FDI: Pleasant Surprise or Bolt Out of the Blue?

The long awaited but recent guidelines from DIPP on FDI in eCommerce came as a pleasant surprise for some, a boost and encouragement for some and of course a bolt out of the blue for many.
Impact of FDI

The long awaited but recent guidelines from DIPP on FDI in eCommerce came as a pleasant surprise for some, a boost and encouragement for some and of course a bolt out of the blue for many.

Most of the foreign players or foreign investment controlled Indian companies made their own interpretations with structuring advice from expensive consultants and established, what you would call, in a layman’s language, retail operations in India. This was in clear violation of the existing rules on FDI in multi-brand retail, by creating multiple entities linked to each other to do biz in retail with a veil carrying words such as ‘online’, ‘marketplace’ and more commonly ‘eCommerce’.

Neither the structuring nor the delicate veil could save them from the clear guidelines that came from DIPP. This is one occasion that we must congratulate the Indian government for coming out with guidelines, protecting the Indian business in the long run, from foreign investors taking control of Indian retail/consumer-related businesses. The guidelines have clearly disallowed FDI in online retail, but allowed 100 per cent in marketplaces. They clearly stipulate that prices and service must be controlled by the vendors online.

This impacts large players like Amazon, Flipkart, Snapdeal, and so on who are either foreign-owned or FDI controlled. They will be forced to operate only as technology platforms facilitating the process of buying and selling online, with logistics services added. As per the new rules, these platforms cannot offer discounts and in addition, the returns, quality of product, warranty and replacement and other services are sole responsibility of the vendor. The details of the vendor also must be displayed in bold on the site.

However, the large players are blatantly flouting all the rules because they continue to guarantee quality of the product, returns et al through aggressive advertising. Most of them continue to operate as retailers in addition to further re-structuring their models and procurement. This will continue for some more time, but India is a country, where if you get on the wrong side of the law and if the government has no intention of protecting you, then penalties can be very severe. The penalties for violations and the controlling body have not been clearly rolled out yet. But they will happen and needless to add, as other Indian biz laws, they will be draconian perhaps with some quasi-judicial powers at some point in the future. Even Indian companies have not been able to deal with Indian regulatory systems particularly in the last 25 years. It is very few companies that have been setup in the last 25 years in India that have actually been successful, profitable and paid dividends. Yes, the older companies established decades back or IT and Pharma companies which actually do not do any biz in India, are profitable and declare dividends.

So, for these foreign companies, to manipulate complex laws in an Industry in which they are discouraged, is not the best way forward, but they must modify their business models and comply with the new rules in law and spirit! In any case, it is a matter of time before we will see law suits and PILs against them for violation by NGOs. Unfortunately, the nature of biz of this industry is such that it cannot escape public attention.

The right to discount should always rest with the owner of goods/vendor. Deep discounting, aggressive advertising under the guise of brand building on long term basis as a strategy to kill competition is not a great business model in any industry. The basis of setting up any business unit should be a motive to make a profit in foreseeable future. The objective of any company should be to compete on differentiation, value addition and a serving an existing need or creating a new need of a customer. E-commerce certainly addresses a new need of a consumer and it is irreversible. But, one must understand it has to be built on technological capabilities on the front end and not by attracting visitors and sales by advertising on TV and selling below your purchase price.

The business must have complete order fulfillment capabilities to deal with thousands of products, orders and corresponding systems/processes. This is a huge value addition which most Indian companies still do not possess but have ventured out into the business by strength from funding and advertising alone. We can take it for granted, that such companies will not survive beyond 2016.

We call a company profitable when they start declaring dividends to the shareholders. We call a company successful, when they have been able to actually earn the invested money back. Yes, the business needs expansion into new territories. But that is not an applicable rule here, because they are not expanding to other countries. Under these rules and the present business philosophies they have, they will neither be profitable nor successful in the foreseeable future. However, the investors will continue the valuation game upwards with hype and they call it a boom! The same investors will revise the valuations downwards and they will say the bubble has burst ! The only advantage brand building can provide is lower cost of sale. If it is not good enough or sustainable without continuous brand building costs, then the bubble has obviously burst.

India is a great market for eCommerce with challenges on mobile technologies, logistics issues and pampered by returns apart from the fundamental/in-built challenges in online retail. It requires courage from the entrepreneurs, innovators who can differentiate and strong CEOs who can execute and build efficient companies. This will also happen and these winners will come from amongst the bunch that exists today. Spotting them is the difficult part, because it takes a lot of knowledge, in-depth understanding of technology, process and systems capabilities, operational efficiencies and a good understanding of retail industry and verticals.

Author's Bio: This Article has been written by Palem Srikanth Reddy, Founder & Chairman, LatestOne.com

 

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