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Jakarta Post

Indonesia's e-commerce must look at India

  • Vishal Bhargava
    Vishal Bhargava

    Assistant vice president, business strategy at Cogencis Information Services, Ltd.

Mumbai   /   Thu, November 17, 2016   /  11:06 am
Indonesia's e-commerce must look at India Easy shopping: A small shopping cart sits on a laptop keyboard to illustrate the easiness of e-commerce. (Shutterstock/File)

Just recently Indonesia’s GoJek acquired a mobile app development company in India. That’s not surprising. Indonesian companies have joined a long list of entities looking to leverage on the value proposition of dealing with the economical and skilled talent of India. Two days ago another event took place.

Softbank marked down its investment in Ola (Indian peer to Uber) and Snapdeal (India’s local competitor to Amazon) of more than half a billion dollars.

Indonesia’s e-commerce industry is following an uncanny similarity to that of India — with a time lag. The fundamentals are similar in the two geographies that have large consumerist populations that are taking a fancy to digital commerce. Hence, it’s useful to keep in mind the India lessons for investors as well as startup founders in Indonesia. Otherwise there is a distinct probability of a severe hard landing.

The first key thing to establish for a startup is its market scope and there is little doubt on the potential of e-commerce companies in geographies like China, India and Indonesia. Faster internet speeds along with cheaper smart-phones have made life vastly easier for residents with regards to travel, dining, shopping etc.

With over 320 million mobile connections in a land of 250 million people in Indonesia, there is little doubt that Indonesia is a robust market for companies.

But valuations must be based on optimism and not mindless exuberance. Funds like Softbank, Morgan Stanley, T. Rowe Price have marked down their investment valuation in India’s top e-retailers over the past six months as marquee investors lose patience with the loss-making giants in India.

While the market scope may be large, it needs to be supported by a rationale business model. The current business model is naïve and spurred by liquidity. This liquidity believes that subsidizing customers in the short term will lead to an addiction that will be tough to resist even once the incentives disappear.

That is being hopeful since markets like Indonesia, India and China are highly price-sensitive. Once discounts disappear, a substantial chunk of customer base will not be willing to pay for the convenience offered. Innovative business models need to emerge to mitigate this.

Discounting is not innovation — it’s a strategy. There needs to be a profit model and not just a revenue model for these companies. According to startup database Nucleus42, more than 500 Indian startups shutdown operations in January 2015 — August 2016 or almost one shutdown daily.

Third — startup mentoring. Technology startups are generally founded by youngsters with little experience but high enthusiasm and a penchant for ideas. That means they view themselves as visionaries — but there exists a fine line between visionary and reckless.

Venture Capitalists need to in a position to bridge that gap by mentoring founders — in terms of business strategy as well as future capital raising. The untold story of several startups across the globe is that by the time they reach the Series A / B funding stage, promoters have lost control of their company due to excessive dilution of equity in the earlier rounds of fund raising.

Easy liquidity to start-ups also has a downside in breeding arrogance in the minds of founders. India’s famed example is that of real-estate purchase and rental platform, Housing. com, wherein its maverick and CEO Rahul Yadav had to be fired by the board after a string of shoddy behavior and etiquette.

Fourth — problem solving. Jakarta is not unique as a city. It has several similarities to cities like Beijing, Mumbai or even Manila. Indonesia has adopted several successful business models of the West and other emerging markets.

But there is still ample opportunity for new ideas and businesses to flourish in an environment where utmost convenience to a customer is still some distance away with regards to shopping, eating, medical help, capital lending etc.

Lastly is the element of this rapidly developing sector creating ancillary jobs and businesses to support it. As any new industry emerges, accompanying services are needed. Among startups — it’s unlikely that an investment bank will not be created to fulfill the demand of young founders with fresh ideas looking to raise capital from venture capitalists.

The commission value may not be high given the low ticket sizes associated by the early-stage startups, but the way forward is for investment banks to receive fees in the form of equity in the start-up as well. Similarly, many middle-income individual investors would like to have exposure to startups but lack the necessary knowledge to make the investments.

Mutual Funds fulfill the role for investors wanting diversified exposure to the equity and debt markets. In the start-up space, there is scope and potential for similar expertise with new structured products for the investing community.

Indonesia has the benefit of learning from India’s experiences. It must navigate carefully. E-commerce can very well be the best stimulus to its sluggish economy.

 

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Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.