Growth Potential: Tier II and Tier III Cities in India

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4. Potential

4.1 IT Offshoring & Business Process Outsourcing:

Although most firms have a presence in the Tier I cities, many have made inroads into the Tier II cities of Pune, Hyderabad and Chennai. They have been attracted to these destinations for their talent pool, infrastructure and labor cost savings of about 15 – 20% over the Tier I cities. However, recent reports suggest that these savings have shrunk significantly to just 5 – 10%.

Tier II and Tier III cities holds significant potential for IT offshoring and BPOs. There is the necessary talent pool, especially in those cities with fairly established universities and educational institutions. Since there are fewer firms competing for the same talent, labor costs are considerably lower. Real estate is available and affordable with low lease and acquisition costs, especially if the developer has premises, which are nearly ready to move in.

Jones Lang LaSalle has identified 5 Tier III cities as having the greatest potential for supporting IT and BPO activity. They are Ahmedabad, Indore, Kolkata, Nagpur and Chandigarh. They have also identified three additional cities as having the potential to deliver high yield in the years to come. They are Cochin, Thiruvananthapuram and Manglore.

4.2 Retail:

The boom in this sector has a very strong visual impact – colourful hoardings, multi-level stores, mega marts and malls and don’t miss those happy faces after their fix of retail therapy. The spending power is what brings international players to India by the droves, and the low penetration levels coupled with high aspiration and exposure keeps them optimistic about the long haul. In a short couple of years, retail mania has hit tier I cities - and how. If some see signs of overload, it is lost on the retail majors who want to plumb it for all its worth. Having said that, they are casting an interested eye and following it up with investments in tier II cities as well.

These cities mean higher investment on real estate, manpower and brand building, but projects indicate that there are huger returns from consumers who want more and then some more. Ernst & Young’s report, “The Great India Retail Story” estimates that the number of malls in the country is set to go up, with retailers planning to enter tier II cities in a big way. The reports indicates that of the 220 mall projects in the pipeline until 2007, 139 are in the 8 major retail centers (tier I cities) and 81 are in tier II cities. The country’s 67 cities which have a population of over half a million can absorb many more hypermarkets slated to hit them in the coming 4-5 years.

5. Promising TierII, Tier III Cities

Here is a quick introduction to some of the promising tier II and III cities:

Pune
This western India city is known for its universities and educational institutions. A sleepy town with laid-back people, it was a retirement home for most original “Punekaris”. Its combination of low cost talent pool; low real estate costs and proximity to Mumbai, the financial capital of India, attracted IT majors. Its is now a thriving IT centre, with significant mall activity and spiralling real estate costs.

Nagpur
Here is another city in Western India with good engineering colleges that attracts IT firms and BPOs for its low cost real estate and labor pool. This city is also a large trading center for commodities.

Ahmedabad
This largest city in the state of Gujarat hosts the Indian Institute of Management (IIM - A). Once known for being a textile centre with thrifty business folk, this city is seeing a retail-driven construction boom with an increasing number of malls, multiplexes and stores. The city is also an emerging educational centre, and is an attractive option for BPOs and IT firms. This city has in the past seen some political instability on account of communal differences.

Thiruvananthapuram (Trivandrum)
This capital city of the state of Kerala, is home to the Kerala University and the Vikram Sarabhai Space Centre, among other educational institutions. The country’s first IT park “Technopark” and the first biotechnology park “The Rajiv Gandhi Centre for Biotechnology” is at Trivandrum.

Manglore
This scenic coastal city is well-known as a travel and heritage destination. Its proximity to Bangalore, its high quality educational institutions and engineering colleges have attracted some IT firms to consider expansion here.

Hyderabad
Arguably, amongst the most developed of the tier II cities, Hyderabad is an emerging IT and biotechnology hub. Known for its cultural and architectural heritage, it is perhaps to be lauded for being the melting pot for north and south India. This is one city where Muslims and Hindus have coexisted peacefully for so long there it has its own unique dialect, the Hyderabadi Hindi and its own cuisine, famous for its biryani and kebabs.

Kolkata
The capital of India during the British Raj, this city was once a teeming center for education and culture as well as the centre stage for India’s freedom movement. Amongst the most congested and populous cities in India, Kolkata has seen economic stagnation for some time. It is also known for its leftist and trade union driven movements. This city is now seeing a revival of sorts with industry and IT firms considering it as a likely option, with its vast talent pool and relatively cheaper real estate.

Indore
This commercial capital of the central state of Madhya Pradesh was a quaint city with its dynastic rule by kings, the Peshwas and the Zamindars. It has traditionally been a hub for the garment industry and soyabean cultivation. Today it is among the fastest growing Tier II cities. It is also a preferred test market for a number of FMCG majors because of its cosmopolitan character.

Chandigarh
This capital of two states, Punjab and Haryana, is actually a union territory governed by the Centre. One of the few planned cities in India, Chandigarh is known for its high quality of life and good educational institutions. It is an attractive destination for BPOs and IT majors like IBM and Convergys.

6. The Believers: Who is going to these cities?

While there are many believers - firms and retailers discussing and firming up intent to set up shop in these cities - it is early days yet. Here are some of the early birds:

• TCS is keen to ramp up its operations in Tier II cities. The firm indicated that they are looking closely at Hubli and Manglore in Karnataka and Nagpur in Maharashtra. The firm already has a presence in Kochi and plans to ramp this up.
• Bose Corporation, the premium niche player in audio products like speakers and headphones has opened a store in Ahmedabad, with a view to expand to India’s Tier II cities. Bose products are currently available in the firm’s 11 single-brand outlets in all the major metros.
• Retail majors like the Future group and Reliance have big plans for Tier II and Tier III cities, where hypermarkets are the format to go with, as per a report by Ernst & Young. Real estate developers are also chalking up big plans for malls and multiplexes in these cities.

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