Francis Gouillart, ECC Partnership Infonavit Forum on Housing Economics Veracruz, September 24, 2007 The ECC Partnership 100 Main Street, Suite 130 Concord, MA cell: The enclosed material is confidential and proprietary to the ECC Partnership and is for the internal use of the addressee only. Housing opportunities at the bottom of the pyramid

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 1 Outline  Bottom of the Pyramid: the assumptions we make  Pioneers at the bottom of the pyramid  Early pioneers in low-cost housing around the world  Building an eco-system: the e-choupal case  A possible vision for the Mexican low-income housing eco-system: process of co-creation

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 2 What defines the “Bottom of the Pyramid”? Annual per capita income (1) Population in millions ,500 – 1,750 4,000 More than $20,000 $ 1, ,000 Less than $ 1,500 Source: U.N. World Development Reports (1) Based on purchasing parity in US $

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 3 Six Assumptions You May Be Making 1. The poor are not our target customers because with our current cost structures, we cannot profitably compete for that market. 2. The poor cannot afford and have no use for the products and services sold in developed markets. 3. Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology. 4. The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits. 5. Managers are not excited by business challenges that have a humanitarian dimension. 6. Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid. Source: C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, strategy + business, Issue 26 Every single one of those assumptions is wrong.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 4 Cemex Launched the Patrimonio Hoy Project for the Poor People of Guadalajara (Mexico) “How can we give poor people access to the home-owning experience faster?”

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 5 The Challenge for Poor People: Building Their Home One Room at a Time Cement bag “Self-construction” market “How can we accelerate access to the cement bag for poor people?”

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 6 Patrimonio Hoy Builds on an Existing Community Called a Tanda Tanda concept  A tanda is a traditional Mexican community savings scheme. For example, 10 people save 1 peso per month.  Every five months, the accumulated savings is won in a lottery by one of five people, who receives 50 pesos. All participants win the 50 pesos one time only.  Traditionally, the tanda money goes toward festive events.  With Patrimonio Hoy, the winner receives a bag of cement from Cemex. The value is in the acceleration of access to the larger sum, and in the discipline of savings that is created (community peer pressure). Communities nearly always play a role in solving bottom- of-the-pyramid problems

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 7 A win-win solution for Cemex and tandas Microcredit lending to the tanda:  Based on solidarity of a group of at least 3 people.  No collateral required.  $4 credit for each $1 saved. Security of supply:  Frozen prices for 70-week periods.  Warehousing services to store materials according to customer needs. Technical advice:  Customized house growth project for each family, phased one room at a time.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 8 Results from the customer’s standpoint  More than 75,000 families have participated.  Customers in 23 cities served by 48 Cemex offices.  Families have built the equivalent of 33,000 additional 11-square meter rooms.  Accelerated access to home-owning: 1 room in 16 months vs. 48 months historically

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 9 Results for Cemex Results from Cemex’s standpoint  Excellent credit results: On-time payments better than 99%.  Demand expansion: Accelerated cement use. Creation of a new market valued at $ MM. Growing quickly.  Branding: Increased brand loyalty. Brand preference in other segments based on demonstrated socially responsible programs.  Generating its own growth resources: Customers become Cemex cement salespeople.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 10 The Casas Bahia retail chain of Brazil  Casas Bahia: founded in 1952 by Samuel Klein, an immigrant from Poland. Still privately held.  Today one of Brazil’s biggest employers, with 52,000+ employees.  In 2007, named one of the 250 biggest companies in the world by Deloitte Touche. The only Brazilian company on the list. Sales of US$4.8 billion in Highly profitable  Fast-growing: from 250 stores to 540 stores in the last decade. Department stores selling a wide range of home goods.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 11 Selling to poor people  The company’s name is a reference to Bahia, a Northeastern state of Brazil that is homeland of most migrants who move to the big cities of the wealthier Southeast in search of jobs. Samuel Klein originally immigrated to Bahia.  Most stores are located in poor parts of big cities. Klein first sold blankets and linens door-to-door in poor sections. When expanding his business, Klein realized that he had to sell goods in a way that poor people could pay for them. “My father’s vision was to fulfill the needs of the poor population. But how could they pay for it? The answer was simple: financing.” – Michael Klein Casas Bahia starts with customer empathy.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 12 Customer profile  70% of Casas Bahia’s customers have no formal, consistent income. They are primarily maids, cooks, construction workers and independent street vendors. Average monthly income: R400 ($200) They live mostly in favela shantytowns.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 13 The credit process 1.If merchandise costs less than R600 ($300), then no proof of income is required, only a permanent address. 2.If merchandise costs more than R600, then Casas Bahia uses its proprietary credit scoring system.  Based on income (both formal and informal), occupation and calculated expenses.  Electronic scoring takes less than 1 minute. 3.If the customer is rejected by the IT system, then he or she meets a credit analyst.  The analyst sizes up the person to determine trustworthiness.  The analysts are considered the linchpin of Casas Bahia’s success. 4.The customer receives a credit limit.  The credit limit increases when loans are paid back. 5.Loans are paid monthly.  They must be paid in-person at a store.  Financing accounts for about 90% of Casas Bahia’s sales. The key: a “co-created” approach to credit with each customer.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 14 Profits from financing  Most of Casas Bahia’s profit comes from financing.  Average finance term: 6 months (range 4-12 months).  Average interest rate: 4.13%/month Ranging from 2.5%/mo. for 4-month sales to 6%/mo. for 12-month sales. Company motto: “Every loan installment fits the size of your pocket.”  Average sale: R440 ($230)  The monthly interest rate is low compared to financeiras who traditionally serve Brazil’s low-income population. Financeiras charge up to 14%/month interest. On a per unit basis, bottom-of-the pyramid solutions are often more expensive than middle- or top-of-the pyramid solutions (and it is O.K.!).

