The recently announced deal whereby Walmart takes a controlling stake in Flipkart is a milestone event on many dimensions. The world’s largest retailer buys the largest e-commerce business in India. It is the largest single FDI into India (once it closes, after going through all the regulatory requirements). It is also a huge show of confidence of a global leader in the India consumer, and more broadly in the Indian economy, at a time when globalisation is still a ‘dirty’ word, and huge uncertainties continue to loom. But, there is much more to be read into this deal, which has important implications for both, Indian companies aspiring to be global leaders, and also for the country’s public policy makers.
Why did Walmart, with primarily an offline business model, buy an online company? This acquisition represents a very important shift taking place in the global business model where customer value propositions are slowly shifting from the physical product to the digitally delivered service/solution/experience—a shift which we in BCG call ‘servitisation’. Over the last two years, as part of my research on new global business models, I have had an opportunity to interview many CXOs of global companies. All of them confirmed the importance of this trend and many industrial companies confirmed that their fastest growing business was not selling physical products but digital services and solutions. These business leaders were also wary of what they called ‘non-industry’ players entering their sector, be it start-ups (e.g. taxi sharing companies in the automotive industry), or more established players from other sectors (e.g. digital giants like Google with self-driving cars) targeting the emerging profit pools and transforming the competitive landscape.
The hallmark of this shift in value proposition is the integration of a digital services layer on top of a physical product delivery, which, for retail business, means combining offline and online delivery models. This new business model allows the company to create new value propositions like ‘sachetisation’ ,i.e., one-off consumption experiences like what Uber offers for point to point travel, pay-for-performance solutions in industrial products like what Rolls Royce offers to airlines for its engines, ‘personalisation’ of consumer value propositions like what Netflix offers to customers wherever in the world they may be. For Walmart, the online capability of Flipkart will allow it to develop many such value propositions besides offering a very strong distribution channel to its customers. Such digital capability is also highly scalable globally compared to a physical supply chain, which means that Walmart can easily take Flipkart into other markets without having to make huge local investments.
The second question that many will ask is why did Walmart pay such a high price for Flipkart, that is still on a path to achieve profitability? The simple answer is that, India is becoming the largest value creating market for all digital businesses outside US and China. For Walmart, that is faced with intense competition from local players in China, on one hand, and the growing ambition of Amazon to build a physical retailing model in its home market on the other, India, with its still-developing organised physical and digital retailing markets, represents a huge opportunity to build leadership for the future.
This digital transformation of customer value propositions represents a huge opportunity for Indian companies. But, it also presents a huge challenge as the US digital companies on the west coast, and Chinese digital companies on its east coast, have come to dominate this space and seem pretty invincible today. (Only a global leader like Walmart could have taken on Amazon who was also interested, if media reports are to be believed to buy Flipkart). And for these ‘digital hegemonists’, India is clearly emerging as the battle ground.
This in turn raises some interesting questions for public policy for a country like India which, as someone half-jokingly said to me, will create more than a trillion dollars of value in the coming years in the digital services and e-commerce space. And, given the high valuations involved, it is clearly foreign capital—in all likelihood, the owners of the global digital leaders—who will capture this huge value.
For public policy makers wanting to keep some part of this value in domestic hands, it reinforces the urgent need to deepen the local venture capital eco-system, and introduce many different types of financial instruments that would allow local entrepreneurs to raise large amounts of capital without having to give away ownership easily.
The challenge for public policy makers is further accentuated by the fact that, as digital trade, particularly B2B, grows from the customer shifts described earlier, the rules for measuring, regulating, and taxing these trade flows are yet to be fully defined. This has emerged as one of the top issues to address for domestic regulators and tax authorities, and also for the WTO, the global trade body held accountable when these flows cross-country boundaries.
The next decades of the 21st century will see the build-out of the physical-digital business models as an important facet of the fourth industrial revolution. There will surely be many more Walmart-Flipkart type of deals happening, which will create huge value. It is in our hands—our business leaders and policy makers—on whether we remain bystanders, participants or leaders, in shaping this transformation.
The author is Senior partner, BCG, and Director, BCG Henderson Institute. Views are personal.