Amazon’s push in India and Alphabet vs Apple
An analysis of some of the news that made headlines in February
Will Amazon continue to invest in India?
Since late December 2015, Amazon has invested ₹ 3,676 crore in the Indian market. Why is it investing so much? And will the investment continue? I think so and here’s why:
Amazon has already lost the battle in China. Alibaba, the local competitor, is so well entrenched that Amazon could barely manage to garner a lowly single-digit market share in the large Chinese e-commerce market.
China is poised to overtake the US to become the world’s largest economy by 2031, according to a study by the UK-based Centre for Economics and Business Research. India will become the third largest economy by then. A weak presence in this market is not good news for Amazon, which aspires to dominate the global e-commerce market.
What makes India the next battleground?
In 2013, when Amazon entered India, local competition spearheaded by Flipkart and Snapdeal was well entrenched. Both these companies enjoyed top-of-mind recall among customers. It seemed that the China story would repeat in India too—a prognosis that was unacceptable to Amazon’s founder and CEO Jeff Bezos. He saw India’s huge potential:
• Large and growing population: India has over 1.25 billion people; in the next decade it is likely to overtake China and become the world’s most populous nation.
• Large and rapidly growing market size: The Boston Consulting Group estimated the size of the Indian e-commerce market at $16-17 billion in 2014; it is projected to touch $60-70 billion by 2019.
• Growth of the Indian economy: The International Monetary Fund estimates that the Indian economy will record a growth of 7.5% for 2015 and, more importantly, is poised to repeat its performance in 2016. This growth has to be viewed in the context of the anaemic growth in the rest of the world.
• Young demography: The mean age in India is 27 years, making it one of the youngest nations in the world. Young people display more propensity to spend.
• Ever-improving connectivity: India has the second largest online population in the world, estimated to be 400 million-plus. Of these, 280 million have access to the Internet through mobile phones, laptops or desktops on a daily basis. Demand for smartphones will rise as their prices drop, connecting more young people to the Internet.
The Indian government too is playing a critical role in making the country an attractive destination for investments:
• Make in India: This initiative is geared to attract investment into India. As investments flow in, they will create more jobs. The increased prosperity will lead to increase in disposable income.
• The push for goods and services tax: This will ensure that India becomes one homogenous country when it comes to the movement of goods and services—a critical requirement for e-commerce companies.
• Building infrastructure: rail, roads, ports, airports.
• Digital India: This initiative seeks to ensure Internet connectivity reaches the remotest corners of India. As a result, e-commerce companies will have a channel to communicate with the people here.
• Financial inclusion: Pradhan Mantri Jan-Dhan Yojana seeks to ensure financial inclusion into the banking system, so that government subsidies reach the people directly, leading to a rise in prosperity and discretionary income.
These facts have not gone unnoticed by Bezos. In 2014, he promised to invest $2 billion to build the Indian market.
In the past couple of months, Amazon has pumped in ₹ 3,676 crore into India which is being deployed into four large areas: offering deep discounts to counter local competitors; advertising extensively to create awareness about the product and discount offering; logistics to ensure prompt fulfilment of the orders; and of course, technology to ensure that customers get an awesome experience when engaging with the brand.
How have the local boys reacted?
Sensing Amazon’s mood, Flipkart and Snapdeal have raised funds worth $700 million (July 2015) and $500 million (August 2015), respectively, to ensure they can match the US retailer’s spending firepower.
Who are funding the local companies? Existing investors and Alibaba.
Alibaba has already invested in Snapdeal and Paytm. It is exploring the possibility of investing in Flipkart and increasing its stake in Snapdeal.
What is holding Alibaba back? High valuation. Flipkart has been valued at $15 billion and Snapdeal at $4.8 billion. If these companies give a steep discount to Alibaba, the deal will go through. If and when that happens, the $17 billion cash sitting on Alibaba’s balance sheet could well find its way into the Indian market to fight a common enemy—Amazon.
If and when that happens, the battle promises to become meaner and bloodier.
Amazon’s game plan
Before that happens, Amazon wants to gain a strong foothold in India by investing in building infrastructure to fulfil orders and leveraging technology to deliver an enjoyable experience to its customers, thus becoming a trustworthy partner of Indian customers.
So, as Fortune reported, the question being asked inside Amazon is not, “When will we make money?” but “Are we investing enough?” because the leadership at Amazon believes that “the opportunity will be measured in trillions, not billions—trillions of dollars, this is, not rupees”.
As long as such questions are being asked inside Amazon, it will keep investing in the Indian market. After all, it does not wish the Chinese nightmare to play out in India too.
Will Alphabet permanently displace Apple to become the world’s most valuable company?
On 1 February, Wall Street dethroned the reigning king, Apple Inc., and coronated the new king, Alphabet Inc. (Google Inc.’s parent company), as the world’s most valuable publicly traded company. This coronation came about when Alphabet’s market capitalization topped $565 billion, while Apple’s trailed at $539 billion. With this, Alphabet became just the 12th company to take the title of S&P 500’s most valuable company in the history of the index.
Though Apple regained the crown just three days later on 4 February, Alphabet’s brief resurgence shows that it is a strong challenger.
What catapulted Alphabet forward?
In 2015, Google reorganized its business into a holding company—Alphabet—that has under its umbrella a collection of companies. This separates Google, the cash cow, from the other bets, internally called “moonshot” projects. Google has search, YouTube and other related businesses under its fold. The moonshots include Fiber (high-speed Internet), Nest (interconnected devices for homes), Life Sciences (glucose-sensing contact lens), Google X (self-driving cars, Google Glass, Internet balloons), Calico (longevity), GV (formerly Google Ventures, the venture capital arm) and Google Capital (the investment arm that focuses on late-stage growth companies).
