The future that VCs wanted is here

The Nutgraf is a 10-min newsletter

sent at 10 AM IST every Saturday. It
connects the dots and synthesizes
one big event in business, technology
and finance that happened over the
week in India. In a way you’ll never
forget.

This is a paid newsletter that’s

available exclusively to The Ken’s
premium subscribers.
Just 10 mins long Synthesis not analysis
Sometimes memes

13 JAN, 2024

One of my subscribers sent me the latest notification from Blusmart, the electric
vehicle (EV) ride-sharing company in India.

Raising prices isn’t the only thing that Blusmart did. It also launched a new
loyalty program to lock-in users who rely on the service regularly.
Simultaneously, it also degraded the older version of the loyalty program and
introduced a brand-new one called Blu Elite to nudge users to pay more.
Naturally, many customers are unhappy with this move, with some likening it to
a form of “surge pricing”—something that Blusmart had promised earlier that it
wouldn’t do.

I want to say I told you so.

Most consumer products follow a similar life cycle. First, there’s the market
creation and capture phase—this is when someone comes up with something
that solves a problem in a way that sounds too good to be true, which drives a
 change in behaviour and leads to adoption. Second, there’s the consolidation
phase, when these products and services scale up by maintaining the same
proposition, until they hit a limit. And finally, once this barrier arrives, these
products start segmenting the market to extract revenue and margins, and to
actively push away “worse” consumers behind, which leads to a broad loss of
quality.

I believe that 2024 is the year when almost every product and service we’ve
gotten used to for years will decisively move into the final phase. We’re going
to witness a broader trend of degradation and deterioration, and most
consumers will be forced to accept this new reality and be dragged into a new
era kicking and screaming.
2024 predictions, The Nutgraf

Oh, also this.

Some others combined loyalty subscriptions with premium tiers and expanded
their programs. There are a ton of examples of this expansion. I’ve already
written about how and why Netflix laddered down in India. Swiggy had a
membership program since 2021, but they got really aggressive with
distribution through credit cards this year. And then just a couple of months
ago, Swiggy decided to expand it downwards by launching another tier at a
lower price point. Flipkart also expanded their loyalty plan, but in a different
direction—they went upwards.

There are going to be a ton of multi-tiered loyalty programs and subscriptions

marketed to you in 2024. All intended to get you to keep what you want by
paying a little extra for it.
 2024 predictions, The Nutgraf

Even after I’d made those predictions, I received questions from subscribers who
were confused about the timing of it. Why are these companies in such a rush to
create new methods to monetise their customer base all of a sudden? Why now?

Well, the answer is that we are finally in the future that VCs told us was coming.

Back in the late 2000s, when venture capital began funding Indian startups, the
mandate was clear—growth at all costs. Even if those costs meant losing money.
And startups dutifully followed suit with deep discounts and spent a lot of money
aggressively to acquire customers. Today, this business model is something that
most of us have accepted as a fait accompli. However, back then, for a lot of “old-
school” people, this model seemed completely unhinged. “But how do you build
a sustainable business with this?”, was a common response whenever I’d meet
people. Most people simply couldn’t reconcile the idea of losing money to
acquire customers. And it wasn’t just a couple of startups. Everyone seemed to
be doing the same thing. The more sceptical ones were convinced that this whole
thing was a gigantic scam and would eventually implode spectacularly.

If you spoke to the VCs and startups, they’d tell you that winning the market was
a bigger priority than actually building a sustainable business. “Once we win the
market, then we’ll raise prices and make profits”. Others characterised it as a
battle of attrition, and urged their companies to become the ‘last man standing’.

Well, we are certainly there right now. After fighting off a long line of
competitors, like the end of a WWE Royal Rumble, nearly every category is down
to a couple of players. The Indian consumer market is already looking
oligopolistic. Ride-sharing is controlled by Uber and Ola. Food delivery, there’s
Swiggy and Zomato. E-commerce is all about Flipkart and Amazon. Even UPI,
which was created using open protocols that anyone could build upon, is a
market of Google Pay, Phonepe, and Paytm*. Even younger categories like quick
commerce are dominated by Instamart and Blinkit. Licious and Fresh to Home.
Makemytrip, Cleartrip, and Easemytrip. Insider and Bookmyshow. Jiocinema,
Amazon Prime, and Netflix. The list goes on and on. Sure, there are the
occasional, spirited challengers like Blusmart, Meesho, and Zepto—and I wish
them strength and luck. But for the most part, it’s clear who the incumbents
are… and nobody expects them to go anywhere anytime soon.

This isn’t unusual in itself. We expected this to happen.

But what we certainly didn’t expect was how quickly we’d get here. Back then,
when dozens of startups were all competing in a single category, a future where
all these startups would eventually consolidate to a couple of players appeared to
be distant. Newer, nimbler challengers kept popping up all the time to challenge
the ones that had barely started to dominate categories. It’s like if someone told
you today that eventually, there would be one or two AI companies in India. It
feels like a long, long way away, if it ever happens.

“Winning” the Indian market isn’t something that usually happens in years. It
was supposed to take decades. And yet, it feels like we are already here.

And it feels sooner than we anticipated.

We can speculate about why we got here this early. I’ve already written multiple
times about how the ZIRP (zero interest rate phenomenon) era exposed the
limits of India’s consumer market.

Specifically, we discovered:

First, the market of online purchasers is much shallower than we

expected and skews upwards towards India’s California users. Plus, on
the B2B side, nobody wants to pay for software in India. This has placed a
massive speedbreaker in the path of growth, forcing companies to extract more
from fewer consumers instead of going wider and deeper.

Second, we discovered that distribution does strange things in India.

We learnt that cross-selling doesn’t work too well. We also learnt that it requires
a scalpel and not a hammer. For a long time, distribution is what kept Netflix
from expanding in India. But unfettered distribution is also what doomed
Disney+Hotstar, because it practically made it into cable television. Eventually,
Netflix India figured out that a much better way to crack distribution is to win
the top of the market and then cautiously ladder down and wade in slowly,
instead of cannonballing into the water.

Finally, we learnt that there are 10,000 engineers in India.

Put yourself in the shoes of the oligopolists. You’re finding it hard to expand the
market because nobody wants (or can) pay for your products. You cannot
suddenly unlock newer distribution channels, or start cross-selling other things.
Talent is scarce. And on top of all this, you lose access to what used to be a
limitless supply of money, and you now need to become “sustainable”.

What do you do?

You raise prices, of course.

Often, you don’t just do it because you have to—you do it because you can.
Pricing is essentially a function of competition. Usually, companies refrain from
raising prices because they’re afraid of being outflanked by a newer, disruptive
competitor who offers the same product for less. Companies raise prices when
they’re secure that nobody else can disrupt them. Sometimes they’re wrong—ask
all the companies who got their demat businesses destroyed by Zerodha and
Groww. But sometimes, the confidence pays off. Just ask telecom companies,
who often announce tariff hikes in lock-step one after another. That’s one benefit
of being an oligopoly.

Silicon Valley companies are doing it too, but at a much bigger scale. Netflix
continues to raise prices (and crackdown on password sharing) in the US
market. And a couple of months ago, Spotify started degrading its free product in
India to persuade users to pay up.

Spotify is restricting features for the free tier users in India in an attempt to
garner more paid users in the country. These limits, coming years after the
streaming service was launched in India in 2019, will not let users play songs
in a manual order and won’t let them rewind, scrub or repeat songs.

Since its launch, the Swedish company has offered a liberal free tier in India to
let users play songs in any order. However, it said because the market has
 matured now, it is making these moves to change the free tier. As Musically
noted, the new free tier is closer to the one Spotify offers in Brazil.

Spotify said India is one of the top five countries in terms of monthly active
users for the service. However, it doesn’t fall under top markets in terms of
subscribers to free users ratio — given the majority of users in India opt for the
ad-supported model.
Spotify puts restrictions on its free tier in India to attract more paid
users, Techcrunch

Other companies are trying to expand elsewhere instead of raising prices in

India. Take PocketFM, which expanded into the Middle-East and the US, and
already has over 70% of its revenue coming from abroad.

What happens now?

Well, for the most part, expect the worst, and you can’t even complain about it.
Of course, it’s possible that experiments like the ONDC may start to see traction,
creating stiff competition—which will push this out a bit further. It’s also
possible that all those fintech lending startups may introduce a wave of cheap
credit, driving up consumption and spending, which may delay the inevitable.
Maybe some regulations will come in that prevent pricing changes. And nobody
has any clue what AI is going to do to all of this.

But until then, be prepared to pay up.

This is the future that VCs wanted.

It’s here.
 Share this edition
Here's the link to this edition for you to share. Or you can use the easy share
buttons below

https://the-ken.com/the-nutgraf/the-future-vc-wanted-is-
here/

Take care.

Regards,
Praveen Gopal Krishnan

The future that VCs wanted is here

The Nutgraf is a 10-min newsletter

sent at 10 AM IST every Saturday. It
connects the dots and synthesizes
one big event in business, technology
and finance that happened over the
week in India. In a way you’ll never
forget.

This is a paid newsletter that’s

available exclusively to The Ken’s
premium subscribers.

Just 10 mins long Synthesis not analysis

Sometimes memes

13 JAN, 2024

One of my subscribers sent me the latest notification from Blusmart, the electric
vehicle (EV) ride-sharing company in India.

Raising prices isn’t the only thing that Blusmart did. It also launched a new
loyalty program to lock-in users who rely on the service regularly.
Simultaneously, it also degraded the older version of the loyalty program and
introduced a brand-new one called Blu Elite to nudge users to pay more.
Naturally, many customers are unhappy with this move, with some likening it to
a form of “surge pricing”—something that Blusmart had promised earlier that it
wouldn’t do.

I want to say I told you so.

Most consumer products follow a similar life cycle. First, there’s the market
creation and capture phase—this is when someone comes up with something
that solves a problem in a way that sounds too good to be true, which drives a
change in behaviour and leads to adoption. Second, there’s the consolidation
phase, when these products and services scale up by maintaining the same
proposition, until they hit a limit. And finally, once this barrier arrives, these
products start segmenting the market to extract revenue and margins, and to
actively push away “worse” consumers behind, which leads to a broad loss of
quality.

I believe that 2024 is the year when almost every product and service we’ve
gotten used to for years will decisively move into the final phase. We’re going
to witness a broader trend of degradation and deterioration, and most
consumers will be forced to accept this new reality and be dragged into a new
era kicking and screaming.
2024 predictions, The Nutgraf

Oh, also this.

 Some others combined loyalty subscriptions with premium tiers and expanded
their programs. There are a ton of examples of this expansion. I’ve already
written about how and why Netflix laddered down in India. Swiggy had a
membership program since 2021, but they got really aggressive with
distribution through credit cards this year. And then just a couple of months
ago, Swiggy decided to expand it downwards by launching another tier at a
lower price point. Flipkart also expanded their loyalty plan, but in a different
direction—they went upwards.

There are going to be a ton of multi-tiered loyalty programs and subscriptions

marketed to you in 2024. All intended to get you to keep what you want by
paying a little extra for it.
2024 predictions, The Nutgraf

Even after I’d made those predictions, I received questions from subscribers who
were confused about the timing of it. Why are these companies in such a rush to
create new methods to monetise their customer base all of a sudden? Why now?

Well, the answer is that we are finally in the future that VCs told us was coming.

Back in the late 2000s, when venture capital began funding Indian startups, the
mandate was clear—growth at all costs. Even if those costs meant losing money.
And startups dutifully followed suit with deep discounts and spent a lot of money
aggressively to acquire customers. Today, this business model is something that
most of us have accepted as a fait accompli. However, back then, for a lot of “old-
school” people, this model seemed completely unhinged. “But how do you build
a sustainable business with this?”, was a common response whenever I’d meet
people. Most people simply couldn’t reconcile the idea of losing money to
acquire customers. And it wasn’t just a couple of startups. Everyone seemed to
be doing the same thing. The more sceptical ones were convinced that this whole
thing was a gigantic scam and would eventually implode spectacularly.

If you spoke to the VCs and startups, they’d tell you that winning the market was
a bigger priority than actually building a sustainable business. “Once we win the
market, then we’ll raise prices and make profits”. Others characterised it as a
battle of attrition, and urged their companies to become the ‘last man standing’.

Well, we are certainly there right now. After fighting off a long line of
competitors, like the end of a WWE Royal Rumble, nearly every category is down
to a couple of players. The Indian consumer market is already looking
oligopolistic. Ride-sharing is controlled by Uber and Ola. Food delivery, there’s
Swiggy and Zomato. E-commerce is all about Flipkart and Amazon. Even UPI,
which was created using open protocols that anyone could build upon, is a
market of Google Pay, Phonepe, and Paytm*. Even younger categories like quick
commerce are dominated by Instamart and Blinkit. Licious and Fresh to Home.
Makemytrip, Cleartrip, and Easemytrip. Insider and Bookmyshow. Jiocinema,
Amazon Prime, and Netflix. The list goes on and on. Sure, there are the
occasional, spirited challengers like Blusmart, Meesho, and Zepto—and I wish
them strength and luck. But for the most part, it’s clear who the incumbents
are… and nobody expects them to go anywhere anytime soon.

This isn’t unusual in itself. We expected this to happen.

But what we certainly didn’t expect was how quickly we’d get here. Back then,
when dozens of startups were all competing in a single category, a future where
all these startups would eventually consolidate to a couple of players appeared to
be distant. Newer, nimbler challengers kept popping up all the time to challenge
the ones that had barely started to dominate categories. It’s like if someone told
you today that eventually, there would be one or two AI companies in India. It
feels like a long, long way away, if it ever happens.

“Winning” the Indian market isn’t something that usually happens in years. It
was supposed to take decades. And yet, it feels like we are already here.

And it feels sooner than we anticipated.

We can speculate about why we got here this early. I’ve already written multiple
times about how the ZIRP (zero interest rate phenomenon) era exposed the
limits of India’s consumer market.

Specifically, we discovered:
First, the market of online purchasers is much shallower than we
expected and skews upwards towards India’s California users. Plus, on
the B2B side, nobody wants to pay for software in India. This has placed a
massive speedbreaker in the path of growth, forcing companies to extract more
from fewer consumers instead of going wider and deeper.

Second, we discovered that distribution does strange things in India.

We learnt that cross-selling doesn’t work too well. We also learnt that it requires
a scalpel and not a hammer. For a long time, distribution is what kept Netflix
from expanding in India. But unfettered distribution is also what doomed
Disney+Hotstar, because it practically made it into cable television. Eventually,
Netflix India figured out that a much better way to crack distribution is to win
the top of the market and then cautiously ladder down and wade in slowly,
instead of cannonballing into the water.

Finally, we learnt that there are 10,000 engineers in India.

Put yourself in the shoes of the oligopolists. You’re finding it hard to expand the
market because nobody wants (or can) pay for your products. You cannot
suddenly unlock newer distribution channels, or start cross-selling other things.
Talent is scarce. And on top of all this, you lose access to what used to be a
limitless supply of money, and you now need to become “sustainable”.

What do you do?

You raise prices, of course.

Often, you don’t just do it because you have to—you do it because you can.
Pricing is essentially a function of competition. Usually, companies refrain from
raising prices because they’re afraid of being outflanked by a newer, disruptive
competitor who offers the same product for less. Companies raise prices when
they’re secure that nobody else can disrupt them. Sometimes they’re wrong—ask
all the companies who got their demat businesses destroyed by Zerodha and
Groww. But sometimes, the confidence pays off. Just ask telecom companies,
who often announce tariff hikes in lock-step one after another. That’s one benefit
of being an oligopoly.
Silicon Valley companies are doing it too, but at a much bigger scale. Netflix
continues to raise prices (and crackdown on password sharing) in the US
market. And a couple of months ago, Spotify started degrading its free product in
India to persuade users to pay up.

Spotify is restricting features for the free tier users in India in an attempt to
garner more paid users in the country. These limits, coming years after the
streaming service was launched in India in 2019, will not let users play songs
in a manual order and won’t let them rewind, scrub or repeat songs.

Since its launch, the Swedish company has offered a liberal free tier in India to
let users play songs in any order. However, it said because the market has
matured now, it is making these moves to change the free tier. As Musically
noted, the new free tier is closer to the one Spotify offers in Brazil.

Spotify said India is one of the top five countries in terms of monthly active
users for the service. However, it doesn’t fall under top markets in terms of
subscribers to free users ratio — given the majority of users in India opt for the
ad-supported model.
Spotify puts restrictions on its free tier in India to attract more paid
users, Techcrunch

Other companies are trying to expand elsewhere instead of raising prices in

India. Take PocketFM, which expanded into the Middle-East and the US, and
already has over 70% of its revenue coming from abroad.

What happens now?

