Joaquin Rodriguez Torres, Managing Director, Head of Technology, Media and Telecom Investment Banking, Asia, Deutsche Bank shares his perspectives on the present and future of e-commerce, online advertising and the mobile space
Q: What are the opportunities for internet companies in India?
A: The landscape for e-commerce is still unfolding and is only at a very early stage of development. India has leapfrogged the rest of the world in many ways and is in the running towards forming a large internet economy like China and the US.
Joaquin Rodriguez Torres, Managing Director, Head of Technology, Media and Telecom Investment Banking, Asia, Deutsche Bank
In some sectors like online travel, India has developed more quickly than China and going forward, e-commerce and online advertising are the two major verticals to watch out for. Currently, e-commerce as a percentage of total retail sales remains significantly under-penetrated, just as online advertising is a percentage of total advertising spend. The opportunity and challenge lies in this space.
Q: How are the Indian and Chinese e-commerce markets similar?
A: The fundamentals of India are very similar to China. The offline, brick-and-mortar retail infrastructure is satisfactory in the more developed cities. However, in the inner cities where transportation is more of a challenge, resources are scarce, and retail space is more basic. Internet is capable of addressing some of these challenges.
The other opportunity that the internet provides is the ability to reach a large number of consumers through advertising. The audience is shifting from traditional media such as print and TV to the Internet and mobile devices. Advertisers are looking for targeted reach. The internet allows advertisers to reach more people in an economical and targeted way. The penetration of online advertising in India is currently minimal compared to the US but it will grow over time as more consumers get access to internet. We expect the online advertising market to grow quickly.
Q: Is there any other space which you are excited about in India?
A: The other space I?m very excited about in India is the mobile space. The country has the largest mobile user base in the world and the usage of mobile phones in many ways is more sophisticated in India than in other countries in the world. Despite the market having some challenges, including low connection speed and low smartphone penetration, innovative opportunities have emerged in the country in the form of value-added services. I am very bullish on the mobile space in India. The country will look back 20 years from now and realize that the trend was obvious.
Q: Currently in India, close to 94 percent of e-commerce transaction value is travel-related. With the economy not doing too well, is the over-reliance on the sector a good thing or a bad thing?
A: Online travel as a percentage of non B2B e-commerce makes for a significant part of the e-commerce market in India. On the positive side, it shows that travel has done extremely well compared to other segments of India?s e-commerce. It also highlights the fact that the rest of the Indian e-commerce market is significantly underdeveloped. This is where we see the need and opportunity for significant growth.
Online travel penetration relative to total travel spending is 32 percent, similar to what we see in the US, but a lot larger than China, which is at about eight percent. Online travel has developed faster than other sub-sectors in the country largely because the experience of buying tickets offline in India is comparatively more complicated and cumbersome than in other countries. The rest of e-commerce is still underpenetrated but is growing fast.
Q: What are the problems in the e-commerce space?
A: The two key challenges are payments and logistics. Similar to China, Cash-on-Delivery still seems to be the preferred payment method in India and that presents some logistical challenges, including high returns. In China, we saw payment models emerge such as Alipay, a subsidiary of Alibaba, which is an escrow system to hold the payment until each transaction is finalized and confirmed by both the buyer and the seller. The other challenge in e-commerce is logistics. We have already seen Chinese e-commerce companies spend a lot on building their own logistics infrastructure and now we witness independent logistics companies as a new addition to the e-commerce ecosystem. This has started to happen in India too.
Q: The US has a market cap of about $500 billion, while in India it is at approximately $3 billion. Though it is still early days for Indian internet, can this huge disparity be bridged?
A: The big disparity exists mainly because the Internet market in India is still at an early stage. In time we will see the creation of big businesses through e-commerce?selling products and services online, and advertising. The talent is tremendous and the opportunity is not only for Indian internet companies to cater to the domestic market but also global consumers.
China?s internet space is a somewhat protected environment for local players and the competition is low from global internet giants. That is not the case with India. India?s internet space reflects the fact that the Internet world is without borders. Indian companies face tough competition from global players. Surviving brutal competition means that as and when you win in India, you are ready to compete anywhere else in the world. This will be particularly true in the mobile space.
Q: The recent Facebook IPO produced lackluster results. Where do you see markets panning out?
A: There is a lot of liquidity out there and investors need to put money to work. Through this crisis, the risk factor for technology investments in Asia has increased and investors have allocated more capital to cash. They have preferred to park cash aside because if they do not know which way the markets are going to go, it is very difficult to make directional investment decisions, whether long or short. As the macro picture becomes clearer, the capital will get back to investments.
As interest rates continue to remain low, equity investments will be more attractive. Equity returns are driven by growth, and growth is still higher in the emerging markets at the moment. I think the fundamental thesis of technology equity in countries like India and China remains solid. We need to get past macro concerns. In the longer term, there is a lot of shareholder value to be created in the sector.
? Entrepreneur India October 2012
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