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It’s not the Indian government Ola and Flipkart need to be asking for favors: It’s the Indian consumers

By Sarah Lacy , written on December 13, 2016

From The China Desk

In the last week two of India’s most celebrated, over-hyped, over-funded, and arguably over-valued startups have started to complain that the government should protect them over US rivals.

One was Ola and the other was Flipkart.

My first thought was: Finally! Some good news for Uber in an international market! It must be doing well, if its local rival is inviting more government regulation into the market.

The battles Flipkart and Ola are fighting are particularly challenging because both are battles for commodity products, and Amazon and Uber have deeper pockets. The Indian press was remarkably unsympathetic. Here’s an excerpt of one local write up of the news:

At a panel discussion on Wednesday, Flipkart chairman Sachin Bansal and Ola chief executive Bhavish Aggarwal said India should protect its start-ups against “foreign” rivals in a similar way that China did with its own in the first decade of the millennium.

This, coming from the same entrepreneurs who had mocked the India strategies of Amazon and Uber in the past.

Why ask for protectionist policies now?

Simple: Amazon and Uber have expanded in India faster than most expected and are threatening to overtake Bansal’s and Aggarwal’s companies...

...Their case isn’t helped by the fact that Flipkart’s main entity is registered in Singapore and that both Flipkart and Ola are majority-owned by foreign investors.

Those aren’t the only flaws in the argument. Bansal and Aggarwal created a false equivalence between the two countries based on the fact that both China and India are large developing markets, and Uber was just defeated in China by a local rival. But even if you agreed with the spirit of what they argued, the comments are based on faulty assumptions about how business works in both places.

First off India and China are hardly identical markets. They both have massive populations, and undergoing huge surges in urbanization with rising middle classes. But China’s urbanization is authoritarian and controlled; India’s is chaotic and messy.

When I was reporting in both countries a few years ago, I had the difference described to me thus: When you pay a bribe in China, you get a result. You pay a bribe in India, and then you pay another bribe… and another bribe. It’s functional corruption versus messy dysfunctional corruption.

According to FactorDaily’s Pankaj Mishra, things haven’t changed much. In an August 2016 piece, called “How India Is Failing its startups,” he argued:

India is failing entrepreneurship, one startup at a time.

There are three crucial tangents on which any successful startup ecosystem is built — government and policies; domestic consumption; and startup exits fuelled by acquisitive, local companies.

Unfortunately, in a year when the funding winter is worsening, India’s startup ecosystem is struggling on all three fronts…

...Behind the Indian government’s new-found love for all things startup and the headline-grabbing announcements related to incentives, there’s actually an absolute cluelessness, both in terms of policy formation and in helping fledgling startups in areas that really matter.

What is also not helping the cause is grassroots-level corruption, apart from startups’ self-inflicted ethical mess. A few weeks ago, I met an entrepreneur who narrated a story about kickbacks being demanded by an official for a deal to get through. The deal was a potential buyout, and the kickback was based on the valuation of the startup. After deciding against paying any kickbacks, those involved had to live with a much lower valuation than what it was worth.

“How do you fight this?” he told me, frustrated...

...The whole world is debating how Uber lost to China’s Didi, and how the country’s regulations favour local startups and so on. What gets missed in these debates is that for whatever it’s worth, China ensures clarity, even if it’s protectionism. Days before Uber China and Didi deal happened, the country moved to ensure regulatory clarity by legalising ride hailing apps.

In India, you’re only a notice or a petition away from rediscovering the lack of clarity on taxi sharing apps.

No one buys the countries’ self-reported growth metrics, so it’s impossible to even know which is growing faster than the other. But most metrics show a more rapidly growing Chinese middle class and a lagging Indian middle class. In 2011, 31% of Indians lived on $3 a day, versus just 13% of Chinese, according to the Pew Research Center.

All of this matters when you are talking about commodity products that are heavily subsidized in order to jumpstart growth and grab market share. The question is: Should you win the market, what is the real size of the customer base, once all the discounts are gone and these companies have to turn a profit? Bear in mind, Uber’s business model doesn’t even work in the US yet.

