There is also the war with Google – Facebook doesn’t want to lose out to Google in the war for controlling the ‘Internet of things’ – which has lead to high value acquisition spree The next eye-popping acquisition by Facebook to hit the news recently, after Facebook’s acquisition of Whatsapp, had left people baffled. Atleast, most of us know what Whatsapp is and can see its utility and feel its ubiquity. On the other hand, Oculus, and the business space it occupies i.e. Virtual Reality are almost unknown outside the ultra geek world. Virtual Reality (VR), as the name suggests, is a computer simulated environment where people can perceive realistically the presence of things in the real or imaginary world. The devices used to simulate reality are normally head mounted displays i.e. devices wrapped around your eyes like binoculars, typically producing the illusion of depth, headphones for sound, and haptic systems (Haptic systems use the sense of touch for simulation, the best illustrative example being video games using steering wheels for car racing). An indirect mention of Virtual Reality in Indian mythology is given in Mahabharata when Sanjay, using his gift, narrates the battlefield actions to Dhritarashtra. As is the case with most technological advancements, early applications of the technology were in the field of defence, where it was used for combat training. With advances in computer processing power, it was widely expected that the industry would receive immense growth. The industry got a false start in mainstream markets when Nintendo released Virtual Boy in the 1990’s, which literally gave customers a headache due to motion sickness and eye strain. All this looks set to change. Oculus Rift, a highly affordable head mounted VR display, developed by Oculus, has made the industry exciting. The product is user friendly and it has largely eliminated the one big problem faced with earlier versions of VR headsets – motion sickness. Only the Developer Version of Oculus RIft, aimed at developers to begin integration of Rift into their games, is available in the market currently. The consumer version is expected to become available in 2014 or 2015. With other players working on the R&D or set to roll out products from there stables, namely Sony, True Player Gear and Microsoft, it looks like VR has (finally) found its day under the sun. A confluence of reasons support the case for future growth of VR products – motion-control advancements means there is no lag between user input and machine response. Software and hardware costs have come down due to research and development in the mobile market. High processing power and high bandwidth internet access implies/promise that more high end VR applications which interact over the internet can be built. But pundits scratching their heads for the $2 Billion acquisition of Oculus have zeroed in another reason for the lucrative valuation – platform. Facebook is betting big on Oculus being the next big thing – Oculus will be Facebook’s answer to Google’s Android. Facebook is betting that consumer s will get hooked onto Oculus platform, like they switched from PCs to mobiles, and reveal details about their personal life – which will help Facebook in selling more targeted ads to consumers – the bread and butter of Facebook’s business. Also, Oculus Rift is more than just being a gaming headset. The platform & technology of Oculus Rift can be used for wide range of applications – walk through of long gone historic sites in museums, telepathic viewing (watching a cricket game ‘from the stands’, sitting at home), science fiction, motion pictures, training of medical students, – enabling multiple revenue streams for Facebook. At a tech fest in Texas in March, some hard core fans of the hit TV Series – Game of Thrones – were able to see the fantastical landscape depicted in the series. Coming to the valuation of Oculus, the $2 Billion should be seen carefully. There is buzz in the market that valuations of social media companies (read Twitter, Facebook, Whatsapp) may be overblown – with revenues, atleast the current ones, not even remotely sufficient to justify the valuation. Facebook has buffered the potentially reality shock to a large extent by structuring the Oculus acquisition through $400 Million in cash and $1.6 Billion of its own shares. The acquisition of Whatsapp was also structured around similar cash to equity ratios. Facebook bought Whatsapp for $19 Billion with $15 Billion paid out as Facebook shares and $4 Billion in cash. There is also the war with Google – Facebook doesn’t want to lose out to Google in the war for controlling the ‘Internet of Things’- which has lead to high value acquisition spree. Armed with cash from its IPO in 2012, Facebook is leaving no stone unturned. By buying out diverse companies they are holding to the likelihood, but not the certainty, of hitting jackpot in the future. In this hard-to-predictever changing technological landscape, Facebook is acting like a strategic VC partner to hedge its bets.
