When an online commerce company set up by a former English teacher in China makes a stunning debut on US bourses, questions are bound to arise whether an Indian player can replicate the success.
While success in entrepreneurship is largely due to individual brilliance -as is evident from Alibaba’s and its founder Jack Ma’s spectacular IPO last week -other factors, including investment climate and government regulations, do play a key part.
Hangzhou, China-based Alibaba’s shares soared almost 40% in its first day of trading on the New York Stock Exchange, as investors fought to grab a piece of what is expected to be the largest IPO in history . While India ticks all the right boxes when it comes to demand and potential for growth, the jury is out if an Indian ecommerce player would be able to do what Alibaba did within the next few years. Industry pundits point out that India’s e-commerce sector is at a stage where China was in 2007, but a combination of factors -such as low internet penetration, supply chain and logistics hurdles and an archaic regulatory regime -act as barriers.
“One cannot have this scale if you don’t think of going global. I don’t see any company in India working toward that right now,“ said Rachna Nath, leader of retail and consumer at PricewaterhouseCoopers India. “That is the need of the hour.“
According to a recent report by investment bank Avendus Capital, India’s online commerce sector, currently valued at $3.1 billion (RS. 18,800 crore), is expected to gross about $5 billion (Rs. 30,500 crore) by end of the current year, and is projected to hit over $11.8 billion (Rs. 71,800 crore) in sales by end of 2015. Impressive, but still tiny compared with the $542 billion (Rs. 33 lakh crore) that China’s ecommerce, which contributes more than 3% to the country’s GDP, is expected to touch by 2015 “It’s unfair to expect that we will produce a company the size of Alibaba right away, given the difference in basic denominators, such as GDP and retail market size of the two countries,“ said Kunal Bahl, cofounder and CEO of Snapdeal.
According to Bahl, the strategy is to build an ecommerce company for the Indian market, and not to ape existing business models.“If you went to China in 2007-08, you would be asking the same questions of them, as you’re asking about India’s e-commerce sector now,“ said Bahl. “It’s not common to see billion-dollar businesses growing 300%-400% year-on-year. It’s an unusual thing. I don’t think there’s any other industry in India growing at that kind of pace.“
Regulatory roadblocks, however, continue to be a cause of concern, with Amazon India’s recent tax issues with the Karnataka government highlighting the dis sonance between prevailing tax norms and the demands of growth. “The government at the Centre needs to address the whole gamut of tax-related issues for the retail industry, not just e-commerce. Otherwise, the e-commerce firms will be at the mercy of local tax officials in different states,“ said Arvind Singhal, chairman of retail advisory firm Technopak.
The high cost of customer acquisition incurred by India’s e-commerce companies, adding to their already-significant burn rates, is also a cause for concern. The average aggregate cost of acquiring users is estimated at between . 500-.Rs. 1,000. “Establishing `stickiness’ is going to be an issue. There will always be margin pressure to keep prices low, given that customers tend to switch easily,“ said Ajay Relan, founder and managing partner of private equity firm CX Partners.
On a per-dollar basis, private equity investors earn more from their investments in China than in India. Barriers notwithstanding, the bigger ecommerce ventures in the country such as Bangalore-based Flipkart and Delhi-based Snapdeal, are building up their technology platforms, investing in infrastructure. “The reach is still limited.What is really desirable, is the ability to deliver and manage logistics,“ said PwC’s Nath.
In May, Snapdeal launched 40 fulfillment centres or warehouses across 15 cities, and said it plans on launching more over the next few months. Cross-town rival Flipkart runs about six such warehouses.
Both companies have crossed gross merchandise value, or value of goods sold on their website, of $1 billion (.`6,000 crore) in the last few months. This pales in comparison to Alibaba, which reported GMV of $248 billion (. `15 lakh crore) for the previous fiscal, according to its draft Red Herring prospectus. With the desktop revolution bypassing India, Snapdeal and Flipkart, along with their peers, are focusing on the mobile platform to drive deeper penetration in the country. India currently has a mobile subscriber base of over 900 million, one of the largest in the world.
“3G prices have been coming down and the growth of smartphones, makes it very clear there will be a tsunami of new users going forward,“ pointed out Bahl.
Both, Flipkart and Snapdeal, see more than 50% of their overall orders coming from mobile.
It’s a strategy that has been accepted by global PE and strategic investors, as they continue to pour money into the space. While Flipkart raised a massive $1 billion in financing in July, Snapdeal is also believed to have closed its latest funding round led by Alibaba and Japanese investor Softbank.
Amazon chief Jeff Bezos has also committed $2 billion (. `12,000 crore) towards its Indian unit.“For Amazon, due to regulations in China, India is the only emerging market still open and it will never let go off that opportunity,“ said Rahul Khanna, MD at Canaan Partners, which has companies such as Naaptol and BharatMatrimony in its portfolio. “An Alibaba or not, we will see at least $5 billion companies from India, in the next 10 years,“ he said.