Source: The Economist
Published on 16th March, 2013
SIGNS of middle age were obvious at a recent gathering of Nasscom, the club for India’s giant IT industry, which now has sales of $100 billion and is dominated by outsourcing firms. The venue was a hotel in Mumbai, a five-star fortress of foyers and finger food. The guests of honour were politicians. Grey-haired, well-fed executives sat and talked in jargon. It was hard to spot anyone close to India’s median age of 26. Things have come a long way since 1981 when Infosys, a bellwether Indian IT firm, was founded in a flat by seven hungry engineers with $250.
Yet if you walk to the exit of that hotel and reject the option of an expensive limousine, or of hailing a bashed-up street taxi, and instead press “Book now” on your phone screen, another Indian tech scene appears. The application links a network of taxis using satellite positioning, cheap Chinese-made smartphones, souped-up Google maps and credit cards. A 6km (4-mile) drive north in a modern car will deliver you to a snack shop, above which is the firm that runs the system. Olacabs was set up in 2010. Its co-founder, Bhavish Aggarwal, is a 26-year-old engineer who has worked for Microsoft in Seattle. He has raised a slug of venture capital, some of it American, and says business is growing at 30% a month. “When you start you are viewed as a fool,” he says. “But if you are worried about that, you’re in the wrong line of work.” His goal is to transform transport in India’s congested cities.
India needs a million Olacabs: start-ups that use technology to overcome everyday problems. The economic benefits would be huge. And in a country with a stuffy business culture, in which commercial and political dynasties are all too common, a technology revolution would be a colossal breath of fresh air. It would help unleash the energy of a generation of young people. But will it happen?
India has already had one technology revolution. In the 1980s middle-class engineers from a dirt-poor socialist India somehow persuaded Western firms to outsource their back-office functions and bits of their IT operations to the subcontinent. Thus began a three-decade-long boom.
The revolution fed its children well. Thanks to IT, some 3m Indians now work in well-paid formal jobs of the kind that India needs so badly. Perhaps another 10m knock-on jobs have been created for maids, drivers and the like. Technology services have saved India from bankruptcy—exports were 4% of GDP in 2012, keeping the balance of payments in passable shape. As well as local champions such as Infosys, TCS and Wipro, 750 multinational firms have outsourcing and technology hubs in India. Many perform research and development. The cultural impact of all this has been huge. The best-selling novels of Chetan Bhagat, such as “One night @ the call center”, record the angst and romances of India’s young workers.
Yet all is not peachy. The IT-services industry is maturing. Other countries are building rival call centres. (Americans find Filipino accents easier to understand.) The gap between Indian and Western technology workers’ wages is shrinking, although it will probably not vanish for a decade or more. Rich countries are putting up barriers to stop jobs moving overseas.
And another thing worries Indian geeks. Their country has so many advantages: the English language, engineers with global experience, a conspicuously successful diaspora in Silicon Valley. Why, then, has it failed to produce a new generation of big tech firms? In contrast to America’s constant regeneration, India’s champions have spare tyres and grey hair.
False dawns, elusive profits
Indian IT has seen several false starts. Between 1998 and 2002 a crowd of dotcom start-ups were born. Most died. In 2006-08 India had a mini-boom in mobile “value-added-services” such as ringtones and text-based products. That, too, fizzled out. In 2010-11 venture capitalists lavished cash on weak e-commerce firms, inflating a bubble. About 70% of the 50-odd firms that got funding are now dead or on life support, reckons Allegro, an investment bank in Bangalore.
The gulf between Indian hype and reality over the past decade is best shown in numbers. One veteran venture capitalist reckons the investments made in “new-generation” (ie, excluding IT services) technology firms are worth $5 billion-6 billion today. The largest listed firm has a market capitalisation of $700m. By way of comparison, China’s listed internet firms have a combined value of over $100 billion and its e-commerce sales are about 18 times India’s. Other emerging economies, such as Russia, Argentina and South Africa, have produced multi-billion-dollar internet champions. During the past decade India has fallen behind.
Fortunately things are changing. First, the internet is becoming popular. Penetration is just 3-4% of the population, if judged by the number of moderately fast fixed internet lines and smartphones that use 2.5G and 3G services. About two-thirds of these connections are mobile. If you include people who access the web through cafés, at work, on friends’ computers or through basic phones with small screens, penetration is 10%. Most surfers are young. Many live in provincial towns that the IT revolution has hitherto bypassed.
