Innovation is a key to enduring competitive advantage. Innovation that can open mass markets becomes an unsurmountable advantage in today's globalized world.

A Barrier To Entry is defined classically as an obstacle that makes it very difficult for a competitor to enter a market.

When these concepts were discussed 30 odd years ago, poverty in the developing world was considered a curse. There is increasing evidence that poverty, at least in India, is emerging as a trigger & key to product innovation as well as a very strong barrier to entry.

We articulated this hypothesis in our February 7 article titled Will The Indian Market Be To America What The American Market Was To Europe 100 Years Ago.

After all, 100 years ago, America was the emerging mass market. The dominant European companies of that time were focused on making high quality, expensive products for the affluent Europeans & Americans. American companies began making good quality but inexpensive products for the American mass market. These American companies became multinationals because of the competitive advantage of their inexpensive products and dominance of their local large market.

This, we argued, is beginning to take place in India today. We gave examples of the $2,000 Tata Nano car and the often predicted $20 laptop. Such inexpensive products are the only ones that can sell in India's huge mass market. We also argued that the ability to make such good quality but inexpensive products was certain to become a major competitive advantage for India's companies and a couple of multinationals who see the same opportunity. These uniquely innovative products had such attractive price points that they could create tremendous domestic and export opportunities for Indian or Indo-focused American companies like GE.

This week Erin Bellman of the Wall Street Journal wrote an article that provides several examples of this trend. In his article Indian Firms Shift Focus to the Poor, Bellman writes "such (inexpensive) inventions represent a fundamental shift in the global order of innovation." He goes on to say "They (Indian companies) are taking advantage of cheap research and development and low-cost manufacturing to innovate for a market that's grown large enough and sophisticated enough to make it worthwhile."

What are these innovative products that Bellman describes?

    * A small portable $70 refrigerator that can run on batteries from Godrej
    * A wood-burning stove for the village housewife for $23 from a start-up company
    * A $43 battery-powered water-purification system from Hindustan Lever
    * A portable bank branch system called Zero that costs $50 a month to run & services hundreds of customers daily.

These, according to Bellman's article, are highly innovative products and not cheap versions of existing products. Consider Bellman's description of the "Chotokool" (little cool) refrigerator from Godrej, the household products giant in India:

    * "It opens from the top and is about 1.5 feet tall by 2 feet wide. It is tiny because the poor live in small homes and don't buy food in bulk. It has handles to make it portable for the migrant workers who move a lot. It has no compressor to break or make noise. Instead, it runs on a cooling chip and fan similar to those used to cool computers. It can survive power surges and outages common in the country kitchen and even has the option of running on batteries. It also consumes only half the power so it keeps electricity bills at a level the poor can afford. While designed with cost in mind, it uses high-end insulation to stay cool for hours without power."

These products have the power to create jobs as well as open new markets. Hindustan Unilever sells its $43 Pureit portable water purification system through its network of 45,000 women who demonstrate Pureit and other  products in their own homes and sell door to door around their villages, often from the back of bicycles.

Not all products are from giant corporations. Bellman describes the $23 wood burning stove introduced by First Energy, a start-up company. As Bellman's article states:

    *  "This Pune-based company adopted the gasifier technology used in power plants to make a stove that would burn more efficiently and with less smoke. Engineers from the Indian Institute of Science in Bangalore designed a stove with a perforated chamber that uses a small fan to get just the right amount of air to keep a fire burning at a high temperature, meaning less smoke and quicker cooking. It has sold around 400,000 of the $23 stoves across India."
    * "A lot of innovation has gone into the stove as well as the fuel," which is dry pellets made of agricultural waste like corn husks and peanut shells, says Mahesh Yagnaraman, head of First Energy. "This is not a gizmo like a cellphone. But it is definitely a life-changing product because the houses will not be smoky.", adds Yagnaraman.

Bellman also describes the Zero system, an invention of a telecommunications engineer Anurag Gupta who distilled a bank branch down to a smart phone and a fingerprint scanner. The Zero System is now being used to help Indian laborers in Bahrain to open bank accounts and send money to their homes.

According to the article, these innovations are possible because engineers are plentiful and relatively inexpensive in India. GE Healthcare has used Indian software engineers to develop an electrocardiograph that costs $1,000, one-tenth the standard models used in the past. GE hopes to sell the technology in the U.S. eventually and elsewhere.

According to the article, GE's chairman, Jeffrey Immelt, on a recent tour of Asia, outlined how the global giant is restructuring to take advantage of what he calls "reverse innovation." While in India this month, he said the innovations in medical equipment in India could eventually help bring down the cost of health care in the U.S.

None of these product innovations could have been conceived or developed in America or Europe. These two societies are simply not poor enough to create such innovation. The poor in India are a huge mass market that can be dominated by such products and the companies that make them.

This is what we mean by Poverty being a Competitive Advantage and a Barrier To Entry. A dominant position in India's mass market provides the springboard to target other poor markets in Asia & Africa. Urban markets of Europe & America should be next. Europe is already a target market for the Tata Nano.

This story of product innovation and entry into a huge untapped market is the story unfolding in India. This is why we remain long term bullish on investing in India.

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