Indian technology firms
Looking for India’s Zuckerberg
A pioneer in outsourcing but a laggard in the internet era, can India become a
leader in mobile technology?
Mar 16th 2013 |From the print edition
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INFORMATION technology has been a mighty force for good in India. Its first tech revolution began 30
years ago, when a few engineers came up with the unlikely idea of doing back-office IT work for far-off
Western firms. Today that outsourcing industry is a capitalist marvel. It has annual sales of $100 billion,
mostly from abroad, and these export earnings have been vital in a country with a weak balance of
payments. Millions of good jobs in India have been created. Young Indians have seen that globalisation
creates winners. India’s reputation in the world has changed, too: Bangalore’s shining IT campuses have
become as famous as the Ganges and the Gandhis.
Yet India has been a comparative failure in terms of innovation over the past decade. You might have
expected India’s many advantages (the English language, abundant engineers and a thriving diaspora in
Silicon Valley) to pay off spectacularly on the internet. But only a few start-ups have made clever technical
innovations that have been sold abroad. And at home e-commerce is in its infancy, with sales only 6% of
China’s. Thanks to lousy infrastructure, useless regulation and a famously corrupt telecoms sector, the web
is available to only 10% of Indians, many of them squinting at screens in cafés.
India boasts no big internet firms to compare with Chinese giants such as Alibaba, Baidu and Tencent, nor
start-up stars like Facebook’s Mark Zuckerberg. Instead, it has seen a succession of false dawns, from its
version of the dotcom bubble in 1998-2002 to more recent hype over deal-of-the-day websites and textbased cricket updates. In 2010-11 lots of start-ups raised cash, but they have struggled since. Venture
capitalists grumble that their returns have been poor. The original emerging-market tech pioneer has fallen
behind in the internet era.
Feeling luckier
Catching up should be a priority for India—not least because its outsourcing champions are now reaching
middle age. As the wages of India’s engineers rise, its IT industry cannot rely for ever on doing
straightforward work cheaply for foreigners. The good news is that India now has a chance to lead again;
the bad news is that this opportunity relies in part on Delhi’s bureaucrats not messing it up.
Optimism springs, first, from a healthy stock of young entrepreneurs (see article). Many have gained
valuable experience working in America or for multinational firms. Many are battle-hardened through
previous ventures that flopped, from dairy farms to bowling alleys. As in California, failure is no longer
frowned upon in India. New firms such as Flipkart and Redbus are adapting Western e-commerce models
to deal with India’s rickety logistics and cash-based economy. They are transforming mundane areas such
as bus tickets, and opening up scores of smaller cities to modern retailing. Tens of millions of people are
benefiting as a result.
The second change is the mobile internet. India’s fixed-line system may be abysmal, but cheap
smartphones and fast wireless networks are rapidly spreading. India is poised to leapfrog the era of the
personal computer and go straight to the mobile-internet age. Already a quarter of internet traffic is from
phones, compared with a seventh worldwide. E-commerce sites are getting a surge in activity from phoneusers.
But this budding revolution needs clever regulation. Outsourcing boomed in part because it avoided
government: the product was exported through global networks. The mobile internet needs capital, payment
systems and wireless capacity. In all three areas the government is in the way.
The e-commerce industry appears stymied by the same restrictive rules on foreign investment that have
bedevilled bricks-and-mortar retailing. Only a fifth of Indians have credit or debit cards—and using them
online is a nightmare, again thanks to regulations (India could learn a lot from Africa’s use of mobile
money). And India needs more and better wireless networks; some big players such as Mukesh Ambani,
India’s richest man, have been tempted in, but the telecoms regime is a tangle of overcomplicated rules and
graft.
India has the talent to lead in the mobile internet, as it did in outsourcing. But so long as Indians struggle to
get a signal or to make payments, the revolution will be held back.
Indian technology
The screen revolution
Meet the next generation of Indian
technology firms—and the obstacles they
face
Mar 16th 2013 | MUMBAI |From the print edition
http://www.economist.com/news/business/21573551-meet-next-generation-indian-technology-firmsandobstacles-they-face-screen
SIGNS of middle age were obvious at a recent gathering of Nasscom, the club for India’s giant IT industry,
which now has sales of $100 billion and is dominated by outsourcing firms. The venue was a hotel in
Mumbai, a five-star fortress of foyers and finger food. The guests of honour were politicians. Grey-haired,
well-fed executives sat and talked in jargon. It was hard to spot anyone close to India’s median age of 26.
