India can be in top 5 cross-border e-tail destinations in the world in a decade
Prof. Arun Sundararajan, New York University, opines that India needs to create a robust ecosystem for fostering investment and innovation in the e-commerce space to be in top 5 cross-border e-tail destinations in the world in a decade. He also insists that building the necessary infrastructure and skills will be the key in facilitating this development.
IBT: What role does e-commerce play in India’s cross-border business? And what are the opportunities or challenges that e-commerce sales will have vis-a-vis retail?
Prof. Arun Sundararajan: At this point, cross-border e-commerce is much more about the inflow of goods into India rather than the outflow from India. There is a global market of consumers and there is no reason why Indian retailers and manufacturers should have to constrain their reach to the domestic market alone. So, the real opportunity is in creating infrastructure and policy that encourage the growth of India-sourced global retail e-commerce.
With the right infrastructure, we can create opportunities for a wide variety of small and medium-sized businesses (SMBs) who may have an international market but may not have the scale or know-how to reach that market through non electronic means. Also, the opportunity is especially promising in certain sectors like household items, furniture and handicrafts.
However, there are multiple barriers to Indian SMBs. Often while establishing an e-commerce operation, we think that simply having an internet connection is the primary barrier or enabler. Rather, what is frequently missing often is the expertise and education that can enable someone who is used to selling locally or selling from a physical store to go global through a platform, set up a digital storefront, manage customer service for global clients, handle shipping and returns, build and manage the online reputation, and so on.
We need gateways that catalyze this transition for Indian SMBs, helping them set up shop online and get educated in a focused way about running online retail. These gateways could be set up by local government agencies, non-profits, trusted community groups, or perhaps a combination.
Another hurdle which is a harder one to clear is that even in this era of global commerce, consumers often have a preference for buying from vendors who are geographically not too far away. This preference for local has many reasons. International customers don’t know how much truth is there in advertising when it comes to purchasing products from a seller in another country. The lack of shared legal infrastructure is another reason – with cross-border e-commerce, the sellers are operating according to the laws of one country, while the buyers according to the laws of another. There are some rules of the game and shared standards that the WTO can help define, both from the point of view of business standards and also for things like handling cross-border payments, and others can be shaped by retail platforms, but gaps will remain.
IBT: How does the cross border e-commerce trade work in terms of payment options, return and shipping policy, etc.?
Prof. Arun Sundararajan: In case of India, there is a light at the end of the tunnel. India has come a long way as it already has an advanced digital payment infrastructure that has grown rapidly on the foundations laid by Aadhaar. But the real challenges for cross-border retail come from the challenges in the physical movement of goods rather than the digital payment and settlement. So, the shipping and returns will sort if continue to be a much bigger barrier.
Successful returns are shaped by at least two sets of player — the retailer themselves and what their policy is and the digital retail platform if one is involved. If there is a platform facilitating this kind of cross-border retail, then really the economic institution, or the entity of last resort ends up being the platform because if the customer wants to return something directly to the retailer, they’ll go to the platform. While certain retailers have made returns a lot smoother in certain countries, it still is a significant barrier to e-commerce in general.
IBT: What are the key commodities that are traded across borders on e-commerce platforms and what are the markets that they cater to? How has COVID-19 impacted India’s cross border e-commerce trade?
Prof. Arun Sundararajan: One of the visible impacts of COVID-19 has been to keep people away from physical stores. For example, if you take the apparel and accessories category, in the USA alone, if you look at the mix of e-commerce versus traditional retail last year about one-third of sales went to e-commerce and about two-thirds to traditional channels. But this year, I project that more than half of US apparel and accessories retail will be through e-commerce channels. There’s been a massive jump because not only are people less willing to go to stores, but people are now reticent about coming in contact with items that other people have come in contact with as part of the buying process.
As e-commerce evolved, the buying segment outside of the US and Western Europe had been skewed sort of towards the high end of the market. But now with the expansion of the market, there is a much greater fraction of bargain hunting consumers who are dipping their toes into the e-commerce market and this category. This creates significant opportunity for cross-border trade because there may be consumers who are willing to accept the risk of slower shipping or less reliable returns in exchange for much more favorable pricing provided by a global seller. So I think this is certainly one category in which there is lot of opportunity.
Another promising category for cross-border growth in India is in more simple electronics, non-brand name accessories. Of course, there’s always been opportunities for flat screen television or mobile phones and so on, but India, like the rest of the world, imports its high-end electronics from China or South Korea, so the potential is really in areas where the price point is low and brand is less important.
In the furniture and household furnishing category, there is tremendous growth potential because the physical world retail setup has really been disrupted by COVID-19 in many high spending markets like the US and Western Europe. And given that a significant fraction of these items are manufactured in one country and then shipped to another country anyway, that’s an opportunity that India might capitalize on, becoming a dominant force.
At the same time, the pandemic has highlighted the fragility of global supply chains that favor efficiency and cost reduction over resilience. If some link in the supply chain gets disrupted, then the spillover effects are quite dramatic. And so I’ve seen a tendency for larger and midsized companies that relied on a global supply chain to start to look for local alternatives. And so in many ways this points to what I think will happen over the next two three years is that business to business commerce is going to shift away from global and become more local, while consumer e-commerce might go the other way.
IBT: How can Indian investors be attracted to invest in India’s e-commerce sector?
Prof. Arun Sundararajan: The talent pool in India is as good as or better than the talent pool anywhere else in the world. So the constraints are not from human ingenuity, but there are other barriers. One is that there are lots of investors at the very early stage and there are lots of investors at the much later stage but Indian start-ups often struggle to raise money in that middle stage of their evolution Another big barrier is that compared to other hi-tech leaders like the US, China or Israel, the domestic exit options for Indian companies seem to be more limited. Financial sector reform can really play a role in paving the way.