Despite both having more than 1 billion people, it’s China you hear talked up in Apple’s analyst calls, not India. In the most recent quarter, Chinese startups raised nearly $4 billion, while Indian startups raised $1 billion. (Indeed, Indian venture capital investments are 75% below their peak in 2015.) China has produced several Internet companies that vie with Silicon Valley giants in terms of size, reach, and power, not India. Chinese capital too is investing heavily in global companies: One-quarter of US-based unicorns have a Chinese investor.

It is a more protectionist market, for sure. But it’s China that the most US companies still think of as the one the have to risk playing in, not India.

To pretend that foreign investors will simply line up to back companies like Ola and Flipkart-- which, let’s face it, are derivative versions of US originals to begin with-- and be happy to be locked out of competing in country themselves is unrealistic. Yahoo (and now Uber) are two of the only companies that have taken that approach to China, and China is a far juicier market with more experienced local entrepreneurs.

Lastly, any suggestion that until now it has been easy for foreign companies to waltz in and build huge businesses in India is absurd. Neither country is easy for foreigners. The World Bank ranks China as 78th in terms of ease of doing business; it ranks India as 130th out of 190 nations. India’s edge is-- in theory-- it’s the billion person nation that is less protectionist, and more open to Western companies and Western philosophies than China. That is the only reason Facebook, for instance, has shown more attention to India than China. (So far, but that, too, could be changing.)

Second, it’s easy to dismiss China’s success as all about protectionism. It’s also wrong.

Before Uber failed in China, it built a pretty decent business there. CEO Travis Kalanick boasted that many Chinese cities were its largest in terms of rides. Its growth rate-- if you took out every other financial metric or market share metric-- was impressive. Millions of Chinese people took Ubers, and Uber was free to slog it out with subsidies and driver bonuses to artificially boost its numbers and get more of them.

In some ways, Uber had more top line success in China than in India. The reason that Uber failed in China had nothing to do with protectionism. The only time regulators weighed in, it impacted Didi and Uber. What killed Uber was two things: Didi’s flawless execution and the fact that international heavyweights worth a combined trillions of dollars were behind Didi. Uber has won every market with cash. And in China, Didi simply had more access to cash.

Ridesharing is a particularly horrible example if you are trying to argue that protectionism is why Chinese tech companies win.

Now, granted, it’s been a very different story for companies like Facebook and Twitter and Google and eBay and so many Web companies of earlier generations. Protectionism did help, by locking those companies out of the market, or limiting what they could do. But to pretend protectionism is the only reason that Baidu, Tencent, and Alibaba built some of the largest tech companies on the planet is at best naive and at worst doesn’t give the Chinese people who built those companies the respect they deserve.

While “copycats,” each of these companies had to pioneer new ways of monetizing a nation with a growing middle class, with few delivery networks, and low credit card ownership. Tencent absolutely ripped its original product off of ICQ. But it was the first global company to figure out a way to monetize instant messaging, laying the foundation for so much of the world’s micropayments, virtual goods, and messaging platform business models today.

Alibaba’s Jack Ma and Tencent’s Pony Ma are two of the best entrepreneurs in the world. Full stop. A big market protected by the government simply doesn’t create companies of this size with this much growth. If it did, you’d have a higher success rate of startups in China, for one thing. The top Chinese companies are so strong that they are increasingly becoming global players, investing heavily in the largest US companies, acquiring some smaller ones, and trying to figure out a way to expand in the US just as everyone else is trying to figure out how to expand in China.

No matter whether you agree with how China got to the point where a Didi could trounce the most highly valued startup in Silicon Valley history without government intervention, you have to acknowledge that’s where China is now. 

Go read every article about how important Snapchat is to the LA ecosystem. Dig up every startup booster in every city or country around the world saying they need “a Google” or “a Facebook” to really jumpstart their ecosystem. China has several of them. China has more of them than any other place outside Silicon Valley.

