“India is well poised to lead the curve on shared economy!”
Prof. D. Tripati Rao of IIM Lucknow discusses how businesses will have to reorient themselves from merely selling products to rendering services at a time when shared economy is flourishing. He also opines that in the times of economic distress, users who find it expensive to own products and services, would like to share the services. Moreover, the emergence of sharing economy is concomitant to the changing socio-economic milieu ushered through millennials’ growing disdain against the notion of an “exclusivist” society.
TPCI: What according to you are the factors for the rise of sharing economy models (e.g. Uber & Airbnb)’s in India? What are the major benefits of the sharing economy?
Prof. D. Tripati Rao (DTR): I think that there is a metamorphic transformation in the way in which the economy & businesses are running today. Shared economy, of late, is gaining ground. It is an eco-system that relies on the shared use of physical & human resources. Also referred to as peer-to-peer economy, access-based consumption, co-creation, it is basically a participative economy having an in-built advantage bringing together a large number of economic agents to share the same product/service on a specific platform operated by a single business entity. It is catalysed by technology and prioritises accessibility over ownership.
First, let me touch upon the drivers of sharing economy. There are 7 socio-economic behavioural factors, in my opinion, which are driving this model:
(1) Increasing economic and social mobility of “on-the-go” millennials interested in frequent travel and tourism and no qualms in relocating themselves in search of a better professional growth. They do not want to burden themselves with hard-to-liquidate immovable assets. This urge for mobility and to have a hassle-free life is defining the changing household consumption pattern; to which essentially the businesses – service providers, are adapting to!
(2) I guess we can also observe a short of transcendence of social status too! The growing trend of minimalism of Gen Z contradicts the personal lives of early Gen X (Baby Boomers) and Gen Y for whom social status mattered and measured by “ownership” of things like number of cars, amount of jewellery possessed, palatial residence, etc. The emergence of sharing economy is actually a concomitant result of this changing social milieu – against the notion of an “exclusivist” society.
(3) This generation is more aware about the negative effects of mindless industrial growth. Therefore, while the search for alternatives for efficient resource utilisation and sustainable growth are on their way., globally investors’ “activism” has emerged and they are also becoming more and more socially responsible, and therefore, actively funding technological advances that promote sustainable development, conserve natural resources and maximise social welfare.
(4) As corollary, technological progress is the main driver of this progress insofar as building social trust and enabling scaling up transaction volume of what was already used to be done on a small scale among family and friends. The advancement of internet, mobile technology and broadband that led to “glocalization” can be attributed to this resurgence of the sharing economy.
(5) The presence of “social media” is a catalyst to the rise of sharing economy. It has become a fertile ground for learning to trust while dealing with “strangers”. So, we are in the process of developing the skills to acknowledge “others” through digital-interface and in turn sharing economy.
(6) The growing incidence of “users-prescription” is also instrumental to its success. The earlier business models built on “learning by doing” or, the engineering curve borne out of the experience of Japanese assembly-line production, i.e., being efficient is in doing the same task repeatedly over time. But now businesses as well as consumers can learn through peer-to-peer prescriptions. This is an essential part of the shared economy platform as it cuts time and hence the diffusion is quick.
(7) Lastly, due to changing consumer behaviour, i.e., both in terms of preference of access over ownership and choice for a variety, business operations in many a sector are moving towards shared economy. In doing so, the service provides are able to substantially reduce investment in fixed assets (costs). And focus on managing operational expenses so that they can function efficiently with a minimum budget and maximise their profits. If you see, higher the fixed cost, higher is the degree of operating leverage, and hence it necessitates for large companies’ realisation of higher sales volume to break-even. The direct implication is that since service providers can circumvent fixed costs, they can achieve break-even volume of business very quickly. Therefore, the shared business is not only visible in a B2C space, but also in B2B space such as, rental brands and working spaces.
Now coming to the benefits of shared economy, they are:
(i) Increasing accessibility to self-employment opportunities. Through proliferation of online jobs and ride sharing platforms, people can work from home and can use their old vehicles to earn additional income. One policy implication is that sharing economy eases the government burden to create jobs and income opportunities for the citizens.
(ii) As I already remarked, a socially embedded trust is building up! Since service platforms have a built-in system of rating and reviews, they help both ends – the providers as well as consumers to be honest. Increased trust ultimately leads to increased economic activity by efficient use of resources and reduction of wastages and idle resources. Service providers are being able to offer services at a cheaper cost.
(iii) Individuals can pocket higher savings while maintaining same lifestyles because quality services can be rented out at economical costs. In fact, consumers can enjoy varied experiences and maintain better lifestyles, simultaneously augmenting their savings at the same level of income.
(iv) Since you don’t have to “own an experience”, it entails a lower ownership cost. Therefore, an incentive is in the offing for young risk-taking entrepreneurs to start a venture and undertake innovations at a lower investment cost.
(v) While MSMEs and start-ups rely quite heavily on banks, most of the banks shy away from lending to them due to “perceived” underlying risk. With the emergence of sharing economy, easier and newer sources of financing like crowd funding are gaining traction. The economic and business landscape is connecting savers and investors ever more.
TPCI: What are the consumer trends that you see vis-a-vis shared economy services. What interesting business models do you see emerging in the coming years?
DTR: Let me first elaborate what we understand a business model is – a tool by which businesses generate & sustain revenue and profit in due course. So, it encompasses the process of service provision, strategic decision making and value creation for the client. However, traditional business models such as, direct sales, brick and mortar stores and franchising are very linear in the sense that we see them either as a manufacturer or distributor or owner.