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The year was 1999. For the first time in India a company was trying to sell musical CDs online. This was the first reported attempt to sell anything online. There were around 3 million internet users in those days and buying or purchasing anything over Internet was never heard of. The company was named Fabmall.com, which later on became Indiaplaza and as per rumors, it has shut its shop in 2013 after not receiving any funding.
Coming back to the present, Flipkart has raised $1 billion in a single round of funding. This was followed by a I-wont-back-down message from Amazon, to invest an additional $ 2 billion in its Indian arm. Flipkart’s $1 billion funding is the largest ever single, private equity transaction by any internet company in India and second only to the $1.2 billion private equity funding of Uber, the largest PE funding in the internet space in the world. Flipkart is now valued at $7 billion, more than six fold of what Just Dial was valued in its much-touted-IPO last year.
The industry has come a long way since the likes of Indiaplaza’s boomed and busted. Indiaplaza was like the Orkut of the Indian e-tailing market – a promising star falling to the wayside. And just like the internet search and social media industry, the etailing industry is consolidating to a few players – who look to stay in the business for good. Still, there are naysayers criticizing the forces of consolidation and sustained losses faced by almost all the etailers. Our argument is that the forces of consolidation are good for the industry and the industry has been most beneficial to the largest and most important stakeholders in the chain – the small businesses and customers. The Indian e-commerce story is one of persistent and adaptability by the major players in the business. Let us look briefly at each of the major aspects of the business and see its holistic impact.
Let us start with operations. Plastic card penetration is very low in India, and in 2010 Flipkart introduced cash on delivery – an unheard of concept in developed economies. No doubt, cash on delivery is a costly route for the business. Similarly, the big etailers introduced extremely liberal sales return policies in 2010. However COD and Sales Returns turned out to be a very effective marketing strategy; get the consumer to try online shopping and build the trust and traction with the company and has rapidly expanded the target market for e-tailers. The timing was perfect – internet penetration was booming and the first mover advantage helped a lot.
Business models adopted by the players are also a hallmark of evolution and adaptation. The marketplace model was widely believed to be adopted by players to be compliant with the law of the land (Amazon) or to switch to a model which was less capital intensive and immune to the funding environment (Flipkart, Jabong). It is interesting to see how the utility of the marketplace model has evolved. Flipkart and Jabong realized that with increased marketing expenditures they had incurred and the traction they had with customers, trust and eyeballs were their biggest strengths and a marketplace model made business sense, irrespective of the funding environment. Amazon has also adapted and is playing to its strengths. Amazon has completely developed its back-end infrastructure i.e. software, warehousing and last-mile delivery and most importantly customer data – and is ready to make a complete jump into direct selling the day the government liberalizes the sector, which someday it probably will.
But the biggest winner of the marketplace strategy are the small manufacturers and wholesalers. Retail rents are highest in India (some of the highest in the world), operating expenses from staffing to generators eat into margins and small enterprises can’t invest too much in customer pull. Such players are finding the additional sales channel of online retail extremely useful. And in the spirit of developing the ecosystem, Flipkart and Amazon are investing in educating these small vendors in computer skills, supply chain management and digital literacy. A recent study by AT Kearney has unearthed that, even in developed markets like USA, online and offline shopping compliment each other.
One of the big advantages that e-commerce has over brick-and-mortar is reduced inventory carrying cost. Inventory can be stored centrally – for categories with a broad range of SKUs and unpredictable SKU demand, like apparels and gifts, called long tail products – that is a huge advantage. The practical and visible manifestation of this theory would be that just like India jumped straight to mobile internet bypassing broadband, there is a strong probability that rural/Tier III cities in India would bypass some of the modern retail formats which are a cornerstone of the developed world retail market/urban markets in India and it would jump to e-commerce directly.