That 10% is a big figure in absolute terms—122m people—and it will rise as smartphones get cheaper. (The fixed-line network, largely in state hands, will probably remain hopeless.) Some applications are already popular. Almost half of all reserved train tickets are bought online, saving hundreds of millions of man-hours spent queuing at stations.
The second change for the better is that the start-up scene now has depth, partly as a result of all those mini-booms and busts. The venture-capital industry, with a mix of local and American firms, is now well developed and capable of writing big cheques. And a new generation of entrepreneurs has emerged, most of whom combine technical skills with global experience. Of the 15 technology-firm founders interviewed by The Economist for this article, 12 have worked in America or for multinationals in India. Unlike the older generation, these tigers do not fear failure. Many boast of their early misadventures, much as Silicon Valley types do.
My phone is my temple
Deep Kalra, the founder of Makemytrip, a travel site, previously worked at ABN AMRO, a Dutch bank, and General Electric. He also spent time setting up bowling alleys in India, without much success, and managed to survive the dotcom bust in 2002. Prashant Tandon of Healthkart, an online health store, studied at Stanford University and worked in San Francisco for McKinsey, a consultancy, before returning home. He and his partner’s first venture, a network linking doctors and patients, failed. Their second looks healthier.
What kind of companies are these new entrepreneurs creating? Sandeep Singhal of Nexus, a venture-capital firm, describes India’s new tech scene as a mixture of Israel and China. The “Israeli” bit involves selling clever innovations to foreigners. It is still fairly small. InMobi, which sells technology and services for advertising on the mobile internet, is unusual in that it broke into other emerging markets, such as Indonesia and South Africa, before cracking America. “A lot of firms struggle to innovate because the [Indian] market is too small,” says its founder, Naveen Tewari. They need to look farther afield, adds Mr Tewari, a Harvard and McKinsey alumnus who has become something of a hero for budding entrepreneurs.
Only a brave few follow this advice. Cloudbyte, for example, makes storage software for use in data centres. It has just moved one of its co-founders to America. “The market is largely in the US. We want to be a global company with our engineering talent in India,” says the co-founder still in India, Srivibhavan Balaram. Another firm, Magzter, puts magazine content onto phones. It began with Indian magazines read by the diaspora but now has hundreds of non-Indian titles on board and customers everywhere. Its app has been downloaded 6m times. Its co-founder, Girish Ramdas, holds the under-21 Indian record for 0.22 rifle shooting. He previously ran a poultry farm, then a website about his home city of Chennai, then a film magazine. He spends a lot of time abroad signing up more publishers.
The “Chinese” part of the industry is much bigger. The label refers to local firms that sell to locals, as China’s internet giants do. Such firms account for about three-quarters of activity by next-generation Indian tech firms (see table). Some sniff that Indian e-commerce firms are mere copies of Western ones, or that they largely serve the rich. Such gripes miss the mark. The real achievement of India’s digital merchants has been to create reliable supply chains and systems in a country where few things work smoothly.
Flipkart, a leading firm, built its own warehouses and delivery teams. It accepts cash on delivery from customers reluctant to use credit cards. To stock 80% of the books printed in India, it needs to deal with no fewer than 1,000 suppliers, says its co-founder, Sachin Bansal. Even “marketplace” sites, which avoid holding inventory, must work hard to make sure suppliers and couriers do what they promise.
Nor is it true that e-commerce sites cater only to an elite. Kunal Bahl of Snapdeal, an online marketplace, says it gets 60% of its orders from outside the big cities, from people who may have little experience of formal bricks-and-mortar shops (as opposed to informal wood-and-corrugated-iron ones). Bangalore-based Redbus has begun to transform long-distance bus travel by bringing a fragmented market of over 1,000 private coach firms online and centralising ticket sales onto its system. Its 32-year-old boss, Phanindra Sama, the son of a farmer, recalls the early days traipsing round bus depots trying to persuade grizzled operators to sign up. “It was painful,” he says. The site spread by word of mouth among young office workers.
These firms are exciting but still small. All e-commerce sites in India between them had sales of $10 billion in 2012, about four-fifths from travel products such as plane tickets, according to McKinsey. It forecasts that sales will approach $100 billion in the next five years, roughly the same size as the conventional Indian IT industry is today. Most of that growth is expected to come from a surge in the number of people accessing the web on their phones. In this scenario India will bypass the PC era and leapfrog straight to the mobile internet.
It is at this point that veterans of the telecoms industry chortle. India’s 700m mobile subscribers are stingy. Only 5% pay for mobile broadband and only a fifth of those engage in e-commerce, says one network boss. Handsets using Google’s Android operating system are available at $100 or less, but their quality is poor. About a fifth of smartphone buyers use them only for voice calls and as a fashion accessory.
