EVERY second three more Indians experience the internet for the first time.
By 2030 more than 1 billion of them will be online. In June last year one in
four mobiles used in India was a smartphone, up from one in five just six
months earlier. Add in two more facts—India boasts the world’s fastest-growing
large economy, and the planet’s biggest population of millennials—and you can
see why the likes of Facebook, Uber and Google are falling over themselves to
establish footholds there.
No battle for the online future of India is more intense than the one now
being waged in e-commerce (see article). Sales are still tiny, at $16 billion last year, but
the country is the world’s fastest-growing #e-commerce market and is prized by
America’s and China’s internet titans. India has become the biggest test of
Amazon’s international ambitions.
Jeff Bezos, Amazon’s founder, wants it to be
his second-largest market, after America, and has backed his plans with
billions of dollars of investment. His opponents are platforms like Flipkart
and Snapdeal, founded by locals and funded by some of the biggest names in
tech, among them Alibaba, China’s e-commerce champion.
As these companies jostle for market share, they are spending feverishly on
logistics and discounts to lure consumers online. Capital may dry up for some;
in February a Morgan Stanley mutual fund sharply lowered the valuation of its
stake in Flipkart. But whoever wins or loses in this frenzied contest, the
importance of e-commerce stretches beyond individual firms and into the wider
economy. In the West e-commerce companies piggybacked on an existing
infrastructure of shops, banks and logistics firms. In India the game being
played by the e-commerce pioneers is leapfrog. It could become a model for
emerging markets around the world.
Pay as you grow
Indian e-commerce has such potential because it can bring three changes
more profound than convenience and keen prices. The first is faster financial
development. China already provides one example. Alipay, an arm of Alibaba,
overcomes mistrust between buyers and sellers by holding on to customers’ money
until they have safely received their goods. Now run by an affiliate called Ant
Financial, Alipay has more than 400m accounts that let consumers buy products,
pay bills and transfer money. The torrent of information that Alibaba gathered
on merchants and consumers was the basis for a lending business.
Something similar is under way in India. Paytm, which provides digital
wallets and is itself backed by Ant Financial, has 120m accounts, nearly six
times the number of credit cards in India. E-commerce companies are also
helping small businesses obtain loans that they would otherwise have struggled
to raise. Amazon India rolled out such a programme for its sellers last month.
In January Snapdeal announced a partnership to streamline loans from the State
Bank of India.
Second, e-commerce firms could help overcome India’s ropy infrastructure
and vast geography. Where roads are clogged and infrastructure is decrepit, the
rival firms are melding warehouses and local outposts into idiosyncratic
distribution networks. About half of Flipkart’s and Snapdeal’s customers are
outside India’s biggest cities. Some are still farther afield: Amazon claims to
be helping more than 6,000 Indian businesses sell abroad. China again shows
what can be done. Alibaba is connecting remote rural areas to the online
economy; there are now 780 “Taobao villages”, rural communities in which at
least 10% of households are shopping or selling over the internet.
The third big impact of e-commerce in India is on retailing itself.
Shopping malls and chain stores account for only about one-tenth of total
retail sales. Already, the combined sales of India’s top three e-commerce
sites, Flipkart, Snapdeal and Amazon, surpass those of the ten largest offline
retailers.
Two-thirds of Indians are below the age of 35. For these young people,
armed with smartphones, shopping is likely to be very different from what it
was for their parents. Malls and chains will not disappear, but they may never
be as prevalent as they are in the West.
That in turn will stimulate the rise of other digital firms. India’s tech
scene is thriving. Tiger Global, a Flipkart investor, also backs an Indian
online classified business and a messenger app that helps users avoid data
costs. SoftBank, which backs Snapdeal, funds a mobile-advertising platform. In
2014 only America, Britain and Israel saw more new tech startups.
Platform boost
Simply to assume that e-commerce will conjure up growth—particularly of the
labour-intensive sort that India needs—would be a mistake. The market in China
had a very different starting-point, for instance. When the likes of Alibaba
got going, it helped that China was already home to many manufacturers looking
for new ways to sell excess inventory. India’s manufacturing base is much
smaller, especially for electronics, e-commerce’s best-selling category. India
is also poorer.
A smaller share of its population is online—32% last year,
compared with 52% in China. Indians speak more than 20 languages, which complicates
marketing. The budget unveiled by Narendra Modi’s government this week includes
plans to upgrade 50,000km (30,000 miles) of roads, but India is not about to
possess a gleaming motorway network to rival China’s. Mr Modi’s continued
failure to install a harmonised goods and services tax blunts the benefits of
e-commerce.
Yet in its heft, governance and manufacturing clout, China is also an
outlier. India is a better template for the e-commerce battle in other emerging
markets. Its logistical woes provide a test of firms’ ingenuity. If they find a
way to deliver goods profitably there, they may succeed elsewhere. If they
falter, their stumbles will provide lessons. That is all the more likely
because India’s e-commerce is so international. Naspers, a Flipkart investor,
backs ventures in Nigeria, South Africa and Egypt, among other places.
E-commerce in India is a local battle for customers, but it is also a battle
for the future.
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