Building a Sunshine Nation

India has one of the highest Solar potential in the World. Can it tap into it build a sustainable economy?

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Source: The Hindu

India generated 68% of its electricity from coal in the fiscal 2013-14. The inability of Coal India Ltd (the state-owned monopoly) to ramp up coal production resulted in 65,000 MW of installed capacity being stranded, causing a power deficit of 5.4% in the fiscal 2013-14. To plug the gap, imports rose to 152 million tonnes in 2013-14 (20% of total coal requirement) resulting in higher power prices. This situation, together with climate change imperative impels a rapid movement towards greener and cheaper sources of power, primarily solar energy.

Rising dreams and falling prices

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Source: Financial Express

 

The movement is already under way as a result of Government’s ambitious ‘National Solar Mission’ announced in 2009 which envisages 20,000 MW solar capacity installed in the country by the year 2022. The Narendra Modi-led Government raised that target last month to 1,00,000 MW of installed solar capacity, inviting domestic and foreign companies to invest about $ 100 billion in the country’s Solar power sector. The buoyant mood behind this ambitious target is supported by 4 key factors. First is the abundant solar resource availability. India receives about 4.5-7 kWh/m^2 of solar energy on average with 1500-2000 hours of sunshine per year (depending on the location). This is enough to generate power more than 1000 times the current demand. A second factor is the falling prices of Solar Photovoltaic modules. Large-scale production, especially in China, has caused the module prices to drop by 80% between 2008 and 2014, dropping by 12% last year alone. As a result the tariffs for grid-interactive solar power have fallen from Rs.17.91/ kWh in the year 2011 to Rs. 5.73 /kWh in the latest round of auctions held by the Andhra Pradesh state government.

Nearing Grid-Parity

The third factor has been the tremendous rise in efficiencies of solar PV-modules. Over the last 8 years, research and mass-scale production have resulted in rise of conversion-efficiency for crystalline silicon modules from 12% to about 19% and that for thin-film (Cd-Te) modules from 8% to 13%. Companies like SunPower (in USA) are already manufacturing silicon modules with 25% efficiency commercially. Scientists at Fraunhofer Institute in Germany recently developed solar cells modules with 44.7% efficiency. This combination of falling costs and rising efficiencies has resulted in solar power approaching grid-parity. KPMG, a consulting firm, predicts solar tariffs to achieve grid-parity by the year 2018-19. Solar power is already more economical than diesel power with an average tariff of Rs. 7/kWh against Rs. 15/kWh for the latter.

The fourth significant factor has been the Government support to build the solar power sector. The ambitious ‘National Solar Mission’ provided various fiscal incentives like preferential feed-in tariff, excise duty concessions, wheeling-charge concessions, income-tax holiday, an 80% accelerated depreciation on solar-equipment, etc. Besides, off-grid solar plants receive a capital subsidy of 30% of the entire-project cost (and of 70% in North-eastern states and J&K). These factors along with falling prices have resulted in rise in installed capacity from 161 MW in 2010-11 to 2,319 MW in 2013-14.

Sunshine on the horizon

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Source: Aditya Greens

This is however only a small amount of the total potential, which is estimated to be in the range of 7,00,000 to 11,00,000 MW. For the non-grid applications, Rooftop solar represents the most lucrative opportunity. It can fulfil 30% of the entire demand generated during the sunshine hours. The example of Germany shows that with robust and attractive policy, Rooftop solar can be effectively leveraged upon. Out of the total Solar capacity in Germany, 80% is via Rooftop solar modules which can meet about 10% of total demand on a typical summer day.

Apart from using Photovoltaic modules, Solar energy can be harnessed through thermal systems as well. In this domain, Solar cooking and Process-heating are the major segments. Of these, Solar cooking is the most mature category with an estimated potential of 2.6 lakh m^2 collector area and target installation sites like temples, hostels, canteens and prisons. Already, successful examples of mass-solar cooking like Shirdi temple and IIT-Roorkee’s student messes exist. But the most lucrative opportunity (of about 46 lakh sq. Metres of collector area) lies in the industrial heating segment. Indian industry accounts for 40% of the total primary energy consumption of which thermal-form accounts for a massive 70%. Solar process heating can easily replace Diesel, LDO or FO-fired boilers in industries like Textiles, Dairy, Pulp & paper and Food processing.

