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Kevin McGovern On The Topic of Emerging Markets, Emerging Opportunities
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The Cornell Entrepreneur Network (CEN) is the University’s multicity business networking program. The people who attend CEN events are entrepreneurially minded leaders in their organizations or industries. Visit cen.cornell.edu to see upcoming events and learn more. This presentation Emerging Markets, Emerging Opportunities was recorded on January 30, 2008. The speaker Kevin McGovern, class of ’70, was the Cornell entrepreneur of the year in 2007 and is the Chairman and CEO of McGovern Capital, LLC, the Chairman of Greenwich Alliances, LTD and the owner of the law firm McGovern & associates. Mr. McGovern has served on Cornell’s board of trustees since 2001 and is the Co-Chairman of the Technology IP Committee. He teaches a course entitled global innovation and commercialization at the Johnson School. As a chartered member of the Cornell Club, New York and a member of the advisory council for Entrepreneurship@Cornell, the arts and sciences school council and the athletic council. Mr. McGovern has a law degree from St. John’s University School of Law and studied at the London School of Economics and Political Science.
You know, usually speakers come between their speeches right before dinner or going home but before wine, I think that’s really a challenge here. So hope you’ll bear with me. Anyway I want to thank you for having me here, Jennifer and John Jaquette if you're here, you know, what I think of you as the ultimate entrepreneur at Cornell. I also want to introduce my son who is sitting right here and is also a partner in my water initiative that I’ll tell you a little bit about tonight and my partner for about 15 years, Bryan Foley has also decided to come here. I'm not sure he’s going to learn anything tonight but it’s good to have you here and of course it’s good to be here with all my dear friends from Cornell. What I'm going to do is I'm going to spend a few minutes just talking about my company, just to sort to tee it up a little bit, and then I wanted to talk about some of the characteristics of emerging markets. It’s a very broad subject. I’ll try my best to cover it in a succinct way today and then we’re going to discuss some primary opportunities as we see it, you know, you're going to have differences of opinions, would love to hear it.
We’ll have the Q&A later. I want to make sure I spend some time on my water initiative which is the 120% of my time right now and it is indeed my passion and other than my family and last I'm going to keep what I hope you’ll like the best is my lessons learned but that’s the last. So you have to stay awake okay, and we’ll go through some lessons learned in terms of emerging markets more than anything else. So let me tell you a little bit about McGovern Capital. I’ll learn to adjust this thing… what we basically do as an organization is we’re … we build businesses based on technologies and we combine successful operating companies and successful licensing programs.
Not everybody can penetrate markets and build businesses around the technologies, often it doesn’t fit with the expertise that they have inside their organization. So what we often do is assess the technology but more important the skill sets of the organization and say okay, where should we build the business and where should we build the licensing program. So we tend to do that. We roll out around the world and we’re very happy to do that and some of our companies as I’ll show you in a second have become household words through our IP strategies, whatever. And some of those companies that you’ve heard of and I hope you drink is SoBe Beverages, we were one of the three founders of SoBe which at that time was the fastest growing beverage company in the history of United States. We had achieved two-thirds the size of Snapple and in about three and a half years, we sold it out to Pepsi and it was quite a ride.
It was a brand that we sold in 2001. I'm really happy to tell you, still is known by a lot of people here, even though if somebody is here from Pepsi, forgive me, Pepsi hasn’t done the best job of marketing it since then but I think they're rejuvenating it now into some very strong energy drink. So I hope they do. Another area that we worked very closely in and Margo you know a little bit about this, the women in the audience… although Margo, you don’t look old enough, really know a little bit about alphahydroxy acids. Alphahydroxy acids is by far the leading technology ever in skin care. At its peak in 2000, 2001, it constituted about 40%, it was in… the technology was in 40% of all skin care products in the world. There was about an 8 billion dollar category. They work. The two doctors Eugene Van Scott and Ruey Yu are my dear, dear partners. Bryan and I still work with them.
We have something like 180 patents in skin care and Gene is now 84 and Ruey is 73-ish and we’re still issuing patents and we’re still enforcing our rights but it was a classic situation of where we took our skill set, they being doctors and we built a business in the ethical market in doctors which today is the largest seller to dermatologists and plastic surgeons in the world in 70 countries. So it’s an operating company. There’s also a licensing program and my dear friend Howard Morgan called it and I don’t mean to sound a little bit egotistical about it but he considers it the top licensing program, technology licensing program in the consumer market. We’ve generated hundreds of millions of dollars in passive income for our programs.
So it was classic, building a business, building a licensing program all over the world, including developing markets. So basically we like to do that and KX which is really part of our topic tonight is the leader and was the leader of creating the first PUR filter, the first Brita end of tap filter and the first refrigerator filter. So we dominated household water purification devices for the last 20 years and it’s very important to the passion that I had I had now built. So in emerging markets we’re doing quite a bit right now ‘cause that again is my passion as it is our company’s passion and so we’re doing a lot of business and we are definitely eclectic. We have three teakwood plantations in Cambodia. We have the water initiative. We’re working on clean coal technology in China and we’re working on various cosmetic and consumer products. We’ve had offices and done business in approximately 18 countries and have had offices in China, in Shanghai, Singapore, Bangkok, Phnom Penh, Mexico City and New York.
So we’ve sort of dabbled around in emerging markets as well as developing markets which I hope gives us a good perspective. We’ve participated in 40 joint ventures, about 30% of which have been firm. Okay. Let’s get on with the … enough of the advertising, let’s talk about emerging markets. You know, let’s define the scope, let’s give you a little bit of the landscape. So we’re talking on the same level here and everybody will have different definitions but basically your emerging markets are those that are still developing their industrial base and you know, what's the phenomenon here is there are often economies with low to middle class income. 80% of the global population in the world of 6.5 billion people are either emerging markets or not yet emerging markets. So developing countries are at best 20% … you know, many statistics, we’re trying to give you a perspective on not necessarily the exact numbers but they basically lie at the intersection of nontraditional user behavior, the rise of new user groups and community adoption of products and services and innovations. So really what they are, if you apply your energy and imagination, they're the entrepreneurs dream. That’s what they are. They're our market over the next 5 to 50 years. As we fall behind in other markets around the world it is an extraordinary, extraordinary opportunity for US energy and creativity to really come to the fore. So I say that basically, sure you have some negatives. You know, emerging markets here, wonderful growth potential filled with corruption, political instability, inequality, currency collapses, etc., all that fun stuff that makes business so much fun because you have a lot of risk and of course you have a lot of reward.