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 15 Low default rates  Casas Bahia’s default rate from financing: 8.5% Default rate for competitors serving the bottom of the pyramid: 16% Default rate for all retail: 6.5%  “Finance here is totally different from what one learns in school. First, the informal market is twice as big as the formal market, especially in the lower- income population.  Most of my customers do not declare income. I have to believe what they are telling me. Here, several multinational retailers did poorly because they were not able to understand local needs, for example, Sears and Wal-Mart.” – CFO Michael Klein What would it take for Mexico to generate Casas Bahia-like builders of low- income houses?

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 16 Bottom-of-the-pyramid car: the Logan  The Logan is an inexpensive car produced jointly by Renault and its Romanian subsidiary Dacia. Manufactured at Dacia’s plant in Romania. Marketed as Renault, Dacia or Nissan depending on the existing presence of the Renault brand in a country.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 17 Designed for developing countries  Versions of the Logan take into account road and climate conditions in developing countries. The chassis sits high so that the car can negotiate dirt roads and potholes. The engine can handle lower-quality fuel. Air conditioning is powerful enough to lower temperature several degrees cooler than is necessary in Europe.  The original sales strategy was to create a car for people in emerging markets who have never owned an automobile – about 80% of the world’s population. The Romanian model was designed to hold “four adults, a pig, a sink, and 100 kilos of potatoes.”

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 18 Demand from unexpected quarters  “A strange thing happened when French auto maker Renault last fall [in 2004] rolled out the no-frills Logan, a midsize sedan was designed to sell for as little as 5,000 euros ($6,000) in emerging markets like Poland. Western buyers clamored for the car.  “So this June [2005], Renault began delivering the roomy, unpretentious five-seater to France, Germany, and Spain. “The West European version sells for a base price of $9,300 – about half that of the Ford Focus ($17,250) and the Volkswagen Golf ($18,264).” – BusinessWeek, July 2005  The Logan was launched in India in June 2007 in a joint venture with Indian manufacturer Mahindra & Mahindra. Made in India. Marketed as “India’s first wide-body car.” An instant success: nearly 3,000 cars sold in the first month.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 19 Modular manufacturing  The Logan is made with reusable elements, no expensive design elements and few electronics. Logan production costs: $1,089 per car, less than half the $2,468 for an equivalent Western auto – Deutsche Bank. Less than half the number of components of other cars. For example, a single-piece molded dashboard. “The Logan is the McDonald’s of cars. The concept was simple: Reliable engineering without a lot of electronics, cheap to build and easy to maintain and repair.” – Logan designer Kenneth Melville  Renault is ramping up production of the Logan in different low-cost countries: first Romania and India, soon Russia and Morocco. Low manufacturing investment. Therefore the factories don’t have to produce huge volumes to be profitable.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 20 Rising production  Sales from the beginning of production in 2004 through 2006: 321,284 Dacia Logans. Dacia sales for 2006 were over $2.1 billion. Up 19.6% from  Annual production: 175,000 in 2005, 200,000 in Half for exports. Prediction of 1 million vehicles globally by  Other Logan models launched in : 4-door sedan, wagon, pickup truck and hatchback. Dacia Logan MCV station wagon

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 21 Low-cost cars  Tata (India) will launch a R1 lakh ($2,500) car in The vehicles WILL be produced primarily in kit form for assembly at several places around India, to create local employment. “It will look like a car and have proper seating – stretched canvas seats would not, for example, be acceptable.” “It will be all right for it to be a bit more noisy than an ordinary car, but it has to be both simple and safe.” – Tata CEO Rajan Tata A model at the 2007 Geneva Motor Show If it works for cars, can it work for houses?

