Adventure-Investing In the Rising Billion, Part II

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Dec 5th, 2012 | By | Category: Featured, High Growth, Investing Strategies, Investor Education

Yesterday, you learned about the macro-trends that are putting the United States on a more level economic footing with other countries, which Chris Mayer considers to be The World Right Side Up — as it is return to a more historically accurate world.

You learned about how roughly two-thirds of American citizens have passports, and how the yearly issuance rate of passport books has slumped since the 2008 financial crisis. While U.S. citizens traveling less and less, you have even more reason to be a contrarian and adventure-invest.

And following the words of The Daily Reckoning’s Eric Fry, “Capital flees from abusive relationships and seeks out environments where it can be fruitful and multiply”… you learned that capital is fleeing not just from developed countries that have suffered economic hardship, but capital is embarking on an “exodus” which is fueling emerging economies and propelling them into the global marketplace.

These poorest of poor, the so-called “bottom billion” are becoming “the rising billion” by plugging into the global economy. These emerging economies have unprecedented investment gaps of rock-bottom lows and rocketing highs — highs which could eventually top some of the best stocks in The United States.

Today, I’m going to show you what’s enabling “the rising billion” to do this, and then I’ll point to some investment opportunities.

Three things are enabling these countries to achieve such extraordinary feats:

1) A do-it-yourself mentality
2) Access to information
3) Transformative technologies.

The “Rising Billion’s” era now, all four billion of them.

The Do-It-Yourselfers

It took four years before anyone would publish one 16 page paper, which went through literally dozens of revisions before coming out in 2002 as ‘The Fortune at the Bottom of the Pyramid’ in the journal Strategy + Business. That paper became an underground hit before it was ever published and spawned a whole new field: BoP business.

The book Abundance articulates one case from the paper very well:

“Their article made a simple point: the four billion people occupying the lowest strata of the economic pyramid, the so-called bottom billion, had lately become a viable economic market. They didn’t claim that the bottom the pyramid (BoP) was an ordinary market, rather that it was extraordinary. While the majority of BoP consumers lived on less than $2 a day, it was their aggregate purchasing power that made for extremely profitable possibilities. Of course, this radically different business environment demanded radically different strategies, but for those companies that could adapt to business unusual, [the authors] felt that the opportunities were immense.

Backing up this claim was a quick survey of a dozen big-name companies that had all enjoyed considerable success in BoP markets after adopting business practices that were a little outside their comfort zone. Arvind Mills, for example, the world’s fifth-largest denim manufacturer, had a history of struggling in India. At $40 and $60 a pair, its jeans weren’t affordable for the masses, and its distribution system had almost zero penetration into rural markets. ‘So Arvind introduced Ruf & Tuf jeans,’ Hart and Prahalad wrote in The Fortune at the Bottom of the Pyramid, ‘a ready-to-make kit of jean components–denim, zipper, rivets, and a patch–priced at about six dollars. Kits were distributed through a network of thousands of local tailors, many in rural towns and villages, whose self-interest motivated them to market the kits extensively. Ruf & Tuf jeans are now the largest-selling jeans in India, easily surpassing Levi’s and other brands from the US and Europe’.”

This is only one of many anecdotes to show that if those at the BoP have the opportunity to increase the value of products, they’ll do it. What do they have to lose? It’s all gain for them.

Access to Information

As author and entrepreneur Peter Diamandis often points out: a Maasai Warrior on mobile phone has better mobile communications than the president did 25 years ago. If they’re on Google, they have access to more information than the president did just 15 years ago.

That means that they can instantly learn how to achieve what was before unthinkable. In India, after the mobile market caught on, less and less people died by simple maladies because they learned began to learn the radical benefits of regularly washing their hands. This is just the tip of the iceberg.

Many of today’s greatest commodities aren’t physical objects, they’re ideas. Economists use the terms rival goods and nonrival goods to explain the difference.

Take the words of Stanford economist Paul Rome:

“Picture a house that is under construction. The land on which it sits, capital in the form of a measuring tape, and the human capital of the carpenter are all rival goods. They can be used to build the house, but not another simultaneously. Contrast this with the Pythagorean Theorem, which the carpenter uses implicitly by constructing a triangle with sides in proportion of three, four, and give. This idea is nonrival: every carpenter in the world can use it at the same time to create a right angle.”

The developed world’s acquiring of knowledge is becoming further available to those at the BoP. More and more, the leaders of the “Rising Billion” will engage in the theory and calculation to prepare themselves fully before physical resources become affordable. When they do, they’ll make the constructive transition quickly.

Transformative Technologies

Consider that Africa is on its way to skipping an entire generation when it comes to mobile communications. Most of the continent didn’t have power lines, but they won’t need to because they’ll have wireless. The simple application of mobile banking on their phones saves them days of time in what used to be an incredibly long walk to deposit earnings in a bank. The internet, it should go without saying, compounds these capabilities.

A good point is made in the 1995 book Capitalism at a Crossroads: The Unlimited Business Opportunities in Solving the World’s Most Difficult Problems: “[I]t is very difficult to remove cost from a business model aimed at higher income customers without affecting quality or integrity”. Take the example of Honda’s motorcycles.

In the 1950s, Honda began to sell inexpensive motorized bikes in Japan’s congested, poverty-stricken cities. In the 1960s, when these bikes entered the American market, they reached the large demographic that couldn’t afford Harley Davidsons. The author of the above book explains, “Honda’s base in impoverished Japan gave it a huge competitive advantage in disrupting American motorcycle makers because it could make money at prices that were unattractive to established leaders”.

The investors behind the original Japan effort ended up making bank once the product entered the United States. So as you can see, what goes around comes around.

If you’d like to look at a similar business opportunity, check out Tata Motors Limited (ADR).

And look up their Nano car. Knowing what you know now, I think you’ll instantly recognize the investment opportunity. But don’t worry, this isn’t the only one you’ll hear from The Penny Sleuth. “The Rising Billion” will be a theme for many issues to come.

Josh Grasmick

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