Clouds spoil the mood

Despite massive potential and Government’s good intentions, severe challenges face the nascent Solar power sector in India. The utility-scale projects through PPA-mode (Power Purchase Agreement) have persistently been under the shadow of poor financial condition of the state-owned distribution companies. The retrospective tariff reduction by Gujarat’s power utility and non-honouring of PPA agreement by Tamil Nadu’s power utility has made the investors apprehensive, lately. The health of the utility-scale projects via REC-mode (Renewable Energy Certificate) is even more precarious. Non-enforcement of RPOs (Renewable Purchase Obligations) by the state-governments has forced the REC prices to tumble by 70% from Rs. 9.5/kWh to Rs. 2.85/kWh. Only 2% of total solar RECs were traded in October 2014 as compared to 18% in April 2012. This has put projects of 500 MW capacity (1/6th of India’s current solar capacity) in a cash-crunch.

For the Rooftop solar industry, the main hurdle has been the indecisiveness in coming up with an effective policy for residential rooftops. In August 2014, a 30% capital subsidy was announced for Rooftop installations but this was applicable to only Government buildings. Moreover, there have severe delays for the last 8-10 months in subsidy payments as the MNRE budget was reduced from US $246 million in 2013-14 to US $72 million in 2014-15. A local rooftop installer, Zolt Energy’s Pradeep Palleli, said “Announcing subsidies and not releasing it in time is really a major hurdle hindering the growth of the rooftop solar industry.” Even the Solar thermal industry has hit a road-block after the Government withdrew the 30% capital subsidy on solar water heaters on October 1, 2014.

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Who will make them?

The weakest pillar in India’s solar industry however is the crippled manufacturing-base. Global over-supply of cheap modules from manufacturers in China and USA has put many domestic-manufacturers out of business. For those who are left, capacity-utilization of factories remains below 30%, putting them on verge of bankruptcy. The high cost of domestic finance has been another major disadvantage. Solar-developers are getting access to loans at 3-4% from US Export-Import Bank (Ex-Im) while domestic interest-rates remain above 13-14%. Solar-developers have taken loans in excess of US $1 billion from the US Ex-Im Bank. But these come with riders to procure modules from US-based manufacturers, thus putting Indian module-manufacturers out of business.

Government to the rescue

To eliminate the barriers and shortfalls in the sector, the Government has to take proactive steps. Foremost among them should be creating an environment of certainty and stability, where in, programs are sustained and incentive-payments never delayed. To reduce the debt costs for developers, funding avenues like long-tenure, tax-free solar bonds. Lastly, the government can also leverage the ‘Make in India’ campaign to create a robust and sustainable solar-manufacturing industry in the country. Solar-sector focused Manufacturing and Investment zones should be set up to provide business friendly ecosystem along with superior physical infrastructure.

Work has already begun on many investment-encouraging initiatives. As a result, India is building the world’s largest solar-power plant in Rajasthan with a capacity of 4,000 MW, which is expected to bring the cost of solar down to retail tariffs (and even lower in some locations). Big business-houses like Tata-group, Mahindra Group, Reliance, NTPC, Aditya Birla Group and others have already planned investments worth thousands of crores to make the best of the solar-opportunity. The US $ 100 billion solar-investment plan by the Modi Government takes India’s commitment to solar technology to an unprecedented level. The sun has begun dawning on India. Combined effort by Government and Businesses can take it up the horizon and shine upon India’s future.

 

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Harsh Jain is a second year student at IIM-Ahmedabad. He completed his graduation in mechanical engineering from IIT-Roorkee. With extensive research exposure in the form of market research projects and industry review reports in the energy sector, Harsh is an environment enthusiast and actively follows the latest trends in the power and automobile industries.

 

What’s clipping our wings?

Source : Bloomberg News

The Indian civil aviation industry, with a size of $16 billion, is among the top 10 globally. It has grown at a CAGR of 17%, which, if sustained, could make it the largest aviation market by 2030. Entry of Low Cost Carriers and thrust on development of modern airports has expanded the market from business class and corporate to the middle class, who have the potential to become the largest and most lucrative customer segment.