Things have come a long way since 1981 when Infosys, a bellwether Indian IT firm, was founded in a flat
by seven hungry engineers with $250.
Yet if you walk to the exit of that hotel and reject the option of an expensive limousine, or of hailing a
bashed-up street taxi, and instead press “Book now” on your phone screen, another Indian tech scene
appears. The application links a network of taxis using satellite positioning, cheap Chinese-made
smartphones, souped-up Google maps and credit cards. A 6km (4-mile) drive north in a modern car will
deliver you to a snack shop, above which is the firm that runs the system. Olacabs was set up in 2010. Its
co-founder, Bhavish Aggarwal, is a 26-year-old engineer who has worked for Microsoft in Seattle. He has
raised a slug of venture capital, some of it American, and says business is growing at 30% a month. “When
you start you are viewed as a fool,” he says. “But if you are worried about that, you’re in the wrong line of
work.” His goal is to transform transport in India’s congested cities.
India needs a million Olacabs: start-ups that use technology to overcome everyday problems. The economic
benefits would be huge. And in a country with a stuffy business culture, in which commercial and political
dynasties are all too common, a technology revolution would be a colossal breath of fresh air. It would help
unleash the energy of a generation of young people. But will it happen?
India has already had one technology revolution. In the 1980s middle-class engineers from a dirt-poor
socialist India somehow persuaded Western firms to outsource their back-office functions and bits of their
IT operations to the subcontinent. Thus began a three-decade-long boom.
The revolution fed its children well. Thanks to IT, some 3m Indians now work in well-paid formal jobs of
the kind that India needs so badly. Perhaps another 10m knock-on jobs have been created for maids, drivers
and the like. Technology services have saved India from bankruptcy—exports were 4% of GDP in 2012,
keeping the balance of payments in passable shape. As well as local champions such as Infosys, TCS and
Wipro, 750 multinational firms have outsourcing and technology hubs in India. Many perform research and
development. The cultural impact of all this has been huge. The best-selling novels of Chetan Bhagat, such
as “One night @ the call center”, record the angst and romances of India’s young workers.
Call centres are running out of steam
Yet all is not peachy. The IT-services industry is maturing. Other countries are building rival call centres.
(Americans find Filipino accents easier to understand.) The gap between Indian and Western technology
workers’ wages is shrinking, although it will probably not vanish for a decade or more. Rich countries are
putting up barriers to stop jobs moving overseas.
And another thing worries Indian geeks. Their country has so many advantages: the English language,
engineers with global experience, a conspicuously successful diaspora in Silicon Valley. Why, then, has it
failed to produce a new generation of big tech firms? In contrast to America’s constant regeneration,
India’s champions have spare tyres and grey hair.
False dawns, elusive profits
Indian IT has seen several false starts. Between 1998 and 2002 a crowd of dotcom start-ups were born.
Most died. In 2006-08 India had a mini-boom in mobile “value-added-services” such as ringtones and textbased products. That, too, fizzled out. In 2010-11 venture capitalists lavished cash on weak e-commerce
firms, inflating a bubble. About 70% of the 50-odd firms that got funding are now dead or on life support,
reckons Allegro, an investment bank in Bangalore.
The gulf between Indian hype and reality over the past decade is best shown in numbers. One veteran
venture capitalist reckons the investments made in “new-generation” (ie, excluding IT services) technology
firms are worth $5 billion-6 billion today. The largest listed firm has a market capitalisation of $700m. By
way of comparison, China’s listed internet firms have a combined value of over $100 billion and its ecommerce sales are about 18 times India’s. Other emerging economies, such as Russia, Argentina and
South Africa, have produced multi-billion-dollar internet champions. During the past decade India has
fallen behind.
Fortunately things are changing. First, the internet is becoming popular. Penetration is just 3-4% of the
population, if judged by the number of moderately fast fixed internet lines and smartphones that use 2.5G
and 3G services. About two-thirds of these connections are mobile. If you include people who access the
web through cafés, at work, on friends’ computers or through basic phones with small screens, penetration
is 10%. Most surfers are young. Many live in provincial towns that the IT revolution has hitherto bypassed.
That 10% is a big figure in absolute terms—122m people—and it will rise as smartphones get cheaper.
(The fixed-line network, largely in state hands, will probably remain hopeless.) Some applications are
already popular. Almost half of all reserved train tickets are bought online, saving hundreds of millions of
man-hours spent queuing at stations.