With intense competition, the low-hanging fruit of urban India no longer remains low-hanging – and players will increasing look at the relatively untapped rural markets. Already, Amazon is experimenting with Indian Postal Service to make them a delivery and COD partner in its bid to reach the rural hinterland and typing up with BPCL’s In&Out stores as a collector point for Amazon deliveries (instead of directly to their homes).
Without the forces of consolidation and the concentration of funding to a few large players, none of these beneficial effects would have happened so fast – the development of multiple categories, the market place model (which requires large marketing budgets), the expansion of markets through COD and liberal sales returns, beneficial usage of “big data”, the support to small businesses and manufacturers to get their presence online and the penetration into the hinterland. Consolidation has allowed the large players to try new things, hire top talent, test and explore new ideas and push the boundaries of the market – which has directly or indirectly been beneficial in creating and sustaining the overall ecosystem – See more at: http://www.businessworld.in/news/business/internet/oh-so-indian-so-tier-ii/1502624/page-1.html#sthash.TqB5w9jC.dpuf
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E commerce industry with such breakneck growth rates needs to give importance to processes and guidance in place to sustain fast growth without committing fatal mistakes and heartburns for employees and customers. It’s imperative to also look at the issues faced by the companies in finance and related sectors.
E-commerce’s growth story in India has been phenomenal. The e-commerce market was worth $14 billion in 2012. It is expected to grow at a pace of 57% annually till 2016, the fastest in the Asia-Pacific region, according to Forrester, a leading market research firm specializing in technology. More importantly, a large ecosystem of specialized service providers have sprung up to support the growth of e-commerce companies: this is an ecosystem that is beginning to sustain itself.
With such breakneck growth rates, it is important to have systems, processes and guidance in place to sustain fast growth without committing fatal mistakes and heartburns for employees and customers. It’s imperative to also look at the issues faced by the companies in finance and related sectors.
The most critical issue faced by the ecommerce companies, as is typical of most Indian firms, is compliance and sound financial advice. In the absence of these factors, companies can grow but after some time start facing issues which not only stall their growth but can also lead to much bigger threats. In most cases, ecommerce entails pan-India operations, which throw up unique problems. For example, tax- and labour-related laws vary from state to state. Under labour laws, Labour Welfare Fund registration is required in Maharashtra but not in Haryana. Professional Tax is applicable in Maharashtra but not in Haryana. So, these companies have to either resort to tailor-made solutions as per state laws, effectively meaning employing more effort and human resource or they tend to adopt the strictest compliance practice, the lowest common denominator, to be compliant with all states. Adding to the complexities, the big firms typically sell across multiple categories: again, it means having specific tax treatment and compliance for each category.
This kind of complicated tax structure makes right advice indispensible for long-term growth of business and reduced litigation costs. The right advice at the right stage is required to ensure that companies do not pay hefty fines and get it right the first time.
Another major problem area is financial controls. The product based e-commerce is a transaction-heavy business, compared to other industries. The return volume of sold products is quite high across this industry, going as high as 40 per cent in certain cases. There are two main reasons behind this: (i) liberal return terms – for example, cash on delivery, returning the product in 10 days from the date of purchase – set by companies to gain the trust of end-customers, a lot of whom are shopping for the first time; and,
(ii) a lack of physical touch by end-customers, which quite often leads to a mismatch between the client’s expectation and the product.
These kinds of unique terms and conditions increase the probability of mistakes in finance and accounting. So, companies require robust financial controls to ensure that daily transactions are being accounted properly.
Another major problem encountered by e-commerce companies is the complicated delivery/transaction model. Typically, a product is shipped from a manufacturer/wholesaler to the company’s warehouse (for big firms) and is shipped out to a third-party e-commerce logistics company, which handles the last-mile delivery. Depending on the transaction model, the product can be billed directly to the company or the vendor. In most cases, it involves multiple transactions: a purchase order being issued by the company, inwards/goods received by the company, quality control rejections, shipping to the Logistics Company, sales returns, and commission paid to payment gateways, etc.