No basically what are they. Okay, how do you describe them. Alright. Basically they are emerging markets stand out with four characteristics. They are regional, economic powerhouses that have an influence not only inside their country but in their surrounding countries classic as the Asian countries in Southeast Asia. They're transitional societies. By and large they haven’t done a good job of generating government reform. They haven’t done a good job of borrowing from the traditional lenders like the World Bank, like the IDB, etc., nothing gets the IDB because I'm working with them in Latin-America but they haven’t done as good a job. So what they do is they go out, okay and they go out to score investments from foreigners, so they develop open door policies to replace their traditional state interventionist policies.
So they're fast growing economies and by 2020, the five biggest emerging market share of world output will double to about 16% from the current rate of 8%. So they are aware of it’s happening and they are growing quickly and they are critical participants already as you well know, and what's happening around the world both politically and socially and they're seeking a larger voice in international politics, etc. So that’s a little bit of a, you know, profile of what they are. Now let’s talk about what are the basics of that … remember we said energy and creativity for the entrepreneurs in this room and the businessmen. What are your basics? What have you got to make sure you take into account when you're looking to penetrate these markets. Well you’ve got to make sure that your products are affordable, right. Price is pivotal. Not only we’ll talk about clean tech a little bit later.
People don’t want to pay premiums, right. They want it to be costly. We did a survey in India in one of our projects, we found that what we had to do to make our products successful, it had to be change in their pockets. They didn’t want to go to microfinance. They wanted to make sure change in their pockets, roughly 75 rupees, couple of bucks, then you have a market. So pricing is extremely important. Distribution incredibly complex. Therefore need to have local partners. My good friend Adi Godrej, the third largest consumer product company in India told me the following. I don’t know whether it’s exactly right… He said, Kevin, he said, in the United States, you have 37% chains, whether it’s 5 stores or whether it’s Duane Reed and whether it’s, you know, whatever department stores, what have you… he says in our country we have ten million retail outlets. I've heard numbers from 9 to 12. And what percentage of it is chain, and what percentage of it is Ma and Pa currently, 97%, Ma and Pa’s. So you’ve got to … you got to understand the distribution is a challenge and you’ve got to partner up with those who can penetrate that market.
Adi said I can get a 3.5, 4 million of that 10 million and that makes me an exceedingly valuable partner in my marketplace. Durability, branding is important. This is a new consumer, aspirational. They're you know, low income, they want quality guaranteed. The old days when I went to China, I used to love it. Everybody used to have the label of their suits on their coats to show that they were wearing an Armani suit and they would leave it on that coat until it dry cleaned off, okay. Right? But that’s where it’s at. Brand, guarantee quality, very, very important. You got to play to win. You got to make sure you choose categories that are attractive opportunities. You’ve got to be local.
We’ll talk about that a little bit later. You have to have unconventional business methods and I’ll talk about that a little later. Different management skills. You're dealing with raging inflation, currencies, etc. You’ve got it. It’s like a chess game. One methodology that business game relating to chess. One principle, one way of doing it is not going to work. You’ve got to keep adapting. You’ve got to keep moving and grooving to the type of things that in this country, you can almost sometimes see it coming. In countries like Cambodia and China and Indonesia, etc., things change overnight. I’ll never forget I was in China June 1, 1994, no warning whatsoever. The currency went from RNB to Yuan, it was announced June 1, 1994. Bump. Suddenly it happened. That’s what happens in countries like that. That might discourage you but as long as its relatively a level playing field, you all deal with that issue. You do your best to make adjustments.
Again adjustments entrepreneurial. Okay. What are the emerging markets today? We all know what they are. What are the markets of tomorrow? I'm a big proponent of Mexico. We dodged a missile in Mexico folks. I spend a lot of time in Mexico. I’ll be on a plane at 05:30 tomorrow morning heading for Torreón. ‘Cause my water initiative is spending a lot of time in Mexico, but the mayor of Mexico City, who was the next Chavez lost by 200,000 votes and a wonderful man in my personal opinion, this is not a political statement, Felipe Calderón is in office for six years, minus the one that he’s been in office. He’s pro-business, he’s very, very much anti-corruption and we, in my opinion, everybody in this room has to think how can we help an economy like Mexico by doing some business down there and helping a little bit.
I think we as Americans have a role of not only doing business in countries like that but building our goodwill through business skills and business relationships. I think it’s very, very important. By 2050, the Chinese economy will be the similar size to the US. You're not surprised to hear that. By 2050, the Indian economy will be about 60% of the US. This was an interesting one. By 2050, the Japanese economy will be comparable in size to that of Brazil and Indonesia. Another one interesting is that by 2050, the German, UK and French economies will be somewhat smaller than Mexico. Okay. So things are changing out there folks. People looking for the latest ideas, they have internet, it’s a level playing field as Freedman talked about technologically and there’s the opportunity for it. Our creativity, our marketing skills, and our opportunities. Okay.
So let’s talk about the dynamics of who they are. About 7% of our world’s population is making over $20,000, this is from my good friend and partner in the water initiative, Stu Hart, and emerging markets, that’s your middle class, is about 2 billion, and the real target area, although the bottom of the middle class is definitely target area for a water initiative is about 62% of the world’s population making less than $3000. Do they have money to buy goods? Absolutely. As pointed out in Stu’s and CK Prahalad’s book, they spend more on a TV set than you do ‘cause they spend so much money on people taking advantage of them and charging them high prices. So there are opportunities in those marketplaces for low cost very efficient products. Now I've been calling this for the last several years pro bono capitalism as I had become very, very dedicated to this proposition and pro bono capitalism is basically do good and make lots of money and I'm here to tell you that that is the trend of the 21st century.
