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.