The second change for the better is that the start-up scene now has depth, partly as a result of all those
mini-booms and busts. The venture-capital industry, with a mix of local and American firms, is now well
developed and capable of writing big cheques. And a new generation of entrepreneurs has emerged, most
of whom combine technical skills with global experience. Of the 15 technology-firm founders interviewed
by The Economist for this article, 12 have worked in America or for multinationals in India. Unlike the
older generation, these tigers do not fear failure. Many boast of their early misadventures, much as Silicon
Valley types do.
My phone is my temple
Deep Kalra, the founder of Makemytrip, a travel site, previously worked at ABN AMRO, a Dutch bank,
and General Electric. He also spent time setting up bowling alleys in India, without much success, and
managed to survive the dotcom bust in 2002. Prashant Tandon of Healthkart, an online health store, studied
at Stanford University and worked in San Francisco for McKinsey, a consultancy, before returning home.
He and his partner’s first venture, a network linking doctors and patients, failed. Their second looks
healthier.
What kind of companies are these new entrepreneurs creating? Sandeep Singhal of Nexus, a venture-capital
firm, describes India’s new tech scene as a mixture of Israel and China. The “Israeli” bit involves selling
clever innovations to foreigners. It is still fairly small. InMobi, which sells technology and services for
advertising on the mobile internet, is unusual in that it broke into other emerging markets, such as
Indonesia and South Africa, before cracking America. “A lot of firms struggle to innovate because the
[Indian] market is too small,” says its founder, Naveen Tewari. They need to look farther afield, adds Mr
Tewari, a Harvard and McKinsey alumnus who has become something of a hero for budding entrepreneurs.
Only a brave few follow this advice. Cloudbyte, for example, makes storage software for use in data
centres. It has just moved one of its co-founders to America. “The market is largely in the US. We want to
be a global company with our engineering talent in India,” says the co-founder still in India, Srivibhavan
Balaram. Another firm, Magzter, puts magazine content onto phones. It began with Indian magazines read
by the diaspora but now has hundreds of non-Indian titles on board and customers everywhere. Its app has
been downloaded 6m times. Its co-founder, Girish Ramdas, holds the under-21 Indian record for 0.22 rifle
shooting. He previously ran a poultry farm, then a website about his home city of Chennai, then a film
magazine. He spends a lot of time abroad signing up more publishers.
The “Chinese” part of the industry is much bigger. The label refers to local firms that sell to locals, as
China’s internet giants do. Such firms account for about three-quarters of activity by next-generation Indian
tech firms (see table). Some sniff that Indian e-commerce firms are mere copies of Western ones, or that
they largely serve the rich. Such gripes miss the mark. The real achievement of India’s digital merchants
has been to create reliable supply chains and systems in a country where few things work smoothly.
Flipkart, a leading firm, built its own warehouses and delivery teams. It accepts cash on delivery from
customers reluctant to use credit cards. To stock 80% of the books printed in India, it needs to deal with no
fewer than 1,000 suppliers, says its co-founder, Sachin Bansal. Even “marketplace” sites, which avoid
holding inventory, must work hard to make sure suppliers and couriers do what they promise.
Nor is it true that e-commerce sites cater only to an elite. Kunal Bahl of Snapdeal, an online marketplace,
says it gets 60% of its orders from outside the big cities, from people who may have little experience of
formal bricks-and-mortar shops (as opposed to informal wood-and-corrugated-iron ones). Bangalore-based
Redbus has begun to transform long-distance bus travel by bringing a fragmented market of over 1,000
private coach firms online and centralising ticket sales onto its system. Its 32-year-old boss, Phanindra
Sama, the son of a farmer, recalls the early days traipsing round bus depots trying to persuade grizzled
operators to sign up. “It was painful,” he says. The site spread by word of mouth among young office
workers.
These firms are exciting but still small. All e-commerce sites in India between them had sales of $10 billion
in 2012, about four-fifths from travel products such as plane tickets, according to McKinsey. It forecasts
that sales will approach $100 billion in the next five years, roughly the same size as the conventional Indian
IT industry is today. Most of that growth is expected to come from a surge in the number of people
accessing the web on their phones. In this scenario India will bypass the PC era and leapfrog straight to the
mobile internet.
It is at this point that veterans of the telecoms industry chortle. India’s 700m mobile subscribers are stingy.
Only 5% pay for mobile broadband and only a fifth of those engage in e-commerce, says one network boss.
Handsets using Google’s Android operating system are available at $100 or less, but their quality is poor.
About a fifth of smartphone buyers use them only for voice calls and as a fashion accessory.