Well, for the most part, expect the worst, and you can’t even complain about it.
Of course, it’s possible that experiments like the ONDC may start to see traction,
creating stiff competition—which will push this out a bit further. It’s also
possible that all those fintech lending startups may introduce a wave of cheap
credit, driving up consumption and spending, which may delay the inevitable.
Maybe some regulations will come in that prevent pricing changes. And nobody
has any clue what AI is going to do to all of this.

But until then, be prepared to pay up.

This is the future that VCs wanted.

It’s here.

Share this edition

Here's the link to this edition for you to share. Or you can use the easy share
buttons below

https://the-ken.com/the-nutgraf/the-future-vc-wanted-is-
here/

Take care.

Regards,
Praveen Gopal Krishnan
 Tata Neu needs to get a move on

The Nutgraf is a 10-min newsletter

sent at 10 AM IST every Saturday. It
connects the dots and synthesizes
one big event in business, technology
and finance that happened over the
week in India. In a way you’ll never
forget.

This is a paid newsletter that’s

available exclusively to The Ken’s
premium subscribers.

Just 10 mins long Synthesis not analysis

Sometimes memes

20 JAN, 2024
So Tata Neu (remember Tata Neu? India’s super app?) is in the news again.

The digital arm of the Tata Group, Tata Digital, is gearing up to take on
investment tech platforms Zerodha and Groww by launching stock trading and
mutual fund investment offerings on its fledgling super app Tata Neu, sources
told Inc42.

Tata Digital has been working on launching these offerings for the last one
year, the sources said, adding that the new offerings will be launched over the
next two-three months under its financial services arm, Tata Fintech Private
Ltd.
Exclusive: Tata To Lock Horns With Groww, Zerodha In The
Wealthtech Space Soon, Inc42

Does anyone else get the feeling that Tata Neu’s sense of timing is a bit… off?
Cross-selling stock market trading and mutual fund investments to your app
users made sense a while back. I’m not sure it’s something worth pursuing in
2024. Sure, the market is growing, but it’s also fiercely competitive, with
entrenched incumbents. Plus, it’s hard to offer a differentiated product.
Everyone does the same thing. Also, people don’t just switch trading platforms.
Once you acquire a user, you usually get to keep them for a while. And India’s
best and wealthiest users are already acquired. Sure, you’ll get some initial
traction, but it’ll soon flatten out, and I don’t see how this is a gamechanger.

In fact, if you think about it, Tata Neu has been jinxed right from the start. They
launched their super-app with great fanfare back in April 2022. Almost
immediately, they understood two things about timing:

1. They were late to the super-app party. Super-apps have been out of
fashion for at least five years—all across the world, there was universal
acceptance that super-apps couldn’t just be spun up whenever you
wanted. Wechat, Grab and Goto are super-apps which emerged from
specific circumstances under somewhat unique ecosystems. There was
general consensus, across academia and tech entrepreneurs, that the
super-app era was over.

2. They were extremely late to the “launch new app and spend lots
of money to acquire customers by giving discounts” party. In
fact, they were so late that they practically walked in just when the last
song was being played on the dance floor. In just weeks after Tata Neu’s
big launch, the ZIRP (zero interest rate period) era came to an end.
Funding disappeared. Layoffs everywhere. VCs who were dancing with the
founders until then slammed Party Smart pills down their throats and
started yelling at them to sober up and become profitable.

Tata Neu’s dissonance with reality continued. In the weeks after it launched,
business news outlets were breathlessly publishing their acquisition numbers,
almost on a daily basis. But then, it became apparent that Tata Neu had a lot of
problems—the app was glitchy, performance was poor, and people got frustrated
by the experience. Tata Neu spent nearly an entire year fixing all these bugs. It
met just half of its sales targets in its first year, and shifted to a different
operating mode—sustainable growth. Mukesh Bansal, who’d been brought in
earlier to helm Tata Neu thanks to his experience at Myntra and Cult.fit, stepped
down. Others followed, and Tata Digital went through a transition. Even from a
product standpoint, Tata Neu was completely out of sync with the times—as an
example, sometime last year, they launched a newsletter on their app. I’m
assuming somebody told them that explainer newsletters were a good
engagement tool. Honestly, it’s a product that would have been outdated even in
2019, but somehow in 2023, Tata Neu thought it was disruptive? I don’t know.
There’s a quote attributed to the ice-hockey player Wayne Gretzy: “I skate to
where the puck is going to be, not to where it has been." The idea is that
anticipating the future is far more valuable than keeping up with the present. In
India’s startup world, this quote is practically a clichè. Even Linkedin people
have stopped posting it. And yet, somehow, Tata Neu appears to have no idea
about how to do this.

Why is this happening? Tata Neu isn’t a dumb company. It’s well-funded, led by
smart people, and has all the resources it needs. So why is it running on this
weird time delay, building things that seemed like good ideas a few years back,
but are clearly passé today?

One reason is somewhat counterintuitive, but it’s something that I’ve noticed a
few times, and I can’t help but wonder if the Tata Neu’s leadership team
understands how startups build a business. I’ve written about this before, when
very little was known about Tata Neu; N Chandrasekaran, Chairman of Tata
Sons, described the app as “open architecture”—a fairly unusual term to describe
it. At various points, Tata’s leaders have described Tata Neu as being on the
forefront of a “digital transformation”—again, a phrase that’s practically unheard
of in the startup world, but is quite common in the IT services industry. I’m
starting to wonder if Tata Digital has inadvertently brought not just knives, but a
full army of samurais to what’s essentially a gun fight in the streets.

In fact, in the week after it was launched, it was quite apparent to me that Tata
Neu was created to solve Tata’s problems. Back then, I wrote:

Which is why, on Thursday, when the super app finally went live, it became
apparent that Tata Neu had multiple fundamental mistakes. It wasn’t much of
a super app, but more like a discovery app linking to multiple digital
properties of Tata. It had a cluttered home screen. And from an experience
standpoint, it wasn’t particularly revolutionary.

But above all, Tata’s superapp had made a fundamental error. It’s a mistake
that big, legacy, companies often make when they push forward with a
consumer app play, aiming to be as nimble as startups. It’s a mistake that
nearly everyone makes—from banks to insurance companies, to retail chains
 and media giants. When they fail, despite their superior resources, it’s almost
always because of this reason.

Tata Neu doesn’t solve a big, urgent problem that exists in the market.

Instead, Tata Neu ends up solving for Tata itself. That’s why it exists.
Tata Neu is a solution to Tata’s problem, The Nutgraf

The second reason, of course, is obvious.

Money.

It’s not clear how much the Tata Group initially invested in Tata Neu, but we do
know that the super-app is a significant resource sink. Just last year, there were
reports that the group was planning to inject US$2 billion into the app.

Indian salt-to-software conglomerate Tata Group is considering injecting

another $2 billion into its super app venture to bolster its digital business,
Bloomberg News reported on Thursday, citing people familiar with the matter.

The funds would help the group's online platform Tata Neu strengthen its
digital offerings, fix technical glitches, and meet any new spending needs, the
report said.

The injection would take place over two years if the deal goes through, it
added.

Tata Group has also asked Tata Digital to look for ways to boost the valuation
of the super app, according to the report.
 Tata Group mulls pumping $2 bln into super app venture, Reuters

The most interesting part of the report is the suggestion that the group has asked
Tata Digital to find ways to raise the valuation of the super app. Seen in this
context, brokerage and mutual fund services make perfect sense. It’s quick, easy
money, and it increases your addressable market, which is a great story to tell
any VC.

So maybe Tata Neu isn’t run like a startup, or think like a startup, but it’s trying
to raise like a startup.

However, the US$2 billion wasn’t enough. A few months later, another report
suggested that the Tata Group was going to invest an additional billion dollars
into Tata Neu. Like I wrote earlier, Tata Neu arrived late to the party. Capital
isn’t cheap anymore. Not even for the Tata Group. This machine needs money.
Lots of it.

The final reason why Tata Neu is out of sync with the market is obvious, but
seldom discussed. Tata Digital is a slow company. By this, I don’t mean that
their app performance is poor. I simply mean that they take their time to do
things. I have some sympathies for them—they are trying to integrate multiple
systems across companies together and stitch it all up under a loyalty program. I
understand all that, but that doesn’t change the fact that they are moving far too
slowly. For instance, in no universe, anywhere in the world, does a startup get a
year to fix glitches and performance issues. A year is practically a lifetime in
consumer technologies. You move fast, or you die.

As a final illustration, remember last week’s exclusive news report about Tata
Neu offering brokerage services that I linked to at the beginning?

Well, here’s another “exclusive” news report—this time from two years ago about
Tata Neu’s future plans.

See if you spot something familiar.

 Diversifying its fintech offerings, Tata Group’s super app Tata Neu is likely to
start offering competition to Zerodha, Upstox and Groww kind of stock
broking services soon, according to two Entrackr sources.

Tata Fintech, which appears to be a backend entity for the stock broking
service, has also sought approval from the market regulator Securities and
Exchange Board of India (SEBI). The entity applied for the stock broking
license in the last week of June and currently shows “under process”.
Exclusive: Tata Neu set to take on Zerodha, Groww with stock
broking services, Entrackr

Tata Neu needs to get a move on.

Share this edition

Here's the link to this edition for you to share. Or you can use the easy share
buttons below

https://the-ken.com/the-nutgraf/tata-neu-needs-to-get-a-
move-on/

Take care.
 Regards,
Praveen Gopal Krishnan

The Great Wall of Fashion

The Nutgraf is a 10-min newsletter

sent at 10 AM IST every Saturday. It
connects the dots and synthesizes
one big event in business, technology
and finance that happened over the
week in India. In a way you’ll never
forget.

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Just 10 mins long Synthesis not analysis
Sometimes memes

06 JAN, 2024

“Who buys clothes online?”

It’s 2011.

I’ve just joined Myntra as a Product Manager.

Neither of us have any idea what I’m doing here. As I’d tell people later, I
suspected that Myntra had hired me 20 minutes after getting funded. The money
had just hit the bank account and once the senior leaders had high-fived and
congratulated each other, someone asked, “Now what?”. Someone else said, “Not
sure. Maybe we should hire some Product Managers? All the cool companies are
doing it.”

And that’s exactly what they did. Their leadership team drove down from the
compact Myntra office at HSR Layout to the IIM Bangalore campus at
Bannerghatta Road, crossing Silk Board junction (traffic was less of a problem in
Bengaluru in 2011, else they’d have probably considered flying to Ahmedabad
instead to save time). When they interviewed me, they figured out instantly that
I had no clue what I was talking about, but I must’ve sounded confident doing it
—essentially the most important skill for a Product Manager. So they hired me
on the spot.

Back then, whenever I’d tell people where I worked, everyone had the same
response.

“Who buys clothes online?”

This may sound strange today, but in 2011, it was a perfectly legitimate question.
E-commerce was just starting off in India. Flipkart mostly sold books, and it
pointed to Amazon as an example of a company it wanted to emulate. Myntra
was different. It was in uncharted territory. The idea that people would go
online, browse through clothes and shoes, and actually buy them without ever
trying them out physically sounded absurd. Since Myntra was the pioneer, it had
to figure out practically everything from scratch.

The biggest problem, it realised pretty quickly, was to solve sizing. Once users
felt confident about which size they needed, they’d start to get comfortable
buying online.

And that’s why I was there. One of my first projects was to launch a new feature
called ‘Relative Size Chart’. As you probably know, sizes aren’t standardised in
apparel. Small, Medium, Large mean different things for different brands. This
was the biggest objection from users who were asked why they didn’t buy clothes
online. And so, this was the first hurdle that Myntra had to overcome. Myntra’s
marketing team did some user research that revealed that most consumers
understood sizing but didn’t understand size charts. They simply couldn’t figure
out measurements in cm or inches for chest, length, etc., for a product. Most of
them didn’t even own a measuring tape. But what they did know was a preferred
size, i.e., that one specific size in one specific brand that fit them perfectly. So the
idea that we had was—maybe size charts could be relative, instead of absolute? If
you knew that a medium size from, say, Reebok fit you perfectly and told us that
on the website, Myntra’s website would suggest that you pick a large if you
wanted to buy a Nike or a small size for Puma.

I was tremendously excited. This was ground-breaking. As far as we could tell,

no e-commerce website else had done anything like this, anywhere in the world.
Imagine me, a newly minted young Product Manager, solving the greatest
unsolved problem facing online fashion. It would be the start of a new era. Out of
turn promotions would follow. Interviews in newspapers. Maybe a Padma Shri
award.

Turns out, we were wrong.

Luckily, I found this out quickly. I went to the Myntra warehouse and measured
t-shirts and jerseys across brands to come up with a relative size chart. After a
few hours, to my disbelief, I discovered that even sizes within the same brand
weren’t consistent. A small size in, say, Adidas isn’t the same across Adidas
products, forget other brands. This wasn’t just one brand. In some cases, there
were variations within the same SKU itself. I found minute, but noticeable
differences in measurements for two identical T-shirts, from the same brand,
both of the same size. I lost all faith in fashion and measurement that day.

Relative size charts were never going to work, because there was no such thing as
absolute sizes. Reality does not care about your PM frameworks and deep
consumer insights. The project got shelved and I moved on to launch other
interesting things—some of which worked spectacularly. Others were disasters,
equally spectacularly. But I didn’t get that promotion. Nobody interviewed me.
They gave the Padma Shri award to Irrfan Khan that year.

I tell this story because online fashion e-commerce was never inevitable. It was
precarious. There were countless reasons why everyone—users, investors,
employees—all simply refused to believe that people would buy expensive clothes
and shoes on the internet. Most of those reasons were also correct.

And yet, somehow, over the next decade, companies figured out ways to do it.
Myntra. Jabong. Flipkart Fashion. Amazon. Ajio. Meesho. Nykaa. All of them
built pioneering products, incredible customer experiences, collaborated with
the right brands, created new ones, and transformed the way millions and
millions of Indians buy clothes online. In 2016, Myntra was skyrocketing,
growing at 60-70% month-on-month. The others weren’t far behind. For a long
time, all of these companies routinely grew at double-digit rates, sometimes even
doubling sales year on year.
And then, quite suddenly, it all came to a halt last year.

If you talk to anybody who works in e-commerce, they’ll tell you that growth
across the board has slowed down, but no category has been hit harder than
fashion e-commerce. As we reported last month, Myntra’s executives believe that
revenue growth “could currently even be in single digits”. Flipkart Fashion’s
numbers are in the same range. Amazon is in the same boat. Meesho has claimed
significant growth (more on this later), but investors seem to agree that the
company is overvalued. Nykaa has seen some growth, but it also started from
zero last year. Ajio is probably doing better than the rest of the pack, but it’s
unclear by how much, and how much of it can be attributed to Reliance’s offline
presence.

It’s almost like they were running faster and faster year after year, until they ran
smack into a wall.

At this point, you’re probably thinking one of two things. If you’re a long-time
reader of The Nutgraf, you’re probably viewing the fashion e-commerce
slowdown as another illustration of the shallowness of India’s internet consumer
market. Or else, you’re probably attributing this as another example of a broader
slowdown in the consumer market as a whole, driven by inflation and low
savings.

Both of these are true, but there’s one more thing.

You know which companies are seeing growth? And not just growth, but
explosive growth?

Offline fashion retail.

Tata Group's retail arm Trent Ltd on Tuesday reported a 189% year-on-year
jump in consolidated net profit at ₹228 crore for the July to September
quarter, driven by robust revenue. It was ₹78.94 crore in the corresponding
quarter of last fiscal.

On a consolidated level, revenues rose 52.7% on-year to ₹2,982 crore,

compared to ₹1,953 crore in the same quarter a year ago. The company earned
 a net income of ₹3,062 crore in the second quarter of the current fiscal.

Trent's EBITDA or earnings before interest, taxes, depreciation and

amortisation climbed 78.5% on-year to ₹456.57 crore as against ₹255.81 crore
in the year-ago quarter. The EBITDA margin expanded to 15.3% as against
13.1% YoY.
Trent's Q2 net profit nearly triples to ₹228 crore on robust
revenue, CNBC

Trent, which owns Westside and Zudio, isn’t just doing well, it’s absolutely
killing it. Zudio, which positions itself as a value-fashion retail outlet, is the
magic weapon. In a short period of time, it’s scaled to nearly 400+ stores, and
expects to open another 200 stores next financial year. Tata Trent’s stock price is
at an all-time high, and almost all of the excitement is driven by Zudio.

Tata Trent isn’t the only offline fashion company growing maniacally.

Guess who else is at the party?

Retail giant Reliance Retail Ventures has reported strong growth in Q2FY24
with gross revenues increasing to Rs 77,148 crore as compared to Rs 69,948
crore in the previous quarter.

In terms of categories, the company saw the fashion and lifestyle business
leading the growth followed by grocery and consumer electronics.

