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Integrating South Asian markets

From the book “Flying with the Winged Elephant: Niche Opportunities for Global Businesses that May Emerge in India”, published by Libertas European Institut GmbH, Germany While e-commerce is big in India, an e-commerce platform encompassing South Asia could be even bigger!

The rationale?

Consumer base and technology ramp-up

The median age is low – 26 in India, 24 in Bangladesh and Bhutan each, and 21 in Pakistan and Nepal each, and 31 in Sri Lanka, as per CIA Factbook. Younger means longer duration to earn and spend. As per IMF, India’s per capita GDP will rise at a 5% CAGR from 2013 to 2018, 5.6% in Bangladesh, 6.7% in Bhutan, 5.9% in Sri Lanka, 3.6% in Nepal and 2.5% in Pakistan. They all have large populations; not just India. A lower Gini Coefficient indicates better income distribution, hence a wider base with purchasing power. As per CIA, it is 37 for India, 31 for Pakistan, 32 for Bangladesh, 33 for Nepal, 39 for Bhutan and 49 for Sri Lanka. Broadband penetration has rapidly scaled-up, as has mobile penetration. As per Mobiforge, India had 894 million mobile users in 2014, and the combined number of Bangladesh, Pakistan, Nepal, Bhutan and Sri Lanka was already about 33% that of India.

Deepen demand/visibility for smaller sellers and small-town sellers

It would give regional sellers a much wider market imaginable – larger than any of their individual countries. More importantly, it would help level the playing-field between the large and small sellers from both small and large towns, even within their domestic markets. Those sellers would not have had access to such a broad market by themselves. Its size may also mean better terms for procurement and shipping/logistics. Due to the cultural commonalities, this affinity can push demand for several ethnic-origin products. For example: designs like zari-work, chikan-kari, silk in the apparel and textile segment, hand-woven home furnishing items, marble and wood-work home décor items, etc. With rentals increasing, the selection-range of products in one physical store might have limitations. But the online platform enables showing a much wider selection range.

Consumer spending over e-commerce growing

Income growth, and the aspirational changes in amongst its sizeable youth population, is driving demand. As per EMarketer.com, B2C e-commerce sales in Asia Pacific are expected to grow at a 28% CAGR from 2012 to 2017 to US $1 trillion. While China comprises about 75% in this pie, the rest are also growing at a fast pace. CLSA, an Asian brokerage, estimates online retail in India itself to grow from US $3.1 billion to US $22 billion in the next five years, i.e. from 10% of the organised retail sector to about 15%.

But an online-only B2C platform in South Asia may fail – for obvious reasons?

When certain members are distrustful of each other, it would face the same resistance that cross-border trade initiatives have. The local communities would cite fears of loss to their business and jobs due to opening up their markets to neighbours. It would become a political issue, throwing the principle of competitiveness out of the window.

A solution – Hybrid online platform of cross-border ‘sellers marketplace’, with a small physical component?

Cross-border sellers marketplace model

This means including local suppliers as sellers, wherein the platform itself is just a technology interface connecting sellers with buyers. E-commerce models in India have already moved from the cost-prohibitive inventory model to this marketplace model. Flipkart, Snapdeal, etc, operate as technology companies, not retailers.

A hybrid e-commerce marketplace model giving multiple sellers access to one of the largest consumer markets in the world may be an incentive. It would give all sellers from all countries have an equal chance to benefit. If their products are of good quality and value-for-money, there is no reason why they cannot have demand. Sellers of these countries benefit with access to a much larger market imaginable – a market displaying similar demographic, technology and cultural characteristics. One might argue that the incremental revenue can still come from grabbing someone else’s market share, and so this platform would face resistance from sellers who fear losing market share. However, the reason behind showing the demographic, economic and spending data in the initial sections was to demonstrate that the entire consumer market itself is growing. So, incremental revenues might not always be at the cost of someone else’s market share. One can still grow as the whole market itself is growing.

Such a marketplace platform can help the smaller sellers the most as well as the smaller-town sellers – even with their own domestic markets. This is a key pitch of this platform. It can give them an equal playing field to that of the larger sellers, even within their own markets. It can support sellers from the small towns of these countries, who would have been otherwise unable to access such a large market.