This makes systems and financial controls the need of the hour. It requires multiple and independent verifications to be done to ensure that chances of fraud are minimized. Time-to-time reconciliations with vendors is a must to ensure the accounting books are closed on time and disputes do not arise between vendors and the company months after a transaction is completed, which is a common malaise in all big companies, e-commerce or otherwise. Inventory audit, an oft-ignored area by small companies, should be done for complete reconciliation between physical and accounting reality. Also, daily cash reconciliation for cash on delivery payments, a customer payment model unique to developing companies, is a must, because (i) the chances of fraud are the highest in cash dealings and (ii) it will make way for the minimal blockage of working capital.
One mistake most companies make is not taking care of the financial work flow in their ERP systems. E-commerce is a relatively new sector and its business models are evolving. Already available ERP solutions are still under development and there is no standardized ERP solution available for the e-commerce industry which can handle all of its concerns. Hence, companies need to customize their ERP solutions at the commencement of their operations. In the beginning of operations, companies require sound financial advice to customize the ERP solution which can suit the requirement of the finance function. The problem is further compounded by the fact that most companies focus on core operations, and finance being a support function is typically neglected. Also, companies need to upgrade their ERP systems as the number of transactions increase, at which point sound financial advice is required again.
E-commerce is a reasonably capital-intensive business. Since most firms are new, vendors are unwilling to commit credit, epically to smaller firms, and many demand advance payment terms. Due to the high number of SKUs and higher margins in long-tail items, the working capital is blocked significantly. As most firms are burning cash, an eagle’s eye needs to be maintained on minimizing the working capital. A strong MIS system is required to undertake any analysis to improve business profitability, for which a real-time bookkeeping system needs to be maintained as a backbone. This fact is often ignored by smaller firms.
Due to high operating burn rates and sporadic funding, a lot of companies have partially or fully adopted or are in the process of adopting a marketplace and light-inventory model, where a vendor ships the item directly to the end-customer or a third-party logistics warehouse, bypassing the company’s warehouse. However, from a financial perspective it increases complexity, as (i) the number of vendors increases multiple folds and (ii) there is a lack of control on the item’s quality, as the item bypasses the company’s warehouse (although some large firms adopt the practice of having back-to-back shipping from the vendor to the company’s warehouse for QC check and then to the third party logistics provider).
The mantra is simple: do not ignore critical support functions; get right advice at the right time; avoid silly mistakes which lead to large penalties and delays; and, set up the system right the first time.
About the author: Deepak Dhamija is co-founder, Aristotle Consultancy. The company is a provider of end-to-end finance and accounting outsourcing services to startups and SMEs.
This Article was published in “Power Corridor” magazine in April 2014. authored by Deepak Dhamija. Deepak Dhamija is co-founder, Aristotle Consultancy. (Download PDF)
With Finance Minister Arun Jaitley presenting the budget for 2014-15 today, plenty of fodder has been served to the debaters nationwide who battle it out to decide whether pro-economy or not. While shutter bugs talk about the pros and cons of the current budget we revisit the earlier budgets presented by UPA government to mirror the major changes that have come into picture with the change of power. In this article, we will walk through three important budgets that were presented by two ministers from the UPA: P Chidambaram’s 2004 budget; Pranab Mukherjee’s 2009 budget and the 201 budget tabled by Chidambaram again. The reason for choosing these three years is pretty obvious; they mark the first and last year of UPA’s rule with the second budget presented after winning the elections again in 2009. ACT
ONE- First budget after five years(2004-05)
The 2004 general elections results were considered a surprise when the incumbent National Democratic Alliance, under the leadership of Atal Bihari Vajpayee, failed to get reelected as per the opinion polls and media speculations of that time. The primary reason for the failure of NDA was considered to be the non-inclusiveness of the economically backward class in the growth story that was touted by the party in its election campaign. The UPA formed the government at the center with support from the Left. They agreed on a Common Minimum Programme to guide the government in formulating its policies. This formed the background in which 2004-05 budget was tabled by the then Finance Minister Chidambaram.
