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5 reasons India is critical for digital success

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Ravi Ramamurti

At the height of the COVID-19 lockdown, Facebook’s Mark Zuckerberg struck a deal to invest US$5.7 billion for a 9.99 per cent stake in Reliance Jio, the three-year-old telecom company owned by India’s richest man, Mukesh Ambani. It was Facebook’s biggest deal since acquiring WhatsApp in 2014. Reliance Jio was barely profitable, yet the announcement boosted Facebook’s valuation on Wall Street by eight per cent, or $40 billion. Why?

Because India is a strategic market for digital firms. Facebook is already the most popular social network in the country; WhatsApp has five times as many users in India as in the U.S. (390 million vs. 75 million), and the country is Instagram’s most important market outside the U.S. But Facebook wants to do even more in India. For example, with Reliance’s help, it may be able to diversify into new services, such as e-commerce or digital wallets — businesses that have eluded it elsewhere. So, Zuckerberg acted swiftly and decisively.

Other digital firms should take a lesson from Facebook’s approach. Following are five reasons why India is too big of an opportunity to let slide.

1) India is a mega-market

The first reason is obvious. Internet businesses depend on eyeballs (for ad revenues) and users (for transactions). With 1.3 billion people, India has a lot to offer on both fronts. India has 750 million Internet users — almost three times the number in the U.S. (275 million)  —and more than 500 million smartphone users. Yet about half of all Indians are still offline. Similarly, e-commerce is growing at 25 to 30 per cent each year but still accounts for less than five per cent of retail sales. The digital opportunity in India is huge — and will get a whole lot bigger, especially in a post-COVID-19 world.

2) India is open to foreign firms

Even though India is a large market with a strong ecosystem of local entrepreneurs, technical talent, and venture funding, it has welcomed foreign digital firms for many years. India’s foreign direct investment policy focused for years on traditional products and services, with relatively few restrictions on digital businesses. China is the most attractive digital market outside the U.S., and certainly among the BRIC nations, but no U.S. digital firm has gained traction there, for well-known reasons. The list of U.S. casualties in China includes Amazon, eBay, Google, YouTube, Facebook, Instagram, WhatsApp, Netflix, Twitter, Uber — and most recently, Yahoo.

Netflix has 75 million U.S. subscribers, but it is aiming for 100 million in India.

In India, most of these companies have thrived and are leaders in their segments. Google and YouTube, like Facebook, have been in India almost from their birth. Google dominates search, and the Android operating system is used by three-quarters of Indian phones. After failing in Brazil, Russia and China, Amazon entered India in 2013, with Jeff Bezos vowing to invest US$5 billion to win there; he committed another $1 billion in January 2020. Amazon’s chief rival in India is local startup Flipkart, which was gobbled up by Walmart in 2018 for $16 billion, making it Walmart’s biggest-ever acquisition. Justifying the investment, Walmart’s CEO said, “When you step back and look….at all of the countries — their size, their growth rate, their potential — there just aren’t opportunities like the one we are looking at.” Netflix has 75 million U.S. subscribers, but it is aiming for 100 million in India. Its main rival in India is another U.S. company, Hotstar, owned by Disney. And Uber claims to have more than half the Indian ridesharing market.

Russia, like China, has developed local champions in most digital businesses: Yandex rules in search, video and ridesharing; VKontakte in social networking; and Ulmart and Ozon in e-commerce. Even in Brazil, which is a smaller market than India, regional firms dominate e-commerce (Mercado Libre), digital wallets (RecargaPay) and ridesharing (99, since bought by China’s Didi). India is the only digital mega-market in which U.S. players have had free play in almost every segment.

3) India has the world's cheapest data plans

A third reason for India’s allure is not widely appreciated: It has some of the world’s cheapest data plans. In 2020, the cost per gigabyte of data was less than $0.10, which was about one fortieth of rates in the U.S., and much lower than most other emerging economies. Cheap data is the oxygen that fuels demand for digital services, and as a result, Indians have become data gluttons. In 2019, they downloaded more apps than users in any other country. Their per-capita data consumption is comparable to that of Americans, who are 20 times richer.