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Figure 1: Indian commercial aviation sector

The Make-In-India program is designed to facilitate investment, foster innovation and build manufacturing infrastructure in a number of key segments that are instrumental in India’s growth and progress. In the aviation sector, the government has announced a number of key policy initiatives, such as 100% FDI in greenfield airport projects and 49% FDI in domestic passenger airlines, along with budgetary support in terms of investment and exemptions. However, there exist a lot of regulatory and taxation hurdles for airline companies in India, and measures need to be taken to support the development of the aviation sector in India.

Essential Air Services Fund (EASF): Connectivity between Tier-2 and Tier-3 cities is low due to air carriers refusing to operate flights on those routes as they perceive them to be unprofitable, due to low volumes. A proposal exists, for airlines to contribute a percentage of each ticket sold to a common fund which can be used to cross-subsidise air travel on unprofitable routes. This is similar to a fund in the telecom sector where operators contribute 5% of their gross revenues to a universal service obligation fund, which is used to provide telephone connectivity in rural areas. A similar policy in aviation would enable increase in connectivity on less busy routes.

Modification of the 5/20 rule: Currently, Indian airlines are required to have a minimum fleet of 20 aircraft and 5 years of operational experience to start international services. This serves as a deterrent for new entrants, who want to operate flights in the more profitable international segments. Instead, the policy can be modified to allow airlines to accumulate flying credits by deploying capacity on domestic routes, with additional credits for providing connectivity on routes deemed unprofitable. Also, the minimum operational experience requirement can be revised to one year. This will help improve domestic connectivity and attract more entrants in the aviation space.

Fuel taxation: High tax rates of 3-30% on Aviation Turbine Fuel (ATF) have made ATF in India 60% costlier than that available in ASEAN countries. Along with state and central taxes on ATF, there exist service taxes on air tickets and high airport charges, which are throttling Indian airline carriers’ competitiveness and adding to their debt burden. A comprehensive look at the taxation policies is required, with reduction in extra taxes.

MRO taxation: Airlines in India spend 13-15% of their revenues on Maintenance, Repair and Overhaul (MRO), making it the second largest cost component for airlines. Myopic policies regarding indirect taxes such as VAT and Service tax, along with laborious customs procedures regarding import of spare parts and consumables, has led to most airlines flying empty aircrafts to MRO facilities in foreign countries for servicing. Merely 5-10% of MRO work for domestic carriers is carried out in India. This represents a huge lost opportunity in terms of revenue and jobs. A task force needs to be set up to review the policies and modify the taxation regime to develop the domestic MRO industry.

Infrastructure development: There has been a thrust on development of infrastructure, particularly new airports, but there needs to be focus on developing low-frill airports under Public-Private-Partnership schemes. Also, a key impediment to growth of airline capacity in India is lack of availability of hangar space at key international airports, which needs to be addressed.

While the initiatives under the Make-In-India program serve as a good starting point, a comprehensive overhaul of aviation policy is required to achieve the growth targets and make Indian aviation competitive from a global standpoint.

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Arundhati Hazra is a second year student at IIM Ahmedabad. She graduated from NITK Surathkal with a B.Tech in Electrical and Electronics Engineering, and worked for three years, in ST-Ericsson and AMD, before coming to IIM Ahmedabad. She enjoys reading, writing and quizzing. She interned with McKinsey and Company during summers.

Will m-Commerce lead the way for e-Commerce in India?

As of now, India has 10 % population penetration in internet usage. This is in stark contrast to the global average of 35%, and much below the average of the developed world at 78%. Though the population base is big enough for a thriving e-commerce industry, India’s e-commerce potential at the moment is limited by a number of factors:

  • Infrastructure system – India still is a cash driven economy with very low availability of the credit systems. This is a bottleneck for many of the consumers willing to purchase goods online, and is the primary reason for India’s unique jugaad of payment via Cash on Delivery. However, many large players are wary of such a system that is manpower intensive, and requires time to collect the cash from the consumer’s doorstep.
  • Slow internet speed – India still has less than 5% broadband penetration among its internet users, compared to 30% globally. The slow net speed results in several payment gateways rejecting transactions because of the time lag in connecting to the server and getting confirmation. This results in poor user experience and discourages further attempts at shopping online.
  • Poor logistics infrastructure – For most of the e-commerce companies selling merchandise, the delivery of the good to the end mile is still critical. This requires excellent logistics and transportation infrastructure which has been a glaring concern in India.

