Contents:
I) Working Hypothesis on the Most Effective and Sustainable Means
II) Industry Analysis
III) Two Possible Business Models
I) Working Hypothesis:
The most cost-effective and sustainable means of providing affordable alternatives to fuel-based lighting for rural regions of Africa will be delivered by private enterprises providing rechargable LED or CFL lighting appliances. In order to overcome challenges in sourcing, marketing and financing (see Industry Analysis below for an overview of these challenges), a capable entrepreneur will require business acumen, technical aptititude, financial resources, and access to a network of complementary organizations that have a stake in the success of the lighting enterprise.
Given our belief that the ultimate provision of rural off-grid lighting solutions can best be undertaken by a private enterprise, and that the social benefits from provided by such an enterprise are highly desired, the role of our team should be to provide as many of the necessary resources as possible in order to encourage the success of such an entrepreneur.
As Columbia Business School students working with the Earth Institute, our team will add value to the enterprise by providing information on the cost attributes of a range of possible lighting products as part of an actionable business plan. In addition, we will work to establish a series of relationships with complementary organizations that a would-be entrepreneur can access at a later date.
Among the resources our team can most easily offer include:
* Research into the availability, price and lighting attributes of a range of available lighting products (supply chain research in China/India/Kenya; Columbia ME Dept. Studies on Attributes)
* Contacts with suppliers, importers, distributors and other key players in the supply chain for these products (contacts made during supply chain research, Nate Choge's father, transport companies)
* Links to potential sources of financing from local or international lenders (local MFIs, E+Co, Enterprise Works, etc)
* Information on the market for alternatives to fuel-based lighting (IFC, Practical Action, etc)
* Information about successful distribution models for related products in similar markets (cell phone companies, Enterprise Works)
* Links to academic institutions that can offer marketing and operations expertise within Kenya (University of Nairobi School of Business)
Although we would prefer to have a candidate for establishing the enterprise before setting out to acquire the required information and resources, we see considerable benefits in developing the knowledge and relationships now rather than waiting. Our hope is that our project will provide an actionable business plan that can serve as a means for catalyzing the future growth of such an enterprise. Once a suitable entrpreneur comes forward, he or she will be able to leaverage the information and contacts gathered as a part of this project to deliver the desired lighting solutions to rural areas. More specifically, he or she will gain signifiant credibility by referencing our team, the Columbia Business School and the Earth Institute when communicating with the businesses and supportive groups in this network.
II) Industry Analysis for Rechargable LED and CFL Lighting Appliances for Off-Grid Areas of Rural Kenya
Any enterprise hoping to enter the business of providing LED and CFL lighting appliances to the rural poor will face challenges created by the lack of leverage with key suppliers and the extreme poverty and isolation of target customers. However, LED and CFL lighting products' clear superiority over existing substitutes, the relatively low barriers to entry, and existence of a strong network of complementary organizations present an attractive industry environment. Because very few businesses are currently serving this market, a considerable advantage may be available to the first individual or group to successfully enter.
Substitutes:
Rechargable LED and CFL lighting products enjoy considerable benefits relative to existing substitutes, however the large up-front costs will pose a challenge for a business targeting the rural poor. Existing substitutes to rechargable battery-based lighting appliances in rural areas of Kenya include kerosene, candles, biomass (firewood), grid connections, small-scale solar systems, microhydro systems, and liquid petroleum gas. Each of these options has considerable drawbacks relative to rechargable battery systems for use in rural Kenya. Yet according to the IFC, worldwide fuel-based lighting currently represents a $38 billion/year business with an established value-chain, collection systems, “technical support,” access to spare parts, and repair services.
Some existing substitutes to LED and CFL rechargable battery lighting include:
- Kerosene lighting costs 150 times more per lumen than LED lighting. Kerosene emits greenhouse gases and hazardous smoke that in large enough quantities can lead to health problems. Kerosene is the lighting product of choice because it can be packaged in very small quantities to bring it into reach of the rural poor.
- Candles – expensive, poor light. Like kerosene, can be sold in small enough packages to make it affordable for the rural poor.
- Biomass (firewood) - low quality light, generates severe respiratory problems, diminishing availability without proper management of forest resources. Where available, firewood is often free, making it an attractive source of light and heat energy.
- Microhydro - a viable option only in population centers close to a suitable hydrologic resource. Requires communal organization or outside support to raise the funds needed to construct the project.
- Solar home systems are too expensive, and businesses providing these have proven only marginally successful; not a solution for the rural poor
- LPG - too expensive for the vast majority of rural households
- Grid-connections are slow to arrive, too expensive, and generally uneconomic in remote parts of rural Kenya. In Sauri grid connection at the household level is simply not a viable option.
Barriers to Entry:
Entering the industry on a small scale would require low capital investment. Lighting and battery systems are available as off-the-shelf commodities, assuming the enterprise can make the right connections with China, has adequate knowledge of ocean freight procedures, contacts in the customs industry.
System costs for LED lighting appliances have only recently fallen into affordable range for the rural poor. As a result, the pay-back period for an LED lighting system has decreased to about 6 months.
The biggest challenge for any company entering this industry is establishing a distribution network in geographically isolated areas with customers who cannot afford to pay for your product up-front.
Customers:
Demand for lighting solutions in rural areas is high, and customers have demonstrated a willingness to pay for products that resolve this problem.
- Only 6 percent of rural Kenyans are connected to electricity grids. Meanwhile, 96 percent of rural and 82 percent of urban customers use kerosene for lighting.
