Inclusive business trends in South Asia and South East Asia
We titled the report on the Asian Development Bank's (ADB) 2nd Inclusive Business Asia Forum ‘A gathering of pioneers’ because it truly was! At the Forum, held in Manila in February 2016, we heard from those working at the cutting edge of inclusive business (IB) and developing models that are breaking new ground. These pioneers are indicative of the state of inclusive business in Asia – that it is growing rapidly but is still considered a ‘niche’ sector and that it takes hard work and needs championing. The discussions also illustrated however that a possible tipping point is approaching, where IB wins acceptance and could accelerate.
The number of IB models and initiatives is rapidly expanding in Asia. While South Asia is leading in innovative and profitable IB models, IB activity in Southeast (SE) Asia is more centred around social enterprise and CSR activities. In both regions however, knowledge and investment are growing across the sectors. The Forum discussed innovative IB models in agribusiness, digital finance, education, health, urban services, and in new areas such as resource based industries, utilities, insurance, and tourism.
Within this broad spread, the largest concentration of businesses was in agribusiness, working with smallholders. Some of the most established agri-businesses are already working with over a million low-income clients (e.g. Jain Irrigation) but other initiatives are on a much smaller scale. Some companies, such as Jollibee in the Philippines, have transitioned initiatives from CSR to core business.
Some of the fastest growing business examples were tapping into pent up consumer demand within the BoP: Coins.Ph reported signing up 1,000 new customers a day, enabling Filipinos to send and receive remittances at a fraction of the normal transfer cost. BIMA, providing digital insurance, is signing up 700,000 subscribers per month. Others tap into high demand for products supplied by the BoP. An ADB dairy investment in Pakistan is rooted in the fact that urban demand for milk is growing at 15-20 per cent per year, while smallholder supply has been growing at only per cent.
Investors and governments are building the eco-system for inclusive business. But overall, deal size is still small in most cases, awareness in mainstream business is low, and the eco-system is fragmented. The majority of deals are in businesses with annual revenues below $5 million. Even the largest inclusive businesses, reaching tens or hundreds of thousands of people at the base of the pyramid, are mostly penetrating only a fraction of the market.
Forum participants were candid about the challenges they face in building inclusive business models – they tend to be messy, complex, iterative as well as inspiring. Large companies talked about the need to invest in pilots for a year, in order to get the model right. Small companies struggled with balancing delivery, growth and fund-raising. Bankers needed to see projects on the ground, to understand how best to structure risk and finance.
Figure 1: Inclusive business is messy and takes iteration
The Executive Vice President and Director of Creating Shared Value Management of Korean conglomerate CJ Foods explained how they spent over $1million trialling seeds and conducting trial runs when CJ started working with poor famers in Vietnam. The chillies were too hot and it took time, patience and partnerships to find the right chillies that the farmers could grow and would feed into the business’ supply chain. This is now an ongoing CJ initiative with smallholders in Vietnam regularly supplying chillies and CJ providing other support services to the farmers.
Inclusive business is rarely a ‘one shot’ business. Jollibee, a large Filipino food business, had to develop four offerings for its farmer entrepreneurship sourcing program: agro-enterprise support, farmer training, access to MFI finance, and linkage to markets for produce sales.
Differences with Latin America were also noted. Inclusive business is better established in Latin America with more innovations, more businesses, and active engagement of the Inter American Development Bank and the International Finance Corporation. With higher living standards in the region, inclusive business is defined as reaching those living on less than $10 per person per day. IADB’s 2015 report - emphasizing that BoP consumers are increasingly urban, connected, educated and able to make discretionary expenditure - provides detailed information on the BoP consumer market, described as ‘Rising US$750 billion market’. Several reasons for the difference between South Asia and Southeast Asia were discussed. The ‘typical’ problems of IB apply in both: high cost of last mile distribution, unfamiliarity with the purchasing and living behaviours of the poor, the large informality of the market, high perceived investment risks, and barriers to affordability and distribution. However, in Southeast Asia other factors come into play including high risk aversion, a culture where imitating innovation is more wide-spread than leading innovation, and an environment in which caring for the poor is done actively by private sector through philanthropy and CSR, and is expected to be delivered by the government.
Figure 2 Lower Inclusive Business activity in Southeast Asia compared to South Asia
A recent ADB study on the Philippines found only about 100 commercially viable IB models, out of the one million companies (most of them in the informal sector) and 20,000 social enterprises, NGOs, cooperatives, and community organizations. Of this 100 only perhaps 15 were investable (meaning having sufficient scale for growth and a big enough rate of return - more than 10 per cent perhaps - to counter the opportunity costs arguments of Chief Financial Officers and bankers).
Another ADB study, jointly with Credit Suisse estimated that by 2015 about $3.6 billion has been placed in Southeast Asia by impact investors. In contrast, Dalberg and the Global Impact Investment Network (GIIN) did a similar study for South Asia finding about $6 billion investments cumulative.