Reliance Retail’s fashion and lifestyle segment reported a 32 per cent YoY
growth despite the festive season falling entirely in the next quarter, said the
company.
Reliance Retail Q2 results: Fashion, grocery biz lead growth; focus
on expanding private labels, ET Retail
If Tata Trent is a beast, well, Reliance Retail is a godzilla. It’s a force of nature.
Already Reliance Retail is worth a lot more than its oil or digital vertical. There’s
a minor caveat here—since it’s not listed as a separate company, some of the
details are a bit fuzzy, such as the split of business verticals and the digital and
physical commerce breakdown. However, one thing is clear, i.e., a big driver of
Reliance Retail’s growth is offline fashion and lifestyle.

So we are seeing two things simultaneously:

3. India’s largest fashion e-commerce companies are struggling to grow.

4. India’s largest offline fashion companies are seeing explosive growth.

I can’t stress how bizarre this is. This is completely backwards. E-commerce was
supposed to be the disruptor. The disruptors always grow faster, usually at the
expense of the disrupted. Perhaps what’s happening right now isn’t a
coincidence, but is a direct causality. Maybe Tata Trent and Reliance Retail
aren’t just taking share away from unorganised retail and chains like Arrow and
Allen Solly, but also creating a massive bulwark that’s putting the brakes on
online fashion e-commerce.

For over a decade, fashion e-commerce grew by convincing people who’ve always
bought clothes offline to change their behaviour and move online instead. For
over a decade, they did this easily, and faced little resistance from offline fashion.

Now that has changed. Earlier, I wrote that it almost feels like Myntra, Flipkart
Fashion, and the others have run into a wall.

I believe that wall is offline fashion.

But this does not answer the most important question—why now? For years and
years, fashion e-commerce was red hot. How did they suddenly run into the
Great Wall? What changed?

I’m not so sure, but here’s my theory.

I’m going to let you in on something that one of Myntra’s early leaders told me
back when I was working in fashion e-commerce. At first, I thought it was
extremely reductive, but over time, I’ve changed my mind. Once in response to a
question on how to solve for growth, he said that all fashion e-commerce is
essentially about making decisions everyday on two dimensions:

5. Increasing categories, i.e., going broader

6. Adding premium brands, i.e., going higher

That’s it. There’s nothing else.

I know it sounds ridiculously basic. But this is also exactly what Myntra has done
for a long time. When it started, Myntra positioned itself as a sports and athletic
apparel destination, primarily selling stuff like IPL jerseys. Then it went higher
and added brands like Nike, Puma, and Asics to the mix. Finally, one day, after a
bunch of senior leaders returned from a trip to China, the new mandate became
that Myntra was now going to expand into fashion apparel. T-shirts. Jeans.
Dresses. Boots. Innerwear. Everything. Myntra went broader. Then, it decided to
get more premium brands, like partnering with Hrithik Roshan to get HRX, and
even attempted to get more premium international brands into India. It went
higher.

For several years, this was the playbook that most fashion e-commerce
companies followed to chase growth. Go broad or go high. Or both. Right now,
this is what’s driving growth for fashion e-commerce. Meesho still has some
growth left in it because it’s right at the bottom of the value segment, and it’s
choosing to go higher. It’s also expanding into other categories, which is helping
it go broader. Nykaa was originally just a beauty and cosmetic products
company, but now it’s decided to jump into fashion e-commerce. It added a
category, and that’s driving some growth.

Myntra and Flipkart Fashion, on the other hand, have already gone as broad as
they possibly can. Online fashion e-commerce is quite innovative and has great
margins, but the one thing that it has been unable to do is create new categories.
All it did was replicate categories that were already available offline. That’s not
true for, say, categories like electronics and mobile phones, which fundamentally
created product differentiation between offline and online products. For a long
time, most of the popular and latest gadget models were only available online.
That makes a big difference. Fashion doesn’t do that. It simply cannot. This
means that once a consumer moves from offline to online, it’s just as easy for
them to switch back. This is the great wall in action.

Well, then, if going broader isn’t an option, they can go higher instead. A viable
path for growth for fashion e-commerce is to add more and more premium
brands and products to their collection, and hope to get a larger share of revenue
from their customers. A few weeks ago, I wrote about how, increasingly, fortune
is found at the top of India’s pyramid. No category can do this better than
fashion, since it essentially thrives on the very existence of tons of premium and
luxury brands. How many luxury electronics or mobile phone brands can you
think of? If you are a fashion e-commerce company, going higher is much easier,
and more lucrative, than going broader.

In fact, they tried. Back in 2018, when Myntra acquired Jabong, one of its stated
goals was to convert it into a luxury fashion destination.

Jabong is making a lot of waves when it comes to the luxury

segment and in April we expect to launch both a luxury store
and a designer store in line with the expectations of our
consumers. The launch of the stores is in line with our belief
that the Indian customer is ready to experience both these
segments online. The luxury store will see several innovations
because if we are bringing luxury online, we actually want to
create an experience that is different
Gunjan Soni, Jabong’s Head and the Chief Marketing Officer at
Myntra

A few months later, Flipkart was acquired by Walmart. I imagine Walmart had
other priorities, because Jabong never ended up becoming the luxury destination
it was envisioned to become. It got shuttered, and all of its traffic got redirected
to Flipkart or Myntra. In hindsight, this was probably not a bad decision. Jabong
would have likely run into the great wall too, but from a different direction.
This is the most mind-blowing part of this story, and it illustrates why the wall is
simply impenetrable for online fashion e-commerce companies.

One company owns exclusive rights for nearly all major international and luxury
brands in India.

One company can decide where to market, distribute, and sell these brands.

One company sits right on top of the wall, effectively blocking off upward
movement from fashion e-commerce companies.

And yes, it’s probably the first company that came to your mind.

Fashion e-commerce can’t go broader, because they have no more categories left
to create. They cannot go higher, because they do not have access to the luxury
and premium brands that’ll pump up their sales. The Great Wall stands in their
way, big and imposing.

For years, fashion e-commerce found a way to convince offline shoppers to buy
online through a combination of discounts, friendly return policies, fast
deliveries, vast collection of styles, and some fantastic product innovations.
Myntra even cracked the size chart problem a few years later, but I wasn’t
around to see it happen. But other things also happened, especially in 2023.
Return policies have become less friendly. Convenience fees are higher. We’re
witnessing service degradation.

Maybe fashion e-commerce hasn’t just reached its limits on expansion of breadth
and depth due to offline stores like Reliance and Trent, but also reached a limit
on how well it can convince users to change their behaviour to buy clothes
online.

For over a decade, fashion e-commerce did a ton of things to move users online,
and now, in 2024, those reasons seem less persuasive.

Today, the question that was asked to me all those years ago is back.
It’s in a different tone, but just as urgent.

“Who buys clothes online?"

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Take care.

Regards,
Praveen Gopal Krishnan
 How to bring
back Vijay
Mallya and Nirav
Modi

India is sending a special team to the UK to quickly bring back

fugitives like Vijay Mallya and Nirav Modi. So in today’s
Finshots, we tell you how one reform might just aid this cause.

Before we begin, here's a quick sidenote. If you're a person

who is great at communicating and are enthusiastic to join our
team, Ditto is looking to recruit new Insurance advisors. You
don't even have to know about Insurance, we'll train you from
scratch and you can enjoy working remotely with a great
team. If you're interested in this or know someone who is
please click this link.

Also, if you're someone who loves to keep tabs on what's

happening in the world of business and finance, then hit
subscribe if you haven't already. If you’re already a subscriber or
you’re reading this on the app, you can just go ahead and read
the story.

The Story
₹40,000 crores!

That’s how much India’s top 10 Fugitive Economic Offenders

(FEOs) owed the country as of 2023. And you too can enter the
ignominious list if you go on a run to avoid prosecution and you
have an arrest warrant against you for economic offences worth
at least ₹100 crores.

Some of the big names in this list include Vijay Mallya, Nirav
Modi, and Mehul Choksi. All 3 individuals left the country when
they realised they could be prosecuted in India for various
economic offences. And the Indian government has been trying
to bring them back to face justice. However, there have been
difficulties in getting these people back home. For context, over
the last five years India has declared 10 people as FEOs. But
we’ve only been able to successfully extradite 4 of them over the
same period.

So why is it so hard to bring back fugitives who’ve taken refuge

overseas?

Well, on the face of it, extraditing a criminal from a foreign

country isn’t a cakewalk even if we have an extradition treaty in
place. In fact, despite having extradition treaties with over 40
countries, you can see that progress has been slow. This is
because the countries we work with have to believe these
fugitives are guilty of crimes that we accuse them of. So it's
incumbent on Indian authorities to prove this much. But that’s
not all. They must also be convinced that extradited individuals
are not denied basic human rights and are accorded a fair and
free trial. And this is where things get tricky.

When our authorities tried to get the UK to extradite some of

these popular fugitives there was one common argument their
lawyers relied on. They said “Hey, India’s prison conditions are
pretty bad. Their health could be at risk.” And courts in the UK
seem to agree with this line of thought.

In 2014, a UK High Court refused to extradite Raymond Varley,

a British citizen after he was found guilty of a non-economic
offence in India. Its reason? Varley was a senior citizen with a
mental illness whose condition could deteriorate if sent to India.
Another similar case occurred in 2017. A UK Court refused to
extradite Sanjeev Chawla, a criminal guilty of match-fixing
because Tihar Jail’s conditions were appalling and detention
there would amount to a violation of his human rights. He was
eventually extradited 3 years later. But that's the only time
we've managed to extradite an individual from the UK after we
signed an extradition treaty with the country back in 1992.

Okay. So, this all boils down to our prison conditions then?

Well, that could be one key reason.

Because Indian prisons are in fact overcrowded. Over the last

five years, their average occupancy rate has been nearly 25%
more than they could accommodate. And the major culprit is
undertrials — close to three-fourths of these inmates are still in
the process of being proven guilty. And while the number of
undertrials increased by an average of 5% year on year, the
prison capacity has increased by a measly 2%.

Then there’s the problem of insufficient expenditure. If you look

at the Prison Statistics reports of the past 5 years, you’ll see that
although the government does allocate higher amounts to the
prison system every year, it might not be enough. For instance,
we spend an average of just ₹130 per prisoner every day. That
includes everything ― food, clothing, medicines and vocational
training to help them improve their skills. On the other hand, as
per the State of Food Security and Nutrition in the World
Report, it will cost nearly ₹180 per day to meet a person’s basic
nutritional needs alone.

And finally, another thing going against the prison system

might be the lack of medical staff. In 2021, The Leaflet pointed
out that only 59% of the allotted provision of medical staff was
employed in prisons. That put the number at about 1.4 medical
staff per prison — including doctors and others. That may not
be enough to care for the health of the inmates in over-occupied
prisons.

So what’s the solution, you ask?

Well, we might need some major prison reforms.

See, we told you earlier that undertrials are overcrowding

prisons. So you’d think that utilising funds to build more
prisons would be a solution. But that’s only partially correct.

Overcrowding could be tackled to a certain extent if undertrials

as well as convicts over 75 years old or those who have mental
illnesses could be released as a respite measure. This could
shrug some pressure off jail occupancy rates. But since that may
not always be possible, such inmates could also be moved to
open prisons instead of jail cells. And this isn’t a solution we
whipped out of thin air. It’s something that a report by a
Parliamentary Committee on Home Affairs suggested a couple
of months ago.

Another suggestion it has up its sleeve is to improve prison

budgets without actually increasing them. See, India has a few
colonial-era jails that are over a century old. These could be
converted into tourist attractions to bring in revenue. The
Gujarat Government for example has a proposal to convert
Ahmedabad’s Jail Bhajiya House, an eatery run by jail inmates
into a restaurant cum historical gallery. And that makes sense
since here’s where revolutionaries like Mahatma Gandhi,
Kasturba Gandhi, Sardar Patel and many others spent jail time.
If other states could identify similar sources of revenue, it could
help them manage expenses more efficiently.

But yeah, that doesn’t mean prisons don’t need better financial
assistance from the government. Over 10 state governments
don’t receive funds for prison reforms at all. So identifying and
fixing those lapses is something governments may have to do
before they start appealing to foreign governments to extradite
Indian fugitives.

Until then inadequate systems will only make it easy for these
folks to escape extradition. They just need to convince foreign
courts that India’s prisons aren’t fit to accommodate them. And
yeah, the fugitives will continue to remain fugitives.

Hopefully, things improve in the near future.

Until then...
 The times
they are a-
changin’ for
Indian
smartwatch
makers
Playing only the low-margin high-volume game for too long can
be a risky business
 Friday, 05 January 2024
Time has been on my mind this past fortnight. It’s an appropriate season for it; for
millennia, people have celebrated these moments, when the days start getting longer
again. More daylight—>more time to do things. Of course, that’s a rather
straightforward way of looking at it. People like painter Salvatore Dalí have been more
esoteric in their explorations—the Persistence of Memory, which Dalí painted in 1931, is
something I’ve always been intrigued by.

Time is an inescapable part of stories, too. Characters are always anchored in time,
either a victim of it or changing it. And so are storytellers, because when the times
change, the stories you tell have to change with them. To quote singer-songwriter Bob
Dylan:

The order is rapidly fadin'

And the first one now

Will later be last

For the times they are a-changin'

India’s smartwatch segment is having one of these “times they are a-changin’” moments
right now.

It’s time for a new story

Over a year ago, Counterpoint Research announced that some time between July and
September 2022, India had become the world’s biggest smartwatch market. The news
was reported extensively, as was the primary reason for it: “the global smartwatch
market grew 30% YoY and India grew 167% YoY, taking the top spot for the first time
thanks to the growth of local brands.”

The stars in this story were two Indian smartwatch brands—Noise and Fire-Boltt—
which each crossed 5% in global market share by the end of 2022. In fact, in the first
quarter of last year, Fire-Boltt even surpassed Samsung, taking up the second spot
globally, after Apple. (Noise and Fire-Boltt have about 10% each in global market share
currently, according to Counterpoint’s latest release.)

The way Indian smartwatch makers managed to do this was by launching products
packed with features, but with pricing that was ultra-affordable. How affordable? Well,
by early 2023, smartwatches priced under Rs 2,000 (US$24) made up around 40% of
all smartwatches sold in India.

"This milestone is a testament to our strong focus on innovation, quality, and

affordability. Our agile product strategy, a strong focus on R&D, and our
unwavering commitment to providing the most affordable yet quality products
to our consumers have been some of the biggest drivers of our extraordinary
growth," Fire-Boltt Co-Founders Arnav Kishore and Aayushi Kishore said in a
statement.

India's Fire-Boltt surpasses Samsung for first time in global smartwatch

shipments, The Economic Times
By the third quarter of 2023, most domestic manufacturers had also increased their
localisation levels significantly, with the share of domestic manufacturing in their
products rising to 82% compared to just 4% a year earlier.

But there was a trade-off. While low-cost high-feature products accelerated sales, there
was also a sharp fall in average selling price (ASP), and hence margins. Competition also
intensified, with players such as Titan’s Fasttrack entering the market, leading to more
discounts and aggressive pricing.

To keep up with the competition, these smartwatch brands are compelled to cut
down the prices to almost half. As per an IDC report, the average selling price
of the smartwatches has declined by 44.9 per cent YoY, dropping to $25.6
(approx Rs 2,000) from $46.6 (approx Rs 3,800) in the second quarter of 2023.

[…]

“The first half of 2023 saw hundreds of smartwatch model launches with
premium finishing, sporty appearances, rugged builds, and a variety of strap
 finishes like metal, silicon, leather, etc. The second half of 2023 will see
aggressive festive offers and discounts, while brands remain cautious for
supplies,” says Upasana Joshi, Research Manager, Client Devices, IDC India.

Cut to 2024, which The Economic Times has termed a “make or break” year for
smartwatch brands in India. By now, experts quoted in the piece say, the smartwatch
market is behaving like it’s part of the fast-moving fashion and lifestyle industry, which
means high-speed launches at low prices with minimal changes, while spending more
on marketing and leaving little for R&D.

This can be risky business, though.

“Fashion brands keep a high margin of 60-65% to accommodate for the

variations they need to make in their products, all of which might not sell. But
to do that for smartwatches, where margins are at best 20-25%, it starts eating
into your unit economics,” said Sameer Mehta, chief executive at Imagine
Marketing that owns the Boat electronics brand.

Some wearables makers seem to have realised this, because they’re starting to tweak
their product narratives, shifting focus to more premium products.
For instance, Boat, a major player in the Indian wearables market, launched “smart
rings” priced at Rs 8,999 (US$110) in November last year, while Fire-Boltt, for its part,
has begun teasing an Android-Based LTE “Wristphone” that’s set to launch on 10
January.

On that note, Happy New Year! I’ll see you again next week. And as always, please let me
know what you think about this newsletter by writing to [email protected].

Yours,

Ruhi
 The next
move isn’t
Boeing’s
In fact, Boeing’s next move is inconsequential

Friday, 12 January 2024

This is Mathew, and I’ll be your host for Inciting Incident this week.

