The $300 House – the value-chain challenge

January 26, 2011 | $300 house, AHI work, Global news, Housing, Innovations, Slums

By: David A. Smith

 

In the five months since Vijay Govindarajan and Christian Sarkar put up their original Harvard Business Review blog post, the concept has been picking up steam.  My post on the financial challenge led to five more posts (see box below), with a few more envisioned.

 

   

 

In turn, that has given me furiously to think.

 


How can we make this work?

 

$300 House is predicated on making a visionary leap – envision what you want, not what engineers think they can give you – and then working backwards.  Such leaps are the only way to make breakthrough change, because of Clarke’s First Law of Prediction:

 

When a distinguished but elderly scientist states that something is possible, he is almost certainly right; when he states that something is impossible, he is probably wrong.

 

Distinguished but elderly, and envisioning the possible

 

For ‘scientist’ substitute ‘large corporation’ and you have the mindset we are challenging with the $300 house project. 

 

Now it’s conquer or perish, lads

 

Burn the intellectual boats – start by assuming that it’s possible, then pursue the possibility zealously, scavenging puzzle pieces until comes an ah-ha moment, when they can be fitted together into the desired outcome.  It’s the only way game-changing innovations have ever arisen. 

 

A concept that needs realizing

 

The more I think about $300 house, the more convinced I am that the technology won’t be the hard part – that is, after all, the core business of global corporations, getting spectacular technology down into manageable sizes and manageable costs. 

 

Not envisioned by thinking the same

 

Envision the end state, and work backwards

 

Not will architecture be the blockage – the effort has surfaced so many fantastic and promising technologies, from plastic-moulded adobe to bamboo frames and panels, that I’m sure somewhere in all those innovations we will find some that are adaptable regionally. 

 

Bamboo housing panels, Costa Rica

 

Nope, the big challenge – the one that will decide the issue – is the value-chain challenge. 

 

Porter’s ultra-abstratced value chain

 

Slums have enemies within: skeptics and cynics, illicit landlords, and fifth columnists, as well as useful idiots.  None of them will welcome the $300 house, except insofar as they personally profit form it.  Materials can be stolen, either directly by slumdwellers or neighbors or indirectly through government fiddles.  The poor can then be exploited by rent-seekers, protection rackets, or duplicitous politicians.  We have to create a delivery system – a chain of actions and actors whose cumulative work creates additional value – in which the pieces that comprise the $300 House, both the high-tech engineered ones and the low-tech self-built ones, can get to the urban poor, then constructed, assembled, or built by the urban poor at the site.  Any other approach will be sunk in transport costs, leakage, pilferage, corruption, and myriad other flea bites of loss that will render it infeasible, impractical, or unaffordable.

 

Got to join them up, not let t hem fall apart

 

Hence our $300 House value chain has to do all these things:

 

 

  1. Interest the customer in the possibility.  Slumdwellers are trained to be skeptical, especially by their everyday experiences, so this is no small hurdle.

 

  1. Persuade the customer to believe.  The customer will be responsible for much of the work and the coordination, and nothing will happen if the customer is not genuinely motivated.  One cannot push spaghetti. 

 

  1. Deliver the components, either high-tech installations or low-tech self-constructibles, to the customer at the property site.  Cemex’s brilliant Patrimonio Hoy program delivers cement in bags to home improvers on a regular schedule, because otherwise they have to hire an expensive taxi, and then store the bags outside, where they can be stolen, ripped, or rained upon.

 

  1. Teach the customer what she needs to know for layout, construction, assembly, operations, and maintenance. 

 

  1. Finance the customer’s purchase.  Such is the de-capitalization of the poor that even $300 will often have to be financed, usually through a microfinance institution that has learned how to expand into Home Asset Loan Finance (HALF). 

 

I don’t know how to create such a value chain – if we did, we’d be in business now J – but reflecting on those value-chain imperatives leads to the following principles that must be incorporated into the value chain that we do build.

 

We each do our part, and it gets built

 

1.         Make the completed and integrated $300 House much more valuable than its individual components.  That reduces the incentive to steal components either before they get to $300 House or afterwards.

 

2.         Mobilize the poor’s labor via self-buildingAside from the practical cost element — using local labor will be much cheaper than global labor – we want to remake the slum’s economics.  Slums are poor in part because they are wealth-extracting machines, where any money that flows into them immediately flows out.  We have to ‘fix’ wealth in slums, just like atmospheric nitrogen can be fixed in soil, by creating durable property that has value, and by creating income-generating opportunities in the slums.  High participation by local low-skill people will both costs low and generate community income.  (It’ll also generate community legitimacy and favorable word of mouth.)

 


Working at home, in the slum

 

3.         Use indigenous building materials for four reasons. 

 

(A) People like living in housing that resembles better housing their affluent neighbors live in: what the Indians call a pukka house instead of a kacha house. 

 

 (B) Local building materials are climate-adapted.  Not only is it plentiful, the locals will have had centuries if not millennia learning how to make homes out of it. 