However, the new business models that are emerging now are not necessarily one-to-one nor they have to fit into this linearity of just one job or one function; as they could be a hybrid of 2/3 functions/model addressing all the three dimension of value creation/delivery/traction. Similarly, access-based business model, customers are reoriented towards a new way of thinking – value gain is through access to the product than ownership. Therefore, I foresee that businesses have to reorient themselves from selling products to rendering services. Another popular model is the marketplace model wherein platforms like Airbnb facilitate access to services. Rather than substituting, they complement the existing hotels and broaden the choices available to the consumers by overcoming information asymmetry between service providers and service seekers.
On-demand service model is another unconventional business model, which bridges the gap between buyers and suppliers of specialised services. Channel businesses of the type of Ola and Uber are the basic fund providers. They ensure efficient service in terms of cost and overcome information asymmetry through a rating system.
Traditional businesses should appreciate these emerging unconventional business models. They should adapt themselves to the changing business landscape by continuous learning, greater adaptability & flexibility, digitalization, understanding and providing better consumer experience and continued innovation. By adopting these strategies, fixed costs can be reduced to a minimum.
TPCI: Will India’s economic slowdown act as a detriment to the popularity of sharing economy in the future? Are there any other challenges that these models could face?
DTR: On the contrary, in the times of economic distress, users who find it expensive to own products and services, would like to share the services. Therefore, this makes for a compelling proposition that sharing economy is recession-proof. In fact, during economic slowdown, which increases income uncertainty with potential job losses and unemployment, users would rather prefer these kinds of services without ownership.
Even small firms that are not ready to invest too capital are increasingly getting into sharing through B2B arrangements. Some of recent developments in Indian business clearly points this out. A recent E&Y survey projects that the sharing economy in India is going to become nearly US$ 20 billion in the next 5 years. Similarly, Stage 3, a fashion franchise funded by Bloom Venture, claims to have seen a six-fold increase in userbase between Oct’18 to Aug’19. Florenco, the furniture renting company, has seen its revenue rising and expects its net subscription to touch US$ 300 million by 2023.
TPCI: Can India lead the evolution curve in this arena, given its history of frugal innovation? How can this be facilitated?
DTR: I think India is rightly poised due to her natural richness and ideal socio-economic landscape. Properly guided, India can harness demography and growing market with sizeable middle class. Moreover, India is second largest in smartphone numbers in the world and the number of internet users are expected to double by 2021. The BCG survey shows that 83% of those surveyed population want to be able to rent products through access and sharing platforms. Further, India’s rank in the ‘ease of doing business’ surveys has leapfrogged from 130th to 63rd in 2019.
Therefore, given the demography, sharing economy can accommodate large number of businesses yet can remain attractive. In fact, unlike the usual perception, it is just not a space for small and new start-ups, there are handful Indian large firms which are already entered in this business doing well. Mahindra and Mahindra created Trringo to let farmers rent out their agricultural equipment. The same is case with taxi ride and hospitality business.
Of course, there are some challenges which need to be addressed if India wants to leapfrog into sharing economy:
(1) Addressing the contentious incidences of labour disputes would be the first big challenge. In contract sharing models, there is no statutory guarantee of employment, healthcare or other benefits. This is why what we are seeing is the resurgence of unorganised sector. For instance, Ola & Über drivers so often go resent. Moreover, the service provider provides services to multiple competitors simultaneously.
(2) All said and done there is an impending challenge of building socially embedded trust. While sharing is deeply embedded into the Indian culture, but individuals are still wary about sharing with strangers. For instance, Olx took a long time to tap the market. Therefore, behavioural changes are a long-haul exercise!
(3) The third challenge is that the gig economy is still at a nascent stage. MNCs adopt different HR yardsticks when comes host countries compared to their home countries. They hire freelancers and contractual employees in their home country, but not here.
(4) Notwithstanding the impressive growth of mobile phones, the penetration and usage of it is still far off the mark.
(5) Lastly, against metamorphosed economic and social landscape of India, political will and acceptance to change can only create a regulatory architecture congenial to all-encompassing and vibrant ecosystem.
TPCI: What suggestions do you have for the Indian government to make sure that businesses run smoothly?
DTR: Whether the behavioural changes of millennials or an aggressive environmentally friendly policy shifts are the reasons for the dramatic slowdown of Indian automobile industry, but the issue throws open to regulatory uncertainty and binds the government to create a suitable regulatory framework.
In the short-term, for example, Airbnb faced tough laws that prohibited short-term rentals and usually allowed only long-term lets. Stricter regulations seemed to favouring large owners of capital who can build and/or operate multi-storey five-star properties. Therefore, there are shreds of political discontent for not coming to terms with the changing business landscape.
In the medium-term, traditional players in India, facing unexpected competition from access and sharing economy businesses, will continue to push for strict regulations on aggregators and service providers. You can see that the local taxi walas and hotel associations are very vocal in their opposition to Uber, Ola and Airbnb, respectively.
In the long-term, companies like Uber, Ola and Airbnb need regulatory certainty to grow revenues (driver service fees for Uber and Ola, guest and host service fees for Airbnb). Uber and Ola want to be the taxi ‘aggregator’ only and claim not be responsible for the services of the independent contractor drivers. Similarly, Section 79 of the Information Technology Act 2,000 provides a limited safe harbour for content publishing intermediaries.
Therefore, as an overall assessment, while India should design and formulate regulatory architecture by recognising the market power and sophistication of technology platforms but at the same time hold liable for certain kinds of content or behaviours by market participants.
Prof. D Tripati Rao is currently Professor of Economics, Business Environment Area, Indian Institute of Management Lucknow. He gratefully acknowledges the valuable inputs provided by Ms. Vanga Deeksha Reddy, MBA, IIM Lucknow and other available published source content on Sharing Economy. Usual disclaimer applies.