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 22 The need for low-cost housing around the world  2006 United Nations estimate: 750 million people live in urban areas without adequate shelter and basic services. 65% of the need for inexpensive housing is in the Asia-Pacific region. 16% in South America and the Caribbean. 11% in sub-Saharan Africa. 8% in North Africa and the Middle East.  The need for low-cost housing is often tied to the movements of workers in developing nations from rural to urban areas. “…cheap housing [is] vital to the city’s [Beijing’s] huge pool of migrant workers. China does not like to admit it has slums. But it does…” – The Economist

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 23 Major constraints in the delivery of low-cost housing United Nations report: 1.Lack of security for squatters and even renters. 2.Lack of adequate land for urban development. The #1 problem, particularly in countries with weak property laws. 3.The high cost of infrastructure and services. Subsidies often are misdirected. 4.Limited scope of housing finance programs. Most poor people rely on informal credit. 5.The use of imported building materials and technologies. Despite the presence of abundant natural resources. 6.Over-reliance on government housing programs. “…provision of ready housing units by governmental agencies to the needy households have failed almost everywhere. This approach is simply not sustainable and cannot reach the scale.” It takes an eco-system of partners to co-create the solution with customers.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 24 The problem of high-cost materials  “The construction industry in the developing economies is facing an immense and apparently worsening problem of required materials shortage aggravated by rising prices.  In most countries, frequent shortages have often led to further increases in prices and profiteering, thus marginalizing more and more people beyond the affordability level.” In developing countries, imported building materials often cost 70% of the total.  “One strong option is to promote use of innovative composite materials based on local resources from forestry, agriculture, natural fibres, plant materials, and other local resources like agricultural and industrial wastes…” – “Managing Low Cost & Innovative Housing Technologies” conference, India 2004 How can we involve Mexican material suppliers?

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 25 Building a whole village  Necessity Housing offers a plan for a village of 736 houses, ranging from 37m 2 to 111m 2. Average cost per house: $9,180 Use of local materials.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 26 Traditional home types at HUDCO’s Rural Building Centre Himalayan houseKarnataka mud house North-East bamboo house Sikkim house Wardha adobe house Kutch stabilized mud block house

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 27 Habitat for Humanity  An American-based housing ministry that relies on volunteers to build “simple, decent, affordable” houses around the world. 225,000+ houses built around the world, providing housing for 1 million- plus people in 3,000+ communities. Not free housing – paid for with no-profit, no-interest loans. Present in 90 countries. Houses built to local tastes with available materials. Habitat for Humanity does remarkable work ….

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 28 Habitat for Humanity builds below local costs Sri Lanka – average house cost: $2,436 Papua New Guinea – average house cost: $2,304 Guatemala – average house cost: $2,100 Romania – average house cost: $24,843 Hungary – average house cost: $25,516 … but in the end, the problem is best solved by private sector builders searching for a profit.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 29 New building technology: Moladi  Moladi is a South African building company that sells a proprietary building technology. A plastic injection-molded method for producing cast-in-place mortar structures.  The mortar dries within 24 hours and is then ready to receive the top structure, plumbing, conduit window and door frames.  The process allows unskilled laborers to use indigenous materials to quickly and cheaply construct high standard permanent buildings. “Moladi addresses six key challenges embodied in the housing shortage facing developing countries: lack of resources, shortage of skills, time constraint, controlled work flow, waste and insufficient funds.” – Moladi founder Hennie Botes

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 30 Assembly line techniques to lower cost and improve quality  Cost of a house built using Moladi technology: about $95/m².  Cost of a typical “affordable housing” house using cement building blocks: between $175/m² and $225/m². “In order to be a contender when it comes to delivering 50 or 1,000,000 houses, it should be viewed as a ‘production line,’ similar to that of the automotive industry. By applying a disciplined approach, logistics, management and a reliable technology such as Moladi, a project can be completed on time, in budget without forfeiting quality.” – Moladi founder Hennie Botes Bottom-of-the-pyramid solutions typically require scale and technology.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 31 Moladi exports its idea  Most of Moladi’s business comes from outside South Africa. Projects in Mexico, Panama, Angola, Botswana, Brazil and Kenya.  Moladi does not build the houses, instead selling the concept to local contractors.  Moladi’s molds are manufactured at a plant near Port Elizabeth and exported from the city’s harbor. Project managers travel from South Africa to transfer know-how. Moladi then sells the building mold to the builder. Available only to builders planning to build 50+ houses. An 800-house project currently being built in Los Mezquites, Mexico, with Moladi technology.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 32 E-choupal ITC case in India: can we learn from what they did? Local market called mandi Farmer Input suppliers (seed, fertilizer, etc.) Grain processor (ITC) How to know when to sell for best price? How to avoid being cheated at the mandi? What inputs to use? How can I get more high- quality grain? The problem from the perspective of the farmer and of ITC