Boeing and its most profitable offering—the 737 Max aircraft—are in the headlines
worldwide for all the wrong reasons. All over again.

ICYMI, on 5 January, a plug on one of the emergency exit doors on Alaska Airlines’
eight-week-old Boeing 737 Max 9 plane blew out just a few minutes after takeoff,
causing rapid depressurisation. Thankfully, no one was injured.

Ever since the two fatal Boeing 737 Max crashes in 2018 and 2019, which together
claimed 346 lives (there were no survivors in either crash), there has been a growing
consensus in global media that “corporate greed” and corroding organisational culture—
especially after Boeing’s US$14-billion merger with McDonnell Douglas in 1997—is to
blame.
Filmmaker Rory Kennedy’s documentary Downfall: The Case Against Boeing is a
brilliant watch on Netflix if you’d like to get deeper into this. Or perhaps listen to
episodes #6 and #7 of the seven-part Business Wars podcast, which gets into the
Boeing-Airbus duopoly and the events that led to the two tragic crashes.

But this week’s edition of Inciting Incident is not an explainer on what happened last
week. Nor is it an evaluation of what got Boeing here. There’s a ton of reportage around
that already.

It’s about what happens next—and I don’t think the next move is Boeing’s.

Sequential games 101

One of the most popular types of games in game theory is the sequential game. Chess,
for example, is a sequential game—player A moves a piece, then player B moves a piece.
And for every action, there are trade-offs; advantages and disadvantages to each move.
I’d like to break down this situation using the same concept.

First, this isn’t chess; we have a lot more than two players in this game. There is Boeing,
of course. Then the airline companies (both current operators and potential customers
of the 737 Max). Then there are passengers like you and me. And finally, aviation
regulators across the world.

[Source: Wikimedia Commons]

So, after two crashes that killed nearly 350 people, a worldwide grounding, and then an
emergency door flying off in mid-air just a few years after the 737 Max got back in the
air, what moves are available to each of our players?

Imagine you are an airline company that already has an order for 737 Max planes—like,
for example, Akasa Air, which has an existing order for 76 aircraft. You have two options
if you want to drop the Boeing order: a) you could switch to Airbus planes, or b) lease
non-737 MAX planes from leasing companies.

Now, both of these have significant trade-offs involved. As per its September 2023
figures, Airbus has a backlog of nearly 4,000 A320 Neo orders (A320 Neo is Airbus’
offering in the same segment as 737 Max). Which means, you’ll have to wait in the queue
for who knows how long, and you’ll also incur additional costs, like having to train your
Boeing pilots to fly Airbus aircraft.

As Tim Jeans, the former managing director of Monarch Airlines, says to the BBC:

“The thing is, these days, aircraft manufacturing is now really a duopoly
between Airbus in Europe and Boeing in the States. You don’t really have a great
deal of choice. It is not easy, for example, to switch allegiance from one
manufacturer to another because you have to train your pilots differently; there
is all your engineering and maintenance to be changed. So the notion that this is
going to damage Boeing in a sales sense, a commercial sense, is probably wide
off the mark.”

And given that other airlines may also be approaching leasing companies for non-737
Max planes, leasing costs will also rise. Bloomberg columnist Brooke Sutherland argues
that airlines have little choice, whether they like it or not:

From a customer standpoint, it’s just not possible for the aerospace industry to
be entirely dependent on Airbus SE for narrow-body jets. The planemaker is
sold out of its marquee A320 narrow-body planes into the 2030s, and its
supply chain is straining to ramp up production. The Boeing-Airbus duopoly
isn’t exactly good for competition; there’s a good argument to be made that the
pattern of hyper-consolidation in the aerospace industry has diminished
accountability for quality-control lapses and contributed to the deterioration of
safety culture. But a duopoly is better than a monopoly. After a long delay,
Commercial Aircraft Corp. of China Ltd.’s C919 jet — an attempted rival for the
Boeing 737 and Airbus A320 series — has finally started commercial flights
locally and is seeking international certifications, but those are unlikely to be
forthcoming from the FAA or the European Union Aviation Safety Agency any
time soon.
 “If incremental customers want a 160+ seat narrowbody aircraft before the
end of this decade, a 737 MAX is the only option unless Airbus can raise
production rates further, which may not be possible,” Melius analyst Spingarn
wrote in a note.

Airlines and Flyers Are Stuck With 737 Max, Like It or Not, Bloomberg

Or there’s the third option: you could go back to Boeing and say, “Hey, I hope you fix
this ASAP, but I want to renegotiate the price for our order”, and maybe pocket a
discount. I wouldn’t be surprised if many companies chose this route because in 2020,
after its grounding after the two fatal crashes, Boeing offered huge discounts to
companies willing to buy the 737 Max.

Passengers of the world unite?

So what about passengers?

Users on social media have been raging for a couple of days now, some claiming that
they will now think twice before flying on an airline that operates the Boeing 737 Max.
Others say that all airlines should switch from Boeing to Airbus immediately. We’ve
even had calls for a halt in 737 Max production entirely and a return to the drawing
board.

So are we on the brink of a passenger boycott?

Well, actually, nope.

That’s because passengers are heterogeneous, with each making independent decisions,
which naturally reduces their collective bargaining power. And then, there’s the fact that
safety can often take a backseat to convenience or price for many. If you want an
example, just check some of the crash test scores of India’s top-selling cars.

Some passengers may consciously avoid flying on the 737 Max, but I think they’ll likely
be a minority.
Boeing’s best option
Which brings us to Boeing.

At first glance, there seem to be three possible moves the manufacturer can make, all
with significant drawbacks.

i. Admit there were shortcomings, compensate all existing customers, and

offer price cuts for new customers

If Boeing does this, it’s likely its stock will take an even bigger hit and revenues will
decline in the short to medium term. Since the Alaska Airlines mishap, Boeing’s share
prices have already fallen by 8.5%.

ii. Boeing could actively lobby officials and splurge on marketing to try to
convince everyone that the planes are safe

The aircraft manufacturer is already a large spender when it comes to lobbying and US
federal campaign contributions. A Bloomberg story published in January 2020, for
instance, says that Boeing hiked its lobbying expenditure in the wake of the 2019
Ethiopian Airlines crash.

Choosing to take this route, however, may end up cementing the already unfavourable
public perception of the company.

iii. Halt production completely, return to the drawing board, and build a
brand-new jet

Building a new plane takes years and a couple of billion dollars at the least, and Boeing
will have to sacrifice short-term profits for supposed long-term gains in goodwill. Not to
forget, Boeing already has a US$9 billion debt on its balance sheet. Also, if there are
airline companies that are still willing to buy the aircraft (Boeing 737 Max’s current
order book has a backlog of 4,783 aircraft) and large numbers of passengers who don’t
care what aircraft they’re flying on, why should Boeing surrender a market it already
has?

Which is why I think Boeing’s best move now is to do none of the above, and instead,
just assure everyone that it is looking into the issue (like CEO Dave Calhoun’s latest
response does) and will make the required changes, and then sit quietly praying that
another mishap doesn’t happen before everyone moves on.
So whose move is it, then?
Well, the aviation regulators’. Or at least, it should be.

Because this series of incidents with Boeing isn’t something that only the aircraft
manufacturer is to blame for. The United States’ Federal Aviation Administration (FAA)
and other regulators around the world have much to do with it; the FAA more than
others because Boeing is a US company.

In recent times, the FAA has been pulled up for falling standards and a tendency to be
lax with manufacturers.

The FAA had been considered the global aviation industry’s gold standard since
it was established in 1958. But by 2006, the Government Accountability Office,
the nonpartisan congressional watchdog agency, was warning the FAA that
their programs were becoming ineffective because of their tight relationships
with and lax supervision of industry leaders like Boeing.

How Boeing Bought Washington, The Lever

Thus, it is the world’s aviation regulators who have to take control of the narrative,
which currently leaves them looking weak and entirely susceptible to corporate
interests, and turn it around by showing that they can actually do their jobs of ensuring
passenger safety.

“The bottom line is, this is a safety issue, and it’s incumbent on the FAA to ensure
that we don’t have any kind of a repeat of what happened with those two fatal
crashes.”

William McGee, senior fellow for aviation and travel at the American
Economic Liberties Project, to The American Prospect
That’s it for this week. Please let me know what you think about this edition. What did
you like? What could I have done better? What did I miss? Write to me at inciting-
[email protected], and we’ll be back in your inbox at 7 a.m. India time next Friday.

Till we meet again,

Mathew Jacob
 Your
favourite
influencer
may not even
be human
How worried should we—the brand, the influencer, and the
influenced—be?

Friday, 19 January 2024

It’s Mathew here, and I’ll be your host again this week.
At the outset, let me state that I am not a motorsports fan. Unlike many of my peers who
are obsessed with Formula 1 and MotoGP, some partly influenced by the Drive to
Survive docu-series on Netflix, my closest brush with motorsports was playing the Road
Rash video game while growing up. (Ah, those carefree old days!)

Why are we talking about motorsports today?

Well, the past week has not been very kind to Mahindra Racing’s Formula E team. As
you might have already guessed, Formula E is like Formula 1, but with electric cars.

The Mahindra Formula E team drew criticism on social media after launching
an AI-generated female influencer to promote their activities in the electric
championship.

[…]

Much of the immediate reaction was caustic comments on the Instagram page.

“Motorsport companies/teams will do anything but hire actual women,” said

one.

“So many available, talented women out in the real world who eat, breathe and
sleep motorsport ... and yet we are supposed to cheer for AI,” added another.
“Her bio says ‘fuelling inclusion’. She’s literally not real. How is this inclusive in
any way?,” questioned another.

Mahindra cause a stir with AI-generated female influencer, Sportstar

The incident spurred me to dig into something that’s had me curious for a while now,
and a subject that I think falls squarely within this newsletter’s remit of exploring the
world of narratives.
You see, brands like Samsung, Puma, Calvin Klein, Prada, and Mahindra—though in
this case, it backfired for them—are increasingly opting to use Artificial Intelligence (AI)
to fill a role that’s become essential for modern narrative building—the influencer.

There is some pushback right now, but it looks more and more like “AI/virtual
influencers” are here to stay (and multiply).

What does this mean? Not just for the human influencers who have to compete with the
machines, but for the brands that use them and the audiences that consume them.

Human-like, almost
Digging into the history of virtual influencers on VirtualHumans.org, an online
organisation that documents the rise of “virtual” influencers (I am happy to inform you
that humans indeed run them), I came across Lil Miquela, one of the world’s first virtual
influencers, whose rise to prominence in 2016 and subsequent virality drove great
interest in the nascent AI influencer ___domain.

Two recent photos Lil Miquela shared on her Instagram profile, Source

Created by Los Angeles-based AI startup Brud, Lil Miquela is a computer-generated

character who is a singer, model, and influencer with nearly 2.6 million followers on
Instagram. Her bio says she’s a “19-year-old” robot living in LA.

From giving interviews to publications like The Guardian, Vogue, and Refinery29 to
collaborating with brands like BMW and Samsung, from being the first virtual avatar to
be represented by a talent agency to being named one of the 25 most influential people
on the internet by TIME magazine, Lil Miquela has gone very far in blurring the lines
between the real and the digital. On Instagram, she shares photos of her hanging out
with other influencers (both real and virtual), holiday snaps, eating pizza, and in 2020,
she broke up with her human-boyfriend Nick, and much like every other influencer, she
even posted a ‘Why I broke-up video!’

And Lil Miquela is not alone. Nor is this something that’s happening only in the West.
There are Indian AI influencers, too. According to a report by NewScientist, there are
over 150 virtual influencers online. Brazilian AI influencer Lu Do Magalu has more than
twice the number of followers that Lil Miquela has on Instagram (6.7 million to Lil
Miquela’s 2.6 million), though I’ll admit that Lil Miquela looks much more real than Lu
Du Magalu.

Screenshots of Naina Avtr’s Instagram account, a “22-year-old” AI influencer from

Jhansi, created by Avtr Meta Labs

At this point, you may be thinking that humans can easily distinguish a virtual
influencer from a human influencer, right? That’s what I thought too, until I started
reading the comments below Lil Miquela’s posts. It looks like virtual influencers have
evolved to appear incredibly human-like, even exhibiting seemingly individual attitudes
and personalities.

Why aren’t many of us able to see through the illusion? Why can’t we distinguish?

In a research paper published in the Journal of Digital Learning in Teacher Education,

Punya Mishra, Melissa Warr, and Rezwana Islam provide an answer:

Humans are social beings, with a significant proportion of our cognitive

activity based on inferring the social norms, beliefs, and desires of other people.
Moreover, we are cognitive misers, and we will take psychological short-cuts to
minimise cognitive effort. As Kahneman (2011) argued in his book “Thinking,
Fast and Slow,” inferences are forms of “fast thinking” that operate
automatically and are made with little voluntary control, driven by instinct
and emotion. What this means is that it is easier to believe and act as if LLM’s
are psychological beings than to consider them machines.

Disbelief takes cognitive effort while engaging with these GenAI models and
interpreting their actions through a social/psychological lens is effortless. Our
social brains, honed through millions of years of evolution, are not trained or
prepared to deal with these boundary objects. For these reasons, we will
anthropomorphize GenAI technologies despite knowing better. In other words,
we will often attribute psychological states such as beliefs, intentions, and
desires to these technologies even though we know that they lack personal
experiences, emotions, or consciousness and that their outputs are purely the
product of learned patterns, devoid of personal insight or emotional depth.
 We find them to be psychologically real in ways that other technologies are not
and never have been.

TPACK in the age of ChatGPT and Generative AI, Journal of Digital Learning in
Teacher Education

AI-nomics
If many humans find it hard to distinguish AI from humans, it should start making
sense why brands choose to work with AI influencers. Just the savings in costs probably
looks like reason enough.

“We were taken aback by the skyrocketing rates influencers charge nowadays.
That got us thinking, ‘What if we just create our own influencer?’” said Diana
Núñez, co-founder of the Barcelona-based agency The Clueless, which created
Aitana. “The rest is history. We unintentionally created a monster. A beautiful
one, though.”

AI Is Coming for the Influencers, Intelligencer

Screenshots from Aitana Lopez’s Instagram account, a “25-year-old” spanish AI

influencer, created by AI modelling agency The Clueless

Pink-haired Aitana Lopez is Lil Miquela’s colleague, another AI influencer with nearly
260,000 followers on Instagram. According to a report in Financial Times published
last month, brands pay her almost US$1,000 per social media post to promote their
products. In comparison, human influencers with a similar number of followers are paid
way more, as The Washington Post’s 22 December story reveals. Moreover, visual
influencers are available and can work 24/7. Human influencers have to sleep
sometime.

While the initial costs of creating an AI influencer are high, in the long run, they are
cost-effective. There are no travel expenses, they don’t age, they are versatile, and more
importantly, for brands, it allows unparalleled control—an entity entirely programmed
to reflect the brand’s values, all the time.

Celebrity ambassadors and influencers, however, are unpredictable. They are

human and are vulnerable to controversies, which can end up adversely
 impacting the brands they represent. Think Tiger Woods, Johnny Depp, or even
Snapdeal dropping Aamir Khan in 2015 after the actor voiced concerns about
growing intolerance in the country.

We forgot to bring mascots with us to the 21st century, Inciting Incident by The
Ken
Moreover, some preliminary studies show that campaigns featuring AI influencers on
Instagram seem to be more effective.

Instagram analysis of an H&M advert featuring virtual influencer Kuki found

that it reached 11 times more people and resulted in a 91 per cent decrease in
cost per person remembering the advert, compared with a traditional ad.

“It is not influencing purchase like a human influencer would, but it is driving
awareness, favourability and recall for the brand,” said Becky Owen, global
chief marketing and innovation officer at Billion Dollar Boy, and former head
of Meta’s creator innovations team.

How AI-created fakes are taking business from online influencers, Financial
Times

A screenshot from Influencer Marketing Hub’s AI Influencer Marketing

Benchmark Report 2023, displaying that despite their artificial nature, virtual
influencers outperform human influencers on average engagement rates

What does this mean for human influencers?

Given that digital advertising runs on metrics like reach, engagement, and conversions,
if an AI model produces measurably better returns, brands will undoubtedly have all the
incentive to go down the AI path. But to understand how AI influencers may impact
human influencers, I spoke to Manisha Jessica Kean, who works as a manager for the
New Delhi-based PR consultancy firm The 23 Watts.
 “The superstar influencers, for example, Bhuvan Bam or Dolly Singh, have
nothing to worry about from AI influencers. The influencers with 10-100K
followers focusing on a particular niche say fashion or beauty, will be affected.
And within this cohort, the unoriginal ones will go first.”

On a lighter note, when I asked her whether there was any other advantage in engaging
with or creating an AI influencer, aside from better control and possibly higher
engagement, Jessica replied without missing a beat: “No tantrums”.

So, if you are an influencer, how do you make yourself AI-proof? Or better yet, if the
world is going to be one where AI influencers are everywhere, how do you stand out?

