Is China the role model for India’s Internet story? NO. Most definitely NO.

Historical civilizations, humongous populations, cultural and religious overlaps, and current generation economic powerhouses- India and China are perhaps the two countries in the world that share most in common. Do the above similarities mean that the India internet adoption and business model monetization story will also pan out the same way that it did in China? According to a recent JP Morgan study, the answer is “No”.

Let us first capture the similarities, of which there are many. India is quickly emerging as a robust consumer market, driven by metrics such as rising per capita incomes, growing internet user base, hyper smartphone usage leading to data consumption pick-up, and connectivity technology shifts such as 3G/4G. The internet and internet-based businesses are playing a key role in helping consumers/businesses leap over the significant intrinsic inefficiencies in the offline world, as has also been the case in China. In this regard, the India story can probably better the Chinese, since in India the overall infrastructure is poorer, and market fragmentation is higher. Additionally, the demographics (young population) in India are far more conducive to internet centric habits. On all these fronts, India internet today stands probably where China stood 5 years ago, and appears poised to mirror the China path.

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Look closely though, and the 4 key dissimilarities become visible.

  1. Heightened Competition- The market landscape in India is significantly different from China; competitiveness in India is far higher than what was the case in China at a comparable stage of internet evolution. For example, Alibaba had a long run without any competition when it started out, and even today it has an 84% share of the mobile shopping market. In fact this lop sided market share story is replicated in other internet based segments in China too- Ctrip has a 57% share of the travel business, and Baidu an 82% share of the search engine business. In contrast, the competition is far more intense in India. Flipkart, Snapdeal, Amazon, and Paytm are fighting hard, are well funded, and are in it for the long run.
  2. Increased Discounting- Discounting by ecommerce players was not so prevalent in China in the early years. In fact, it is evident that aggressive price benchmarking was largely against offline retailers – not so much against online competitors. As a result, China’s second largest ecommerce player, JD.com has been generating profits since 2009. Lower discounting helped optimize the route and duration to profitability in China. India Internet, on the other hand is already seeing heavy discounting, which is a necessity, given the more price consciousness Indian consumer and greater competitive environment. However, this is definitely going to impact the path and time to profitability.
  3. Higher Funding- The funding environment in India is far more positive as compared to China. Flipkart has raised more money than Alibaba did at a similar point in its history, even though, it is likely that Alibaba had attained much greater scale/profitability than Flipkart at a similar point in its history. Some investors who have seen the China Internet story unfold but may missed participating in it in any notable manner seek to replicate that success in India. Also, flush with success in China, companies such as Softbank and Alibaba are now pumping funds into India- these two reasons are why funding source is high for India Internet. Start-up innovation needs funding to thrive, but it also calls for a lot of discipline in usage of funding, given the competitive environment. Excess cash can lead to startups developing exorbitant customer acquisition and branding strategies which may be difficult to rein back in the long term. Another risk of raising too much capital is setting the bar too high for investor exit.
  4. Relaxed Regulations- Ease of entry and operation is more restricted in China for outsiders than is the case in India. Global internet players such as Google and Facebook are either not allowed to operate in China or face tight constraints. This has led to the emergence of domestic leaders- such as Baidu and Tencent that have experienced a more protected environment, and in turn have created enormous value.

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To sum up, those who think that the China internet industry model will be replicated in India, might be wrong in the end. Given the distinctly different competitive scenario, funding environment and state of regulations, Indian internet players have a far tougher fight in their hands to gain market share, and an even longer path to profitability.

 

One Response
  1. Viju George

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