 

Bamboo housing, southeast Asia

 

Southeast Asians build with bamboo, desert people with cement or mud adobe, Americans with wood.

 

Mud-walled houses, Mopti, Mali

 

(C) Heavy imported materials will cost too much to transport.

 

Afghani mud house: not much transportation cost here

 

(D) Indigenous materials may be scavenged, found, or grown, contributing to the local economy.  This will tend to be peri-urban employment, not urban – the city is too dense to allow timber forests — but that will nevertheless strengthen the overall regional economy.

 

4.         Envision $300 House as a ‘fruitcake’ combining a low-tech building envelope and high-tech additives.   

 

Instead of marachinos, think solar cells

 

[Illustrative photo provided for non-Anglosphere readers who have never been subjected to one of these at Christmas. – Ed.]

 

The ‘cake’ is the low-tech building structural surround, built as noted above of indigenous materials (adobe, bamboo, formed composites), and the ‘fruits’ inside are high-tech engineered gadgets (e.g. LifeStraw, malaria nets, rooftop solar hot water heaters, and low-cost wi-fi laptops).

 

5.         Make this compatible with a new form of housing finance, Home Asset Loan Finance (HALF).  I presented on HALF last year at the South Asia Housing Finance Forum; HALF sits in between microfinance and mortgage finance:

 

Not housing microfinance, and not micro-mortgages, but a thing unto itself

 

Microfinance is predicated on the expectation that the money lent will contribute directly to income generation, and as a result, even though everyone knows something like one third of all microfinance loans go for housing improvement, these are statistics the industry chooses not to track.  HALF requires a different collateral decision and business model, one that recognizes the house, immovable real property, as a different and better form of security than the chattel which is the most a microfinance lender can hope to secure.

 

The home won’t move, so make it part of your credit

 

This will take reinventing microfinance institutions, but the results will be exciting and transformative. 

 

6.         Spend serious non-recoverable R&D on the technological innovations.  This is the developed-world’s contribution – to invest in the disruptive innovations (as VG calls them) that enable the developed world to deliver GPS, cell phones, and pharmaceuticals all over the world. 

 

The value-chain innovation required for $300 House includes:

 

(A) Design of the structures, including regional alternatives, modularity, expandability, and adaptability. 

 

Bill Gross’s sketch of $300 House

 

(B) Engineering of the financial products and business, especially around how to use existing MFI platforms to originate a different loan product for a different purpose: Home Asset Loan Finance (HALF).

 

(C) Identification and capture of government subsidy, grant, or tax credit resource identification and capture for $300 House.  This may well involve reverse-engineering the policy ecosystem. 

 

(D) Piloting of the whole delivery.  It took microfinance thirty years to figure out its business model, with many false starts along the way, and even with recent troubles that call the whole concept into question.  We cannot wait that long, so we should use everything that microfinance has so painfully learned, and everything modern business has learned, and create the reverse innovation VG envisions.

 

The Great Mosque of Djenne, built of mud and wood

 

7.         Capture carbon credits as an external subsidy source that brings the net cost down.  Admittedly, this could be seen as a subcase of 6(C), the government resources, but I think it worth its own bullet.  Now that it has been thoroughly embedded within Europe, the carbon-credit market will only continue to grow, and it needs meaningful reform.  Ecologically, any given number of human beings live more greenly in cities than sprawled into suburbs or exurbs, so there has to be a way to reflect the green-additive value of cleaning up the slums through self-improvement.

 

Let’s get more and poorer countries into this game

 

8.         Award security of tenure upon completion of a $300 House, because that will enhance the $300 House’s value.  It also solves the problem of irresolution-versus-amnesty, where the municipality is afraid to grant the slumdwellers rights to land, lest it be accused of giving something for nothing.  Entitlement following investment has been a core principle of urbanization since at least the 1862 Homestead Act, and most likely long before.  Government need not grant the resident full title, but even an eviction estoppel for an interval (say four years) will make the post-renovation $300 House substantially more valuable, and that is value very difficult to co-opt.

 

Not just physical security, legal too

 

9.         Create new businesses and business models.  We have to go beyond the traditional microfinance institution and the traditional low-cost mortgageable building company – both have tremendous uses, but neither will solve this problem.

 

Trash pickers in Mumbai – how can we create better jobs for them?

 

10.        Build the business from the value chain first, the components second.  The greatest technology will be useless if we can’t get it to the people who need it.  Setting aside the elements of creating the supportive ecosystem, for each incremental $300 House we have a value chain that includes (a) structural component manufacture (e.g. bamboo panels), (b) additive component installation (getting the ‘fruits’ into the cake’), (c) promotion and origination of prospect, (d) design and building assistance, (e) financing, (f) loan servicing/ asset management.  In a good world, all these steps could be performed by local people, if the supportive ecosystem is suitably structured.

 

Ten principles of value-chain creation.  Now all we have to do is make them a reality.

 

Faster, please?