To address such concerns, the government recently launched the ambitious National Broadband Plan with an outlay of USD 12 billion, which aims to bring 160 million households under broadband connection by 2016. This would take broadband penetration to that of the developed countries, opening up significant opportunities in sectors like education, business, entertainment and e-governance. However, it is feared that if we miss out on the intervening years, the Internet revolution could just bypass India.

This opens up an excellent platform for the private sector to contribute by pitching in and leveraging the strong telecom infrastructure already in place. With more than 67 million smartphones in the country and a ubiquitous 3G connectivity, high-speed mobile internet penetration far outpaces the broadband penetration. Though high speed fiber network is still important for organizations and institutions, mobile internet speed is sufficient for individual consumers – the main segment of customers in e-commerce.

Just as mobile telephony overtook the Indian wired telephone network thus revolutionizing voice-communication and sms, jugaad innovations in m-commerce are paving the way for a similar transformation in e-commerce. Mobile payments such as Airtel money and mobile to mobile transfer can circumvent the need for a credit card payment which has been so far unavailable to the mass public. Mobile e-commerce or m-commerce can really help capture the Fortune at the bottom of the pyramid. Already 45 % of the online users in India access so using only their mobile and contribute close to 3% of the e-commerce revenues. M-commerce is well established and trusted for small payments such as downloading ringtone and music. This suggests some trust is already established in the virtual mobile payment system.

Critics of m-commerce point to the small screen size of the handsets and suggest it would fail to gain momentum. However this argument fails to stand ground. Myntra is a leading online fashion portal and earlier had only 4% of its revenue coming in from mobile. However, they realized the advantage m-commerce offered in capturing the demand of Tier 2 cities and small town India, and after they redesigned their website to suit mobile screens they witnessed explosive growth in revenues generated from mobile purchases – they were able to garner 20% of their revenue from m-commerce last year. Additionally, 70 % of Indian e-commerce is for travel bookings and classifieds, which can be easily transferred to a small screen. The travel bus ticketing giant RedBus, attributes their success to presence in the mobile segment via apps that consumers quoted were its differentiating factors offering ease and convenience.

The m-commerce also offers other benefits such as geo-contextual shopping experience which is unmatched by any other media. Zomato and Justdial have shown leaps and bounds in their growth since they launched apps that use a consumer’s GPS position for better targeting of services.

To sum up, m-commerce is ready to take India’s e-commerce success to new heights. However it needs government and public support. The government should offer significant incentives such as promotion of FDI in e-commerce and telecom. High pricing of the 3G spectrum, and the failure to share 3G spectrum across competitors will only hamper India’s e-commerce growth story, and is bad for the consumer. Nonetheless, with year-on-year growth of 57%, m-commerce stares ahead for an exciting run.


Satvik Dudeja is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. 

The Sustainability Imperative in FMCG

The rapidly growing FMCG sector in India accounts for about 2.2% of the GDP. The sector has stood its ground in the midst of recessionary pressure and volatility in the markets, and is poised to register steady growth. With rising disposable incomes, evolving consumer lifestyles, growth of modern trade, greater awareness of products/brands, and availability of online channels, the imperative for firms in India to develop core areas of differentiation is on rise.

Figure 1. Growth in the Indian FMCG Sector (CII FMCG Roadmap 2020)

Figure 1. Growth in the Indian FMCG Sector (CII FMCG Roadmap 2020)

An impetus on environmentally friendly business practices under the ambit of enhanced social responsibility is one such differentiating strategy that FMCG majors like HUL, P&G and ITC are now deploying. Some of the drivers for this differentiation have been the increasing concern for climate change, depleting natural resources and action by different stakeholders: the government through policy, the consumers through brand selection, and the community (NGOs) through increased awareness.

Figure 2.  FMCG Focus Areas (Booz and Co.)

Figure 2. FMCG Focus Areas (Booz and Co.)