You know what's amazing, last Thursday, my copycat, I guess I trained him well, Bill Gates, he came out and said, I'm mean it … any Gates’ relatives here, I meant that jokingly, okay. He came out in Darvos and said, we need… he called for capital … creative capitalism that uses market forces to address poor country needs. He said we have no … we have to find a way to make the people, make the aspects of capitalism that serve wealthy people serve poor people as well. This is not just charity. This is business and this is opportunity, okay. Moving forward, this is another pyramid that I like, alright and it shows you where multinationals are not penetrating. They're penetrating 30 to 40% of the marketplace. But these huge opportunities for entrepreneurs to come in with various subset issues in those … component parts, services, etc., go to targeted countries where you would be well received and bring your products and I'm going to define those right now.
Who are those targeted companies, okay? The old expression is my good friend Tony Gado at medical school said, he says, global means you're participating, international means they're out there and you're not participating. So we tonight, we’re global okay, and that’s what we need to be. We’re not fossil fuel leaders. We’re not leaders in certain categories but I truly believe that what we need to be the leaders in this room, hopefully part of it, is we need to be leaders in emerging markets and bringing technologies such as clean tech, etc. Another chart, we’ll finish the charts very soon. What's the transition to middle class? When do they start buying? As they transition into the second column, you see household good, TVs, appliances, etc. As you transition into upper middle class, 15000, 20, it’s transportation. So those are basic year trends.
By the way all these charts will be available on my website, mcgoverncapital. So anything that we can help you with, we certainly will. Okay. This is I think a pretty stark chart and the emerging countries are in blue, the developing countries in the red and the rest of the world is in grey. They will be emerging countries, a lot of them. They're new consumer markets. But you can see that really Asia and South America, if I had to categorize two areas well certainly… if you want to talk about geographical clusters that’s where the developing countries are. And we are really bullish on both and spend a lot of time in both areas and I emphasize South America, Latin-America, huge markets, huge opportunities. There are people who contend … I was at Sweden … in Sweden looking for funding on the water initiative and my good friend there said, you know, I can't fund you. We consider Mexico a developed country.
Now I don’t really think so but some of these countries, you may consider developed. Okay, now the next couple of charts may not be as important to this audience but I guarantee you this is the measuring stick for countries around the world. Last week I had the honor of participating in the World Economic Forum in Riyadh, Saudi Arabia, and the head of SAGIA which is the Saudi Arabian Government Investment Authority said, this is where we want to raise our ratings. Wow. A lot of money over there, all this and that. We feel that this is the measuring sticks and what are those measuring sticks. We want to be leaders in not just the fastest growing GDPs, now get this a second… there are your fastest growing GDPs, you're not surprised, China being at 11.4%, these are ’06 numbers. United Arab Emirates, the rising power of those gulf states. We’ll talk about it in a second.
Cambodia 8.5%. I was in Cambodia no more than a month ago, got three businesses there. Going to the … my partner Dan Mitchell was speaking at an international trade show there. I decided to wear a tie with my navy blazer. I guarantee you, I don’t wear a tie in Cambodia more than 1% of the time. I'm strictly jeans, okay. So I walked into the room, into the Continental Hotel and how many other ties were there, about 400. 400, all over from Singapore, China, not much from the United States though. The growth over there is not just happening in China folks. It’s happening in Thailand and Cambodia and other countries where not only laborers is there but a needy consumer. So I'm driving out of Phnom Penh to the airport with Toby, my general manager. This is Phnom Penh. If anybody has been to Phnom Penh, how many people have been to Phnom Penh, anybody? Pretty low buildings and pretty sort of wild, wild west, fair to say?
You may be shocked. How recently have you been to Cambodia?
Male: Three years ago.
I'm driving out of Phnom Penh, I'm leaving the square right … I like the Sunway Hotel, I don’t know why… I think it’s very traditional, I like Cambodia. I say, Toby, what are those two buildings there. He says, sir, he said one is a 43-story skyscraper building and the other one’s is a 30-story skyscraper. Can you … Phnom Penh. So what's happening over there? You got to go out and travel and see what … are you shocked to hear that? It’s right as we speak. I don’t know how many stories they got up but these companies are growing and we see… now these are the fast growing GDPs. However, big countries have GDPs… so what are some of the real key measuring sticks, is GDP per capita. The big boys have big GDP but the real successful people have GDP per capita.
That’s what the Saudi said, that’s where we wanna grow. That’s where we wanna be. We wanna be a country that has high per capita and the highest population in the gulf states. Very important to them. Very important to them. You know, two and a half, three years ago, they were in debt. They were in debt. Now they’ve got all that money and now they want to spend it. So this SAGIA, you know what they're going to do? This is unbelievable. And you’ve heard about it a little bit. I can give you any details after the talk. They're going to build six economic cities and they're going to invest 100 billion dollars and they're going to build one city called King Abdullah Economic City, KAEC… whatever way they pronounce it. I'm sorry… and they're going to put a wall around it, okay, and as my dear friend of Investcorp, you may know who he is, you may not. He got up and he said, you're going to put a wall around the city like that, don’t bother building it, okay.
But anyway, that’s the type of plans. There’s a lot of competition going over there by the way. No doubt about it, the Saudis are jealous of what Dubai has done. Dubai wants to keep ahead of Saudi. So it’s an interesting dynamic over there. We’ll talk about it some other time, okay. Anyway, so these are the GDP per capita. Now here’s a key chart and we’re going to get to the opportunities in a second, but I want … you’ve got to know the basics. That’s much more important coming out here tonight. I want you to know the basics. Ease of doing business, they consider that a big deal. The developing countries and it’s really important to you. If you're going to start a business there, if you're going to generate a business, if you're going to bring in products you want to make sure that you're not bringing it to a country where it’s really difficult to do business in and these parameters are very, very good and often very, very accurate. This is in ’07, ’08 okay and the 12 elements that they use, the 12 factors, I’ll list them quickly, they make sense.
They're institutions, they're infrastructure obviously. They're macro-economy, stability, they're health and primary education, surprise. Goods, market, efficiency, how effectively do they trade in your economy, labor market efficiency, financial market sophistication. What can they do, how do they allocate resources, do they have markers to build capital, okay. Technological readiness, market size, the size of the market affecting productivity, business sophistication, and innovation. So I think that’s very, very interesting. Now you're going to see Panama, again we do business in Cambodia, we do business in Singapore which I’ll speak to you about in a second. I'm going to Panama in early March. Why? As part of my water initiative. I'm building an R&D facility in Singapore. You know where I want to build my R&D facility in Latin America? Panama. Anybody been to Panama lately. It is the international trade center building for Latin-America and they are extremely progressive, lots of money going in there.
