What I learnt about Indian e-commerce from George Soros - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 14 July 2015
PRINTER FRIENDLY | ARCHIVES
What I learnt about Indian e-commerce from George Soros A  A  A

- By Vivek Kaul

Vivek Kaul
Other than writing The Daily Reckoning, I also write columns on a freelance basis for digital publications as well as newspapers. A few days back I got an email from an editor at one of the newly launched digital publications.

She wanted me to write for them. I replied back and asked four basic questions, which any freelance writer would, before taking up an assignment: a) What exactly did they want me to write on? b) What was the frequency of columns that they expected from my end? c) How long should the columns be? d) And how much would they pay?

I never got a reply.

My guess is that the digital publication wanted me to write for free. This led me to wonder as to why would anyone in their right mind launch a new digital publication if they were not willing to pay for content? Wouldn't content make one website standout from another?

The answer came to me a couple of days later: the only reason anyone would launch a digital publication without wanting to pay for content, was in the hope of managing to raise some venture capital/private equity money in the days to come. This money could be raised only when there was a website up and running. And this clearly is not a good sign.

--- Advertisement ---
Every 15th, You Could Either Grab Or Miss Exciting Opportunities...

On the 15th of every month, we reveal one high potential small cap stock to our privileged subscribers.

Some of the recommendations we made in the past have given returns like 288% in 2 years and 5 months, 124% in just about 7 months, 250% in 2 years, 4,392% in 6 Years 2 months and more.

So don't miss the recommendation we're going to make on this 15th...

Click here for full details...

------------------------------

What it also tells me loud and clear is that the website did not have a business model in place. It is just hoping to raise some quick money from venture capital/private equity investors and get a valuation in place. In that, it is not any different from almost all of Indian ecommerce, where the idea seems to be to keep raising money from investors, without making any profit. A business model can be defined as how a company hopes to make money someday.

Here are some numbers that take the point I am trying to make forward. Take the case of the much in news Housing.com. The Economic Times reported some time back that as per filings with the Ministry of Corporate Affairs, the dotcom reported losses of Rs 48.8 crore on a revenue of Rs 1.9 crore for 2013-2014.

Is that a business model? What these numbers clearly tell us is that the firm does not seem to have any business model, and is surviving on the investor money that has been coming in.

A recent news-report in the Business World magazine pointed out: "Flipkart, in 2013/14, ran losses of Rs 400 crore whereas Snapdeal lost Rs 265 crore, and Amazon Rs 321 crore. Some estimates say Flipkart and Snapdeal have roughly enough cash to last out a year and a half at current burn rates. And this war is unlikely to be settled within that time period." Every few months, one reads newsreports on these companies raising more money from investors. And that's how they survive, after making huge losses.

Another estimate in a newsreport in the Mint newspaper suggests that the various India entities of Flipkart made total losses of Rs 719.5 crore in 2013-2014. This on a revenue of Rs 3035.8 crore. In 2012-2013, the company had made losses of Rs 344.6 crore on a revenue of Rs 1,195.9 crore.

These losses would only have gone up in 2014-2015.

Interestingly, a recent news-report in Bloomberg suggests that the taxi-aggregator Uber is also losing a lot of money internationally: "Uber Technologies Inc. is telling prospective investors that it generates $470 million in operating losses on $415 million in revenue, according to a document provided to prospective investors. The term sheet viewed by Bloomberg News, which is being used to sell $1 billion to $1.2 billion in convertible bonds, doesn't make clear the time period for those results."

Why is Uber making such huge losses? The pricing of the company is significantly cheaper in comparison to other taxi-services available in the market (in the Indian case at least). Other than sharing a major portion of the metred fare with the owner of the taxi (as has been told to me by multiple Uber drivers), the company also pays him a significant amount over and above the metred fare, per pick-up. This is primarily because at the fare that the company charges the consumers, it is simply not financially viable for the car owners to offer their services.

The idea in the case of Amazon, Flipkart, Snapdeal and Uber operating in India, seems to be to offer the consumers cheap deals and kill the competition in the process. And once that happens, these companies will have a pricing power as well.

The! trouble is almost all e-commerce companies seem to be following the same strategy. And that can't be a good thing. As Gary Smith writes in Standard Deviations-Flawed Assumptions, Tortured Data and Other Ways to Lie With Statistics: "The idea was that once people believe that your web site is the place to go to buy something, sell something, or learn something, you have a monopoly that can crush competition and reap profits." Smith is talking in the context of the dot-com bubble that hit the United States in the late 1990s. The statement applies equally well in the Indian context as well.

Hence, in the years to come there is going to be a lot of bloodshed. Many of these companies are going to be shutdown. Many jobs are going to be lost. And a lot of capital is going to be destroyed.

Nevertheless, all that is for the stakeholders like investors in these companies and those who work for these companies, to worry about.

The consumers just need to remember what George Soros said in a totally different context. Soros is different from the class of investors who believe in buying financial assets which are supposedly underpriced and then holding onto it in the time to come. Soros works in the opposite way.

He either likes entering a bubble early or shorting them once they have got on for too long. As he writes in The New Paradigm for Financial Markets "Nothing is quite as profitable as investing in an early-stage bubble." In fact one his favourite quips is "when I see a bubble, I invest".

The consumers also need to look at the e-commerce revolution in India as a bubble. Like Soros invests in bubbles, consumers should use the services offered by these companies to the hilt and save money in the process. Nevertheless, they should be careful about investing in their IPOs as and when these companies list.

So, buy yours books from Flipkart.com, furniture from Pepperfry.com and clothes from Jabong.com. Oh, and use Uber to travel within the city and get rid of the kaali-peelis for the time being. But stay away from investing in their IPOs.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "What I learnt about Indian e-commerce from George Soros". Click here!

6 Responses to "What I learnt about Indian e-commerce from George Soros"

Krishna

Jul 16, 2015

Vivek
As usual hits the nail on the head......albeit with a lot of wit and sarcasm. Keep up the good work. I enjoy reading articles by you and Bill Bonner

Like (1)

S.Krishnan

Jul 15, 2015

Knowing that all these E commerce companies are consistently making huge losses why are the Investors pumping in so much money. Cant understand the logic

Like (1)

paulose

Jul 14, 2015

This was such a beautiful read with an even better logic and investing sense ......... Loved it !

Like (1)

Biju Poduval

Jul 14, 2015

Nice article. But why would anyone in their good senses want to get into such business. Shouldn't there be a regulator for stopping IPOs of loss making companies when they dont have a business model in place?

Like (1)

vijay

Jul 14, 2015

same goes mahendra in ssc bank po exams coaching. They are coming out with low fee and in near future they have to compromise on quality or shut their shop. But the collateral damage is people go on looking for these kind of services and put a hold on buying new and these hurt growth

Like (1)

Surekha Desai

Jul 14, 2015

Excellent article, as always Mr Kaul. Keep up the good work

Like (1)
  
Equitymaster requests your view! Post a comment on "What I learnt about Indian e-commerce from George Soros". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.