 

Opportunities

There are 3 major practices that FMCG firms in India can utilize to realize the sustainability advantage:

  1. Green Energy Sourcing
  2. Product and Service labeling
  3. Packaging Material

An analysis of these options from the perspective of the 4 major stakeholders of FMCG firms – the Government, the Investors, Retailers & Consumers, and NGOs is as follows:

Green energy sourcing

Sourcing energy from renewable sources (Wind and Solar) has the potential to reduce the energy costs of FMCG majors in India by up to 90% and carbon foot-print by 85% depending on the location and the availability of power evacuation infrastructure near the factories, warehouses or installations. One of the major policies formulated by the Government to incentivize greening of energy sources by the industry was the Accelerated Depreciation and Generation Based Incentives offered. Apart from meeting the strategic cost management targets, these schemes have served as alternate sources of revenue for FMCG majors. This led to a massive increase (21% over 2010-12) in the percentage of energy sourced by FMCG majors from green energy. HUL and ITC spearheaded this growth.

However, with the replacement of the generation based incentive regime by the Renewable energy certificates mechanism, a slow-down in the rate of installation of the green-energy capacity has been observed.

Another major opportunity that the FMCG firms can leverage is the sustainability certification system. Various green certifications like ISO 14001 and Leeds Green Building/Factory are opportunities for differentiation. These certifications have gained special relevance given the rising consumer awareness and sensitivity to environmental issues.

Product and Service labeling

rohit blog 4

Benchmarking production processes and services to best sustainability practices is increasingly emerging as another major differentiation. The eco-label, green-seal and eco-logo stamps are being deployed on offerings to differentiate them from competition offerings. In India, this concept has gained traction recently with the development of the Ecomark scheme by the Central Pollution Control Board (Ministry of Environment and Forests). The major driver of the Ecomark scheme is the reduction of environmental and health hazards due to industrialization. Signaling through accreditation encourages aware consumers make informed decisions and can thus be leveraged by FMCG firms.

Figure 3. Differentiating eco-product marks in-use around the world

Figure 3. Differentiating eco-product marks in-use around the world

Packaging Material

Innovative sustainable packaging is another thrust area for the FMCG industry. Given the increasing cost and environmental ramifications of conventional packaging solutions (in spite of recycling and reusing), FMCG firms are increasingly evaluating biodegradable options for packaging. The use of biodegradable films and paper-centric packaging solutions has witnessed a tremendous (160%) rise during 2009-2012.

Innovative methods of utilizing non-biodegradable waste are also an opportunity that the FMCG sector is undertaking. A case-in-point in this regard is the initiative by a Canadian firm Terracycle, which converts cigarette butts into plastic skillets and containers.

Figure 4. Terracycle - Model

Figure 4. Terracycle – Model

With increasing levels of consumer awareness and government regulations, sustainability is gradually transforming from being a differentiator, into a primary business driver. Major FMCG firms must capitalize on the first mover advantages and establish themselves as industry leaders in this space.

Rohit Sharma is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. 

Indian Aviation Industry: In-Flight Turbulence

2012 may be remembered as the darkest year for the civil aviation industry in India. The difficulties being faced by Kingfisher Airlines and Air India and their consequences well represent a delicate moment for the entire sector. Analysts had started to look at 2013 as the year of the recovery.  However, one thing was clear last year: business models of the major carriers were not sustainable, structural changes were needed in the industry.

APPARENT RECOVERY

In the first week of June, the DGCA (Directorate General of Civil Aviation) released the official passenger statistics for the first 5 months on the year. The overall image was of a weak recovery in the number of passengers.

Aviation 1

Passengers carried by domestic airlines during the period Jan-May 2013 were 259.98 lakhs as against 258.08 lakhs during the corresponding period of previous year thereby registering a growth of + 0.74%.

Some sector experts described these results as the beginning of a new sustainable growth trend for the industry.

The factors taken into account to support such optimism related to the fact that the Indian market is severely under-served, with less than 3% of its population utilizing the air route. Market potential is huge, and with the increase of the income per capita, demand is expected to grow at a double-digit pace in the next 10 years. According to the IATA (International Air Transport Association), by 2020, traffic at Indian airports is expected to reach 450 million, making it the third-largest aviation market in the world. However, the present reality is very distant from these expectations.

STRUCTURAL PROBLEMS

Aviation 2

According to the DGCA, India’s air passenger traffic fell by 1.84% in June from a year ago, going from 5.10 million passengers in 2012 to 5.01 million in 2013. In order to face the declining demand, all the major airlines have decided to lower or at least not increase the airfares. In particular, full-service airlines like Jet Airways and Air India have consistently dropped their fares to match those of low-cost carriers. On the other hand, IndiGo and SpiceJet are trying to keep the fares at the same level as 2012. Even though ticket fares are on average almost 20% lower this year than in 2012, no positive effect in the demand is registered.