Through this reorganization, Alphabet has de-risked its business—failure of one company will not fatally impact other companies.
After setting up Alphabet, the company decided to go in for additional financial disclosure, resulting in greater transparency. Result: The Wall Street got a good view into how individual companies are performing.
And what did it observe?
Google, the cash cow, is in robust financial health. Revenue rose 14%, while operating income rose 23%.
Other bets (the moonshot projects), which have a longer gestation period, are indeed losing money, as the disclosure clearly indicated, but they seem to hold a promise of transforming into blockbuster businesses in the years to come, provided they are nurtured and funded prudently. If and when that happens, it is sure to propel Alphabet into becoming the world’s first trillion-dollar company.
Ruth Porat’s appointment as chief financial officer (CFO) in May last year seems to be having a positive impact on the functioning of the company, more specifically, in the areas of financial discipline, control and capital allocation.
Porat, who was CFO of Morgan Stanley before joining Alphabet, had a ringside view of the reasons and circumstances that led to the 2008 financial meltdown. She led the Morgan Stanley team that advised the US treasury department on restructuring housing lenders Fannie Mae and Freddie Mac, and noticed that the lack of internal controls, systems and processes sowed the seeds of destruction for these companies. Hence, at Alphabet, she introduced stronger internal controls, systems and processes to ensure that the management has a good view into every aspect of business, and that there are no unpleasant surprises.
Porat also took steps to rein in expenses while ensuring that Alphabet’s economies of scale (from computing power, talent pool, capital on its balance sheet) percolate to every business unit depending on its unique requirement.
So, while the company took some tough calls to reduce investment in less promising areas (the capital expenditure for the whole company dropped to $2.1 billion in the fourth quarter against $3.5 billion a year earlier), in the 2016 budgeting process, it focused on long-term capital allocation for the company’s collection of businesses. In a conference call with analysts on 1 February, Porat reassured that Alphabet will continue to invest in the moonshot projects and in ongoing steady businesses.
It seems she is inspired by Peter Drucker’s maxim “Feed your strengths and strangle your weaknesses” while allocating capital.
Why Apple needs to watch its back
Let’s move to Apple. Though it has regained its position as the most valuable company, it can’t rest on its laurels. Although its revenue and profit are 3x Alphabet’s, Wall Street gives more weightage to the future prospects of a company than to its past.
Apple’s product portfolio is ageing. Its last blockbuster product, iPhone (launched in 2007), is showing signs of slowing down. No new launches have shown promise of taking over the baton from iPhone. Though Apple Watch (launched 2015) did well, it did not match up to the precedent set by the success of previous Apple launches.
Other offerings from Apple in recent times too have not set the market on fire. At best they seem to be improved versions of existing products. Apple Pay (launched in 2014) is competing with Pay Pal and Android Pay. Apple Music (introduced 2015) is competing with music streaming companies like Spotify. Neither of these qualify as transformational products.
New product launches in the post-Steve Jobs era do not seem to be enhancing Apple’s reputation as an innovative company, fuelling speculation that the spirit of innovation seems to have died with Jobs.
Apple continues to be secretive about all aspects of its business. It has built opaque walls around its business that ensure that outsiders do not get a view into what’s happening inside. Result: A booming rumour and speculation market for what Apple is doing.
Unfortunately for Apple, what was visible to the outside world in the last few months, did not seem to inspire Wall Street’s confidence, at least in the short run.
Apple’s management, while pursuing its secretive strategy, wishes Wall Street to believe in it, that it is taking the right decisions. But for Wall Street to give it a thumbs up, it will not rely on reassurances, but will arrive at its own conclusions based on realities inside Apple.
Apple would do well to adopt some of the strategies that are working for Alphabet:
1) Greater transparency.
2) Strong internal controls, and systems and processes.
3) Check on expenses while ensuring economies of scale get distributed across the company, leading to expansion in margins.
4) Judicious capital allocation to projects to ensure that they are nurtured to fructification.
5) A balanced brand portfolio. If the BCG Matrix (a matrix to aid portfolio analysis developed by the Boston Consulting Group) were to be used as a reference, a company should have brands in at least three of the four quadrants—cash cows (high relative market share but growing slowly), stars (strong relative market share and growing rapidly with potential to become cash cow) and question marks (rapidly growing but have low market share, but with a potential to become stars). (The fourth quadrant, dogs, indicates low market share and low growth rate.) This will ensure that Alphabet continues to have an unending stream of new launches.
Postscript
By the way, have you noticed the strategic changes that Alphabet has been quietly embracing in its code of conduct and mission statement?
Take its code of conduct: when it was launched, Google advised employees “Don’t be evil.” Alphabet has quietly replaced it with “Do the right thing,” advising Googlers to do it by following the law, acting honourably and treating each other with respect.
Alphabet also seems to be tacitly acknowledging that the company’s mission statement, “To organize world’s knowledge and make it universally accessible and useful,” may have outlived its utility. Especially given the company’s intention to focus on other bets that will have a direct impact on quality of life.
Google CEO Sundar Pichai hinted at how Alphabet may be looking at the future when he said, “Google has scratched the surface of truly being there for users, anytime, anywhere, across all devices.”
When the new mission statement gets crafted and it guides Alphabet’s decision-making, it is likely to give Apple a run for its money, if not permanently displace it from the No. 1 spot.
One thing in Alphabet’s favour, which Apple can never get back: Alphabet still has its founders at the helm to ensure that the spirit of entrepreneurship, which catapulted it to this position, is alive and kicking. In Apple’s case, it is lost forever. That may prove to be a crucial differentiator as Alphabet takes on Apple.
Read an unabridged version on www.foundingfuel.com
Rajesh Srivastava is a corporate consultant, entrepreneur and academic.
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First Published:8 Mar 2016, 12:50 AM IST
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