If you ask Jessica: “By being authentic. All these AI influencers are not truly powered
by AI yet. Your originality will make you stand out. No matter how much AI becomes
human-like, it can never become human. Being original is your sole defence.”

That’s it for this week. Please let me know what you think about this edition. What did
you like? What could I have done better? What did I miss? Write to me at inciting-
[email protected], and we’ll be back in your inbox at 7 a.m. India time next Friday.

Till we meet again,

Mathew Jacob

..
.Extreme weather cost
Indians $7.8B last year.
But try buying insurance
for that

By Nathan Narde
With even the insurance industry's losses mounting, catastrophic climate events
require more than just a standard product

18 Jan 2024 / 11 min read

Comment

With an interest in emerging technologies, Nathan writes about the Indian EV ecosystem.
READ SUMMARY

Climate-related events make headlines almost every other day but

people in India are yet to figure out a way to financially insure
themselves. It isn’t easy either.

Take the case of Vinay, a Chennai-based media professional affected

by Cyclone Michuang that hit the south Indian city early last
December. While Vinay, like several others in his building and the
neighbourhood, sought shelter on elevated grounds, his car became
one of the many casualties: the rainwater had reached its bonnet.

“It’s been a month” since Vinay sat behind the wheels of his SUV. A
2022-model Tata Punch that hadn’t seen much action on the road is
now parked at a corner of a workshop, waiting for its fate to be
sealed. While Vinay hopes to get the insurer declared value (IDV) of
Rs 6.5 lakh ($7,800) for the car, the cost of repair, he was told, has
exceeded the insurance cover.

Vinay has no hopes from the grievance redressal process as well, for
it is “extremely time-consuming and inconvenient”: wait for a tow
truck, file a claim, call a surveyor, and then continue waiting to hear
back!

This is just one of the many climate crisis-induced financial tragedies

—also known as extreme weather events.

And India experienced them on 235 days of the 273 from January to
September 2023, according to Climate India 2023—a report by the
Centre for Science & Environment (CSE). The aftermath was just as
alarming: as many as 2,932 human lives were lost and 80,653 homes
destroyed. This devastation, however, is only the tip of the iceberg.

An analysis done by climate-change consultant Axa Climate—a wholly

owned subsidiary of one of the largest global insurers, Axa Group—
for The Ken reveals that 5.4 million Indians experienced weather
havoc last year.

“Compared to previous years, we can say for certain the frequency of

such events and the regions experiencing such events have both
been steadily increasing,” Rajit Sengupta, the author of the
aforementioned CSE report, told The Ken.

Burning hot // The year 2023 was India’s second warmest (after 2016) in 122 years,
as per the Indian Meteorological Department (IMD)
With 2024 expected to be warmer than 2023, the World
Meteorological Organization has emphasised the need to accelerate
the “transition towards renewable-energy sources”.

But given nature’s wrath spares no one—be it individuals or

corporations—renewable-energy projects, too, end up needing a
helping hand.

This is precisely what happened with the Sikkim Urja plant, the
northeastern Indian state’s biggest hydropower project. A glacier
outburst-induced flood washed it away in October. As a result, the
customer claimed the full cover of Rs 11,400 crore ($1.37 billion).
Citing exemptions from Glacial Lake Outburst Floods (GLOF)—
considered too huge for conventional covers— reinsurers at Swiss Re
and Munich Re capped their liability for hydro projects in the region
at Rs 500 crore ($60 million).
This is not an anomaly; Indian insurers are losing money hand over
fist to extreme weather, where 93% of the exposures remain
uninsured.

According to the internal data shared exclusively with The Ken by a

new-age insurance firm on the condition of anonymity, the economic
loss for India in 2023 stood at Rs 65,000 crore ($7.8 billion), down 9.7
% from Rs 72,000 crore ($8.6 billion) in 2022, while the insurance
losses are expected to have risen about 21% from a year-ago period.

SEE MORE VISUAL STORIES

“Insurance loss refers to the cumulative claim value an insurance

company pays out from a particular natural calamity or any type of
claim,” said a researcher at the new-age insurance company.

For instance, if an insurance company pays a claim of Rs 1 crore

($120,000), then the insurance loss for the insurer is estimated at Rs
1 crore. “If 10 people file claims of Rs 1 crore each, the insurance loss
is estimated at Rs 10 crore ($1.2 million),” added the researcher
quoted above.
So when the insurance industry’s standard approach during rising
catastrophic climate events is not helping it cut its mounting losses,
the only solution that remains is an unconventional one.

A product to pare losses

In contrast to the Sikkim Urja case, Morocco—the North African
country that was struck by an earthquake in September 2023—is
expected to receive the full cover of $250 million from Gallagher Re,
a senior official at a large global reinsurer told The Ken. The person
did not wish to publicly comment on the matter.

That’s because it was covered by a different type of policy:

parametric insurance. This type of insurance works like a wager on
the weather; defined payouts are determined by the magnitude of
the trigger event (i.e., earthquake, flood, heatwave, etc.).

The Ken spoke with five industry experts who see potential in such
products. Unlike traditional insurance, where payouts are determined
by the scale of losses, parametric insurance eliminates the need for
surveyors and delivers payouts faster. Hence, the latter can safeguard
insurers and customers alike.

SEE MORE VISUAL STORIES

Axa Climate is one of the companies betting big on parametric
insurance. Besides training corporates in sustainability practices and
acting as consultants to corporates in identifying pieces of the supply
chain susceptible to climate risks, it exclusively offers parametric
insurance products to customers, which are typically corporates.

The company strategically chooses to offer just parametric products,

said Pankaj Tomar, India head at Axa Climate. “It’s the level of
scientific expertise which gives us confidence and helps us stay ahead
of the curve.”

Gone are the days when actuaries were the go-to underwriters for
insurance and reinsurance companies. Now, no one can do without a
Ph.D. in Earth Sciences.

Essentially, underwriting risks is a process of making an informed

guess. For that, having someone who understands the nuances of
weather is crucial. The Ken spoke with five insurance company senior
executives who confirmed this shift in talent dynamics.

Parametric products are not new in India; their adoption remains

nascent, said Tomar. These are currently used in sectors such as
agriculture.

These products do have the potential to be used in urban contexts as

well.
For instance, Uber/Ola drivers or a hotel chain will be unable to
conduct their routine business during floods or landslides. If the
rainfall is above a threshold, parametric payouts kick in for all the
insured clients/customers in the affected area, said Ankur Gupta,
head of client management at Munich Re India.

In this use case, there is loss of life and damage to goods, but workers
do lose out on wages. Therefore, such products are useful in giving
customers quick cash to tide them over during extreme weather
events.

Unlike standard loss-based insurance products, parametric ones

aren’t over-the-counter products. Premiums are priced specifically to
the end customer/client. For instance, the extreme weather event
threshold for a customer in Rajasthan will be totally different from
one in Assam, added Gupta.

But the process with defined payouts, sans surveyors, doesn’t make it
a quick-selling product; the runway is beset with a major obstacle
before parametric insurance can really take off.

Pricey premiums
Parametric policies require a scale which only one body is large
enough to undertake: the government, said Jatin Singh, founder of
Skymet Services, a weather and information services company.
Singh has first-hand experience as his company supplies weather-
monitoring information for an active parametric policy in India. It’s an
outcome of a collaboration between Tata AIG General Insurance
Company Ltd and Swiss Re to build climate resilience against heavy
rainfall in Nagaland.

“Parametric policies have been taking off for 15 years. Companies

have tried different policies at different scales but have failed. Pricey
premiums aside, there is not enough granular data [from satellite
images] to support these policies,” said Singh.

Granular data, and one that is validated, is key to ensuring that

parametric products work. This comes in handy while developing
‘basis risk’, the foundation stone of a parametric product.

Basis risk is how close the real-life damage is to the probable damage
signed off on in the contract. The closer the gap between the two
cases, the less the basis risk, said Gupta of Munich Re.

So when the basis risk is minimal, insurers sign off on a policy to an

end-customer.

Such granularity demands a minimum of 10 years of rainfall data at a

gram panchayat level. Presently, this capacity is absent in India, said
Singh.
According to a senior employee at a large global reinsurer, “several
governments like Delhi and Odisha were interested in taking up
parametric policies but were dissuaded by their upfront costs”.

The employee wishes to remain anonymous as they are not

authorised to speak to the media about internal programs.

Pricey premiums and large upfront costs are par for the course for
any new product in the market. “For the policies to become
affordable, you just need enough demand. And once reinsures enter
the picture, the initial high cost will start reducing,” said Gaurav
Arora, head of corporate underwriting at general insurance company
ICICI Lombard.

That’s exactly how crop insurance became affordable in India. Once

the demand came in, the pool of premiums expanded, and prices
dropped, added Arora.

In India, where overall (life and non-life) insurance penetration was

just 4% of the country’s GDP in 2023—well below the global average
of 6.7%—parametric products are few and far between.

But with both insurance penetration and extreme weather events

likely to grow, there is scope for parametric products. So, what India
needs is more “bespoke solutions”, said Gupta.
As for achieving the scale, the government alone can’t score a
victory. The entire ecosystem, including “various agencies like FICCI
[Federation of Indian Chamber of Commerce and Industry] and CII
[Confederation of Indian Industry] will have to play a more active role
in putting out parametric products”, added Arora.

.
 The rise of
India’s affluent
class?

On Saturday, Goldman Sachs’ latest report called “Affluent

India” went viral. Investors couldn’t stop talking about it; the
Indian government handles shared it, and social media
influencers went gaga over it.

In case you missed it, in today’s Finshots, we wanted to break

down what’s in it for you.

But before we begin, if you're someone who loves to keep tabs

on what's happening in the world of business and finance, then
hit subscribe if you haven't already. We strip stories off the
jargon and deliver crisp financial insights straight to your inbox.
Just one mail every morning. Promise!

If you’re already a subscriber or you’re reading this on the app,

you can just go ahead and read the story.

The Story
Goldman Sachs’ central idea is simple — India’s affluent class is
going to dictate consumption activity in the economy. They’re
probably going to even determine product features. Right now,
they estimate that there are 60 million people who earn
$10,000 (~₹8 lakhs) annually. And they expect this population
to grow to 100 million in 2027.

To back this up, they point to the income tax filing data.

Apparently, the number of folks filing tax returns stating they

made over ₹10 lakhs annual income in the past 5 years has
grown by 19% annually. In contrast, the overall growth in the
number of people filing taxes has grown only by 8%. So they
expect this trend to continue.

Mind you, it’s not just GS that has relied on income tax data to
show the rise of this affluent class.
Last year, SBI Research also dug into this and said that the
weighted-mean income a decade ago was around ₹4.4 lakhs.
And that it is now ₹13 lakhs. They believe this is partly because
more people have transitioned from the lower-income group to
the higher-income group.

India seems to be moving up the income ladder.

So, who benefits from this rising Affluent Class?

Well, whenever a country sees such a shift, the first thing that
comes into play is discretionary consumption. Suddenly, people
have more disposable incomes and have economic security.
They’re not concerned as much about being vulnerable.

Just think about America in the 1950s. The country had a fairly
young population, wages were rising, and consumerism kicked
in. In fact, as one article put it, the “American consumer was
praised as a patriotic citizen in the 1950s, contributing to the
ultimate success of the American way of life.”

There’s something similar playing out in India too, no?

Especially if it’s about ‘Made in India’ products and services.

Also, this consumption has a large elasticity — meaning that if

income rises by 1, consumption might rise by 1.25.

One reason for that could be that people are more willing to
indulge in credit-based consumption. For instance, the GS
report clearly shows that the number of credit cards issued in
India has doubled in the past 4 years. And the amount spent on
credit cards has risen by 2.5 times.

But where do people moving up the income ladder spend their

money?

Well, GS looked at China and Brazil which are ahead of India on

the per capita income spectrum and found that leisure activities,
hotels, and eating out make up a bulk of spending as people
upgrade lifestyles. And they believe that’s what India could
gravitate towards too. Because while overall consumption
activity in these countries is around 3 times higher than in
India, when it comes to these specific segments, it’s nearly 20
times higher.

So yeah, that means companies that sell products catering to

this fast-growing income bracket over other segments end up
doing well for themselves. And it seems to be playing out
already as

GS points out:

These trends are visible in FMCG (Nestle India growing faster

than Hindustan Unilever), footwear (Metro growing faster
than Bata), fashion (Trent growing faster than V-Mart),
passenger vehicles (SUVs growing faster than entry-level cars)
and 2-wheelers (Eicher growing faster than the industry)
Also, back in April 2023, we wrote about companies trying to
play this premiumisation game.
We said that manufacturers are adding more features to
products and selling them at a much higher price. They’re okay
with moving fewer products off the shelf. They believe that the
higher prices they squeeze out of these customers can maintain
their profits and margins. Maybe even improve it. And this
seems to be working. The average selling price (ASP) for
products in India has increased. Across multiple categories —
such as refrigerators and shoes.

That supports the theory that the affluent are on a consumption

drive, no?

But while all that’s fine, we do want you to keep a few things in
mind as well.

For starters, Goldman Sachs hasn’t revealed anything out of the

ordinary. It’s just that they’ve managed to capture people’s
attention by spinning a great story about the potential of
consumption growth. And let’s just say that it’s in Goldman
Sachs’ best interest to sell the story. Because that’s how they’ll
make money. They sell these investment ideas to big
institutions who want to hear a good story about India. But
whether this affluent segment will really move the needle for a
lot of companies remains to be seen.

Secondly, one of the predictions in the report is that within 4

years, the number of people who can be classified as affluent
will rise to 100 million. But, you would assume that more people
come into the bracket anyway when incomes start getting
adjusted for inflation. I mean you could be earning ₹5.5 lakhs
today and if you assume an average annual hike of 10%, you’ll
end up being classified as affluent in 2027. But you’ve not
necessarily become wealthier, no?

And finally, many folks have been conflating this affluent

category mentioned in the report with India’s middle class.

However, as per the report, only 4% of India’s working-age

population has a per capita income that places them in this
affluent category. So if this is the middle class, does that mean
over 90% of India is lower-income?

Or maybe it simply means that this small subset of the

population that seems to be driving consumption is the
country’s rich. And the only thing that companies will have to
wonder is if this tiny segment is enough to drive long-term
consumption growth in the country. After all, we’ve been
hearing tales of the great Indian Consumer for over a decade
already.

Will it be different this time?

We don’t know. But we’ll just leave you with what Nikhil Ojha,
senior partner with Bain & Co, told the Financial Times earlier
this year about consumption:

“Anyone who is looking at the Indian economy from the rear-

view mirror is going to underestimate not just the quantity but
also the quality of the changes in consumption that are coming
in India.”
Until then…
 The mystery
of why
anyone would
misuse a
Fastag
Why are scammers going to all the trouble of cracking Fasttag
wallets when the payoff is barely a few thousand rupees?

Thursday, 11 January 2024

If you’ve been a reader of Ka-Ching! for a while, you’ll know that we love going down
rabbit holes chasing how various payment products are used or misused.
This edition, it’s the turn of the National Payments Corporation of India’s (NPCI)
Fastag, which was rolled out as part of the retail payment body’s National Electronic
Toll Collection program. These electronic tags were made mandatory in 2021. For the
uninitiated, Fastags are fitted onto the windscreens of vehicles, and work in such a way
that when you zip past toll plazas, money gets deducted from the prepaid wallet linked
to your tag.

Fastags are now accepted across 1,000 different toll plazas across the country. About 81
million were issued in December 2023, and 347 million transactions worth Rs 5,860
crore (US$706 million) were processed during the month.

Where there’s money, though, there are always crooks. And the Fastag ecosystem seems
to have attracted a few of these by now.

Just this Monday, Lithika, a Bengaluru-based user on X ( formerly Twitter) wrote about
how her Fastag was being misused at tolls in several places in North India and the
money in her linked Paytm* wallet deducted.

Indeed, how can this happen?

Afterall, every tag is linked to the vehicle number, phone number, and is validated with
an OTP at the time of registration.

I was curious too, so I asked cybersecurity expert Anand V the same question.

One way Fastags could have been misused in Lithika’s case, he says, is through cloning.
Fastags come with information like Issuer ID, vehicle ID, and the digital signature of the
issuing bank coded onto the tag. But cheap cloning tools can easily help crooks burn
these details onto another card, he says.

“Unlike a credit card it doesn’t have a chip or pin. It’s just data written on a
chip.”
If it’s any consolation, Amit Lakhotia, who runs Park+, a car services platform and is the
largest distributor of Fastags, says that the number of scams they’ve come across on
Fastag “is not much”. Many times, he adds, users think they’ve been scammed because
they get a notification of a debit from their wallet late, sometimes even 24 hours after
having passed through a toll.

Why so late? Because Fastag is not a real-time payment system. And if there is one thing
Indians have been spoiled with recently, it’s real-time payments.