However, demand stagnation seems to be only one of the several structural problems affecting the industry. There are a number of other critical challenges facing airline companies:

– Taxes are everywhere in India’s aviation sector, a clear indication that the government views the sector as a revenue source rather than a revenue generator. In contravention of International Civil Aviation Organization (ICAO) policy, India’s Ministry of Finance has put a service tax on tickets as well as landing and navigation charges.

– Fuel accounts for the 45% of Indian carriers’ operating costs, compared to the global average of 33%. With the presence of 8.2% excise duty, taxes are again one of the sources of disadvantage. The recent devaluation of the Rupee, and the consequent higher cost of the dollar (oil currency), is further aggravating the situation.

– Indian airlines are starved of skilled workforce. It is estimated that Indian aviation will need about 350,000 new employees to facilitate growth in the next decade. Shortfalls in skilled labor see staff salaries rise above inflation, adding further cost pressure. Given this situation, robust training programs will be the key to a sustainable future.

WORKING TOGETHER

Looking at the structural problems listed above, it seems clear that a change plan is needed. The aviation industry supports close to 0.5 % of Indian GDP, and in an emerging economy like India the need for connectivity is critical to facilitate the growth of trade and tourism. The development process of the country is at stake.

For this reason a coordinated approach, involving the government, airline companies and infrastructure developers, is urgently required. Some points that need to be developed in order to address the central challenges of infrastructure, costs, and taxes are:

– Ensure collaboration between the Ministry of Civil Aviation, other related ministries, regulators and the industry and promote other sectors that can both support and benefit the aviation sector

– Reduce fuel sales taxes. The long-term benefits on terms of higher economic activity and employment generation would more than compensate for the notional loss of tax revenue in the short run

– Establish a world-class National Aviation University and promote private sector investments in training academies to produce highly-skilled human resources

– Implement recent policy decisions such as the 49% Foreign Direct Investment limit, and establish safeguards to prevent excessive and predatory ticket prices.

Aviation 3

This last point seems to have central role in the future dynamics of the industry. Etihad Airways, the national airline of the United Arab Emirates, can be considered the pioneer of this future trend, buying a 24% stake in Jet Airways. This acquisition represents the first foreign investment in India’s airline sector since ownership restrictions were eased on March 2012. The deal, that is expected to boost the fortune of Jet Airways, has faced political opposition in India, driven by the fear that it may hurt national carrier Air India.

Many sector experts see these initiatives as the factor that can make the difference for the future of the Indian aviation industry. Top international players such as Etihad can transfer specific knowledge and best practices, improving domestic partner’s efficiency and marketing capabilities.

However, as highlighted before, the progressive internationalization of the India’s domestic airline industry needs to be coupled with structural changes, involving the government and other firms operating in related sectors.

Only a common effort by all the parties involved, would allow India’s carriers to get out of this turbulence and start to fly high.

Laviero Satriano is a Dual Degree student at Bocconi University and IIM Ahmedabad and a member of the consult club. Before coming to IIMA, he had an internship at The American Chamber of Commerce of Texas in the USA, and he was responsible for a volunteering project in Uganda. He holds a Bachelors of Management and Business Administration at Bocconi University.

Knowledge Process Outsourcing in India: the Changing Scenario

KPO-1Knowledge Process Outsourcing (KPO) is the outsourcing of business processes that require significant domain expertise. In the early 2000s, India saw a boom in KPO activity, with the Western multinationals sourcing their high-end information processing requirements (such as analytics, data management, legal services and human resource management) to captive entities/ third-party KPO units in developing countries. According to ASSOCHAM, India’s KPO market is growing at a CAGR of 30% in spite of the global slowdown. By taking care of non-core functions of the multinationals, the KPOs have freed up their time to focus on core business activities. At the same time, the sector has opened new employment avenues for the large pool of young and highly skilled professionals in the country, thus augmenting the GDP growth.

KPO-2

Critics argue that increased level of outsourcing activity would lead to inflation and expose us to global business cycles. However, these risks can be minimized if growth in the KPO sector is matched with a focus on enhancing domestic demand. Therefore, in spite of these criticisms, the knowledge sourcing activities should be encouraged.

