Ever since the announcement of the Flipkart-Walmart deal, there has been much doomsday talk in India Inc, largely along the lines of “the foreigners have taken over and now that is the end of Indian e-commerce business, so sadly nipped in the bud”.
A recent article on the edit page of the Economic Times captures and maybe even fuels the general sentiment. It bemoans the fact that “in one of the world’s biggest online markets… two foreign businesses will fight for supremacy” and then asserts that “foreign online companies are not unmitigated good news”, and that this is a death knell for India’s “medium and long term evolution as an innovation led hub of the global internet”.
The thesis propounded is that when these two elephants fight, they will trample over all the small entrepreneurial Indian ants. Also, the two foreign owners will not do what’s right for the Indian market and a vibrant Indian (local) ecosystem of e-commerce will never develop.
It then proceeds to suggest the remedy of having laws that prevent the “dumping of capital” (almost always otherwise called foreign direct investment, something our prime minister spins around the world for, hard-selling India).
Finally, it extols – hold your breath – Reliance Jio as a role model for good business practices by an Indian owner and fuelled by desi capital.
The sentiments expressed in the article and echoes of it in different ways by many in India Inc are surprising. They exhibit a xenophobia reminiscent of the Bombay Club days and are unexpected coming from people who have till recently insisted that the free market is the only way to go and that India must embrace globalisation. These arguments are not only based on an insufficient understanding of the retail business and of the availability of Indian capital, but they also underestimate the intrepid Indian entrepreneur, especially of the millennial kind, by making the assumption that Flipkart was the first and last Indian retail entrepreneur left standing. In this regard, Kunal Bahl of Snapdeal is more correct his assessment that this deal will be an inspiration to many people
The general lament that two big foreign players slugging it out for supremacy of the Indian market will kill the yet-to-develop Indian e-commerce ecosystem suggests a loss of memory about the panic that Indian business went through just after liberalisation, its experiences since then, and the emergence of several new, confident and vibrant businesses thereafter.
Indian businesses, like Indian people, have a very high learning quotient, and there is ample evidence that they have learnt from the best practices of outsiders who came in. Furthermore, India is such a large country, with a humongous number of consumer needs and desired experiences, that one size, no matter how scaled up, will not fit all. One winner will not take all. But yes, as with the case of any disruptive competition, everyone will have to think harder and work harder to deliver consumer perceived value. And those who don’t cut it will die.
Shop online or watch your kids shop online to know that the Indian e-commerce industry is already off the ground with a thousand flowers in various stages of budding – proof of concept done, interesting, sharp and well-differentiated consumer offerings with business models that work and deliver, but still at a very small scale, stuck for want of capital (which in turn could buy them good advice and good people).
The question is what can we do to let these thousand flowers bloom? To mix a metaphor, India’s e-commerce has just taken off but what will it take to give it enough fuel to prevent crash landings? It needs more than Mudra bank in its current avatar, and more than the present banking system reeling from big boy non-performing assets and discovering credit appraisal and prudence when it comes to small and medium enterprises. It needs infrastructure and capital. It certainly doesn’t need, as suggested by some, an anti-dumping law on foreign capital.
Employees of Amazon India are seen behind a glass bearing the company’s logo inside its office in Bengaluru, India, August 14, 2015. Credit: Reuters/Abhishek N. Chinnappa/File Photo
Where is the desi capital that could have invested in buying Flipkart and then pumped the required money to seize the opportunity offered by such a large potential market? Retail needs patient capital – it is a business where you have to invest for a long stretch upfront to build enough scale to be able to buy cheap and sell cheap, and to sustain the levels of service and speed that Amazon has got us used to.
Even specialty retail needs patient capital to build brand and scale, and expand to overseas markets. In any case, when Indian banks lend, many of them get their raw material of capital from foreign money. Even the venture capital firm quoted in the Economic Times article as suggesting anti-dumping measures on capital from foreign shores no doubt has raised a lot of foreign money.
The real issue: predatory pricing
The issue of concern is not the parentage of money but whether it is used for predatory pricing. Money used to build businesses is the same, no matter how it comes in – via venture capital funds, via banks or directly into a subsidiary’s business operations – and predatory pricing is predatory pricing whether it is done with money from overseas retailing operations or from domestic petrochemical businesses.
Let’s talk about predatory pricing. The practice isn’t the preserve of global giants, as is obvious from Jio’s rock bottom pricing and and Flipkart’s B1G3F (buy one get three free) or heavy discounting genre of marketing. As an aside, even more interesting was their accounting – rack rate prices to show revenue earned and discounts shown as marketing expenses. They burnt money (dumped capital) too.
Yes, predatory pricing which destroys the healthy competitiveness of a market should be stopped – and that’s what the Competition Commission of India should decide. And surely they will appreciate the difference between someone selling at a loss to kill competition and someone who can sell far cheaper because of the competitive advantage of cheaper sourcing due to globally integrated supply chains or more imaginative local sourcing or pouring money into vendor development and finance (not to be written off in advance against future subsidies).
China Inc is another source of unbelievably low pricing and is firmly entrenched in the Indian market now. Let’s bring in another C word , the customer. Thanks to Chinese imports (coming from factories of enormous scales that India cannot match) into the Indian market, the modest income Indian gets decent quality clothing at amazing prices, blankets and windcheaters for winter, better quality footwear to trudge those miles that lousy public transport compels them to do. This is the consumer that most of India Inc doesn’t want. And has not invested, barring a few companies, to be able to serve them profitably.
Yes, two foreign giants will fight for supremacy in the Indian market, but please relax. Neither can behave like the asset-stripping East India Company. They will serve Indian consumers better, buy and sell local produce (cow dung cakes, Kerala red rice, fake mangalsutras, grinders locally made for idli and dosa grinding, gangajal are all available on Amazon) and the Indian consumer is known to force global giants to adapt. They will create employment (not just for a large Indian operation but to serve some of its global operations yet), and develop vendors. This time around is very different from the earlier time when FDI in retail was first introduced and talked up as developing vendors, creating employment and being good for the farmers. It produced very tepid results from global retailers, who only wanted to serve the ready demand and not develop the market for consumers or suppliers. Now we see it in action already.
As for losing the chance of being a global innovation hub, we didn’t even when we could have. Now, energised, maybe we will. The Flipkart app isn’t there in Indian languages yet (and neither is Amazon, but I am more inclined to forgive them because they are foreign). Innovation has to benefit customers. We now have an even better chance of being a global innovation hub then before, with cash-starved pigmy businesses running around the place dressing up for the IPO party.
Lets give the last word to the consumer – is she bothered by foreign giants taking over the Indian market? A WhatsApp joke floating around says it all: A husband keeps asking his wife to get this that or the other for the house and each time she says “Aap Amma Jaan se mangwaana (Get it from beloved mother) ”. Fed up, he yells at her and says why do I have to ask my mother, and she replies that Ammajaan (Amazon) has it all.
Customers clearly don’t care what the colour of their money or the skin of their parent company is. And from now on, given the exceedingly local nature of a large part of their product mix, more small businesses will gain than ever before in the era of wholly Indian retail.
Rama Bijapurkar is a leading management and market research consultant who also serves as an independent director on the boards of ICICI Prudential Life Insurance, Axis Bank, Bharat Petroleum, CRISIL and Godrej Consumer Products, among other companies.