Ola & Flipkart pose same threat to small Indian businesses that Uber & Amazon do
It was surprising to read about Ola and Flipkart playing the 'We are Indian, Help Us!' card with the government.
Where was the feeling of Indian-ness (to coin a word) when the entire merchant lobby was reaching out to the government with the plea that the predatory discounting of ecommerce companies was killing their business?
Where was the feeling when Meru, a dyed in the wool Indian company, that first offered comfortable rides with high customer satisfaction levels, suffered due to Ola's subsidies? Or for that matter the taxi unions across the country which felt threatened by the same deep discounting tactics?
In today's age of social media enabled public opinion, ask the common shopkeeper whether they feel more threatened by Amazon or Flipkart? Or just ask around if taxi operators witness a decline in rides due to Uber or Ola? You will get your answer.
All four companies pose the same threat. They have the same ambitions of monopolistic market dominance and are as Un-Indian as the other.
Ola's and Flipkart's pleas, therefore, are a classic case of the pot calling the kettle black.
When Sachin Bansal says that Indian startups need foreign money but not foreign competitors, it's a very politician-like statement to the uneducated. Both Flipkart and Ola not only have foreign investors but are also registered overseas. Is that not an attempt to avoid capital gains tax in India in the future?
The reality is that both 'Indian' companies have been operating at huge (gross) losses. Net loss is when the company sells above its direct costs but the sale margin is less than its indirect costs. Gross loss is when the company sells below its direct costs.
To explain, take the case of two companies that produce and sell sauce bottles.
Company A can become profitable by increasing sales and optimizing indirect costs. Company B can never be profitable due to a direct loss of Rs 2 per bottle sold which is given to the retailer as subsidy.
Also, losses get compounded in the case of company B. The retailer can report fictitious sales, earn the Rs 2 subsidy and then, sell the same product in the open market again.
Most Indian start-ups have been operating like company B. Moreover, they don't even manufacture their own 'sauce'. They buy from a large pool of suppliers and sell to an even bigger universe of buyers. A supplier for them can easily become a buyer and start an unstoppable downward spiral of losses.
We know scenarios where people shifting houses buy and sell their own furniture and get it delivered by listing sites. Ghost restaurants on food delivery apps have placed orders themselves to avail cashbacks without any actual delivery. And drivers take two rides with themselves as the passenger on one phone and driver on the other, and vice versa, claiming ride subsidy from two companies.
Both Flipkart and Ola went through similar scenarios. But no one focused on this because all the attention was on market growth. Gross losses were merged with net losses and fresh funding was raised every six months. That is the primary difference between foreign startups and Indian startups where foreign companies look to operate like Company A.
Today, Flipkart has managed to reduce the gross loss business to some extent. To put a complete check on the gross loss would mean a huge drop in market share and hence, valuation. They need to sit back and reflect. They claim they can become profitable if they wish, but are holding out for market growth. It's time to walk the talk. Just one quarter of operating profitability will see their valuation skyrocket again if they were to go profitable.
Ola, or for that matter Uber, will struggle to completely cut off gross losses. They are services companies and not product companies like Flipkart or Amazon. Their sauce bottle doesn't pass through their system at all. They don't have a distribution network that controls every delivery. Their supplier is also the distributor for their service. The buyer doesn't have an address, just a location. And the cash payment option leaves them with even lesser control.
So Ola can only fight Uber through a subsidy war because their partner is not singularly attached to them. To maintain their partner's loyalty, they will continue to incur gross loss through driver subsidies.
Let us now revisit the Indian company vs Foreign company debate. Any monopolistic attempt can never be good for a country in the long term. Ola and Flipkart should try to become more Indian. They should not threaten other Indian companies but partner with them. Ola should support other startups in the transportation space and not compete with each one of them by stifling their supply through capital dumping. Flipkart should extend their distribution network and technology platform to other SMEs to expand their market reach.
With this eco-system, Indian startups can together flourish and effectively counter competition from foreign capital dumping attempts. Right now, both companies are equally guilty of capital dumping as Uber and Amazon.
Rohit Koshy, an IIT-Delhi and IIM-Kozhikode alumni, a former AGM at L&T ITDPL, is entrepreneur-in-residence at bike taxi startup Baxi, which competes with Uber and Ola's bike taxi services UberMOTO and Ola Bike. Views expressed are personal and may not represent that of his organization.