Thrifty customers make profits elusive. Sundar Lakshmanan, an engineer in Bangalore, designed “Suruk”,
a mobile app that checks if your rickshaw driver is ripping you off. It became a media sensation, but he
made no money from it. Mr Lakshmanan has now moved away from mobile to set up a travel site called
Tripthirsty.
Yet the mobile internet is spreading. About a quarter of internet traffic in India is now from mobile phones,
reckons Rajan Anandan, the head of Google in India. The global figure is 14%, according to StatCounter.
E-commerce sites are seeing a shift towards mobile. Flipkart says phones account for 6-7% of sales, most
of it from new users. This should reach 20-25% in a year. Hrush Bhatt of Cleartrip, a travel site, reckons
8% of his sales are now from mobile and this will reach 25-30% in a year. “People underestimate how
quickly India will adopt the mobile internet,” he says.
Existing e-commerce firms have a head start, but no one knows who will win in the long run. The mobilenetwork operators, such as Bharti Airtel and Vodafone, will probably be “dumb pipes” without a big role in
content, as they are elsewhere. The most downloaded mobile apps by Indians are foreign, such as
WhatsApp, a messaging service, and Facebook.
Yet in time more India-specific apps may emerge. Some 300km south of Goa on India’s balmy west coast
is the town of Udupi, where Rohith Bhat runs Robosoft Technologies. It is a big developer of mobile apps
globally (mainly for the iPhone) and builds sites for third parties as well. Thus far only a small part of Mr
Bhat’s business is in India, but he expects that to change. “In 2013 you’ll see some success stories. By 2014
it will be huge.”
The hope is that as mobile e-commerce booms, it will boost software and hardware start-ups. Vani Kola, a
venture capitalist, says that “India will never build the next Oracle. We don’t have pure science
innovation—we’re not winning Nobel prizes. But India will develop technologies that could take off
around the world, from cheap internet-access systems to payments processes.” If that happens, the boom
would change India and create a new generation of exporters.
To lead a mobile-internet revolution, India’s entrepreneurs must overcome three problems. The first is
payments systems. Only about a fifth of Indians have debit or credit cards and those who do are scared of
using them online. When they try the process is clunky—a quarter of attempts to pay on the Indian
Railways site, probably India’s most frequently used, fail. The good news is that regulators are easing the
rules for small transactions. Anish Williams quit HSBC to co-found Transerv, a firm that has just launched
a pre-paid mobile wallet that can be bought from street vendors and downloaded onto phones. It
piggybacks on the credit-card payments system and should make buying online easier. Firms like this could
make a big difference.
The second bottleneck is capital. India’s e-commerce industry will need billions of dollars to grow. But
local venture-capital firms struggle to write cheques of over $100m. Some fear that foreign investment in ecommerce may fall under the same rules as apply to bricks-and-mortar retailers such as Walmart. These let
individual states ban activity.
The third impediment is India’s telecoms sector. Once celebrated, it is indebted, loss-making and
fragmented. To blame are a price war, graft and licensing rules that prevent consolidation and roaming. The
industry is cutting investment in networks at exactly the wrong time. There are multiple different spectrum
and licence charges; big operators pay up to a third of their sales on such levies and on taxes. Telecoms
firms are so fed up they refuse to participate in new spectrum auctions.
One potential saviour is India’s richest man, Mukesh Ambani, who owns a licence for 4G services and
whose secretive firm, Reliance Industries, has the firepower to invest $10 billion. Rival executives think his
project is stalling—the spectrum he has is at an unattractive frequency, they think, that requires too many
base stations to work well, and will struggle to be compatible with global handset standards. Even if they
are wrong, it would be uncomfortable if India’s mobile-internet boom relied on a single politically
connected tycoon. What India really needs is a complete clean-out of its rotten telecoms bureaucracy. That
would help investment to recover.
The competence trick
Ministers now bask in its reflected glory, but India’s outsourcing revolution happened despite the
government. All the best firms needed was a little deregulation in the 1980s and 1990s. Once politicians
stopped restricting access to global bandwidth and imported computers and cut taxes, these firms were set
free. Even today they are unusually self-reliant, educating their own staff and running their own backup
power plants.
A mobile-internet boom, by contrast, will need a more competent state: one that unshackles payments
systems, regulates telecoms sensibly and does not throttle everything with red tape. India has all the other
ingredients it needs: entrepreneurs brimming with ideas and customers hungry for change. With the right
framework, they could bring about a second technology revolution that dwarfs the first.