“Sometimes, because of patchy internet issues, toll plaza sends the files for debit
slightly after the car has crossed the toll. So the debits can happen 12+ hours
later in odd cases.”

Amit Lakhotia, Park+

Fastag is also probably the only payment system that has escaped RBI’s two-factor
authentication (2FA) mandates—you don’t have to go through one if you want to use a
Fastag.

And I understand why it’s been spared the treatment: tolls are usually low-value
transactions, after all, and 2FA may end up causing traffic jams at toll booths, defeating
Fastag’s purpose.

The one question I couldn’t get a good answer to while speaking to my sources for this
piece was: just why would scammers go through all this effort to misuse a tag when most
users may not have more than Rs 500 (US$6) or Rs 1,000 (US$12) in their linked
wallets? Of course, very long-distance travellers or commercial vehicle owners may have
a few thousands more, but my point remains.

And honestly, I don’t have a good answer for that, except to remember that this is a
country where crimes have been committed for smaller amounts. If you have a better
answer for why Fastags are being misused, and how, please write to me at kaching@the-
ken.com.

Regards,

Arundhati Ramanathan

Two bonds
and a lesson
in
diversification
How much was inflation in India over the past decade? Just ~5%
a year on average, thinks the RBI. It certainly feels like a lot
more

Thursday, 18 January 2024

At the end of December 2023, I finally got the maturity proceeds from an investment I
made a decade ago. I should have been smiling. Instead, I was left scratching my head.

Way back in December 2013, I had invested some money in inflation-indexed bonds
issued by the Reserve Bank of India (RBI). These bonds, linked to consumer prices, had
a mouthful of a name—Inflation Indexed National Savings Securities-Cumulative. They
were meant to act as a hedge against price rise by offering returns over and above
inflation at the retail level.

Here was the deal.

The interest rate was to be the inflation rate based on the combined consumer price
index (CPI) plus a fixed rate of 1.5% annually. Interest on the bonds would be
compounded on a half-yearly basis. This was to continue for 10 years (the bond tenure)
after which the principal and the compounded interest would be paid back.

So, I got the money at the end of last month. How much annualised returns had I
received over those 10 years? I keyed in the numbers in the Microsoft Excel ‘Rate’
function and it threw up a princely 6.59%. Deduct 1.5% from this and the annual
inflation over the past ten years would be just a tad over 5%—5.09%, to be precise.

That did not feel right. Could this be true? From fuel to food to rent to lifestyle expenses
to healthcare expenses, the cost of everything seems to have risen much faster over
these years. Especially in recent years.

But then, a quick Google search showed that, yes, the official inflation number was not
too far off from what my returns indicated. Even the Cost Inflation Index, released by
the Income Tax Department each year, threw up a similar number.

India Retail Inflation Rate, Source: Trading Economics

So, that was settled, kind of, even if I was not fully convinced. Truth, of course, is
relative. The way the powers-that-be calculate inflation and how we experience price
rise in our day-to-day lives could be very different.

It’s also interesting that the first tranche of the inflation-indexed bonds based on retail
inflation (which I invested in in December 2013) was also the last. There have been no
more issues after that. A closer look at the numbers suggests why that might have been
the case.

In 2013, annual inflation was more than 11%, and for a few years before that it had
hovered in a high range of 9% to 12%. The clamour for investments that would hedge
against inflation was understandably loud. It could have been a good product, to be
honest, if inflation had stayed high. But then, the cycle turned.

From 2014, the official inflation numbers started trending down, and even went below
4% before rising again after the pandemic. So, these bonds would have lost their appeal
for a long time after 2013, and the RBI in its wisdom, probably decided to give it a quiet
burial.

Anyway, like I mentioned, I was disappointed by the returns on my decade-long

investment. To make it worse, the meagre return I’ve earned is taxable. So, I will end up
with less than 5%; thus, ironically, not beating inflation.

But I’m taking consolation in another investment that I made that has turned in healthy
returns—sovereign gold bonds (SGBs). Gold prices have more than doubled over the
eight years since the first tranche was issued in November 2015, and the annualised
returns at redemption in late 2023 was about 12% (including the 2.75% interest being
paid yearly on the investment). Plus, while the interest was taxable, the capital gain (the
chunk of the returns) was exempt if the bonds were held till maturity. What’s not to
like? No surprises then that multiple tranches of SGBs have been issued over the years.
Investors have been lapping them up, and there have been record subscriptions in
recent times.

Success begets success, until the cycle turns. Or prices stagnate. Gold too has had its
long, weak runs in the past—from 2012 to 2019, for instance, after which it took off. Skill
surely matters, but never underestimate the luck factor in investing.

The key lesson for me from this whole episode is to strictly adhere to that first principle
of investing—diversify. You’ll win some, you’ll lose some, but you’re more likely to do
okay overall.

Updated for clarity: An earlier version of this newsletter said that returns from SGBs
were not taxable. This has been updated to say that while interest gains are taxable,
the capital gain—which comprises the large majority of the returns—is not.
That’s a wrap for this week. Write to [email protected] with your thoughts and
suggestions.

Regards,

Anand Kalyanaraman

.
 What if all
electric
vehicles end
up looking the
same?
Over time, SUV, sedan, and crossover designs have moved
towards a sameness that is striking, boring, and perhaps
inevitable. EVs are at a crossroads and likely driving straight
into that sameness

Wednesday, 10 January 2024

Even as news of some large investment commitments at Tamil Nadu’s investors’ meet
was breaking last week—many of them in green energy, electric vehicles (EVs), and
batteries—Tata Motors unveiled its “first pure EV architecture” in Mumbai.

I’m not an automotive nerd; I don’t even have the eye of an auto reviewer. But pictures
of the big launch revived from dormancy a nagging question that I’ve been wrestling
with for a while now.

Are EVs as a category destined to race down the same boring road that SUVs,
crossovers, and sedans have all taken in the past?

Here’s what I mean:

Much has been written about this, and for years. (You can find a tiny sample here and
here). In fact, I came across the picture above on a decade-old Reddit thread.

The broad consensus is that this happened due to a bunch of reasons, including
government regulations and the need to sell the same product in multiple markets,
which forced automakers into converging on neutral-looking designs.

I’m afraid we’re beginning to see those copy-paste design touches in electric vehicles
too.

They don’t look as boxy in the rear as most ICE cars, especially SUVs, but most EVs are
going for minimalism, distinct straight lines of LED lights both back and front, and a
certain angularity for increased aerodynamics.

Are designers all cut from the same cloth, or is an electric vehicle by default a platform-
ised product?

I asked this question to Gagan Agrawal, founder and CEO of Planet Electric, a new
electric light commercial vehicle manufacturer that’s charging up to take on Tata Ace. As
a new company that’s readying to launch an EV built using a brand-new material—
which also gives it a little flexibility in design—Planet Electric, and Agrawal, make some
interesting arguments.
Diversity in sameness

With Punch.ev, Tata Motors has unveiled its second generation EV platform—Activ.ev.
The new car’s front does have some typical EV design touches, especially the LED lights,
but the back is very much like Tata’s first-gen Nexon EV, which was itself built on the
Nexon ICE framework.

It appears the Tatas have taken the existing powertrain and battery packs, and put them
on a platform that’s only a few slight tweaks removed from their first-generation design
(the new platform has a flatter chassis, something that most EV platforms have). In fact,
it won’t be wrong to say the Tatas are a little behind in this race.

It’s not surprising then that Cardekho has called it a “baby Nexon EV”.

At first glance, you will find a lot in common between the exterior design of the
Nexon EV and Punch EV. The latter also gets a split-lighting setup sporting
triangular projector LED headlights and fog lamps, while there’s the new
elongated LED DRL strip on the upper portion. There’s a big air dam in the
lower bumper and a silver skid plate…At the back, there’s no major change
except for updated LED taillights and a silver skid plate.

Why is it so hard to break from the past?

The first reason is designers, says Agrawal. Before he and his team settled on an LCV,
they wanted to build a passenger car, so they engaged with many automobile designers
and found frequent similarities in how they “used lines, cutouts, LED lights, etc”.

Second, there’s the constraint (or convenience?) of using similar suppliers who provide
certain economies of scale.

“Everybody is talking to the same kind of suppliers, which means that at the end of the
day, you have some of these moulds made, you know what the intricacies of a shape are,
and you don’t want to divert too much because a lot of focus is still on the EV battery
and powertrain. They remain key technological challenges for many EVs.”
 The future of car design is all about skateboards and top hats. The former
refers to the flat, often self-supporting chassis of an electric vehicle, housing a
large battery pack in the middle and motors at either end, along with the
suspension, brakes and wheels. Upon this sits the top hat, which is car
designer-speak for the body and interior of a vehicle.

With far fewer moving parts than an internal combustion engine, the battery
pack and motors sat in this skateboard chassis perform in a near-universal
way, no matter which manufacturer the vehicle comes from.

This is why all electric cars look exactly the same, Wired
There’s also a bit of oversimplification on the design side because the assumption is that
customers will focus on battery life and motor power, which were sort of taken for
granted in ICE vehicles. As Agrawal puts it: “when you say it’s a two-litre engine, people
know what you’re talking about.”

The long and short of it is, for the foreseeable future, EVs will increasingly look the
same.

Until they won’t.

Design will start to matter again

While many auto designers talk of aerodynamics today in the context of EVs, few are
paying much attention to it.

“Mostly, people mess up aerodynamics with heat exchangers in the front. They
also mess it up by not having a uniform canopy on the elevation. We wanted to
solve it. A square front will not get you those extra 10 kilometres that you want
for the economics to work.”

Gagan Agrawal, founder and CEO of Planet Electric

If a typical SUV today has an aerodynamic drag coefficient of somewhere around 0.35-
0.40, Tesla’s Model Y SUV and Model X are at about 0.22-0.23, which makes Tesla’s
models that much more efficient. Aerodynamics R&D typically costs a few million
dollars (in the high single-digits) if you want to bring down drag from 0.3 to 0.2,
Agrawal says. No one in India is going to do that kind of work.

Planet Electric is using high-strength composites, a new material that allows it to be 10-
15% cheaper than its competitor—which is Tata Ace EV as far as I can see—while still
delivering a higher payload. (One tonne vs 600kg.)

Planet Electric’s LCV (on the left) is priced Rs 9 lakh (US$10,800) while Tata Ace
EV (on the right) is priced close to Rs 11 lakh (US$13,200)

With his founding team mostly from the aerospace industry, Agrawal can’t help but
liken EVs to aircraft or rockets which can’t refuel mid-air and hence need to deliver their
payloads with higher efficiency and “less range anxiety”.

Frankly, range anxiety is being addressed with fast charging, better infra, and better
battery packs. So fundamentally, higher efficiency will come down to reducing the
weight of the vehicle.

“If you have a 2,000kg car to carry 200kg of passengers, you have to ask
whether it can be done in 1,000kg or 1,500kg. I say it can be done, but at a cost.”

Gagan Agrawal, founder and CEO of Planet Electric

Let’s just say that’s some years away; most car makers are yet to even move away from
normal steel or aluminium the way Tesla has done.
That’s a wrap for the week. Keep writing to [email protected] with your
thoughts and suggestions.

Regards,

Seema Singh

..
 Climate
lawsuits are
now a money
risk no
company or
 investor can
ignore
The possibility of legal action can also raise risk perception and
borrowing costs

Wednesday, 17 January 2024

Financial mavens have made a hell of a lot of money through greenwashing over these
past few years—a form of corporate spin where PR and marketing campaigns are
deceptively used to persuade the public that their products and policies are
environmentally friendly.

But the backlash has been swift. So swift that companies are scrubbing themselves clean
of ESG (aka Environmental, Social, and Governance) claims. The Wall Street Journal
had an nice article on it last week: The Latest Dirty Word in Corporate America: ESG

Greenwashing had red flags planted all over it, so I’m surprised that it lasted as long as
it did.

Anyway, last week, India’s consumer affairs department finally announced that
companies making any environmental claims such as “green”, “eco-friendly”, “good for
the planet”, “cruelty free”, etc., will now have to back their assertions with verifiable
evidence. Here’s an excerpt straight from the consumer affairs ministry’s press release:

 “All environmental claims shall be accurate and disclose all material

information either in the relevant advertisement or communication or by
 inserting a QR Code, or any such technology including web link, which will be
linked to relevant information.
 While making disclosures in relation to environmental claims, data from
research shall not be cherry picked to highlight only favourable observations
while obscuring others that are unfavourable.
 Any person making an environment related claim should specify whether it
refers to the good, manufacturing process, packaging, manner of use of the
good or its disposal; or service or the process of rendering the service.
 All environmental claims shall be backed by verifiable evidence.
 Comparative environmental claims that compare one product or service to
another must be based on verifiable and relevant data that is disclosed to the
consumers.
 Specific environmental claims must be supported by credible certification,
reliable scientific evidence, and independent third-party verification to
maintain their authenticity.”
So many brands come to mind, including some beauty and personal care products, that
it’s not fair to name only some, so I’ll let that pass. But I am glad the notification has
finally arrived, which means every such ad, and the companies publishing them, must
specify whether the claim refers to the product, manufacturing process, packaging,
disposal process of the product, or the process of rendering the service.

Specifics matter, and consumers should look out for them. What caught my attention,
though, was the mention of lawyers. The notification says the committee which
prepared the guidelines comprised, among others, various “law firms and law schools”.

The role of the legal system in climate-related risk exposure is getting clearer and bigger
as climate litigation increases. It’s still in the nascent stages in India, but investors and
regulators can no longer just focus on physical and transition risks while assessing the
climate-related financial risk of a business.

More than 2,485 climate lawsuits have been filed globally, says a new study published in
Science last week. And the subjects being contested range from a business’ commitment
to emission-reduction policies to penalising parties for a lack of due diligence or sharing
disclosures.

Imagine, just imagine, Adani Power or JSW Energy suing the Indian government—
which has made international emissions reduction commitments—if it decides to stop
these private coal power producers from using coal from 2030. Or if it slaps stringent
conditions on how these power companies operate.

I am not kidding, they very well can. A company’s green-transition risks may shift to the
government if legal entitlements to compensation exist for policy-induced asset-
stranding.

For example, the Energy Charter Treaty (ECT), an international agreement to facilitate
energy investment and trade, includes protections for incumbent energy investments.
Under this, in 2021, the German energy multinational RWE initiated arbitration
proceedings against the Dutch government seeking €1.4 billion in compensation for a
ban on operating coal-fired power stations from 2030.

In 2022, UK energy company Rockhopper Exploration was granted €190 million in

compensation from the Italian government under ECT arbitration proceedings. The
authors of the Science study write that oil and gas investors could seek an estimated
US$340 billion in legal claims because of governments’ climate policies.

“Existing contracts (such as power purchase agreements) and creative use of

corporate law [such as strategic insolvency to avoid tort liability] may also
protect parties from transition risk or liability.”

As it is, individual firms are exposed to amplified risks, but the possibility of legal action
can also raise risk perception and borrowing costs. The upward slope in the graph above
shows that successful litigation against one firm can set precedents or demonstrate the
success of a legal strategy, raising (perceived) risks for similarly situated firms in the
same jurisdiction.

The authors argue that climate-related legal actions also introduce financial risks that
are not directly related to a company’s physical risk exposure (say, a manufacturing
plant in a cyclone or flood prone areas) and the underlying transition (say a company
only making diesel vehicles that must now move to alternative fuels). There are financial
risks from obligations to manage risks or emissions, like under the Paris agreement.

In fact, the authors of the Science study referred me to a working paper from the
London School of Economics that shows “climate litigation filings or unfavourable court
decisions reduced firm value by -0.41% on average”.

In India so far, not many private corporations have been the target of such litigations
(you can find a nifty list of jurisdiction-based climate-related lawsuits here). But the
authors tell me that investor standards on climate risk have moved rapidly. “In less than
a decade, we have gone from virtually no standards or regulations on—and, indeed, very
little understanding about—climate change-related financial risks, to this now being a
mainstream topic.”

For instance, the Reserve Bank of India has been doing some climate-related stress
testing; the Securities and Exchange Board of India has produced a circular on
“greenwashing”; and the International Sustainability Standards Board is issuing
climate-risk guidance which is being adopted by regulators and investors in many
countries. There also exist frameworks where causing environmental damage (through
pollution, for instance) can land companies in hot soup and result in stiff penalties. Law
firm Vinod Kothari and Company says in a 2022 article that courts may take the same
approach when it comes to “the assessment of damages in climate-related cases”. And
Indian courts have already said that the directors of companies have a duty towards the
environment, like in M.K. Ranjitsinh v. Union of India, where the Supreme Court
observed that:

…the Companies Act, 2013 ordains the Director of a Company to act in good
faith, not only in the best interest of the Company, its employees, the
shareholders and the community, but also for the protection of environment.