One of the biggest investors in Panama is Wal-Mart. You know why? I understand, correct me anywhere, about 40 to 50 or 60% of Wal-Mart’s products go through the Panama Canal. You think they're interested in Panama? Very much. The government is doing everything they can to make Singapore the model for Panama as is the gulf states. I must tell you they know what we do as America, they know what we’ve accomplished but Singapore has definitely taken number one position as the most enviable economy in the entire world. I can tell you that for a fact. Let me show you, Singapore and the other ease of doing business that was put on by the World Bank, came out number one. And why are we building an R&D facility in Singapore?
One, because 30% backing from the government, they're building a hydro hub of 1.2 billion dollars. It will be announced as one of the first companies, extremely committed to growth and research and two, the intellectual property is protected and three, if you want to sell into China, you want to be made in Singapore. Okay. The relationship of China and Singapore … you got any investments that do in a country, a currency or whatever, Singapore. Okay. Singapore is the launching pad in to China and one of the most revered partners in the world. Guess what, I'm going down to Panama, they just formed a joint venture with Singapore, okay. So what are the indications for this? Little different. Again ease of doing business, things you have to consider, starting a business. How easy is it? Some countries it takes you months. Dealing with licenses. Very important. Hiring and firing workers. As you know our sophisticated business people here, some places in Europe, it takes you months if not years to get rid of people that really aren't doing a good job. Registering property. Getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, sort of a pretty big deal. We’ll talk about that in a second and closing a business.
So these are lessons to be learned and considerations to do when you're going into a business, okay. Now what's the demographics? What are the emerging markets all about? Who are they? Who are the individuals? They're young, not surprising but I'm just giving you some stats. I love statistics. I'm a statistics guy. China, little older, 33. Brazil 28, India 24, US of course is 36. Basically, 69% … 68% of the world is now under 39 years of age. We still count by the way but it is really a young world interested in young products, interested in grants and interested in innovation and they got an internet, they got a computer, they know what's going on.
China is middle class which is already 100 million will double by 2010 to 200 million. This past year, the middle class in the world has added 600 million people to its ranks and spending 4 trillion dollars, okay. So now I’ll quickly go through this population role. You know the developing countries have a problem with population growth. You know particularly the European countries are extremely worried about the fact that minorities are going to take over those countries because they're not developing enough of their own, okay. Well, that’s a real problem. But it’s also important for you to know as business people, ‘cause the new markets are growing and that’s lots of people to buy products. Sure they have health issues. Sure they have all sorts of issues with instability, not necessarily political but they have product issues. Ah opportunities.
So the growth is in where the people are growing, okay. The growth of the consumer markets. So moving along quickly. Alright, so how do we create new markets. Let’s go conceptually and then we’ll try and give you a primer as best as we can. Okay, and there are some real philosophical points that I want you to have. I teach at the Cornell Business School and I really think it’s helpful just to get … sit back and get some philosophical points too. If there’s one thing I want you to take away from this chart is this really two types of innovation that count. And you’ve heard about disruptive innovation and you think you know what disruptive innovation is and I'm not going to give you a quiz, etc., but you know what Clay Christensen talked about with disruptive innovation? He talked about going to developing countries to try your product first. You know why? Because they’ll give you feedback faster. You know, when you go to US markets, you’ve got to be much more sophisticated in your approaches and your hope for develop…
If you go to a developing country, smaller markets you can pick out smaller communities, get your feedback back, tweak your product, develop your rollout, that’s exactly what we do in our water initiative, co-create and then bring your products out, roll them out into some of those developing countries and then bring them back. It’s almost like a road show for a Broadway show. Okay. That was his prescription for building successful platform technologies. That’s what we’re doing with water initiative and I think it’s a way of going about it. Now what's catalytic innovation? That’s a new one. We just published an article in December of ’06, Harvard Business Review and he said, okay that’s disruptive innovation for the 21st Century. You know what that is? He was ahead of Bill Gates too. He said that is disruptive innovation to create social change and to create social benefit. Water. Okay. Are there innovations, clean tech what have you, those things that will really create social changes in society because you will make people healthier, more efficient, etc., and because of that they’ll become far more effective social participants.
So moving right along. So disruptive… how do you exercise disruptive technologies. You create a new market and how do you do that? You compete in the lower end and you often provide benefits, often cheaper, simpler, smaller, more convenient to use but how do you execute? Okay. We all know cellphones classic disruptive. That was a market that you know, you created a whole new market. Cellphones didn’t exist in India few years ago. Okay. Electric cars, solar wind, point of use filtration. So let’s keep moving on this. Now, I’ll talk about some opportunities but I would be remiss if I didn’t spent a little time on clean technology. I'm a clean technology maven and I truly believe clean technology…. Josh… you hear Josh… okay, I think that clean technology is going to be very much part of the new markets Josh, and I know you speak a lot about and talk about and write about clean technology.
I think it’s an emerging market phenomenon even more so than a developed country phenomenon, okay. So basically let’s talk about those clean tech technologies. I’ll breeze through this a little bit. I don’t want to take too much of our time ‘cause I want to get on to some … but clean to any product you know, service a process, delivers value using limited or zero non-renewable resources. They basically harness renewable materials, they cut or eliminate pollution and they deliver equal or superior performance and promise to increase returns. Now we know they’re a little bit away but do we know that they're growing at 30% per year. Do we know that a lot of the countries in the world are making fundamentally part of their economy? That’s why I'm here to tell you. You want to hear something shocking. I’ll be surprised if not 90% of you… I was shocked. Flying through Dubai, Thursday, and I get to Dubai paper, ’cause I always like to read the local papers and find out what's going on. Now this is … here we go. We’re in Dubai, just left Riyadh, Saudi Arabia.
I'm at sort of the home of fossil fuels, right. Making lot of money, right. Guess what Dubai is. They just established a 15 billion dollar fund and what do you think they're going to invest the 15 billion dollars in? Clean tech. Alternate energy. You're talking about getting ahead of the curve. That’s scary folks. That’s scary. ‘Cause what they're doing is they're taking their own market and they're also jumping ahead to the next market. And where are we? We better get moving, okay and we will. I really believe that. We better get moving. 15 billion dollars in alternate energy and clean tech in Dubai. Okay. That’s amazing to me. I don’t know how much it’s to you but that was amazing. So what are the elements of successful clean tech? You got to have cost parity.
