– Alagu Balaraman
Let’s consider how the automotive industry, which was revolutionised by Maruti Suzuki in 1984, reached a size of $59 billion in 2016-17 and is growing at 5.4%, according to SIAM. By 2020, the e-commerce industry in India would have not just caught up with it but well overtaken it — despite starting 10 years later and being revolutionised 20 years later. This is an industry on a roll. Causes for huge growth Watching the e-commerce industry has been like watching a movie in a fast forward mode. Obviously, the rapid growth in internet penetration has been the main platform for e-commerce. Equally important are the trends in the growth of mobile internet and the improvement in data transfer speeds.
Business innovation also played a major role in driving growth. Regulation has always lagged technology and especially so in India. Until the year 2000, all information technology was regulated by the India Telegraph Act of 1885. However, there is a flipside to this — where there are no regulations or rather silly ones, businesses are free to innovate. But it’s messy. E-commerce had to navigate through the political minefield of the retail industry which is highly regulated in India. Since most of the e-commerce companies that grew in scale required large doses of capital, they were funded by foreign investors who had that kind of risk appetite.
To circumvent the tag of being a foreign retailer, complex business structures were created and later sanctified under the marketplace model. The most important driver of growth would probably be faith. The industry is tough and is fighting with extremely low margin bricks-and-mortar competition. So, it took a lot from entrepreneurs to believe in this industry that internet penetration would happen, that customers would change buying behaviours, that the technology would work and that fulfilment will be feasible.
As this industry evolved, it required larger and larger doses of capital. Amazon announcing a $5 billion war chest for the battle in India this June is a clear indication that this industry is not for the tentative investor. When the industry started, it is unlikely anyone visualised such numbers. In the early days, delivery was taking place by putting people onto commercial flights with a suitcase of merchandise for delivery. Today, huge investments go into infrastructure — both technology and logistics. Also, a major component of the capital flow is towards advertising to change customer behaviour and product discounting, which seems to be even better at attracting customers.
From getting people to book a railway ticket at a street corner where a shopkeeper had a computer to buying clothes from an online site unseen or saying that e-retailers will go mobile only, this is an industry that has aggressively gone in for change. But there are areas that are yet to arrive. One of the biggest hurdles is still the area of payments. A $14.5 billion industry and most deliveries are still based on cash on delivery. The effect of demonetisation last year was to push more people to online payment, but with cash getting back into the banking system this has reversed.
GATI reported that in 2017, the COD transactions were back to over 50%. Given that IMPS transactions have already overtaken debit and credit card transactions in the country and there is a strong infrastructure put in place using UPI, the ingredients are present for a move away from COD. Such a move will be highly beneficial operationally. It will eliminate cash handling and cost of transactions for the e-retailer. It will probably also drive a more considered purchasing decision by customers and reduce the quantum of returns.
The other major challenge is fulfilment. The pace of growth has left India’s rather primitive logistics environment struggling to keep pace. Large investments are needed to fund innovation and systematic working in this field. There are huge challenges like poor infrastructure coupled with congested urban roads. Solutions like motorcycle riders with huge backpacks are hardly a long-term solution.These are difficult but not insurmountable challenges. The industry has shown remarkable ingenuity in the past. Coupled with aggressive determination, these problems are also likely to be overcome.
Author is Partner and MD, CGN Global India