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From base of social pyramid, only way is up

Firms serving Africa's poorest paving way for mutual growth

by Hiroko Nakata

Staff Writer

Third in a series

In a small village in northwest Senegal, residents depend on a treatment plant to clean enough of the nearby muddy river to provide them with potable water.

It takes a whole day for the blue machine with several attached tanks to purify 8,000 liters from the Senegal River near the village of Ndiawdoune Nar. The 8.1 by 5 meter treatment plant can purify enough drinking water for between 800 to 1,600 people.

“We are so welcomed every time we visit the village,” said Satoshi Yamagiwa, group manager of Yamaha Motor Co.’s clean water group. “Before the treatment plant was set up in the village, people had diarrhea and kids died. But now, not only the villagers but people in neighboring villages come to buy the water.”

The water-purification business at Yamaha, a global motorcycle and marine product maker, is a major example of “the bottom of the pyramid” concept introduced by U.S. business schools in the 1990s.

Now generally referred to as “base of the pyramid,” presumably due to its less derogatory connotation, the method is aimed at solving serious social problems, including unhygienic conditions and malnutrition in Africa, by designing products for the poorest segment of the global population: 4 billion people with a market potential of $5 trillion.

Via the base of the pyramid approach, companies hope to penetrate the African market and tap its vast potential, as both the continent’s overall population and economy mushroom.

Africa’s population, now at around 1 billion, is expected to rise 2.3 percent annually. China, which has some 1.3 billion people, is only expected to see a 0.5 percent increase, while India, whose population now numbers 1.2 billion, will see 1.3 percent growth.

The Japanese government started to support base of the pyramid businesses in 2009, prompting many firms to enter the market. The Ministry of Economy, Trade and Industry in 2010 created the Japan Inclusive Business Support Center to provide information about government support, countries to invest in and possible business partners.

Tokyo at the time was worried that Western, Chinese and South Korean firms had already jumped the gun and that U.S. and European entities were staking most of the claims, so it quickly needed to get Japanese businesses engaged.

“Even if it takes time, once (base of the pyramid) businesses start to generate a profit there is the potential that they will grow exponentially,” said Izumi Ono, a professor at the National Graduate Institute for Policy Studies and a specialist on global aid. Base of the pyramid businesses are deemed to be more sustainable than merely providing humanitarian aid, which has time limits, she said.

Base of the pyramid, or “inclusive,” business ventures aim to succeed by lowering retail prices to a level that even the poorest can afford.

Yamaha said the cost of 20 liters of water from its treatment plant is the equivalent of ¥5, compared with ¥25 to fully charge a mobile phone. The price comes from low operating and maintenance costs, and the local plant operators are the ones who are paid.

Unlike many other high-tech systems, Yamaha’s unit does not need expensive membrane filters or coagulants to clean water. In the first stage, it reduces mud and other sediment in the river water, and then bacteria purify the water and reduce iron and other substances. In the final stage, a slow sand filtration tank reduces fine sediment, sand and harmful bacteria.

“There are certain sectors (at the very base of the pyramid) that purely need financial aid,” said Yamagiwa. “But our clean water business targets the population just above that zone. We call it a zone of ‘uncultivated customers.’ “

Yamaha initially created very compact water cleaning installations for its employees assigned to Indonesia and their family members, and later started to sell bigger machines elsewhere in the world as a business.

The plants set up in Senegal, which is politically stable and has good access, and neighboring Mauritania were introduced on a trial basis with financial support from the Japan International Cooperation Agency and the Foreign Ministry. Yamagiwa hopes his firm will be able to actually sell five machines within a year in other western African countries. Yamaha does not disclose sales or profit figures for the clean water business.

Known globally for its motorcycles, Yamaha has run the core business for half a century in Africa along with other emerging markets. The experience is an advantage in terms of gathering local information, Yamagiwa said.

Ajinomoto Co. boasts a similar advantage.

The company has been selling monosodium glutamate in Africa for 25 years. In 2009, it launched a social business project to sell sachets of nutritional supplements for babies in Ghana, which also is politically stable.

“The project was launched in 2009, the 100th anniversary of our company. It is when we reconsidered how to contribute to society through meals,” said Yasuhiko Toride, who oversees the Ghana project and is the director of Ajinomoto’s nutrition improvement program.

Ajinomoto aims to sell its Koko Plus supplement, which consists of soybeans, lysine, vitamins, minerals and sugar, to help babies grow. The product is meant to be added to a local baby food called Koko, which is made of wheat but lacks protein.

The company is currently building sales channels to the poorest segment of Ghana’s population in cooperation with global nongovernmental organizations, including U.S.-based Care and U.K.-based Plan. At the same time, it is conducting tests of how Koko Plus affects babies’ height and weight.

The project not only targets malnutrition in babies but also provides jobs for adults. The sales networks with the NGOs offer sales jobs to women, while the production partnership with the local firm Yedent also creates employment, Toride said.

“I hope Ajinomoto can reach a break-even point three years after we launch mass production in 2014,” he said.

Ajinomoto launched the business in Africa because malnutrition remains an acute problem despite the continent’s recent economic growth.

The firm already succeeded in selling its core product MSG in Nigeria. In 2011, sales spiked 30 percent from a year earlier. The seasoning maker said its overall sales came to about ¥1 billion that year.

However, due to geographic and historical reasons, Japanese involvement in base of the pyramid businesses in Africa remains limited.

Unlike Yamaha, Ajinomoto and their many European counterparts, including Nestle of Switzerland, and Unilever, headquartered in Holland and Britain, few Japanese companies have business know-how in Africa. Other difficulties include organizational issues, as new business projects take time to become profitable and require appropriate human resources.

Toride of Ajinomoto pointed out that another key problem in doing business in Africa is a lack of legislation. It took longer than expected for Ajinomoto to get permission to produce Koko Plus as well as to test its nutrition effects.

Yamagiwa of Yamaha cited a unique local problem: African governments virtually stop operations during election campaigns, meaning the firm has to suspend its water business because it involves government permission.

Asked why the company is pursuing new business in Africa, Koji Sasaki, general manager at Toray Industries’ fibers and textiles green innovation business planning department, pointed to the continent’s vast business potential.

“Few companies aim at simply improving their social image,” he said.

For future opportunities, Toray is currently examining the effects of roll planters and sand tubes that turn mine waste in South Africa into farmland.

Sasaki said he hopes the company will start selling products made of biodegradable material called PLA this year.

Initial customers would be mine businesses that are pressed to take action to resolve mine waste problems. If the business performs well, the products will join the base of the pyramid market, he said.

“Africa’s market scale will become something that no other market can compare with,” Sasaki said.

“If the (base of the pyramid) population becomes richer in the future and invests in our other products, it will be big business. The project will also provide jobs to local people,” Sasaki said. “It is the base of the pyramid now, but we hope it will become a big market if they grow.”