They say that a lot of the clean tech areas will create cost parity by about 2000 year… clean energy costs the costs the fossil fuel energies going down, so your future is to scale up, manufacture and drive down costs. We have a tremendous, unprecedented influx of capital into clean tech, you know. Nick Parker has been … put on his clean tech conference in February 24th, 25th. I’ll be speaking out there in San Francisco. He started with about 50 people in Toronto and now he’s the hottest convention there is for venture capitalists, whatever. It’s amazing. Competition, governments are competing. Abu Dhabi, okay. China, in they are … they want to be leaders in clean tech too. They're already developing clean tech over there. Don’t dispel… don’t think that they're just working with that equipment, they want to solve those problems ‘cause they want to be part of the curve, being ahead of the curve, alright. Consumers, they're demanding cleaner products and not willing to pay a premium.
Global climate change. You know, some of my brethren … not sure, but I think it’s one of these things that’s relatively certain… alright, this chart says a thousand words, okay. Maybe a gazillion, I don’t even know. Look at the 30% annual growth of biofuels, wind power, solar power. Folks, this is not you know… this is not tomorrow although it is. This is today. This is happening today as we speak all over the world. Happening less in the United States to some extent than it’s happening in other countries in the world. Biofuels, from the period of ’06 to ’16, it will grow from 20 billion to 80 billion, four fold. Wind power is 17 billion to 60 billion roughly four fold. Solar power, 15 billion to 69 billion, better than four fold, etc., etc.
Unbelievable area of opportunity. We can't miss that, alright. Solar energy is category. I'm going to jump through these fairly fast, okay, but basically you’ve got startups in Silicon Valley working on innovative tech breakthroughs in solar energy to make it lighter, thinner, faster, manufacture cheaper. Basically you’ve got to have lower costs installation. You’ve got to get to price parity. What some people say will be at the point when we’re at $2 for 2050 per watt. We’ll deal with that later. But there are 2 billion people in South Asia and Africa who have no access to conventionally generated electricity. Two billion. One third of the world’s population. Developing countries are non-consumers of energy compared to the west. Therefore much easier and much more cost effective for alternate energy to establish themselves. So developing countries tend to be also located in tropical areas where solar energy can be more applicable.
So you can leapfrog into those and I'm not just talking about building huge solar companies. I'm talking component parts, services, warranties, all sorts of businesses that maybe you can translate from your skill set here and look at what you can do in other situations where they're opportunistic. A very key one is I don’t know how many people knew this. Germany is 55% of the installed base of solar energy. They decided they want to be a leader and they are, right now. Hopefully we will be some day and hopefully we’ll be ahead of the Gulf States but that’s the story. US is about 8%. Sorry Alright basically, we covered that. Let’s move forward. Let’s talk about wind power real fast, okay, and basically the global giants are in wind power but also there’s a lot of startups and smaller players both in the US and around the world who are making smaller scale projects with lucrative niche opportunities and on site micro turbines, community based wind farms, big business.
Take dormant farmland and put a wind energy out there, lease part of the land and you suddenly have an entrepreneurial business, guys. All over the world, not just here, okay. You can make components such as gear boxes, turbine blades, etc. Opportunities, opportunities. No specific countries in States where the wind is growing the fastest often depress the rural economies such as India and China are looking to wind farms as a very important source of their energy. So the opportunity, market new materials as I just said, lease your farm for facilities, alright. Next one. We won't spend all the time on clean … sorry. I'm so sorry, thank you. I appreciate that. Thank you. So biofuels. Let’s turn to biofuels. Okay beautiful, alright. The key there is this, you know, a lot of people don’t know this, I didn’t know this until recently. Over 50% of the energy used in developing countries goes into cooking food, stoves.
The same guy who brought me clean coal is trying to convince me to go in to a whole new stove technology. Believe it or not, cooking stoves is a huge business around the world, okay. Huge, huge business and basically you know, we have all sorts of energy. We have remote sustainable energy, we introduced modern energy in rural, developing countries through clean coal, electricity. The average rural family spends 20% or more of its income purchasing wood or charcoal and that creates all sorts of health problems as you may or may not know. You know, basically the smoke creates lung and eye ailments, birth defects, and using stoves also creates problems for deforestation but that’s the fact today that is not a really super intellectual technology area that can be attacked. How?
Better technology okay… moving it along. Lighting, two billion people have no access to electricity. They can’t, you know what, you’re gonna see the whole trend, incandescent lights are out, they are going, going, gone. Fluorescent lights, far more efficient, estimated 25 to 30% of the world’s total electricity production is consumed by lighting. Two billion people rely on fuel-based lighting, a dangerous alternative, not too good for global warming. It’s unhealthy, expensive, and offers very poor levels of illumination. In addition, for our humanitarian side okay, it basically makes it difficult to perform most evening activities and you know who suffer from that, children. They can’t study. There is no lighting in these homes. So, one of the things to do is to get low cost lightning into the homes of poor people like that so children have a chance to do their homework.
Silly, fundamental thing in this Western world, extremely, extremely important, okay. Personal transportation, one of my partners in the water initiative, Ratan Tata, you saw he came out with his TATA car last week, 15 years from now, anybody correct me with your techno, I hope we’re all electric cars and you know I’ll tell you something, the Gulf States are really worried about it. How many have they said whether you go to Qatar, whether you go to the Gulf States, two years ago they were in debt, Jim, unbelievable, two years ago, right. They now are flush with cash. They are so worried that 15 years from now they will not have the market, not only are they worried about depleted resources, they’re worried about alternate energy, etc. So, again opportunities and definitely you have to look for it. Now, I've seen opportunities in transportation. When you're talking about transportation, you’re talking about electric cars, HEV’s and plug-ins and things like that.