Citing the Common Minimum Program as the basic guideline, the main focus of the budget was to sustain the economic growth that India had witnessed over the last few years while providing the benefit of this growth to the economically backward section of the country. To achieve this total planned expenditure to Rs. 145490 Crores from Rs. 135701 crores proposed in the previous budget tabled as an interim budget by NDA govt.
Chidambaram in his 2004 budget proposed to increase the deadline of Financial Responsibility and Budget Management Act from March 31, 2008 by a year. FRBM Act was a legislation proposed by Yashwant Sinha, the finance minister in the NDA Government, which was designed to institutionalize financial discipline, reduce India’s fiscal deficit and improve the management of public fund by Union and state governments. The main purpose of the act was to reduce the fiscal deficit to a manageable figure of 3% of GDP. Chidambaram felt that complying with the deadline would adversely affect the social expenditure and this extension would provide him the breathing space to dole out more benefits to the downtrodden.
Food For Work Program
Chidambaram in his budget speech indicated that work had started on National Employment Guarantee Act with the objective of providing 100 days of employment in a year to one person in every poor household. He proposed the launch of a new Food for Work Programme in districts which were classified as areas in immediate need of such a Programme. A total sum of Rs. 6000 Crores was allocated for such plans. This may be the precursor to the much touted Mahatma Gandhi National Employment Guarantee Act (MNREGA) by the Congress Party, which has branded it as one of its most successful Programmes in the election campaigns.
Foreign Direct Investment
Chidambaram rightly identified the need for Foreign Investment in India and emphasized on investments in infrastructure, technology and export. Identifying three sectors-telecommunication, civil aviation and insurance, as befitting these criteria, he increased the cap for FDI in them. Unfortunately, in hindsight, these moves, while well intended, failed in execution due to inefficiency and corruption. The telecommunication investments were marred by the 2G scam which surfaced much later in 2010.
Overall the 2004-05 budget was a visionary step by the then Government with the objective of maintaining high growth while bringing the benefit of that growth to the poor people, and thus making it an inclusive growth. Let us view the later budgets and see how they measure up to this vision.
ACT TWO – A budget in uncertainty (2009-10)
Pranab Mukherjee, for long had been a senior leader in Congress party and had been the Finance Minister of India during the Indira Gandhi Government in 1982. He became the Finance Minister again in 2009, a period when Congress was reelected at the center with a thumping majority and the world was undergoing a severe financial crisis. India was at crossroads with a moderation in its GDP growth looking likely.
Pranab Mukherjee in his 2009 ( and also 2010) budget speech mentioned the three challenges for the Government in the short and the medium term:
- Bringing the economy back to the high growth rate of 9 percent per annum.
- Bringing inclusive development to all the people of India and
- Improve the delivery mechanism of the benefits by the government.
Interstingly, as per his own admission in his speech, this led to an increased fiscal deficit from 2.7 per cent of GDP in 2007-08 to 6.2 per cent in 2008-09. It is worth noting that in the year 2012-13, he was criticized by a large section of economists who felt that he was reluctant to remove the subsidies which were burdening the fiscal deficit and, hence, the macroeconomic scenario of the country.
Launch of Popular Schemes
The period saw the launch of several popular schemes which are now part of public memory. Bharat Nirman, Pradhan Mantri Adarsh Gram Yojna, Women’s self-help group and various employment schemes were introduced in this period. The idea behind them was to further improve on the inclusive growth agenda of the government. Many of these schemes, in fact, were beneficial to the people who were below poverty line and living in adverse conditions. It is rather unfortunate that the success of these schemes were marred by the expose of huge corruption scandals and inefficiency by the Government in the later part of UPA 2 rule, especially from 2012-14 when the economy deteriorated further.