This has all lead to a robust ecosystem with local VCs, massive companies that invest heavily in startups themselves, and multiple generations of managers and employees who have scaled companies like this before.

So even if you want to pretend that all that amassed talent-- those trillions of dollars in market cap-- were simply the result of protectionism, go for it. But right now, China is competing with skill, technology, and huge amounts of capital.

If Ola wants to look at what worked in China vis a vis Uber, a plea for protectionism is barking up the wrong tree-- plain and simple. As for Flipkart, the analogy isn’t quite so obvious, but even the Indian press has reported clear missteps and a juggling of management at the top of the company. No one anywhere in the world can make missteps like those when they are competing with Amazon. Even Jet.com “failed” all the way to $3 billion dollar acquisition, and Jet got off easier than anyone else whose tried to compete with Amazon in recent years. Flipkart’s valuation is five times that amount.

If I were a Flipkart investor, I’d be terrified that the only solution management has come up with to beating back Amazon is proposing an uneven playing field.

And third, if India wants its startups to win, it’s the consumers and companies-- not the government-- that needs to support them.

Back in July, I wrote a piece asking whether Indian consumers particularly care about supporting Indian startups. The answer-- from everyone I asked before the article and everyone I heard after it ran-- was a big, fat resounding no.

From that piece:

Some [of the people I spoke with in India] said they use all four services, even though the service is roughly the same, and felt it was more “supportive” to force Indian companies to earn customer loyalty by outcompeting the Americans. Said one: “What would give me pride is a local player matching a beating anyone else on merit,” adding later in the conversation “is the best way to help local startups to support them even if they drop standards or push them to compete?”

Another told me that it would matter in the future, but not now. I asked what would be different in the future and she replied for now the consumer was “too busy enjoying heavy discounts.”

...I think many of these points, and others expressed by Indians on Twitter, are incredibly valid. These two companies won’t survive if they aren’t competing on their own merits.

But I’m surprised if the two services are comparable-- which many people said they were-- that more Indians wouldn’t prioritize supporting locally grown companies, particularly those working in the tech or startup worlds. 

At the time this was stunning to me. In ecosystems like LA, Chicago, New York, and certainly throughout China, startups tend to rally around local players, for pride partially, but also because of the ancillary benefits if a local startup becomes a multi-billion dollar public company. There’s an exodus of talent, a surge in local angel investing, a sense of confidence that you can build something huge without moving.

Last week, when the pleas for protectionism surfaced in the Indian press, I asked again on social media, and asked several smart Indians in the tech scene directly whether they wanted their government to give Indian companies more protection. Once again the chorus of responses was: If these companies want to compete here, they need to offer services as good as the American companies.

The same FactorDaily story that wrote about Flipkart’s self-inflicted woes noted that many global limited partners will pull back from India into safer territories if these two very-hyped, highly-valued players fail in India. In September, Social Capital’s Chamath Palihapitiya predicted a full on reckoning for Indian startups was 12-18 months away. This isn’t merely theoretical: Indian investment is already down 75% since 2015. And, yet, still even Indian consumers in the tech space seem to shrug their potential failure off as entrepreneurial Darwinism that doesn’t affect them.

Because that’s the thing: Unlike China, most of the major funds going to Indian startups is not coming from inside the country. What made Didi so resilient against Uber was that major companies like Alibaba and Tencent, along with other Chinese hedge funds, were heavily behind the local player. In fact, while Uber global has had no problems raising follow on cash, Uber China failed to do so back in 2015. Uber global had to finish filling out the round itself. All the money in China was going to Didi.

If you want to argue anything gave Didi an unfair advantage over Uber, it wasn’t the government as much as it was consumers and and Chinese investors and corporations. Particularly, the latter is important if you want to model China, because nearly one-third of all “venture” deals in Asia include corporations. That trend is only accelerating: In the fourth quarter, 45% of deals included corporations, more than any other region in the world.

If Indian consumers aren’t willing to vote for an Indian startup offering what they say is an equivalent product or service with their own dollars, why should the government be expected to boost them?