Well, I have an interest in a business in Bangkok. Damn good business … Excuse my expression. Very, very good business. Thailand fashions itself the Detroit of Asia. Lot of cars okay, too many cars, it’s jammed alright. Warranty service, maintenance service, part service, okay, fundamental things. You think there is anything magic about it? Get a local partner and go into the business and bring your products over there, alright. Mobile technology, the last of my clean tech. Emerging markets predicted to provide 87% of the next billion cellular customers. Basically, you know much of the world’s population about a half has yet to adopt this technology. What a business that is, okay. Maybe there’s an opportunity there, maybe there’s not. You know the key factor in the growth of mobile phones has been prepaid cards and SIM cards. I’m not telling you anything, that’s pretty standard. Now what are the other opportunities? The other opportunities, quickly, infrastructure, I’ve been going over to China since ‘93.
I’ve been to tons of developing countries, the first thing I look at is what’s the shape of the roads, what’s the shape of the distribution system, what is the shape of you know, the hotel structure, the cars getting around in the city, what’s the shape of energy, are we going through brown outs, etc., the number one indication. That’s why for now China is so far ahead of India. I don’t think that would be the case in 5 to 10 years. India’s infrastructure is not good. They’re working on it. It’s been estimated it’s gonna cost them about 900 billion dollars to build up their infrastructure. China did it right. When I first went there in ’93, I used to see a hundred Chinese every block chipping up roads and building new roads and now they got bridges, we all know build-operate-and-transfer, they had all the Japanese money, the Taiwanese money, etc., came in and built their entire infrastructure and they get their tolls and they get their money back out and everybody’s happy, but China is classic.
Beijing, how many rings do they have… we have a beltway around Washington. They have about four, last I was there, four, maybe they have the full six complement of rings going around. Infrastructure, why? Movement of goods, ease of economy, big deal as you well know. I mean the last time that we had a revolution of infrastructure in this country was under our esteemed President Eisenhower. We know that for sure, okay. So, got to do something about it. Cooking appliances, etc., creative models of marketing. I love this one. I spoke to my colleagues at Path which is one of the Gates Foundation affiliates and we hopefully we’ll work with the water initiative and the nice lady, Claudia told me, she says, we’ve done an assessment of marketing methodologies in India. She said you know what some of the new methodologies they developed, one is called Haat, I don’t know if in pronouncing right. H-a-a-t. You know what it is, Colgate is using Haat, Novartis using Haat, you know what they do? They have guys on bicycles all over the country delivering products. That’s not a little unusual. I mean we have that in New York, but that’s now a new method of distribution in India that is really catching up.
Second one is, is microfinance institutions because there’s not a whole lot of contact yet, are acting as distributors for products, okay, because as you know in developing countries everything is micro. It’s like nano used to be, everything is micro, micro insurance, micro finance, micro plastics, whatever they are, okay, but now they’re finding that they have to have dual businesses so the micro finance institutions are saying we’re gonna distribute products as well. The things we finance, we’re gonna distribute them as well. Very interesting phenomenon, but it’s happening as we speak. It’s a very new phenomenon. The third thing I talked about before is supply chain organized retailers clustering, the Ma and Pa’s are going out, we still have the 50s, 40s, in the United States. That’s happening over there in various countries, but particularly India, okay.
So let’s move on and then you have the advent of convenient stores, okay. Ma and Pa’s are getting knocked out by convenient stores, the development of OXXO in Mexico. Have you ever seen an OXXO in Mexico? It must be 5000 of them. Okay, Fem’s is the company, a Cornellian is the former CEO and they now have 5000 convenient stores selling these products all over the world. Okay, let me tell you about the water crisis for a second. Okay, I’m sorry I got one behind. Somebody’s got to help me here. What’s the water crisis all about? Now, water crisis is really about the number one public issue in the world. I had a trustee walk up to me on Saturday who said to me, you know, Kevin I sit on a foundation that is given more money by the Gates Foundation than anybody else and I won’t say the number, it’s not important, but it’s hundreds of millions of dollars and we created all sorts of new vaccinations and you know what conclusion we came to, that if we put 10% of it into the quality of water we’ll be doing a better job, because that’s the cause of more illness in the world than anything else. Right now, we’ve done some assessment and we’ve spent a lot of time in water.
I’ve been in water for 17 years on a household level. Two billion people in the world lack access to safe water. Three to five million children under the age of 5 die every year of water borne diseases. That’s about one child every 15 seconds under the age of 5. 50% of the hospital beds in the world are occupied by people with water borne diseases, okay, problem is getting worse. The need for water is growing twofold, population is growing double as fast as the availability of water and it’s on all economic levels. I was attending the Global Water Challenge at Atlanta last October, three months ago. What was the headline, Atlanta running out of water. What is our dear fellow Cornellian, Austin Kiplinger tell me on Saturday. He said, Kevin it’s our prediction from Kiplinger, it’s not Kevin, that there will be a state of emergency in Atlanta declared around June and there will be trucks rationing water in Chennai, India, no, no, no, Atlanta, Georgia. Las Vegas, we all know has deep problems with Colorado River dropping. Water has become a huge issue in the US as well as India, all over the world. Groundwater is going down. What’s happening with groundwater going down? Arsenic is now becoming prevalent. Iron, manganese, fluoride, all those metals that are carcinogenic. So we have huge problems.
Is arsenic a problem in the United States? You bet it is. Our head of R&D who is the co-professor of Cornell and MIT, G. Fitzgerald asked his waterman in New Hampshire. He said, what’s the biggest problem that you have with water in New Hampshire. Arsenic, wow, that’s amazing, okay. So, are we having problems all over the world? Now, we all know the expression, but I got to tell you who first coined it. Ismail … I’ve never remember the pronunciation, Vice-President, World Bank in the late past century, said if the wars of this century were fought over oil, then the wars of the next century, the 21st, will be fought over water. No doubt about it. Different patterns of rainfall, global warming will create more problems. You’ll have droughts and you’ll have heavy rainfall, poor storage, more brackish water, salt brackish water is a huge issue and it will get much, much worse. It’s a problem in Palm Beach where we have a house… constantly have to pump water in so the salt water doesn’t go up. It’s a problem all over inland world.
Salt is now penetrating into groundwater, it’s penetrating inland and we’re gonna have a real problem because we cannot drink salt water. Okay, so moving right along, alright, we know the problem. 31 chronic countries that will double etc., but here’s the real issue. Why does the water initiative have a different angle than most everybody else? Why are we only worried about anything, but we’re worried about point of use household applications? Because that’s where you’re gonna solve the problem. Why? The closer to your lips you purify water, the more affective it will be, why? Large diesel plants, large water plants. They feed into distribution systems, you know what those are called, pipes. As a very eminent venture capitalist in the West Coast said, he said you know the pipes in this country were installed during President Lincoln’s tenure, okay.