- Strong demand for light to allow increased productivity and entertainment after dark
- Lighting allows kiosks and small storefronts to extend their operating hours and boost their income
- End-users motivated to adopt alternative to fuel--based lighting but constrained by choice at level of income- Off-grid lighting often most expensive energy item in household –up to 50% of energy expenses, as much as 33% of household income
- Value offered is in energy savings and higher quality light output.
- Households–Rural–Urban–Peri-urban–Refugee camps
- High potential Non-Household markets include Street vendors and kiosks*–Schools–Clinics–Fishermen–Manufacturing–Signage–Night watchmen–MiningQuickTime
- Per capita income is just $400, purchasing power parity adjusted = $1200
- 90 percent of rural Kenyans live within 10 km of the grid
Stats from IFC Lighting the Bottom of the Pyramid:
Suppliers:
The best suppliers are likely to be Chinese or Indian manufacturing firms. These are large companies that prefer to sell in allotments of 10,000 units or more, creating challenges for any player starting out at the village level. A larger scale distribution network would provide the economies of scale necessary for leverage with suppliers. Such leverage would help reduce unit costs and allow for broader reach in price sensitive rural markets.
Key Complementors:
The key to tapping this market is for the enterprise to leverage the vast supportive network of complementary organizations in addressing the challenges outlined above. Some organizations with the ability to increase customers willingness to pay for rechargable battery home lighting solutions include:
- Microfinance organizations – can help finance a business providing the lights, and perhaps more importantly, provide the credit that customers need to meet the up-front costs of the lighting appliances.
- Kenyan Government – provision of infrastructure needed for the market to develop: grid electricity to schools and other potential recharging stations; roads for transport to remote regions; stable environment for capital investments; incentives to market development.
- IFC’s Efficient Lighting Iniative, Lighting the Bottom of the Pyramid and Light up Africa Projects:
The IFC seeks long-term and sustained impact on markets through: Increasing consumer knowledge and demand, Improved accessibility of capital, Increasing sales volume, and product availability The IFC has said that it will support individual company strategies, Provide and/or Mobilize Debt/Equity for a local assembly facility; Provide and/or Mobilize Trade-Finance products to support imports; Provide and/or Mobilize Micro-financing.
- Mobile Phone companies – distribution of rechargeable batteries and establishment of a charging network will increase demand for their product Mobile telephone use in Kenya has skyrocketed to nearly 6,000,000 customers since introduction of the technology in 1997. The lighting enterprise can benefit from the phone company's successful experience rolling out a new technology on a massive scale in just the last few years.
- Battery Companies - African battery companies would benefit tremendously from the growth of such an enterprise in their home countries. Their existing distribution networks and locale expertise would be very valuable to the enterprise.
- Academic Institutions - Schools such as the University of Nairobi School of Business have offered their assistance with the project. They may be able to offer localized expertise in marketing and operations.
- NGOs - promote awareness of the benefits, offer local knowledge, access to networks of other players in the industry.
III) Two Possible Business Models
Each of these business models require low levels of investment while offering a relatively high probability of financial reward for the entrpreneur.
1) Night market model:
The enterprise acquires ~25 rechargable lighting appliances which he or she offers for rent each night to merchants at the local night market. The entrepreneur charges the batteries during the day (preferably at a grid connected locale) and brings them to the market at night. At the close of the market, he or she collects the products from the merchants.
Benefits:
* The entrpreneur(s) will be working only in the evenings, allowing them to continue their day-time income earning activities
* The rental price can be set below the cost of existing substitutes such as kerosene but above the average cost of using the lighting appliances (avg. cost = up-front cost divided by useable lifespan of the product)
* Only one enterprse requires financing
* Generates positive cash flow for the entrepreneur on a daily basis
* Placing the products on display in the commercial center will provide exposure to very large market of potential customers
* The benefits to the merchants are quantifiable in terms of savings on kerosene and improved lighting of their merchandise
Drawbacks:
* Potential for theft -- the entrepreneur(s) will need to know the clients personally to insure the products are returned safely at the end of the market each nigth
* Inferior product performance could greatly increase the average cost of the appliances, making it impossible for the enterprise to price them at a competitive rate vis-a-vis kerosene -- supportive organizations may need to provide some insurance in the event that the lighting appliances don't perform up to promised standards
* High interest rates may erode all profitability
* Relatively low initial penetration of households will eliminate some of the hoped-for benefits to child schooling and other domestic activities
2) Membership Club Model
The enterprise stocks 100 units (arbitrary number chosen for simplicity) and allows up to 80 people to join in an arrangment to use a lighting appliance. At all times the enterprise will keep at least 20 units on hand for recharging. When a "member's" appliance runs out of charge, he or she may simply stop by the vendor's location to exchange it for a fully charged battery. A variety of pricing schemes and financing structures would be available to such an operation. The entire cooperative might secure a joint-loan from a microlending organization, allowing for shared risk. Alternatively the enterprise itself could be the only borrower, and then price the monthly membership at or below the amounts paid for kerosene.
Benefits:
Above benefits apply, plus:
* Because the products can be taken home, benefits to child-schooling and other domestic functions may be realized
* A successful enterprise using this model would also be able to let out some of its spare capacity during night markets
Drawbacks:
Above risks apply, plus
* Less oversight, increased risk of product loss or damage
* Greater time commitment as the enterprise must be manned throughout the day to allow for ease of exchange
* Increased capital requirements, as the model requires idle units not required in the night market model
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