Guest column: V Sridhar, Professor, IIIT-Bangalore
The recently released NASSCOM-PwC India E-Commerce report indicates that the Indian e-commerce market of $35 billion is expected to grow at 25 per cent in the next five years and exceed $100 billion by 2022 and create close to 1 million jobs. The recently concluded multi-billion dollar acquisition of stake in Flipkart by Walmart; investment plans of $2 billion in the Indian market by Amazon whose valuation recently crossed $1 trillion; and continued interests of Chinese mega investors such as Tencent and Alibaba in Indian e-commerce start-ups are indications of the huge potential of Indian e-commerce sector.
While the NASSCOM-PwC report discusses the growth potential of e-commerce across different sectors, this article delves in to some unresolved issues.
The Platform Approach
A typical e-commerce market place is a platform that connects sellers of products on one side with potential buyers on the other side. The platform provides the required glue between sellers and buyers, thus exhibiting network externalities. Specifically, success of the e-commerce platform depends on the number of users on each side (that is buyers and sellers) and the usage across them which is often referred to as cross-side network effect as expounded by the Nobel prize winning economist Jean Tirole. Because of this phenomenon, world over, e-commerce platforms are normally dominated by a few firms. Capital dumping is one of the methods adopted by e-commerce firms to increase the adoption and hence to win customer attention. While anti-trust laws are still evolving in India, the Competition Commission of India has been reviewing cases of predatory pricing in E-commerce. A regulatory framework that balances the innovation in e-commerce with the market dominance by few firms is required for the start-up eco system to survive in the e-commerce market place.
Accountability in e-commerce?
In all e-commerce platforms, the main advantage is of dis-intermediation through technology and hence the associated cost arbitrage. While the e-commerce platforms in general bring down prices of products and services and hence enable quick scale-up on the downward sloping demand curve, they also pose certain risks to consumers or third parties associated with their business operations. There can be negligence to protect interests of customers due to lack of regulation. In January 2018, the 31 year old Consumer Protection Act has been amended in which e-commerce firms are also included to protect the interests of consumers who purchase goods and services online. The February 2018 press note on the “Operationalisation of Food Safety and Standards (Licensing and Registration of (Food Business) Amendment Regulations, 2018” has included sections on food Licensing and Registration of E-Commerce food business operators. While these regulations may pose more than needed restrictions on e-commerce firms, it is time that the e-commerce firms steer away from their stand as “technology platforms” to “on-line businesses” and hence take more responsibility and liability in terms of consumer protection.
Is profitability a myth in e-commerce?
It is well known that Amazon never was profitable until its Cloud Services picked up in 2015. E-commerce business involves both digital and physical parts in the value chain. Unlike, pure digital goods and services where marginal costs are very minimal, the physical part that includes inventory holding at warehouses, last mile delivery are often costly. In fact, it has been shown that the average cost does not decrease but increase as the firms become larger with
varied customer and product types. This is one of the reasons for the costs of e-commerce firms to go up as revenue and merchandise sale increases, thus making them loss making companies. Hence the e-commerce firms should be innovative in reducing costs as they scale up, so that their business become viable!
What about IPO?
One of the ways to show case the merit of Indian e-commerce is for the founders to take it public through an Initial Public Offering (IPO). As of now, only Just Dial and Makemytrip have gone the IPO way, leaving all the rest to acquire capital from VCs and institutional investors. While there are risks and benefits associated with IPOs, firms in general get a professional board and executives to direct and execute the firm’s long haul strategy, compared to the passion and zeal of the founders, which may often by myopic. It is time that Indian founders of the Unicorn e-commerce firms in India take risk and go public, thus enlarging their shareholder base and hence accountability.
Comparison with China
Needless to say, comparison with China is inevitable. Sales volume through e-commerce in China grew from about 8 trillion Yuan to 10.8 trillion as on 2016 (equivalent to $1.6 trillion). To facilitate the same, mobile broadband subscription has grown to almost one billion, whereas in India it is still at 400 million. A bright spot in India, is the indigenous Unified Payment Interface (UPI), monthly digital transactions of which account for more than Rs 50,000 crore.
Hence, we need to still catch up and have miles to go!