What’s more, even inadequate communication by a business can attract penalties. For
instance, American banks BNY Mellon and Goldman Sachs agreed to pay US$1.5 million
and US$4 million fines, respectively, after the regulator Securities and Exchange
Commission (SEC) concluded that the banks’ communications about their ESG
investment policies were misleading.

So, stakeholders cannot ignore accounting for the law in climate risk evaluations. Yet it
is pretty hard to do. A recent survey of central banks indicated that most struggle with
assessment of such risks—93% of respondents have not yet quantified its impact.

The authors of the Science study suggest a framework in their paper, but more than that,
they recommend that countries and regions design legal transition scenarios in the same
way that climate-risk analysts already use physical- and transition-risk scenarios. “There
is already a lot of activity that has happened on climate-related financial risks, but it has
focused on ‘physical’ and ‘transition’ risks. So we think it will be relatively easy to update
this best practice guidance to include ‘liability’ risks too.”

It’s a new approach to the legal and climate risk professions, but one that is inevitable.
Businesses will have to brace for a bigger legal team. But I think more than that, lawyers
will have to understand science and finance more than they are used to.

Update: This copy has been updated with responses from the authors of the Science
study.

That’s a wrap for this week. Please write to [email protected] with your
thoughts and feedback, or if you have any insights related to climate litigation and risks
that you’d like to share.

Regards,

Seema Singh

17 JANUARY 2024/ECONOMY
 The rise of
India’s affluent
class?

On Saturday, Goldman Sachs’ latest report called “Affluent

India” went viral. Investors couldn’t stop talking about it; the
Indian government handles shared it, and social media
influencers went gaga over it.

In case you missed it, in today’s Finshots, we wanted to break

down what’s in it for you.

But before we begin, if you're someone who loves to keep tabs

on what's happening in the world of business and finance, then
hit subscribe if you haven't already. We strip stories off the
jargon and deliver crisp financial insights straight to your inbox.
Just one mail every morning. Promise!

If you’re already a subscriber or you’re reading this on the app,

you can just go ahead and read the story.

The Story
Goldman Sachs’ central idea is simple — India’s affluent class is
going to dictate consumption activity in the economy. They’re
probably going to even determine product features. Right now,
they estimate that there are 60 million people who earn
$10,000 (~₹8 lakhs) annually. And they expect this population
to grow to 100 million in 2027.

To back this up, they point to the income tax filing data.

Apparently, the number of folks filing tax returns stating they

made over ₹10 lakhs annual income in the past 5 years has
grown by 19% annually. In contrast, the overall growth in the
number of people filing taxes has grown only by 8%. So they
expect this trend to continue.

Mind you, it’s not just GS that has relied on income tax data to
show the rise of this affluent class.
Last year, SBI Research also dug into this and said that the
weighted-mean income a decade ago was around ₹4.4 lakhs.
And that it is now ₹13 lakhs. They believe this is partly because
more people have transitioned from the lower-income group to
the higher-income group.

India seems to be moving up the income ladder.

So, who benefits from this rising Affluent Class?

Well, whenever a country sees such a shift, the first thing that
comes into play is discretionary consumption. Suddenly, people
have more disposable incomes and have economic security.
They’re not concerned as much about being vulnerable.

Just think about America in the 1950s. The country had a fairly
young population, wages were rising, and consumerism kicked
in. In fact, as one article put it, the “American consumer was
praised as a patriotic citizen in the 1950s, contributing to the
ultimate success of the American way of life.”

There’s something similar playing out in India too, no?

Especially if it’s about ‘Made in India’ products and services.

Also, this consumption has a large elasticity — meaning that if

income rises by 1, consumption might rise by 1.25.

One reason for that could be that people are more willing to
indulge in credit-based consumption. For instance, the GS
report clearly shows that the number of credit cards issued in
India has doubled in the past 4 years. And the amount spent on
credit cards has risen by 2.5 times.

But where do people moving up the income ladder spend their

money?

Well, GS looked at China and Brazil which are ahead of India on

the per capita income spectrum and found that leisure activities,
hotels, and eating out make up a bulk of spending as people
upgrade lifestyles. And they believe that’s what India could
gravitate towards too. Because while overall consumption
activity in these countries is around 3 times higher than in
India, when it comes to these specific segments, it’s nearly 20
times higher.

So yeah, that means companies that sell products catering to

this fast-growing income bracket over other segments end up
doing well for themselves. And it seems to be playing out
already as

GS points out:

These trends are visible in FMCG (Nestle India growing faster

than Hindustan Unilever), footwear (Metro growing faster
than Bata), fashion (Trent growing faster than V-Mart),
passenger vehicles (SUVs growing faster than entry-level cars)
and 2-wheelers (Eicher growing faster than the industry)
Also, back in April 2023, we wrote about companies trying to
play this premiumisation game.
We said that manufacturers are adding more features to
products and selling them at a much higher price. They’re okay
with moving fewer products off the shelf. They believe that the
higher prices they squeeze out of these customers can maintain
their profits and margins. Maybe even improve it. And this
seems to be working. The average selling price (ASP) for
products in India has increased. Across multiple categories —
such as refrigerators and shoes.

That supports the theory that the affluent are on a consumption

drive, no?

But while all that’s fine, we do want you to keep a few things in
mind as well.

For starters, Goldman Sachs hasn’t revealed anything out of the

ordinary. It’s just that they’ve managed to capture people’s
attention by spinning a great story about the potential of
consumption growth. And let’s just say that it’s in Goldman
Sachs’ best interest to sell the story. Because that’s how they’ll
make money. They sell these investment ideas to big
institutions who want to hear a good story about India. But
whether this affluent segment will really move the needle for a
lot of companies remains to be seen.

Secondly, one of the predictions in the report is that within 4

years, the number of people who can be classified as affluent
will rise to 100 million. But, you would assume that more people
come into the bracket anyway when incomes start getting
adjusted for inflation. I mean you could be earning ₹5.5 lakhs
today and if you assume an average annual hike of 10%, you’ll
end up being classified as affluent in 2027. But you’ve not
necessarily become wealthier, no?

And finally, many folks have been conflating this affluent

category mentioned in the report with India’s middle class.

However, as per the report, only 4% of India’s working-age

population has a per capita income that places them in this
affluent category. So if this is the middle class, does that mean
over 90% of India is lower-income?

Or maybe it simply means that this small subset of the

population that seems to be driving consumption is the
country’s rich. And the only thing that companies will have to
wonder is if this tiny segment is enough to drive long-term
consumption growth in the country. After all, we’ve been
hearing tales of the great Indian Consumer for over a decade
already.

Will it be different this time?

We don’t know. But we’ll just leave you with what Nikhil Ojha,
senior partner with Bain & Co, told the Financial Times earlier
this year about consumption:

“Anyone who is looking at the Indian economy from the rear-

view mirror is going to underestimate not just the quantity but
also the quality of the changes in consumption that are coming
in India.”
Until then…
What Groww, Angel One,
and other fintechs won’t
tell you about mutual funds

By Anand Kalyanaraman
Retail investors are flocking to direct mutual-fund plans on fintech platforms, but the
‘star’ rankings hide many a fault

17 Jan 2024 / 16 min read

18 Comments

Anand is Finance Editor at The Ken. A Chartered Accountant, he chose to pack the power of numbers
with words when he left a career of seven years in accounting, putting together MIS reports, and
investment research to enter journalism.
READ SUMMARY

When it comes to mutual funds, a chunk of retail investors are riding

the hot-hand bias on popular fintech platforms, such as Groww,
Paytm* Money, and Angel One. But therein lies a cautionary tale—
too often, the allure of returns overshadows the awareness of
investment risks.

In December 2023, the skyrocketing mutual-fund industry hit a

milestone, surging past Rs 50 lakh crore ($615 billion) in assets under
management (AUM), as per the Association of Mutual Funds of India
(AMFI)—with a swift 25% jump from a year ago.

And retail investors, the real stars in this frenzy, have been stealing
the spotlight from traditionally dominant corporate investors. Their
slice of the AUM pie has leapt to 27% from 23% in May 2022.

What’s more, these retail investors are increasingly opting for direct
plans, cutting out distributors and saving on commissions—with the
share of these plans in retail AUM rising to 22% from 19% in the same
period.

This evolution is a result of a range of fintechs, also including the likes

of ET Money and Zerodha*, offering direct plans to new-to-market
investors. In November, fintechs injected 1.3 million systematic
investment plans (SIPs) into mutual funds—over half of the industry
total.

As new-age fintechs surged ahead in SIP inflows—which touched an

all-time high of about Rs 17,600 crore ($2.1 billion) in December—
traditional regular-plan distributors like NJ and SBI were left in their
wake.

The many online investment platforms that

have come up in the recent past and allow
 direct investing in mutual funds seem to have
accentuated the trend
—THE KEN’S STORY (PUBLISHED JUNE 2022)

And the momentum shows no signs of slowing down. Even payments

giant Phonepe, dealing in commission-based regular plans, is racking
up big client numbers.

“A sustained bull market, ease of investing, wide distribution, and

increased awareness are among the factors driving the boom in
mutual-fund investments through fintechs,” said Ujjwal Jain, the chief
executive (CEO) of Phonepe’s investment platform Share.Market.

SEE MORE VISUAL STORIES

Yet, beneath the surface lies a striking weakness. The influx of money
appears to be arriving in ways that leave many uneasy.

“It’s crazy how they are sucking people in,” remarked the CEO of a
mutual-fund house, highlighting the clickbait tactics prevalent on
many fintech platforms. The chief executive of another fund house
noted that many such platforms and portals often flaunt returns
while downplaying associated risks. “It’s often not in the best interest
of investors,” he added. They and some others quoted in the story
did not want to be named as they didn’t want to be seen
commenting on the matter.

The nudge towards flavour-of-the-season bets, and spotlighting star

ratings of funds and past returns without enough guardrails can spell
trouble for investors, according to multiple people in the industry
who spoke with The Ken.

Ratings sans risks

Markets are fickle, and yesterday’s gains don’t ensure tomorrow’s

glory—mutual-fund ratings included. Most of these platforms often
neglect crucial disclaimers, failing to emphasise that fund ratings or
past returns should never be the only factors in investment decisions.

“There’s a high risk of fintechs mis-selling and investors mis-buying,”

warned the second CEO, highlighting that excessive reliance on
ratings and returns can be precarious. Santosh Navlani, the co-
founder and chief operating officer of ET Money, also observed a
general disregard towards adopting a portfolio mindset, long-term
wealth creation, and risk management.
Sailing through a bull market feels dreamy, but when the tide turns,
those chickens will come home to roost.

Nudge nudge (wink wink)

The Indian stock markets have been on fire post-pandemic, and
mutual funds in the equity category, the darling of retail investors,
have been stealing the spotlight.

And it is the small-cap and mid-cap funds, along with hot sectors such
as infrastructure stocks, that have been delivering stellar returns,
especially in the past year.

It’s no surprise, then, that investors are betting on these winners

despite market experts sounding the alarms about high valuations
and risks. Just a few months ago, brokerage firm Kotak Institutional
Equities declared that mid and small-cap stocks had ventured into the
risky “bubble” territory.

Yet, many popular fintech platforms are nudging investors towards

these bets, flaunting “best return funds”, “top-rated funds”, “curated
lists”, and more, all without the proper disclaimers and disclosures.

Take the Groww app, for instance, showcasing a lineup of “high-

return funds” with 10 names arranged based on a “3-year returns”
filter—adjustable to 1-year and 5-year periods. These funds, mostly
in small-cap and infrastructure themes, boast “3 stars” and above—
based on ratings from investment-research firm Value Research.
Groww's high-return funds

Here’s the problem: while the spotlight shines on returns and ratings,
the high risks of investing in these counters post their dizzying run are
pushed into the shadows. Besides, there’s the old chestnut: past
returns don’t guarantee future success.

Then, there’s the Angel One platform that showcases funds with a
high-star rating based on its own mechanism.

Angel One's high-star rated funds

But ratings are hardly carved in stone: many funds have undergone
big changes over the years. Also, even if the ratings are rigorously
calculated, they fall short of providing a comprehensive gauge of
investment worthiness; at most, they serve as a mere starting point.

Most fund-rating methodologies, by their very nature, prioritise past

returns over risk metrics and qualitative factors.
“Fund ratings should be just one among many aspects in the
investment decision,” said Kaustubh Belapurkar, director (research)
at Morningstar India, a mutual-fund-research house. Factors such as
an investor’s circumstances, risk tolerance, and time horizon should
carry equal or even greater significance.

If someone bought a small-cap fund…for a 2–

3-year horizon, it would be very risky. Small-
caps can be very volatile in the short term, as
we have seen multiple times. A horizon of 7–
10 years in such funds improves the
probability of a good outcome
—KAUSTUBH BELAPURKAR, DIRECTOR (RESEARCH), MORNINGSTAR INDIA

Paytm Money lists funds with “best returns” and shows comparisons
between fund returns and those of secure instruments like fixed
deposits. However, it overlooks a crucial detail: the contrast in risks.
While the latter boasts a notably low risk of capital loss, the same
cannot be said for the former.

Paytm Money's best-return funds and returns comparison

The “investor choice” list on the wealth-management platform
Kuvera currently showcases many small-cap funds. But popularity
cannot ensure returns: what’s hot among many may not be the best
fit for all.

Kuvera's investor-choice and top-rated funds

Meanwhile, Phonepe, which offers regular plans, refrains from

assigning ratings to funds. It curates lists of schemes through its own
research, and the “top funds in focus” include small and mid-cap
names. Similar to various platforms, Phonepe also features a
compilation of high-return funds.

“It is important to assess fund philosophy or style, track record of the

investment team, risk, portfolio characteristics, and so on,” said
Phonepe’s Jain.

Phonepe's top funds in focus

Angel One, Paytm Money, Groww, and Kuvera did not respond to
questions sent by The Ken.

What’s in a rating?
Fund ratings and historical returns often play tricks. Over time, funds
that were once top-rated have stumbled, while some previously
underrated ones have climbed up.

But then, mutual-fund ratings exist in an unregulated territory.

Morningstar, Crisil, and Value Research hold the industry standard in

India—followed by many fintechs, with some adding their own
tweaks. But the frontier is open for anyone to come up with their
own ratings. Take, for instance, Angel One, ET Money, and some
media houses.

Some frown upon this.

The regulator should define a strong eligibility framework, asserts Jiju

Vidyadharan, senior director of Crisil Market Intelligence and
Analytics. This, according to him, will ensure rankings parameters are
carefully curated by experienced entities well-versed in mutual-fund
research.

License to show // While mutual funds are prohibited from promoting their scheme
rankings, there are no restrictions for fintechs and other distributors
But not all fintechs are playing the ratings game.
For instance, Zerodha doesn’t rate or rank mutual-fund schemes or
give lists. “Ratings don’t have much predictive value about fund
performance,” said Bhuvanesh R, a business analyst with Zerodha.
“Without human advice, they don’t help.”

Zerodha came to the decision of not ranking mutual funds after

considering the unpredictability and nuances of mutual-fund ratings,
the risk of misinterpretation, and the difficulty of explaining them to
retail investors in a direct-investing platform, added Bhuvanesh.

An executive at Groww, on the other hand, said that the list of top
funds based on “1-year returns” on the platform’s website is
essentially a blog post that is on its way out.

Groww's best equity mutual funds

“Educational content on Youtube and other social media [platforms]

are not recommendations on funds to invest in,” they claimed,
insisting that the representation of funds on the platform is intended
as an exploration tool, not a push for investors.
“We educate investors on investing, product suitability, and risks on
Youtube and through offline channels. These initiatives are outside
the investing app,” they added.

While most fintechs bundle mutual funds with stock-broking services,

ET Money only provides direct mutual funds. Its in-house Mutual
Fund Report Card is open to all, but personalised recommendations
come with a fee and are exclusively offered to advisory clients.

“Unfortunately, the entire transacting base of the fintech ecosystem

is using past returns as the only barometer to evaluate funds,”
remarked Navlani.

He pointed out that given the lack of concern for risk in the current
market conditions, ET Money has opted out of featuring new fund
offers (NFOs) on its app.

While asserting the rigour of the “report card”, he acknowledged the

need to inform non-advised users about the importance of
personalising their investment decisions based on their financial goals
and investment horizons rather than solely relying on the Fund
Report Card. “This will be done shortly,” he said.

It’s only logical, considering the star-crossed experiences of ratings in

the past.
To rank or not to rank?
“If you pick a 5-star fund and look at its performance in the next
three or four years, the odds are it will end up becoming a 2-star
fund,” said Zerodha’s Bhuvanesh. “This is true globally.”

Data bears this out, even if not entirely.

In Crisil’s mutual-fund rankings report for the September 2018

quarter, Axis Bluechip Fund held the top position among large-cap
funds. But in September 2023, it slipped to the bottom. Invesco India
Growth Opportunities—at the top in a list of five large- and mid-cap
funds in September 2018—ended up in the second-last spot.

