Monday, January 21, 2019

India's e-commerce market observations

Interesting developments in India's e-commerce market. Some observations.

1. Mukesh Ambani's announcement of Reliance's decision to enter e-commerce was only to be expected given its very strong footprint in retail and telecommunications. And it has the potential to truly shake up India's retail and lead to the emergence of a genuine home-grown global ecommerce giant.

It could stoke rural entrepreneurship like Alibaba's Taobao which would involve going beyond me-too e-commerce with just IT applications and building a feet-on-the ground logistics and distribution network. Amazon has just started doing it, and  given its track-record with Jio, Reliance is most certain to go the full-hog in taking e-commerce (both on the seller and buyer sides) to beyond the top 10% of Indian market and into rural areas. It already has about 4000 Reliance Retail stores, 50 warehouses, and 4000 Reliance Jio outlets. A race between Amazon and Reliance could well turn out to be among the most interesting things to look for in the global e-commerce market itself, and unlike even in the US, Amazon is far from certain to emerge as a winner.

2. Mr Ambani has also called for an end to "digital colonisation", and ownership of Indian citizen's data by citizen's themselves and not by corporates much less foreign ones. Little to argue against this. It is also an open support for the Government of India's e-commerce restrictions and data relocation policies that would hurt foreign e-commerce and payment companies. The Government should promulgate the Personal Data Protection Bill 2018 and enact regulations that protect personal data across sectors, something which regulators especially in the US have been averse to committing to. 

But in the coming days, this will most certainly provoke articles and op-eds accusing the Government of India of pandering to Reliance, even being captured by it. Without getting into the merits of any such allegation, it raises an interesting point about the dynamics of public policy regulations in such areas which invariably ends up favouring one or other large incumbents. Favourable public policy has played a critical role in entrenching the big American internet behemoths. The biggest lobbyists in the US have been the tech companies, and there too the largest tech companies. This blog has written several times about the capture of political institutions and rule-making by tech companies.  

3. I will go further and argue that such levelling-the-playing field policies may perhaps be the only way to make markets with network effects competitive. The publicly-driven emergence of Union Pay and RuPay in China and India respectively could have been the only way to disrupt the rent-seeking market in payment gateways that the trio of American Express, Visa, and MasterCard had been enjoying for decades. The likes of Amazon, Facebook, and Google with their near monopoly over individual's data dominate their respective markets in the US and raise insurmountable entry barriers for competitors even in external markets. There is no reason to think why those privileges should be globally harmonised.

Surely, even with all the efficiencies and cutting-edge technologies associated, we would not want any market globally dominated by one or two firms, much less one which captures arguably one of the most important resources of modern economy, data. Further, whether we like it or not, the fact remains that individual data is being "colonised" by foreign  companies and that too is not desirable. And all this becomes even more compelling when we realise that these behemoths have repeatedly failed on their fiduciary responsibilities, adopts socially harmful profit maximisation strategies, and  their leaders have even demonstrated shocking incompetence with managing large organisations. 

4. The roles being played by Amazon, Alibaba, Rakuten, and Reliance in their respective markets indicates that, for all the hype around nimble and small innovators, true disruption still requires deep pockets and large players. 

5. Finally, the grouse of the foreign e-commerce firms and their supporters accusing the Government of India of whimsically changing the rules of the game is plain disingenuous. While the GoI has whimsically changed the rules of the game on many occasions, this is surely not one of the cases. 

The original e-commerce policy while allowing ecommerce companies to run virtual "marketplaces" that connect independent sellers to consumers, had explicitly barred them from selling goods themselves and being online supermarkets. The foreign firms in turn gamed the rules by establishing local partnerships and creating new on-seller companies. The entity formed by Amazon's partnership with NR Narayanamurthy's Catamaran Investments, Cloudtail is the overwhelmingly largest seller on Amazon India. The new rules stipulate that no seller on  online marketplaces can source more than a quarter of its inventory from a wholesaler linked to the marketplace, and bars sales on the marketplace by any entity owned by the marketplace or any of the its group companies. 

This reminds me of Indian infrastructure companies who have bid aggressively, overlooking explicit provisions that would have made their sustainability unviable, in an attempt to bag the contract and get back to renegotiate the terms later. Companies like Amazon did exactly the same thing, accepting the GoI's e-commerce policy and entering the market, in the hope that they would be able to either continue gaming the extant rules or be able to lobby and change the policy itself.

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