Although India performs the major share of knowledge processing activities globally, it is gradually losing its attractiveness as the preferred outsourcing location to the upcoming KPO units in South-East Asia, Eastern Europe and South America. Various reasons have been cited for this shift, namely, increasing real estate costs in India; difference in time zones, language and culture; domain expertise & lower costs offered at other locations; and a high employee attrition rate in India. The Indian KPO sector needs to overcome these challenges in order to sustain and enhance its current global share.

Developing expertise: Preferred outsourcing destinations by sector (Source: IBEF)

Developing expertise:
Preferred outsourcing destinations by sector (Source: IBEF)

First, high real estate prices in India, especially in the Tier 1 cities, have become a major concern for the multinational firms. A possible solution might be to shift some of the KPO units to smaller cities. Many units have already taken steps in this direction. The government can encourage this shift by providing incentives (such as tax benefits) to the firms moving to smaller cities. In the long run, such a shift would lead to infrastructural development in these areas. The economic benefits will get evenly distributed across the country, and the KPO firms would be able to tap more talent.

Second, the difference in time zones is an important factor driving the companies’ operations to other locations. The U.S. companies, for instance, now prefer South American locations for sourcing their activities. For the same reason, the European companies prefer Eastern Europe as their outsourcing location. The Indian KPO units can address this problem by identifying areas, such as research, that do not require long hours of contact with on-shore teams. At the same time, focusing on selected segments would help us develop expertise and hence, get more sophisticated work assignments.

Third, because of the high attrition rate in most KPO units, the multinationals feel that they are frequently incurring costs in hiring and training new employees. This problem can be overcome by developing in-house hiring & training facilities, rather than relying on third-party hiring agents. Furthermore, KPO entities and multinationals should invest in the latest communication technologies, such as video conferencing, in order to keep the offshore employees integrated into the business. Greater involvement would enhance their motivation levels and lower attrition rates to a great extent. Negotiating performance-based remuneration contracts with the multinationals, whenever possible, would also attract and retain talented individuals.

Finally, as the industry is becoming more competitive, the professionals should possess good managerial, communication and decision-making skills in addition to technical expertise. KPO units should focus on all-round development of their employees. The employees should be encouraged to take initiative & identify areas where they can add value. Well-rounded employees would give the Indian KPO sector a competitive edge.

A systematic approach towards addressing these issues would make the Indian KPO sector more competitive and allay some of the concerns of the foreign multinationals. The industry leaders, policy makers and employees should work together to bring out the desired changes.

Ashima Setia is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIMA, she worked with Deutsche CIB Centre in Mumbai in its Fixed Income division. She holds a bachelor’s degree in Civil Engineering from IIT Delhi.

When the going gets tough: E-Tailing in India

For many of us, the internet and e-commerce is now an indispensable part of our lives. Till around 2010, however, the Indian e-commerce story was limited to tickets, classifieds and ringtones – and physical retail had been slow to take off. These days, the ticketing and travel segment still accounts for around 80% of the total e-commerce in India, but online physical retail, also known as e-tailing, is finally catching up.

Division of the E-Commerce industry

evolution of e-commerce in India

Click to view: Evolution of E-Commerce in India (comScore report on India Internet)

2011 was the year when e-commerce witnessed a slew of investments by VC & PE firms, which were rushing to get an e-commerce company in their portfolio. E-commerce companies on the other hand were reporting double-digit on a month-on-month revenue growth. With excess funding available, companies invested heavily in back-end infrastructure such as warehousing, in-house logistics team and marketing to acquire customers.

Exhibit-A (VC Circle)

Exhibit-A (VC Circle)

However, the e-tailing in India is still facing several open questions:

  • Is the quality of internet connectivity good enough?
  • Is the supply-chain and logistics reliable enough in India?
  • Comfort of Indian consumers with e-tailing and using online payment as mode of payments?
  • Most importantly, how to achieve profitability?

Eco-system for e-tailing in India

The digital consumer ecosystem comprises several external and internal components.

E-Commerce-EcosystemAccess: How big is the potential market?

There are an estimated 150 million internet users in India, roughly 12.5% of India’s population. That is significantly lower than the world-average of 30%.