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 33 Using information technology to create a more efficient exchange  ITC is one of India’s leading private companies. Annual revenues of US$2 billion. ITC stands for Indian Tobacco Company. Also a grain processor.  ITC created the e-Choupal program in 2000 in an effort to capture more of the soybean crop. Choupal means “gathering place” in Hindi.  ITC set up PCs in rural farming villages to create an e-commerce hub. ITC installed solar panels to power the PCs.  E-Choupal allow ITC and farmers to bypass the mandis. Farmers can check prices in near-real-time and decide whether to sell. ITC created e-choupal to make money.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 34 First, ITC set up a new market to compete with the mandi Local market (originally mandi, now e- choupal/ITC) Farmer E-choupal / ITC Input suppliers (seed, fertilizer, etc.) Grain processor (e-Choupal/ITC)

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 35 How the farmers benefit  Farmers selling directly to ITC through an e-Choupal usually get a higher price for their crops than they would through the mandi system. About 2.5% higher (approximately $6 per ton), on average.  Other benefits: More accurate weighing. Faster processing time. Prompt payment.  The e-Choupal system has had a measurable impact on Indian farmers’ activities: In areas covered by e-Choupals, the percentage of farmers planting soy has increased from 50% to 90% in some regions. The volume of soy marketed through mandis has dropped as much as half.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 36 ITC also set up a whole information system for the village community Local market (originally mandi, now e- choupal/ITC) Community of farmers Farmer E-choupal / ITC Input suppliers (seed, fertilizer, etc.) Global markets (Chicago Board of Trade) Grain processor (e-Choupal/ITC)

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 37 E-Choupal has set up new interaction platforms within the village The village expert or sanchalak plays a key role.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 38 The community brings additional value to farmers  Sense of dignity and respect.  Better price realization through information access.  Personalization of knowledge and expertise in farming practices.  Active learning through community of farmers.  One sanchalak followed Chicago Board of Trade commodity prices for a month and arrived at a correlation with local market prices. He then shared this information with other farmers to decide when to sell. – World Resources Institute What interaction platform could we put in place for the low-income housing community in Mexico?

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 39 Second phase of e-Choupal: rural superstores  ITC opened Choupal Sagar in India’s first private-sector superstore in a rural area. Occupying 2 hectares with a warehouse space of 929 m 2 (for storing 9,000 metric tons of grain), plus a gas station, food court and training center.  30 more superstores planned in  ITC calls the stores “the second avatar of the e-Choupal network.” “A deeper penetration into the rural areas is required for the second phase of the farm-based Internet intervention [i.e., e-Choupal].” – The Hindu Business Line newspaper

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 40 The future expansion of e-Choupal: “the Wal-Mart of India”  Through e-Choupals, ITC has the means to reach into many of India’s 600,000 villages, where 72% of the country’s people live. Most companies do not venture to villages with fewer than 5,000 people.  ITC plans to sell everything from microcredit to tractors via e-Choupals, thereby becoming “the Wal-Mart of India” – ITC chairman Y.C. Deveshwar “…the company behind e-Choupals, ITC Ltd., has done as much as anyone to bridge India’s vast digital divide…E-choupals may offer a model for all developing countries.” – The New York Times In 2006, ITC won the prestigious Stockholm Challenge Award, which recognizes initiatives that leverage IT to improve living conditions and increase economic growth in all parts of the world. Together, could we build in Mexico an eco-system like e-choupal for low-income houses?

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 41 Co-creation is the process that underlies successful solving of bottom-of-the pyramid issues Network Resources Customer Communities Communities are particularly active at the bottom of the pyramid.

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 42 As builders, you have a unique opportunity to co-create a bottom-of-the pyramid housing solution … Customer Builders

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 43 …but this will require that you develop a co-creation eco-system with your customer communities and other parties Community of customers Customer Builders Community of customers (labor) Customer as laborer Materials suppliers Municipalities, state governments

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 44 Infonavit can play a role in orchestrating the co-creation Community of customers Customer Builders Community of customers (labor) Customer as laborer Infonavit Materials suppliers Municipalities, state governments

Infonavit BOP Veracruz – © 2007 ECC Partnership All rights reserved. 45 Suggestion on how to get started: organize a series of co-creation workshops  Pick one or two development pilots where you can test the co-creation approach.  Run co-creation workshops with parties interested in developing a new approach to the bottom of the pyramid in Mexico, perhaps hosted by Infonavit: Small group of builders interested in playing Materials suppliers Customers at bottom of pyramid, coming both as individuals and as members of their community. Local township management and relevant NGOs Materials suppliers.  At the conference, create mix of “big tent” and “small tent” working sessions, using co-creation techniques to design the future interactions.  This is how most “bottom-of-the pyramid” efforts got started. Best of luck in co-creating your future.