A perfect example of UPA 2 mismanagement is the Commonwealth Games. In his 2010 budget, Pranab Mukherjee expounded on the potential of these games to showcase India as an emerging power to the world and allocated Rs.3,472 crores in the budget for these games. While the event was a success, the government faced severe criticism for mismanagement and misappropriation of funds, suresh Kalmadi, the then president of Indian Olympic Association and one of the chief organizers of the event was later arrested by CBI for allegedly involved in corruption.
When Pranab Mukherjee donned the mantle of Finance minister in the UPA 2 government, he had emphasized on tax reforms which were overdue for a long time. In his 209-10 budged, he clarified that he sought to eliminate distortion in the tax structure, introduce moderate level of taxation and expand the base. Two key initiatives in this regard were the Direct Tax Code which would have replaced the Income Tax Act of 1961 and the Goods and Services Taxes which would have recuced the complexity that exists today around sales and service tax. It is considered one of the key failures of the UPA 2 and an example of its policy paralysis that these acts still remain to be implemented. It must be mentioned, however, that these bills were delayed by the parliamentary standing committee and the deadlock that existed in the parliament post 2012.
THE FINAL ACT – Budget in Denial (2013-14)
On July 25,2012, Pranab Mukherjee was elected as the 13th President of the Republic of India, leaving the seat of Finance Ministry to Chidambaram who took back his position after having serve as Home Minister for three-and-a-half years. It was a very bleak atmosphere in which he presented his 2013-14 budget. The current account deficit of the government continue to be high at 5% of the GDP, much above the comfort levels of 2.5% that he may have wished. He even went on to admit in his budget speech that it is one of his greater worries. He recognized the only three ways out of this scenario: FDI, FII and ECB and termed foreign investment as an imperative.
The budget that he presented in 2013-14 was termed as a responsible budget by some and desperate one by others. The Finance Minister curbed the expenditure on populist schemes and assured that the government will provide sufficient funds to the ministries to continue on the existing flagship Programs.
The 2013 budget was perhaps the first time when the impetus was on infrastructure investment as compare to the previous budgets by the UPA government. In spite of the fiscal constraints, FM promised investment in infrastructure with financial measures like allowing financial institution to raise long-term tax free bonds in the form of infrastructure Debt Funds (IDF), solving the bottleneck around roadways development, setting up new ports and impetus on electrification of roads and setting up railway corridors.
Measures to Increase Investor Confidence
The Finance Minister tried his best to allay the fears of the investors by announcing relaxation of certain norms for the FIIs like allowing participation in exchange traded currency derivative segment and permitting them to use their investment in bonds and government securities as collateral to meet their margin requirements. To attract the domestic investors, he allowed the stock exchanges to introduce a dedicated debt segments to improve the secondary debt market and reduction of securities transaction tax. However, these measures were not adequate enough to get a positive response from the investors who expected bigger announcement from him. They were worried that he didn’t lay out a clear solution to the CAD which was becoming a big worry for the government.
As we look back at the performance of the UPA government through its budget, we can observe that the UPA govt. had been very reactive to the environment around it while forming the budget. It is not easy to infer any kind of vision for a long-term growth but they had been consistent on their platform of inclusive growth by promoting various schemes and Programs for the poor. It may be because they did not want to repeat the mistake of their predecessor government which failed to bring the fruits of development to the poor. However, even their best intentions were waylaid by the policy paralysis and ineffective implementation. By the time they tried to get things back on track it was too late.
Keywords: UPA Budget, P Chidambaram, Pranab Mukherjee, Budget 2014
Read More: Aristotle Consultancy analyses Union Budget 2014;
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NEW DELHI: Finance is the backbone of a business and having a full-time seasoned chief financial officer (CFO) on board is not only difficult but an expensive task. It might be easy for large corporates and MNCs but for startups and SMEs, it is one of the major strategic issues. Understanding the real and practical problems faced by such businesses, a few NCR- based firms have introduced and are providing virtual CFO services