Future enterprises and shape of the Flipkart, Uber-driven economy

The world has changed significantly over the last decade, even for say an average middle class consumer in a tier-II city in India. One can choose from a lot more options on e-commerce marketplaces than available in the nearby stores and get the desired thing delivered in a matter of one or two days.

One can get a taxi on the doorstep within a matter of minutes. It was not long ago that Indians had to travel from a smaller city to the nearest bigger city to avail the requirements for a family function. And if you had to take an early morning flight, you had to book at least two taxis (in case one of them doesn’t show up) the previous night on charges far more than the surge prices shown by Uber or Ola.

With all these exciting possibilities have also appeared questions surrounding the business models of these new disruptors. Will Uber become profitable while continuing its discounts for the passengers and incentives for the drivers—its primary weapons of war with Ola? Will Flipkart be able to turn the wafer thin margins of the online marketplace into big profits by converting fickle millennials into loyal customers? Or will we go back to old business models with higher asset costs and bulky human resource departments? And how will the answers to these questions shape the future of the economy?

Three short points can be made.

One, the future is more and more driven by technology. The one reason why the new-age disruptors have made a quick impact is because they are less reliant on people and more on technology. Technology is both cheaper and efficient—it remembers your past preferences without asking for a festival bonus. It is true that some e-commerce companies are flirting with brick and mortar stores and the reason could be growth potential in both businesses. But even such moves have greater possibilities if integrated with technology. Amazon Go is the best example: while it brings people into physical stores, cutting edge technology shapes the entire experience.

Two, it is unlikely that we would witness a slide back to businesses built around acquisition of physical assets and a large number of personnel. The success of Uber vis-à-vis Meru or traditional taxis was largely because the former diversified the cost of buying cars and the risks associated with it.

Unlike Meru which owns a large fleet of cars, Uber does not have to bear the depreciation cost. To be sure, the app-based cab aggregators are experimenting with car-leasing programmes to get over supply stagnation but at least in Uber’s case the fleet is owned by a third party.

Uber also has no social security obligations to its drivers since it does not identify drivers as the firm’s employees. Of course, politics and courts have a way of hitting back as has recently been seen in London where a tribunal has ruled that the drivers will be now be recognized as employees and therefore will be eligible for attendant benefits.

Uber also has a way around it by increasingly embracing technology. Driverless cars are an obvious response but don’t think that the politicians and courts will step back and watch! The regulatory tussle between the state and the disruptors will define the coming years and decades.

While social security costs are always identified as an obstacle for the gig economy, one of the lesser appreciated factors is how lean organizations with fewer people on the payroll allows companies to fight recession. This becomes especially important at a time when the long shadow of the 2008 financial crisis refuses to go away and the outlook for the future continues to remain dim.

The encouraging sign is that these dull years have nevertheless been some of the best years for the emergence of new technology-based business models.

But on the other side, the room for manoeuvrability for the disruptors is too little. They cannot depend on a hire-and-fire spree but have to learn to live without hiring too many in the first place. With a recession always lurking in the corner, it is difficult to keep the wages growing while operating on thin margins available in a cut-throat marketplace.

Third, one of the means available to governments to come out of recessions all these years used to be currency depreciation. It helped make exports cheaper and also allowed the struggling corporations to increase the nominal wages while reducing the real wages to keep themselves competitive.

Recall the protracted struggle of Greece because it simply did not have control over its currency? Thus, the relative share of the new-age disruptors and corporations based on old business models will also contribute to government’s thinking on larger issues such as currency markets and financial downturns.

The survival of Uber or Flipkart is not the question. They may well be replaced. Even the idea of an online marketplace can be tinkered with. But there is no going back to the old models from this point. E-commerce and on-demand taxis will stay and with yet more technology involved.

And, wisdom of courts and regulators permitting, this trend will usher in a new relationship between state and factors of production. No wonder then that it appears rather odd when the poster boy of new-age disruption like Flipkart’s Sachin Bansal gives a push to old style state-capital relationship.