IBT: How can the contribution of e-tail to India’s GDP be enhanced in the next 5 years? What can the government facilitate the same?
Prof. Arun Sundararajan: I think there’s the infrastructure – the gateways that I talked about earlier. The one word answer to this question is infrastructure because e-commerce involves delivery. But not necessarily digital infrastructure but physical world and intellectual infrastructure. This is a critical barrier to Indian e-commerce. We have to realize that e-commerce is not just about a few big platforms or a few big players. 60% of Amazon’s sales and a majority of Alibaba’s sales come from a distributed crowd of sellers, not the platform itself.
IBT: Do you think that things like customs rules in some countries might also be a barrier?
Prof. Arun Sundararajan: Certainly. But compared to 20 or 30 years ago, cross-border customs or taxation is much less of a barrier than it used to be. A bigger barrier than taxation to an Indian exporter, e-commerce or otherwise, may be perceptions of quality and reliability. The government trade organizations have to dispel any myths that might exist about the quality or safety of Indian goods. But there’s also the question of reality – the reality of food safety standards, quality control and what regulatory infrastructure exists there. We must simultaneously guarantee the quality of products and the quality of regulation and standards. This can be done partly by the government, but it can also be done by the trade bodies. Some of the most successful regulation historically, from the medieval guilds to the modern-day trade associations, has been self-regulation.
IBT: Does signing FTAs also help in enhancing cross-border e-commerce sales?
Prof. Arun Sundararajan: Well, it’s a double edged sword. It will certainly help in boosting exports but it might also dramatically increase imports. And so it’s something that has to be approached carefully. Perhaps we must focus on particular sectors where the export potential is the greatest for India, looking to improve trade flows in strategically chosen and highly targeted sectors through free trade agreements and focus also on signing these agreements with trading partners that are attractive export destinations.
IBT: Why is China the world leader in cross border e-commerce trade? What inspiration can India draw from it in order to be among the top 5 countries in the world in terms of cross-border e-commerce trade?
Prof. Arun Sundararajan: There are a couple of factors why China is the leader. One is their deep investment from the 1980s and 1990s in the manufacturing sector during the time the county enjoyed its demographic dividend of a young population and workforce. As the country that manufacturers a significant fraction of what people consume around the world, they have the supply and that naturally makes them a candidate to lead cross-border consumer retail. But a second enabling factor in China is that e-commerce grew very rapidly. As a fraction of total commerce, e-commerce is much higher in China than in most other countries, like the US, Western European countries or Japan. And this happened because of the confluence of a few forces. First, the rapid growth of the middle class happened at the time that e-commerce was available and so the consumer society grew in the digital era and people naturally became e-commerce buyers.
Next, digital payments came of age in China well integrated with e-commerce, WeChatPay and AliPay meld with online commerce more seamlessly than credit cards. Third, China created tremendous government-led innovation incentives. There was a huge amount of financing for companies to start manufacturing and e-commerce. Fourth, China’s e-commerce model has always been the platform model, which favors having millions of traditional sellers become part of the e-commerce solution.
I doubt whether India can become the number one in terms of cross-border e-tail, but it can certainly be in the top five. The foundations have to be laid over the next ten years. We have the demographic dividend today. The time to invest aggressively in growth is now.
Arun Sundararajan is the Harold Price Professor of Entrepreneurship and Professor of Technology, Operations and Statistics at New York University’s (NYU) Stern School of Business, and an affiliated faculty member at many of NYU’s interdisciplinary research centers, including the Center for Data Science. His best-selling and award-winning book, “The Sharing Economy,” was published by the MIT Press in 2016, and has been translated into Mandarin Chinese, Japanese, Korean, Portuguese and Vietnamese.
Professor Sundararajan’s research studies how digital technologies transform business, government and civil society. His current focus is on the future of capitalism, artificial intelligence and platform-enabled change, antitrust policy in tech and the digital future of work. He has published over 50 scientific papers in peer-reviewed academic journals and conferences, and over 40 op-eds in outlets that include The New York Times, The Financial Times, The Guardian, Wired, Le Monde, Bloomberg View, Fortune, Entrepreneur, The Economic Times, Harvard Business Review and Quartz.
His scholarship has been recognized by seven Best Paper awards, two Google Faculty awards, an Axiom Best Business Books Award, and a Thinkers50 Radar Thinker Award. He has given hundreds of keynote, plenary and invited talks at industry, government and academic forums internationally. Watch his 2016 Davos panel. He has provided expert input about the digital economy as testimony to the United States Congress, the European Parliament, the United Nations, federal government agencies that include the Presidential Council of Advisors on Science and Technology, the Federal Trade Commission, the National Economic Council, the Federal Reserve Banks of New York, San Francisco and Atlanta, the US Department of Labor and the White House, and numerous state and city legislative bodies. He is a widely sought-after commentator by top med ia platforms. Keep up with his latest views and opinions.
Arun has been a member of the World Economic Forum’s Global Future Councils on Technology, Values and Policy and the New Economic Agenda. He is an advisor to numerous organizations that include the National Academy of Science, the Carnegie Council, the City of New York, the City of Seoul, Walmart Corporation, Rally Rd., the Female Founders Fund, the Internet Society of China, OuiShare, Samasource, the National League of Cities, and the Royal Society for the Arts. He works with tech companies on issues of strategy, litigation and regulation, and with non-tech companies trying to understand how to forecast and address changes induced by digital technologies. He teaches in executive education programs in the U.S., Europe and Asia about artificial intelligence, platform strategy, the future of work and network science. He teaches full-time MBA students about hi-tech entrepreneurship, undergraduates about networks, crowds and markets, and doctoral students about digital economics. He is an occasional angel investor.