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E-commerce- The vanguard of Software Industry - Views on News from Equitymaster
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  • Aug 5, 2000

    E-commerce- The vanguard of Software Industry

    The domestic software industry is gearing towards growth. It has the potential to alter the future course of Indian economy. The industry is growing leaps and bounds. With a compounded annual growth rate of more than 50 percent between financial year 1990 and 1999, the Indian software industry has expanded almost twice as fast as the US software sector during the same period. It has reported revenues of Rs 243 billion in financial year 2000 and is expected to grow by 60 percent in the current year.

    Besides focussing on the bread and butter activity of software development and services (both offshore and onsite), the industry’s thrust is shifting towards e-commerce (B2B and B2C) and Internet related applications. From banks to retailers to mail order suppliers, everyone seems to be scrambling to get on the e-commerce bandwagon. E-Commerce includes only such transactions that lead to flow of electronic information concluding into an electronic transaction, or actual flow of material information construed as an electronic sale.

    E-commerce segment is expected to register the highest compounded average growth rate by 2008, compared to other areas. With all industries embracing e-business and also as technologies become more affordable, software companies will have more opportunities both in the domestic and in the export markets.

    Software revenues projection
    ($ in bn) FY98 FY08 CAGR
    IT services 2.1 38.5 34.0%
    Software products 0.6 19.5 42.0%
    IT enabled services 0.4 19.0 47.0%
    E-business 0.2 10.0 48.0%
    Total 3.3 87.0 39.0%
    Source: NASSCOM

    ‘One thing you can’t recycle is wasted time’. And probably the quickest way to save time and create business, thereby generating income is through e-commerce. From a corporate perspective the single biggest advantage of B2B e-commerce is reduction in costs. Firstly it reduces procurement cost making it easier to find the cheapest supplier and cutting the cost of processing the transactions. Secondly it allows better supply chain management. This in turn will result in tighter inventory control, so that firm can reduce the stocks. The outcome of these advantages of B2B e-commerce is substantial improvement in the bottomline of corporate, adding to shareholder value.

    The biggest driver of e-commerce solutions market in future is going to be SCM (Supply Chain Management) optimisation and CRM (Customer Relationship Management) which will spur B2B transactions. Some of the areas of e-commerce services are legacy application integration, Internet application integration, EDI (Electronic Data Interchange), migration to web based models, e-commerce training services, web site development and maintenance.

    The potential of e-commerce in India is reflected in the projections of NASSCOM. The total volume of e-commerce transaction in India was about Rs 4.5 billion in financial year 2000 and is expected to increase more than 7 times by 2001 to Rs 35 billion. With the requisite framework in place, improvement in telecom infrastructure and rise in PC penetration, e-commerce transaction would swell to Rs 150 billion by 2002.

    Growth of e-commerce in India
    (Rs m) B2B B2C Total
    1998 - 99 1,190 120 1,310
    1999 - 00 4,000 500 4,500
    2000 - 01 32,000 3,000 35,000
    2001 - 02 132,000 18,000 150,000
    Source: NASSCOM

    Growth in e-commerce has been further propelled by government’s move of approving the IT Bill, allowing 100 percent FDI (foreign direct investment) on e-commerce companies and a total tax rebate on any e-commerce activities during the financial year 2001.

    Nevertheless the road to growth is also littered with daunting challenges and thorny issues. The current volume of B2B commerce does not match the astronomical projections made by Nasscom. The obstacles are lack of infrastructure such as bandwidth, cyber laws, payment gateways and logistic providers. The security aspect in web trade is another roadblock hampering the growth of e-commerce. There should be reduction in tariff for international connectivity. Today the cost for a 1 MB link is about US $ 35,000 per month in India against US $ 4,000 in USA. The bandwidth demand in the country is expected to increase manifold with the rising e-commerce transactions. If the required bandwidth is not provided, India could lose the opportunity to earn as much as US $ 22.5 billion.

    So by now it is clear that e-commerce is where the business is, but getting there requires careful planning. The e-commerce industry has the potential to increase India’s GDP growth rate provided the obstacles the industry is facing currently are solved and it will be able to rake in heartening gains in terms of growth.



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