Even if prices drift upward in the future, as they have begun to do in 2021, they are likely to be quite cheap by international standards. High per-capita consumption multiplied by a large population means India is a great market for testing new products and practicing accelerated innovation.

4) India is a laboratory for reverse innovation

The fourth reason to embrace India is that it’s a wonderful laboratory for reverse innovation. India is full of constraints, and constraints breed innovations that can be leveraged there and globally. For instance, many Indians access the Internet using inexpensive feature phones and smartphones, and connect through undependable 2G or 3G networks. This has led Uber, YouTube, Spotify, LinkedIn, Tinder and others to produce Lite apps that don’t hog a phone’s memory or the network’s bandwidth. “We are adapting technology for India and not expecting Indians to adapt to our technology,” says a senior Google executive. While many Indians speak English, most don’t, so Facebook and WhatsApp are available in many of the country’s 22 official languages. The Indian system of street addresses is inaccurate and confusing, Flipkart’s CEO Kalyan Krishnamurthy told me, so it has manually geotagged the locations of its customers. Indians use many more two-wheelers than cars, so in India Google Maps also provides directions for two-wheelers. And so on. The point is that many innovations developed for India can be leveraged in other emerging markets — and, sometimes, even in developed-country markets.

Being in India also allows you to leverage the country’s technical talent. Many digital firms have large R&D teams in India working on both global and local projects. Stronger legal protections for intellectual property than in China has made India a more attractive location for R&D activities.

5) A chance to match China's scale

The fifth reason to be in India is also easy to overlook. China is the only country, besides the U.S., that is home to digital behemoths. Chinese firms like Alibaba or TikTok have made inroads into the U.S., but the U.S./China tech war has dimmed their long-term prospects there. With China closed to U.S. digital giants and the U.S. closed (or closing) to Chinese digital giants, India is a prize that firms in both countries covet.

As things stand, American firms have a distinct edge in India. Chinese digital champions were late movers in India, because they spent several years building dominant positions in China. Their India investments began only around 2015. Since then, a few have made bold moves; for example, Alibaba group’s investment of $680 million in India’s digital payments firm, Paytm, or TikTok’s acquisition of over 120 million users in a matter of months. But most Chinese investors took a low-profile approach, such as owning minority stakes in existing Indian companies or start-ups. Chinese cellphones accounted for two-thirds of all mobile phones sold in India and encouraged the downloading of Chinese apps, which by 2019 accounted for half of all apps used by Indians. But according to a report by Gateway House, Chinese investment in Indian tech companies by 2019 was only about $6.2 billion, a fraction of the investment by U.S. digital giants in India.

Moreover, Chinese prospects in India were dealt a death blow in June 2020, when the Indian government abruptly banned 59 Chinese apps temporarily — including TikTok and WeChat — on national security grounds, as relations between the two countries chilled. In September 2020, the government banned another 118 Chinese apps, including games popular with millions of users. These developments have given U.S. digital firms a golden opportunity to use India to match or exceed the global scale of their Chinese rivals, who operate in a home market with three times as many smartphones as the U.S.

Time may be running out for Western digital giants to get their act together in India, which has started to rethink its digital policies. The government is realizing belatedly that data is a precious resource, and is tightening rules about data storage and privacy. It has realized that digital businesses have national security implications.

There is also some angst that a country with India’s market size and talent has not produced any digital giants of its own, as it did in the IT and software industries. Walmart may have paid a fortune for Flipkart, but that deal valued Flipkart at less than five per cent of Alibaba’s valuation at the time. Going forward, local companies like Reliance Jio may get preferential treatment, if the Indian government decides to nurture its own national champions. Maybe that’s why Facebook was in a hurry to conclude its deal with Reliance Jio.

The lesson in all this for Western digital firms? Like Facebook, they must figure out how to leverage India in their global strategy and move quickly — or risk missing out on a highly strategic market.

This article first appeared in the Winter 2022 issue of Rotman Management magazine. Published in January, May and September, each issue features thought-provoking insights and problem-solving tools from leading global researchers and management practitioners. Subscribe Today.

Ravi Ramamurti is university distinguished professor of international business and strategy, and director of the Center for Emerging Markets at Northeastern University in Boston.