative
solutions." Now other giant Russian enterprises see it as a role model and
are boosting their tech purchases, too.

To target innovations that will resonate in these markets, companies are
conducting in-depth studies of peoples' needs. Intel, for instance, has a team
of 10 ethnographers traveling the world to find out how to redesign existing
products or come up with new ones that fit different cultures or demographic
groups. One of its ethnographers, Genevieve Bell, visited 100 homes in Asia over
the past three years and noticed that many Chinese families were reluctant to
buy PCs, even if they could afford them. Parents were concerned that their
children would listen to pop music or surf the Web, distracting them from school
work.

RAPID TRANSITION  Russian Railways' Belova works for a recently wired giant RUSSIA The nation's large companies are beginning to see the point of investing in information technologyÂ

Intel turned that insight into a product. At its User-Centered Design Group
in Hillsboro, Ore., industrial designers and other specialists created
"personas" of typical Chinese families and pasted pictures that Bell
had taken of Chinese households on their walls. They even built sample Chinese
kitchens-the room where a computer is most often used. The result: Late this
year, Intel expects a leading Chinese PC maker to start selling the China Home
Learning PC. It comes with four education applications and a physical lock and
key that allows parents to prevent their kids from goofing off when they should
be studying.

Many products designed for consumers and small businesses in emerging markets
will have to fit some demanding specifications: They need to be simple to use
and capable of operating in harsh environments. A handful of products have
already come out with these factors in mind-and many more are on the way.
India's TVS Electronics Ltd., for instance, is selling a new kind of
all-in-one business machine called Sprint designed especially for that country's
1.2 million small shopkeepers. It's part cash register and part computer,
designed to tolerate heat, dust, and power outages. The cost: just $180 for the
smallest of three models.

Pricing is often the make-or-break factor. In rural South Africa, where HP
has set up a pilot program similar to the one in India for developing
technologies for poor people, the average person makes less than $1 a day.
Clearly, not too many can afford to buy their own personal computers. HP's
solution? The 441 PC (as in four users for one computer). It's a machine set
up in a school or library that connects to four keyboards and four screens, so
multiple people can get on the Net or send e-mail at the same time.

Some of the best ideas for the developing world have the potential for
catching on everywhere-including the US. It's already starting to happen.
Kishore Kumar first developed a simple PC-based remote health-monitoring system
for distant villages in his native India. Now his company, TeleVital Inc. of
Milpitas, Calif., is marketing the technology in the States. The first US
customer, Battle Mountain General Hospital in Battle Mountain, Nev., couldn't
afford patient-monitoring equipment-or people to operate it. Now it's
hooking up with a hospital 100 miles away to track its patients. Says Battle
Mountain administrator Peggy Lindsey: "We in rural America can really use
equipment like this."

When tech companies modify their existing products for emerging markets, they
can end up with improvements that have a broader impact. That's what happened
at Nokia Corp. when it set out to reduce the costs of setting up and operating
wireless telephone networks. One improvement, called Smart Radio technology, can
cut in half the number of signal-transmission sites operators need. Wrap that
and other new technologies together, and operators can build networks for up to
50% less than before. Nokia has been rolling out these innovations from Thailand
to Peru. DTAC, the No. 2 Thai cellular operator, is installing the new gear
around Bangkok. "If this works, we can use this concept to penetrate into
much more remote areas up-country," says Sigve Brekke, the company's
co-CEO.

Dell already has translated emerging-market innovations into successes in its
traditional markets. After SmartPC took off in China, Dell in 2001 introduced a
version for the US, for the first time going after bargain hunters. A year
later, Dell absorbed the SmartPC into its mainstream consumer product line as
sales took off. "We try to take some of the best ideas we have seen that
are happening in local environments and make it a global product," says
Dell Senior Vice-President William J. Amelio.

Dell, Nokia, and other Western giants need all of the innovations they can
muster, especially as the field of competition shifts to emerging markets, and
they're confronted by a stampede of aggressive challengers. Chinese
communications-equipment maker Huawei is giving Westerners fits in its home
market, where it has captured a 16% share in the crucial router business, second
only to mighty Cisco, according to IDC. And thanks to prices up to 50% lower
than rivals', Huawei is expanding everywhere from Russia to Brazil. It already
ranks No. 2 worldwide in broadband networking gear, says market researcher RHK.
"Huawei is being very aggressive," says Cicero Olivieri, director of
engineering and planning for GVT, a large telecom company in Brazil.

