The Chinese internet sector has been an amazing success story. From virtually nothing, China is now at the cutting edge, with the largest number of internet users globally (at 700 million more than the US, EU, and Japan combined) and the most pervasive adoption of digital and e-commerce business models. The country leads the US, in percentage of advertising which is online, penetration of e-commerce and more broadly, usage and time spent online. In 2017, on Singles’ Day (November 11) Alibaba recorded sales of over $25 billion (50 per cent growth), more than three times what American consumers spent on Black Friday. Alipay processed 1.48 billion transaction in a matter of 24 hours. No other company in the world is even close to handling this scale on a single day!
Alibaba now handles both directly and indirectly nearly 5 per cent of Chinese gross domestic product (GDP), compared to only about 0.5 per cent of US GDP by Amazon. Over the past 10 years, in China, online gaming has grown 24 times, online advertising 48 times, and e-commerce by over 150 times. The stocks have also been unbelievable wealth creators. Just looking at the top three Chinese internet companies (Alibaba, Tencent, and Baidu), their market capitalisation has grown from only $10 billion just 10 years ago to $1 trillion today. Alibaba and Tencent are now among the 10 most-valuable companies in the world. This market capitalisation does not even include the value of giants like JD.com, Ctrip and many others. This is incredible wealth creation. It has made the fortunes and reputation of numerous investors be it SoftBank or Naspers.
In the broader digital world there are only two super powers, China and the US. Of all the unicorns (private companies with a valuation of over $1 billion) 40 per cent are Chinese companies and 40 per cent are US companies. The rest of the world only accounts for about 20 per cent. If we look at the top 10 publicly listed technology companies by market capitalisation all of them are either American or Chinese, the only exception is Samsung of South Korea.
Illustration by Ajay Mohanty
E-commerce and digital have also generated millions of jobs in China. From simple logistics and warehousing to delivery infrastructure, millions are employed serving the online consumer. Given that China had never fully built out its retail footprint, we have had limited retail job losses, unlike in the US. E-commerce in China has been more about adding new jobs than replacing existing retail positions.
All the Chinese giants are now spreading their wings, both geographically and product wise. Baidu is a leader in artificial intelligence and autonomous car technology, Tencent is trying to take WeChat global, and along with Alibaba entering video, financial services and allied fields. All three have numerous investments across the digital ecosystem both in China and globally.
The question may logically be asked as to why this type of growth and wealth creation has not happened in the Indian internet eco-system?
Firstly, we are at least a decade behind China across all the relevant metrics of internet usage, broadband penetration, and purchasing power. Given all the wealth created in China in the last 10 years, this may still be what lies ahead for the Indian internet players.
Secondly, in India, the Google of India is Google and the Facebook of India is Facebook. We have kept the sector open, and it is thus dominated by the global giants. In China, partly due to language but mostly due to government policy, they have ensured that homegrown players dominate. How smart was it for India to allow unencumbered entry? Debatable? Even our so called homegrown players are almost entirely funded by foreign capital. If foreign capital is going to get the upside, how does it matter whether it is a US-based hedge fund or Amazon? When these business were being set up we, frankly, did not have large enough domestic pools of risk capital. How many investors in India even today are willing to fund a business plan with built-in losses in the billions for a decade? If you just block the entry of the big boys, reserving the space for local players, you restrict competition at the cost of the consumer. It is very difficult to ensure the financial upside through market capitalisation is captured locally.
The reality is that irrespective of the nationality of the capital provider, given the nature of most of these online businesses, jobs and economic activity are fully captured within the country and that is the most important fact. What is probably true is that as a country we could have bargained domestic market access for specific infrastructure investment commitments from some of these global internet giants. Ask Alphabet to fund rural Wifi connectivity or Amazon to set up a cold chain for example. I don’t think anyone had the foresight years ago to truly understand how big Chinese internet would become, the inability of the US players to be involved, and therefore, the attractiveness of India.
Another related issue is the inability or unwillingness of the Indian IT giants to invest in leading-edge technologies. Unlike in China, we are not seeing any of the Indian technology giants commit to try becoming a world leader in, for example, artificial intelligence or data analytics. The Indian companies have the cash flows and talent to do so but have been seemingly unwilling to dilute margins or lack the innovation mindset. The fact is that as recently as June 2013, the market capitalisation of the top Indian IT companies was the same as the top Chinese internet players. Today the Chinese top three have a market capitalisation of $1 trillion and the Indian three (TCS, Infosys and Wipro) $140 billion. Even in their core business of IT services, perception remains that the big Indian players have not invested enough in building capabilities in the SMAC (social media, mobility, analytics, and cloud) space. Growth for these companies has slowed to mid single digits, as they are not winning their share in the new digital service lines. I don’t blame the Indian giants. These are outstanding companies with great management teams, but they have been held hostage by their past success. They seem to be unwilling to invest enough for the future, concerned as they are about short-term margins and stock prices. The problem may be more with these companies investor base. If your investors or boards are not going to let you invest enough for the future, and hit your shares whenever margins dip, can one blame only the management teams? Investors need to look at themselves and the boards of the top Indian IT giants. Who is making the long term versus short term trade off. Do these companies really need to sit on billions of dollars of cash? Is buying back stock the only use of this cash? Buybacks help in the short term, but a successful foray into one of these new technologies can create disproportionate value. Why cannot an Indian tech company invest serious money into AI? We need investors and boards who will both be supportive as well as push our companies to fight for leadership in certain niche areas of the new technologies. No time for complacency: These new technologies will disrupt, create value, and for India, our tech giants are the only hope we have of gaining even a toehold in these new fields.
The writer is with Amansa Capital. Views are his own