Buffalo, New York, London, many cites have done studies anywhere from 40 to 60% of the water that comes out of a large facility and goes in those pipes never makes it to the home, it leaks out. Now, if it leaks out, most of your water pipes do sit right next to your waste water pipes, okay. So if you have intermittent flow, you engineers will know that if it’s constant flow it won't be so bad, but if you have intermittent flow, guess what, contaminants come back in. So one of the problems we’re dealing with in Mexico where we’re using it in pilot cities, we’re working in pilot cities is the water is clean coming out of the plant, it’s dirty going into the pipes, it gets to the home, it’s filthy. Then it goes into a cistern above the house and it gets even worse. So, the bottom line is, is the infrastructure of the world is not conducive in our opinion to this solution being large water, even though billions and billions of dollars…
So our market niche, point of use, last mile. House in maybe village, but basically working on closer to your lips the solution will be, that’s where we’re going. Okay, water purification POU, the bottled water business, let me show you this, this is amazing. Alright, I guess we took out that shot about water. That’s fine, no problem at all. The water business in the world is about 463 billion dollar business, 91 billion add 3, I don’t care what it is lately, but this is 2006 numbers … is bottled water. Household appliance is about 14 billion. I contend that our market is 100 billion because I really believe that bottled water has got some problems. I don’t think it’s gonna be wiped out. Why does bottled water have problems? For various levels, in water quality, but also some cities now are talking about borrowing bottled water because of the environmental impact of plastic containers. So point of use to me is really an important market opportunity pro bono capitalism. Do good, make money, okay.
So that’s part of what we’re doing. So what's our goal, okay? We’ve done a real assessment and said that the water market is so fragmented with a lot of different technologies, don’t forget I've been in it for 17 years. So fragmented with one shoe fits all. My technology is the best. That doesn’t work. Every locale has a different situation. Some of them are representative of situations around the world. Torreón, Mexico, arsenic. Bangladesh arsenic. New Hampshire, arsenic. So we’re working on archetypical situations but we’re co-creating. We’re working with Stu Hart from Cornell. We’re working with a team of scientists from MIT, UCLA, Cornell, Singapore, Monterey Tech, we’ve developed the best technology team in the world. Half of which have never worked on water.
They're the best material scientists and sensor people we’ve been able to round up in the entire world. Scientists, the best development guy in the United States has told me on June 1, he’s joining our company and we have the former head of international at Coke, the former head of Asia… of Coke, former head of international Pepsi. We have oh maybe seven different marketing people to help us put our deal together. Basically it’s the best of entrepreneurs, technologists and scientists to attack this problem. As the head of my R&D says, Gene says, he says, you know what, Kevin, I'm bringing all my old Bell lab buddies. He said we just spent the last ten years making money for Intel and Hewlett Packard, you know what we want to do. I want to work on water. I want to work on something really interesting. Why don’t we exercise some pro bono capitalism? So that’s what we did. So what's our goal? Okay. What's our goal? ‘Cause we want to become … one more I think. We want to become the aggregator of solutions of affordable effective local solution to the world’s drinking problem at the point of use level.
We want to become an unambiguous leader in middle and base of the pyramid water solutions. We’re not going to make enough money to sustain ourselves dealing with just the poorest people in the world. But we’re not going to try and hit those people who can buy all the bells and whistles. So we’re going to go after lower middle class down to the base of the pyramid and we’ll reduce water sickness and we will deploy water solutions that significantly contribute to local economic development and we intend to be a global world leader in what we’re doing and this is my passion folks. That’s what really gets me up everyday. Our growth already has been unbelievable. Again, we’ve rounded up some tremendous investors. I repeat again ‘cause I'm very proud, Ratan Tata from India is one of our primary investors and we gathered up a number of technologist investors, etc. We’re very pleased. We’re completing our first round and what we want to do is literally come together with prototype products that are customized and hopefully you’ll hear more about us over the next 2 or 3 years. This is not going to happen overnight.
So basically what we have to do is a multidisciplinary professionals from venture investing everyday… everything down to R&D. So I won't bore you with that chart. Lets go into lessons learned. Okay. We really want to have the best technical and management team in the world to dissect the issues and co-create customized solutions. That’s called the water initiative and it is a website and I welcome you to look at it. Okay, in closing, the lessons, the rules of the road in dealing with emerging markets and as Jared, my son will attest that I've been going over there quite a bit in the last 15, 20 years. So basically and that doesn’t make me far from an expert… as we all know in this room being bright Cornellians, the more we learn, the smarter we get. So we’re constantly, constantly learning and unfortunately we’re constantly learning lessons that we don’t know what we think we know.
Okay here’s my little litany list. I can go ten more lists but not everybody wants you to succeed over… that’s pretty I couldn’t believe when I first got to Cambodia, this is about seven years ago. My American partner with his Thai wife, he said to me, he said, our general manager was shot and killed yesterday. I said, shot and killed yesterday. I said and this is three hours outside of Phnom Penh. We’re growing 90 million trees out there by the way. It’s a pretty big re-forestation. Actually we planted 90 million seeds but we’ll grow about 20 million trees. Long story short, so I said, Dan, what are you gonna do about it. He says, I'm going over there. I got to apprehend the killers. I said you… you're going to go over to Cambodia and you're going to apprehend the killers of our general manager? He said, Kevin, if I don’t apprehend the killers of my general manager, we must leave the country. Dan Mitchell went over, talked to the town in city which has a population of about 400 of which we employ about 75%, okay, and apprehended the two killers and brought them into jail.
We’ve had no problems since. It’s unbelievable, okay. But that’s a classic example of you know, you’ve got to be a little bit of an entrepreneur there. Cover, does everybody know what cover means? Big deal. George Whatley, Congressman George Whatley once said to me. He says, you know what, you travel all over that part of the world and you’ve got cover and you don’t even know it. I said, George, what does cover mean? He says basically as a congressman, I'm going to tell you. He says, you deal on an upper level where people of the military, the business and the government don’t touch. I've never paid a bribe in my entire life and I don’t intend to. When you have cover you're dealing with people high enough up in the influence level of a developing country that they won't … they may touch… that doesn’t mean you can't get robbed some place or something but the leaders will not touch you ‘cause you got the guy or the gal who’s so influential, they’ll leave you alone. Believe it or not, it works.