Momentum Shift

The most serious challenge lies ahead. Huawei is pouring money into Internet
Protocol version 6, or IPv6, the standard for the next-generation of the
Internet that will have more security, speed, and capacity. And if Huawei's
close ties to the Chinese government help it become the early leader in the
technology, it could get the jump on rivals such as Cisco, Alcatel, and Lucent.
"The Ciscos of the world will have to change their business models to
compete-and try to out-innovate these small, nimble companies," says
William Nuti, a former Cisco senior vice-president and now CEO of Symbol
Technologies.

Throughout the developing world, new players are popping up like obstacles in
a Super Mario Brothers game. Take the online game business itself. Upstart
NCsoft has taken advantage of Korea's lead in broadband penetration to build
the world's largest online game business, with more than 5 million monthly
subscriptions. NCsoft CEO Kim Tack Jin is now expanding in Taiwan, China, Japan,
and the US-where 228,000 copies of its City of Heroes game were sold in the
first three months after its April release. The key to NCsoft's success: It
has come up with a combo of fantasy and action gaming that's a hit with
players.

Even mighty Microsoft is vulnerable to the competitive threats. Linux is
emerging as a viable alternative to its Windows in developing markets and could
cut into its market share. China, Japan, and Korea are collaborating on a
version of the free open-source software package. A number of governments are
considering policies that favor open-source software packages, and one, Israel,
has already decided to stop using Microsoft's products. While that affects
only tens of thousands of government workers, if other countries take the same
path, millions of their employees could end up using open-source software,
rather than Windows and Office.

Microsoft doesn't have an answer -at least not yet. In October the
company, which declined to comment for this story, will begin to sell a cheaper
Windows in Thailand, Indonesia, and Malaysia in an effort to beat back the
open-source threat. But it so far refuses to follow suit in China-where it has
had four general managers in six years. "Business as usual won't work
there. They have to find new ways to do things," warns Jack Gao, who ran
Microsoft China from 1999 to 2003 and now heads up software maker Autodesk's
China operations.

It may turn out that patience is the most important attribute for tech
companies trying to get things going in emerging markets. IBM, after all, has
been in Brazil for 87 years. Hewlett-Packard has spent three years establishing
pilot programs in India and South Africa, and, finally, they're starting to
yield products and to improve the lives of the locals. Take Neelamma, the
itinerant photographer. She has become a star in the two-room house with a dirt
floor that she and her stonecutter husband, Krishnamurthy, share with his
parents and brother. What are Neelamma's dreams? "I want to buy a
television and a ceiling fan. And I want to build a small photo studio in my
home," she says. One young woman's life and aspirations have been changed
by the arrival of technology. Another 1 billion new consumers may not be too far
behind.

By Steve Hamm With Manjeet Kripalani in Bombay, Bruce
Einhorn in Hong Kong, Andy Reinhardt in Paris, and bureau report In BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc

How the Tech Industry is Changing

The rapid growth of sales in developing countries is having a profound impact
on the tech industry. Companies must reimagine how they design products and do
business.

Design


Products have to be simpler and more durable. TVS Electronics, an Indian
printer maker, is producing devices for India's 1.2 million small shops. They're
an all-in-one computer, cash register, and inventory-management system. They can
be operated with icons, because many clerks are illiterate. And they tolerate
dust and heat.

Innovation                    


Companies have to innovate for the peculiarities of emerging markets.
Electricity often is unavailable or unreliable. That prompted Hewlett-Packard to
design a small solar panel to charge digital printers for itinerant
photographers in India. In South Africa, HP is working with a solar fabric that's
cheaper and less fragile.

Pricing                           


There's pressure on prices, so some companies are using pay-as-you-go
schemes. Poland needed to modernize its drivers' licensing system but couldn't
afford it. So Hewlett-Packard agreed to install Poland's new computer system
in exchange for a cut of the fees drivers pay each time they get a new license
or renew an old one.

Business
Development

The old strategies may not work anymore, so companies are trying new ones.
IBM .gures it can do well in China by supplying technology to local companies.
Example: It developed a low-cost, $12 microprocessor and a simple network
computer for China's Culturecom, which is selling computers and Net-access
services in the country's rural backwaters.

Competition                  


Companies like Cisco, Dell, and Microsoft dominate in the developed world.
But now a host of new challengers are using their low costs and intimate
knowledge of local markets to give the giants trouble. Chinese networking
upstart Huawei can charge 50% less for gear than Cisco, and is starting to make
inroads worldwide.