Yes, it still means that those with uncompetitive products will lose, and they would resist the most. But it also means the resisting business sector is effectively cheating its own citizens with expensive, sub-standard products. But a cross-border multiple sellers platform can also generate support from those who feel they have competitive products that can have demand in a much larger market. The USP is ‘access’ – the access to a larger market it can offer to all the small and big sellers, from small and big towns.

A small physical component would still be needed, to support sales-conversions and cross-border logistics

The physical presence here means both a sales outlet and a back-end logistics centre. A physical presence will still be needed as the cross-border experience is still an untested one. It does need few outlets in each country, to stock a range of high-demand products. This very physical experience might help product try-outs and sales conversions, and help push eventual online sales. A physical presence is always useful for higher-value, premium category products since it helps customers experience the products personally. The personal experience can also help increase the recall value of the brand. A network of such stores would make the operation capital-intensive. But it might still help the business reach some scale in a cross-border model. These outlets could also double-up in the logistics of the supply-chain and delivery. In a cross-border environment, the logistics have to be streamlined to enable delivery of maximum goods at minimal price. Cross-border transfers would also raise Customs matters. These outlets could act as central SPOC to aggregate products from domestic sellers that need to be shipped overseas by road or air. This aggregation would simplify the logistics. Bulk shipments can be sent out at one go, and that might bring out the cost of aggregate transportation. In short, these stores could act as the warehouse, in terms of aggregating and dispatching products.

Opportunity for whom?

Apart from domestic companies, there is a potential for global majors in building such an integrated cross-border platform. Leading players like Amazon, Alibaba and EBay might see a rationale in the South Asian opportunity. Even players from the logistics side are evincing interest in the e-commerce play. There is also a significant case for the countries around South Asia, be it China, Thailand, Malaysia, Iran or the Central Asian republics to explore the potential of the South Asian market through this hybrid e-commerce model.

Challenges in building such a hybrid platform:

Building a B2B+B2C online interface?

Showcasing product choice and incentives are key in B2C, while showcasing features are key in B2B. B2C clients demand services that support their buying decisions, but the process is more predictable in nature. B2B demands a more detailed look in the product, and more to-and-fro. Queries can be complex as they seek to make careful decisions. It needs more communication, online demonstrations and showcasing its suitability. But while the process is more complex, B2B gives larger orders.

Building cross-border back-end process which is cost-sensible

The back-end supply chain needs collaborations with courier companies, freight services, airlines, etc. Managing the back-end is more challenging since cost can become prohibitive in cross-border transfers unless aggregation and unified dispatch is done, even if it lengthens the TAT.

Cross-border bank gateways

Given the rules regarding foreign exchange transfers, escrow bank accounts, etc, one solution might be to make single bank account in each country which aggregates all the transfers from the domestic clients, and then acts as the single-point gateway to another aggregate account in the other country.

Restrictions on foreign investments in the retail sector

FDI (foreign direct investment) regulations in retail sector are complicated, given its implications on local businesses. As they simply connect sellers on an online marketplace and do not hold inventory, the platform can be registered as a technology company, not retail. That may help circumvent FDI regulations specific to retail companies.

Payment terms and credit purchases in a B2B sale

Asians love buying on credit and selling in cash! B2B transactions often have flexible payment or credit terms, depending on the working capital cycle of the buyer and the closeness of relationship. This platform may need to incorporate these else it might struggle to find acceptability amongst the local, business communities.

Conclusion

A South Asian e-commerce platform is complicated, but not impossible. Cultural, demographic and technology similarities might give local sellers access to a much larger market than they could imagine, and a level-playing field for the smaller sellers and sellers from small towns. Trust deficits and resistance from the local businesses are the real issues, rather than the actual potential of an e-commerce platform itself.

Sourajit Aiyer, "Integrating South Asian markets," Business Recorder. 2016-12-18.
Keywords: Economics , Purchasing power , Domestic markets , Physical store , Commercial products , Courier companies , Pakistan , Bhutan , Sri Lanka , Nepal , CAGR , CIA , TAT , CLSA , USP