And it does work, alright. Now next thing is influencers. Make them stake holders. In Cambodia, Han Sung’s brother-in-law is our partner. In Mexico, I don’t know if you know, but we’re recruiting some of the leaders in Mexico, Patrick Slim, Manuel Arango, etc. In Singapore, it’s the chairman of the economic development board, you’ve probably have heard of that but we engage the leading stake holders to be part of our company and I’ll give away equity to them any time, not unlimited, but I want to make sure that they're stake holders. So I just don’t look for their money, I give them equity in what we’re doing. Make them future beneficiaries of what we’re doing. So we do that as a rule. When I first went to China in ’93… ’94 I went over to Taiwan and I met the founder of first Taiwan, Spencer Kuo. I said Spencer, I want you to be with me for the next three years and help me develop my businesses in China and I said, I’ll give you one third of everything I do there, and he said, Kevin, he said, I’ll do that with your.
So for the next three years, he was my mentor. Spencer Kuo is one brilliant dude. He was unbelievable. Two stories about Spencer Kuo. I said, Spencer, what is the law here. I'm a lawyer. You know, the first deal we did was a cosmetic joint venture in Shanghai. He says, Kevin, he says, you never be chairman. If it fails your fault. You be honorary chairman. Make somebody else the chairman and then you're just honorary chairman, no problem at all, okay. But Spencer’s rule, Spencer’s rule is I said, what's contract law. He says, there’s no contract law here. He says you always have to remember, you’ve heard this before, that they need you more than you need them. We close a deal and we talk about the next deal right away. So it’s sort of the law of China and other places and don’t tell me it’s changed that much ‘cause it hasn’t. Okay. That’s the way it goes there.
Yes WTO and yes contract enforcement. In those days, all the judges were military officers who had their pension program being judges. Third story about Spencer is we closed on the cosmetic deal and I did a little bit something very unusual. This is 1994 folks, you know, back … way back before you know, modernity, is I invited the 8 top executives of Shanghai Daily Chemical which at that time was the largest cosmetic company in China. I wanted to meat their wives at lunch the next day. I wanted to have a celebration. Ah, our wives come… yes. So we went to the celebration and I’ve given up drinking since ‘cause I got to tell you, I just got too much in China. It … but anyway all the wives went to out-drink Spencer and I. I mean so there was always this anybody know what means. It means bottoms up, okay. So anyway I had given away all my gifts because in China you have to give gifts every time you're there and every thing’s an eagle.
I don’t care if it’s an eagle gold class, I don’t care if it’s an eagle … anything in eagle. Now whatever it is, right. So long story short, I was out of gifts. So the chairman comes walking up to me and he’s got a gift for me. And I'm thinking oh my god, what a way to end this whole thing, no having my gifts and you know what Spencer says to me, he says, take off your tie. I said, take off my tie. He says give me your tie. Woa … and I love this tie. It was lavender, great color. I took off my tie and I gave that to the chairman. Do you now that every time I went back to China, the chairman had my tie on him and he loved it so much. That wasn’t my idea. That’s Spencer Kuo, okay. Have a stake holder, have a partner who understands the culture, just a couple more. Okay. American image. I always make sure that I'm in developing countries that I overdo the humility, not … I don’t … you don’t make a fool of yourself, you're at the door, they go first. You just show them that you're not trying to be an American who knows better than they do. I tell my students at the Johnson School, the number one quality that you can have in doing international business is not knowledge of taxes, it’s not knowledge of distribution. It’s sincerity. Go check up.
Just tell them, promise you're going to do something, make sure you do it, make sure you follow through. Sincerity, very, very important. Next thing. Couple more on the list and that’s it. Behavior. They test you. In many of these countries, they want to put you under. They want to make you drunk, they want to do this, they want to put you in trying situations, they want to find out how you react. It’s not because they're so … that’s their way of checking you up, okay. So make sure that you understand that behavior is every bit a part of what you're doing in foreign countries as anything else, because what are you building. You're building a relationship.
And in China, they call it guanxi, but all over the world it’s the same thing. It’s relationship. It’s consistency. It’s sustainability. We hear that word a lot of time. It’s sustaining, it’s keeping your word. Very important in international business much more so in my opinion than US business. FDIN, FDIL, fine direct investment. That’s going back in here. Sovereign wealth funds, etc. In the developing countries, the power houses, that’s money is coming back into our country and now they're your future partners, people you're meeting. Lastly, I say for the younger folks in this audience is I always say cross link. You know, who was it … I think it was Jack … Mark McCormick. He said, basically if you really want to get ahead in life, you’ve got to make sure if you have a really good ability, whether you’re the top engineer, you're the top this and the other thing, that people will catch up with you on but cross link it with knowing Chinese or knowing Spanish or for some of us knowing golf.
But I'm half serious but cross link your skills mostly for the young people here, so that those two combinations make you unique. I didn’t know Chinese when I was in China and spent so much time in China, although they had me speak at the Shanghai International University in Shanghai which is the first English speaking university. That’s quite an honor for me and then they had me teach in the middle school which is really cool. Okay. Those days I could get away with speaking English. You can't anymore, particularly young people. You’ve got to learn the language, if you're going to do business over there. Okay. And let’s see what else. I think that is it on that. So I'm going to give you my last little summary and then we’ll open it up for questions. Basically I built my career on technologies relating to nature. AHAs are naturally occurring substances. SoBe with herbs, drinking water, etc. However, I really believe that the greatest frontier is to combine technology with the form of nature that perhaps needs the greatest transformation. That’s human nature.
It doesn’t matter the term globalization, localization, catalytic innovation, it’s all about addressing the needs of our partners on this planet. To that end, the means can be creative capitalism, kinder capitalism, pro bono capitalism. Just remember a few things. It’s not the strongest of the species who survive, nor the most intelligent as Charles Darwin stated, it’s the ones most responsive to change. My friends, keep working hard, learn everyday and apply those learnings to foster innovation changes. When you can, visit and work in emerging markets and in the words of Gandhi, I love this, be the change you want to see in the world. So catch the current and thank you very much and thank you Cornell.
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