This aspect of the ecosystem, however, is improving rapidly in the past few years. The advent of 3G and 4G data networks and increasing proliferation of smartphones have accelerated the internet penetration. The expected number of Internet users by 2015 is 376 million – almost 2.5 times the current number. More importantly, the number of users transacting online will grow from the current 15 million users to 40 million users by 2015.

Assuming an average transaction of INR 500 per person/per year, we can estimate the potential market size of e-tailing in India as USD 4 billion by 2015, roughly four times the current market size.

Demographics: Life beyond Metros

The geographic distribution of Internet users has been skewed towards tier I cities. However, the number of users in tier-I&II cities has been increasing significantly. This augers well for most of the e-commerce companies as around 30-40% of current revenues are coming from tier I/II cities.

However, the average basket size (order value per transaction) for tier I/II cities is still around 70% of that of metros. Moreover, logistics and reverse logistics cost are substantially higher for these cities. Thus, profits are still going to come from the top eight metros.

Advertising: Burning a hole in the pocket

This is one the most important internal components for any e-commerce firm, because of its impact on the bottom-line. Marketing costs include digital marketing on Google and Facebook as well banner-ads on other popular websites (YouTube, CNN-IBN etc.)

While companies continue to spend aggressively on online marketing (Google, Facebook and re-targeting banner ads), the conversion rates (% of users who transact after clicking the ad) are in the range 0%-1%. In order to turn profitable, e-commerce firms have to find a way to improve the conversion possibly through alternative ways of free advertising (Google search, bulk-mail, blogs etc.).  Improving the conversion rates is the focus at the moment, and many new start-ups (such as Tooki Taaki) are addressing this concern to help the cash-strapped e-commerce firms.

Exhibit-B

Exhibit-B (The Nilson Report, RBI Bulletin – Retail electronic payment systems)


Payments: The dominance of Cash-on-Delivery

For Indians, the concept of credit-card is still alien. As a result, around 70% of the transactions happen on Cash-on-delivery (COD) basis.

The logistics partner charge an extra INR 40-50 per shipment for handling cash, which is sufficient to wipe-off the entire operating margins. To counter this, firms are increasingly charging an additional INR 50 for COD transactions or giving incentives to customers for using online payment gateway (extra points, free coupons etc.). COD, however, overcomes a major challenge of e-commerce regarding lack of trust and touch and feel and hence will continue to account for a majority of transactions in near future.

Last Mile Delivery: Own v/s Third-party logistics

Globally, top players have almost always outsourced forward logistics, while controlling the back-end supply chain and inventory management. But this model has 2 major challenges in India:

  1. Poor customer-service (delays in shipments, damaged products, handling of reverse logistics)
  2. Lack of good courier partners and increased costs due to monopoly of a few (e.g. Bluedart, First Flight etc.)
forget digital marketing

forget digital marketing

To counter this, several players such as Flipkart, Jabong etc. are building their own end-to-end supply chains. This not only solves above problems to a large extent, but also ensures customer experience while generating enough visibility for the brand on roads.

Thus, few players will follow a two-pronged strategy: developing their own delivery channel for the metros and relying on outsourced parties for tier 2 and 3 cities where they are sub-scale. A majority will still rely on third-party logistics, while they focus on the core-business of merchandising and back-end operational efficiency.

The Way forward

The E-commerce industry is going through a difficult time. The sector will see consolidation over the next few years as companies struggle to make profits and investors work towards reducing their cash-burn. A few big horizontal players (across all product categories) will remain as they can achieve higher basket size and ‘economies of scale’ quickly. Niche vertical players for fashion and lifestyle categories (such as apparel & jewelry products) can still survive as they command higher profit margins.

This sector is not for the faint-hearted. One should also understand that it took Amazon 10 years and billion USD in investments before it turned profitable. India has far more glaring problems such as lack of internet penetration, card-usage and logistics. Hence, one needs to be patient with the Indian e-commerce story. At the same time, firms need to keep an eye on their bottom line if they wish to survive this tough period. The last man standing will reap the benefits.

Rakshit Agarwal is a PGP1 student at IIM Ahmedabad, and a member of the Consult Club. Prior to joining IIM-A, he worked with ITC Limited in the operations team, and managed the P&L of a category in an early stage start-up. He is passionate about tech-entrepreneurship, and holds a Bachelors and a Masters in Electrical Engineering (VLSI) from IIT Madras.