Thrifty customers make profits elusive. Sundar Lakshmanan, an engineer in Bangalore, designed “Suruk”, a mobile app that checks if your rickshaw driver is ripping you off. It became a media sensation, but he made no money from it. Mr Lakshmanan has now moved away from mobile to set up a travel site called Tripthirsty.
Yet the mobile internet is spreading. About a quarter of internet traffic in India is now from mobile phones, reckons Rajan Anandan, the head of Google in India. The global figure is 14%, according to StatCounter. E-commerce sites are seeing a shift towards mobile. Flipkart says phones account for 6-7% of sales, most of it from new users. This should reach 20-25% in a year. Hrush Bhatt of Cleartrip, a travel site, reckons 8% of his sales are now from mobile and this will reach 25-30% in a year. “People underestimate how quickly India will adopt the mobile internet,” he says.
Existing e-commerce firms have a head start, but no one knows who will win in the long run. The mobile-network operators, such as Bharti Airtel and Vodafone, will probably be “dumb pipes” without a big role in content, as they are elsewhere. The most downloaded mobile apps by Indians are foreign, such as WhatsApp, a messaging service, and Facebook.
Yet in time more India-specific apps may emerge. Some 300km south of Goa on India’s balmy west coast is the town of Udupi, where Rohith Bhat runs Robosoft Technologies. It is a big developer of mobile apps globally (mainly for the iPhone) and builds sites for third parties as well. Thus far only a small part of Mr Bhat’s business is in India, but he expects that to change. “In 2013 you’ll see some success stories. By 2014 it will be huge.”
The hope is that as mobile e-commerce booms, it will boost software and hardware start-ups. Vani Kola, a venture capitalist, says that “India will never build the next Oracle. We don’t have pure science innovation—we’re not winning Nobel prizes. But India will develop technologies that could take off around the world, from cheap internet-access systems to payments processes.” If that happens, the boom would change India and create a new generation of exporters.
To lead a mobile-internet revolution, India’s entrepreneurs must overcome three problems. The first is payments systems. Only about a fifth of Indians have debit or credit cards and those who do are scared of using them online. When they try the process is clunky—a quarter of attempts to pay on the Indian Railways site, probably India’s most frequently used, fail. The good news is that regulators are easing the rules for small transactions. Anish Williams quit HSBC to co-found Transerv, a firm that has just launched a pre-paid mobile wallet that can be bought from street vendors and downloaded onto phones. It piggybacks on the credit-card payments system and should make buying online easier. Firms like this could make a big difference.
The second bottleneck is capital. India’s e-commerce industry will need billions of dollars to grow. But local venture-capital firms struggle to write cheques of over $100m. Some fear that foreign investment in e-commerce may fall under the same rules as apply to bricks-and-mortar retailers such as Walmart. These let individual states ban activity.
The third impediment is India’s telecoms sector. Once celebrated, it is indebted, loss-making and fragmented. To blame are a price war, graft and licensing rules that prevent consolidation and roaming. The industry is cutting investment in networks at exactly the wrong time. There are multiple different spectrum and licence charges; big operators pay up to a third of their sales on such levies and on taxes. Telecoms firms are so fed up they refuse to participate in new spectrum auctions.
One potential saviour is India’s richest man, Mukesh Ambani, who owns a licence for 4G services and whose secretive firm, Reliance Industries, has the firepower to invest $10 billion. Rival executives think his project is stalling—the spectrum he has is at an unattractive frequency, they think, that requires too many base stations to work well, and will struggle to be compatible with global handset standards. Even if they are wrong, it would be uncomfortable if India’s mobile-internet boom relied on a single politically connected tycoon. What India really needs is a complete clean-out of its rotten telecoms bureaucracy. That would help investment to recover.
The competence trick
Ministers now bask in its reflected glory, but India’s outsourcing revolution happened despite the government. All the best firms needed was a little deregulation in the 1980s and 1990s. Once politicians stopped restricting access to global bandwidth and imported computers and cut taxes, these firms were set free. Even today they are unusually self-reliant, educating their own staff and running their own backup power plants.
A mobile-internet boom, by contrast, will need a more competent state: one that unshackles payments systems, regulates telecoms sensibly and does not throttle everything with red tape. India has all the other ingredients it needs: entrepreneurs brimming with ideas and customers hungry for change. With the right framework, they could bring about a second technology revolution that dwarfs the first.
Source: The Economist