The same happened in mid- and small-cap categories, with funds like
Axis Mid-cap and SBI Small-cap losing ground.

SEE MORE VISUAL STORIES

A host of factors can upend the ratings applecart. Whether it’s the
unpredictable shifts in the market, changes in fund managers, or
unforeseen black-swan events, these factors can cause funds to
swing either way.
If market-cycle changes can make or break star fund managers, fund
ratings are fair game, too. A prime example lies in the period from
2018 to early 2020 when growth investing—acquiring high-growth
stocks at a premium—was en vogue. This trend buoyed several
schemes of Axis Mutual Fund. However, when the market sentiment
shifted to value investing—purchasing undervalued stocks—Axis
schemes took a hit, while value-focused funds like HDFC Top 100
ascended the charts.

One notable example of the impermanence of fund ratings is evident

in the debt-fund schemes offered by Franklin Templeton India Mutual
Fund. In April 2020, the fund had to close its six debt schemes
because the fixed-income credit market dried up after the pandemic.
So, despite occupying the top spot in Crisil’s charts in September
2018, the Franklin India Credit Risk Fund was absent from the
rankings in September 2023.

Moreover, unpredictable returns in certain funds also underscore the

futility of relying on ratings for predictions.

For example, Axis Bluechip Fund has shown lower annualised returns
compared to most other funds in the large-cap category and its
benchmark S&P BSE 100 Total Return Index over the past five years.
However, a turnaround in the company’s fortunes can’t be ruled out
as it readies for a new innings as well.
Direct mutual-fund platforms like Zerodha are
geared towards people who have the intent
and some ability to research and invest on
their own. Of course, only a small number of
retail investors are savvy enough to do this
—BHUVANESH R, BUSINESS ANALYST, ZERODHA

But if fintechs don’t evaluate mutual funds, retail investors shooting

in the dark amid a sea of over 3,000 schemes would be a problem in
itself.

Bhuvanesh said the key to this predicament is seeking financial advice

or personalised guidance. The hitch, however, is the scarcity of
registered investment advisors (RIAs) in India, numbering between
500 and 1,000. In a half-in-jest comment at a recent conference, Sebi
chairperson Madhabi Puri Buch proposed that India should boast 1
million RIAs by 2030.

Easier said than done.

Tight regulations make it tough for RIAs to cater to a growing wave of

new investors. Bhuvanesh offers a solution that combines digital and
human resources. Imagine a user-friendly app that guides young
investors in mastering the basics. As the portfolio grows and the
investor’s circumstances change, the solution would shift to human
advisory, according to him. “We are trying to solve this. It’s not an
easy problem.”

Until a fix emerges, investors must navigate mutual-fund investments

on fintech platforms with a discerning eye—reading the fine print
before diving in.

“As an investor, it’s your duty to not blindly trust anybody. It’s your
hard-earned money,” as one industry veteran remarked, “Most of
these are just transactional platforms, not advisory platforms.”

*Paytm’s founder Vijay Shekhar Sharma and Zerodha’s perennial

fund Rainmatter Capital are investors in The Ken

.
Crocs worked
wonders for
Metro
Brands. Can
Fila do the
same?
Fila is as insignificant as Crocs was when Metro became its
licensee
 Tuesday, 16 January 2024
It just so happens that almost exactly a year ago, I made a case for why Crocs was
footwear retailer Metro Brands’ X factor.

Until a few years ago, though, the 21-year-old American brand didn’t even
have that many fans in India. Despite being sold in the market since 2007, it
wasn’t really going places. For the year ended March 2015, for instance, Crocs
India’s revenue was a measly Rs 75 crore (US$9.2 million).

But it’s been a different story ever since.

That very same year, Crocs roped in footwear retailer Metro Brands as a
franchisee. And by the year ended March 2020, the brand’s topline had risen
3.5X to Rs 260 crore (US$32 million). The pandemic did affect its offline sales,
but this was a time when clothes and shoes were all about comfort, so Crocs
managed to end the following year with a 30% fall in its revenue—in line with
the kind of decline Nike and Adidas reported in India.

But the story of Crocs in India isn’t just about what Metro has done for the
brand. It’s also about what Crocs has meant for Metro.

The pandemic-induced love for Crocs clogs and Crocs stores’ higher revenue per square
foot than the flagship Metro outlets turbocharged the retailer’s financials.

By March, Metro is expected to have over 200 Crocs stores—more than a 2X jump in
five years. In the same period, Crocs has gone from fewer than one in every five outlets
for the company as a whole to one in four. Interestingly, Metro’s chief executive, Nissan
Joseph, used to head Crocs’ operations in India, Southeast Asia, and South Korea.

When Metro Brands went public in late 2021, its shares were trading at Rs 470
(US$5.7). Now, they’re at Rs 1,260 (US$15.20). Crocs played a big part in that. But
investors used to seeing such mouthwatering returns are always looking for the next X
factor.

There are signs Fila could be that. What’s more, there are similarities between Crocs and
Fila as far as Metro is concerned.

In 2022, when Metro acquired the company that was the India licensee for the
athleisure brand, Fila was insignificant enough not to matter.

Just as Crocs was when Metro became its franchisee in 2015.

Fila’s revenue for the year ended March 2022 was a mere Rs 260 crore (US$31.4
million). That was less than one-tenth of Puma’s top line and one-sixth that of Adidas.

No one expected Crocs to become the phenomenon it did during Covid. Sure, its appeal
was not India-specific. But Metro leaned on its retailing chops to make the most of it. As
an analyst told me recently, “you walk into their store, and it’s hard to come out without
buying something. Maybe it’s not good for consumers, but it’s great for the company.”
That’s because a sizeable chunk of its store-level employees’ pay is tied to sales.

If you want to know how good Metro is, just look at how it runs circles around India’s
best-known retailer of shoes and sandals, Bata. Metro’s revenue per sq ft, at Rs 25,000
(US$302), is 2X of Bata’s.

So it’s implausible that such a company would buy a dud if it didn’t have a plan to turn it
around. And Metro has already begun fixing the Italian-origin, South Korean-owned
athleisure brand. It’s getting rid of Fila’s existing inventory at a discount because, as
Joseph said on a recent earnings call, it’s not in line with how Metro wants to position
the brand.

We honestly believe that in this sport fashion space, Fila has A) relevance and
B) awareness that we can play to and build on, somewhat similar to making it
akin to the China model, where China Fila does roughly $4 billion because they
position themselves differently than your typical athletic brands, and we see
that consumer in India that is quite savvy going and migrating towards it as
well. So, that's how we want to position the brand.

This is interesting because Metro is not a big fan of discounts. Over 90% of its products
are sold at full price—the highest in the industry.
There’s perceptible investor anticipation around what Metro can do with Fila, which has
just 25 stores now. Motilal Oswal, a brokerage, expects Metro to add 400-500 outlets
over the next three-five years. That’s 2X Crocs’ current store count.

The brokerage also expects Fila and Foot Locker, an American sportswear retailer for
which Metro became a franchisee recently, to contribute one-third of Metro’s revenue in
three-five years.

As I wrote in my piece last year:

Metro is a name you instantly associate with Oxfords, loafers, and sandals, and
not so much with trainers or clogs.

But Crocs is more than an afterthought for Metro.

With Crocs, Metro proved it could scale a brand that was the complete opposite of its
own somewhat staid products. Now, it could do the same with a brand that’s just an
afterthought for Indian consumers looking to buy trainers or sweatshirts.

Let me know what you thought of the edition. You can write to me at tradetricks@the-
ken.com.

Regards,

Seetharaman
 Losing the
fear of Byju’s
The 95% cut in the edtech’s valuation signals a new entry point
for its competitors

Monday, 15 January 2024

It’s deep freeze time in Washington DC, and I’m just bouncing back from a week-long
flu attack. This edition will thus be a little shorter than others, as I free myself from
these germs and get back my writing mojo.

Even from deep under my covers, I couldn’t help but gasp at the 95% cut in Byju’s
valuation we saw last week. Yes, yes, valuations are fuzzy math and based on ephemeral
things like VC sentiment, but the drop from US$22 billion to US$1 billion is nothing to
sneeze at. And Blackrock, the global investment firm which made the cut, is a Byju’s
backer that was mired in all sorts of complications when Aakash was sold to Byju’s in
2021:

Blackrock was one of the early investors in Aakash and held a 38% stake in it at
the time when Byju’s acquired it. However, Byju’s started deferring the
payment to Blackrock against its holding in Aakash. Initially, the company was
expected to settle the outstanding amount of ₹1,983 core (US$234 million) by
June 2022. However, the company continued to postpone the timeline for the
payment before settling it finally on September 23, 2022, with a delay of over a
year.
Blackrock’s valuation cut goes deeper than Prosus, another investor who soured on its
Byju’s investment. And while Blackrock hasn’t revealed a reason for the cut yet, there’s a
whole list of reasons to choose from now.

There isn’t much sense in making proclamations about the imminent end of Byju’s. I
mean, for all you know, there are still a few more tricks up its sleeve and it could turn its
ship around. But there is one thing we can be sure of—the fear of Byju’s as an
unbeatable competitor is now well and truly over.

Fighting Byju’s, Fighting FOMO

In early 2022, Byju’s dominance was very real–and felt overseas. There’s no way we can
compete with what Byju’s and Upgrad spend on marketing, a London-based
entrepreneur told me at a conference in California. It was surprising to me that foreign
edtechs feared coming even close to the Indian market because of the sheer power of the
Byju’s sales teams and its marketing spend.

Back home, VCs had an informal question for edtechs in search of funding: how will you
compete with Byju’s in your category? And as Byju’s bought up more and more
companies, its chokehold got tighter.

This is just how massive its ambitions were:

But what he says next is an unvarnished peek into his ambitions for the
company. Sooner or later, claims Raveendran, everyone in edtech will directly
or indirectly work for Byju’s. “They’re clear they are going to buy everyone,”
says the former employee.

Byju’s earlier valuations, I’d argue, had a lot to do with how these ambitions were being
projected by founder Byju Raveendran himself. Byju’s was supposed to be where Indian
edtech began, and ended.

Now, these ambitions have been tempered, and Raveendran has mostly disappeared
from public view. For its competitors, the pressure to compete with Byju’s is gone—
financially and psychologically. This was well articulated by Jeff Magioncalda, the CEO
of Coursera, recently.

“I remember when Byju's was hot. Every time I came to India, everyone was
saying 'You are going to get swallowed by Byju's. I said, 'I don't know, maybe I
will. But, I'm gonna stay focused. And now there's a lot of 'Oh, what happened
 in Indian edtech?' Look, this is part of entrepreneurship,” Maggioncalda told
Moneycontrol.

“In India, the value chain is pretty big. I think a lot of the Indian edtech
companies tried to do it all themselves... Just because the capital is available,
doesn't mean that's a good business strategy,” he added.

I was cautioned that Byju’s would swallow us: Coursera CEO Jeff Maggioncalda,
Moneycontrol
Maggioncalda’s statements will be a signal to other international edtechs who may have
put off or slowed down their Indian operations. They are also a signal to smaller and
newer companies who may have so far feared being outspent by Byju’s in their
categories.

The Coursera CEO also made another key point: there are no “Everything Everywhere
All At Once” edtechs anymore. Edtech companies can thrive in niches. A study-abroad
edtech might become a micro-loan disburser and get into the business of SAT coaching.
But it’s not going to open up a K-12 arm. Similarly, a test-prep platform for government
jobs may expand to IIT coaching, but it’s not going to start a chatbot for class 9
chemistry. With the exception of big businesses like Physics Wallah, I believe edtechs
will be happy in their niches.

This change in Byju’s situation may also trigger a shift in success metrics that were
probably long desired by edtechs. Manan Khurma, the founder CEO of Cuemath, wrote
on Linkedin about how conversions take a long time in the education business. Now, the
value of a platform may finally be linked to its stickiness and not by how many rivals it
plans to acquire:

“One important business metric we track is LTM (life time in months)—the

average time a student takes classes on the platform. LTM directly determines
business success. Because of our single-minded focus on learning outcomes, our
LTM recently crossed 24 months (2 years) and is fast rising towards 36
months, with class attendance rates > 95%.”

That said, with a new influx of capital in the VC market, things may turn on their heads
again.
That’s a wrap for this week. Write to [email protected] with your thoughts and
suggestions.

Regards,

Olina

Meesho wants big brands

in its cart. But unbranded
products are baked into its
DNA

By Gaurav Bagur
The $5 billion-worth online marketplace wants to boost profits with Meesho Mall’s
branded lineup, but this category is a whole new ballgame

16 Jan 2024 / 10 min read

Comment

Gaurav is a reporter covering business and ecommerce. He has a background in journalism and
economics, and enjoys film, fiction, and football.
READ SUMMARY
Meesho—the Indian e-commerce giant valued at over $5 billion—
finally caught a break in the last month of 2023.

On 29 December 2023, it made headlines by revealing in a blog post

that it had turned profitable in the quarter ended September after a
turbulent year in which the company saw layoffs and swings in its
valuation. So, all eyes were on the 77% revenue growth, but a key
venture was overlooked: Meesho Mall.

Buried within its blog post were around 100 words outlining the role
of Meesho Mall—the latest in a series of experiments the company
has carried out in its eight years.

Founded by Vidit Aatrey and Sanjeev Barnwal, batchmates at the

Indian Institute of Technology Delhi, Meesho started as a social-
commerce platform. It even ventured into grocery deliveries.
However, it is mainly known as an online marketplace for small
sellers.

With Meesho Mall, it is breaking the pattern and aspires to be a

platform that also offers a range of branded products. Launched in
August 2022, this strategy put the startup—backed by marquee
investors such as Softbank and Peak XV Partners—in direct
competition with e-commerce giants Amazon and Flipkart.
But Meesho has been clear about its target audience—the value-
conscious buyers. In 2023, Meesho served 140 million customers, and
eight out of every 10 orders came from tier-2 markets and beyond.

Meesho Mall features 500 brands across 6–7 categories, including

the likes of Mamaearth and Himalaya in personal care, Boat in
electronic gadgets, and Paragon in footwear. These are not premium
brands but rather a mix of legacy labels and well-known direct-to-
consumer (D2C) companies. This is a stark contrast to the generic
products with descriptive names such as “Black Printed Sneakers for
Men” and “Round Neck Puff Half Sleeves Polyester Blend Top” that
occupy most space on the platform.

With Mall, Meesho envisioned a model along the lines of other global
players like China’s Taobao and Singapore’s Shopee, which took
similar steps into the branded segment with Tmall and Shopee Mall,
respectively, said the company spokesperson. Mall would ideally
drive a larger share of Meesho’s profits as brands can be monetised
more effectively than small businesses, they added.

SEE MORE VISUAL STORIES

But brands have expectations higher than smaller sellers. And it’s
something that Meesho isn’t fully equipped to handle—just yet. The
platform is missing the mark on good returns on ads, reliable
analytics, and checks on fake products.

The numbers game

Meesho saw users searching for brands on the platform, so it knew
there was a certain level of demand, the spokesperson said. Now,
Mall is one of its “top bets” for sustained growth in the long term,
said an ex-employee of the company. This person and several others
who spoke with The Ken are unnamed as they did not want to
comment on the company publicly.

In 2022, when Meesho Mall was still taking shape, the company
aimed for a 10% share of branded products in its total sales during
the first six months.

However, the vertical contributed only 1–1.5% by early 2023, said the
former Meesho employee. That figure has now reached around 5%,
going even higher during discounting periods and festive sales, added
another ex-employee.

The company’s spokesperson did not comment on these numbers

but said Meesho Mall has seen “sustained 10–15% growth” on a
monthly basis. The vertical’s percentage share of the company’s gross
merchandise value is in single digits but is expected to grow when it
adds more categories, they added.
With this new experiment, Meesho is also eyeing higher revenues
from its sellers.

Three key factors // Meesho did not want to disclose how much profit it made, but
said a rise in revenue, better monetisation, and better cost efficiency helped it get
there
Meesho doesn’t take commissions from unbranded sellers but
charges them for logistics. However, it takes a cut from sellers on
Meesho Mall. “We charge brands certain kinds of fees for the
services we provide for them—verification, account managers, etc.,”
said Meesho’s spokesperson.

This share depends on factors such as the brand’s scale and category,
said the first former employee. On average, this amounts to around
5% of transaction value, they said, adding that as Mall scales up,
Meesho would look at beefing up its margins through these fees.

The average selling prices for Meesho’s unbranded products are in

the Rs 200–400 ($2.40–4.80) range, depending on the category. This
figure would be over 2–3X higher on platforms featuring mostly
branded products, such as fashion e-commerce site Myntra, as per
multiple ex-employees of Meesho and e-commerce industry
executives.

Eventually, Meesho Mall is expected to bring in bigger orders. And at

higher fees.
Here’s the problem, though: brands are drawn to Meesho Mall partly
due to its relatively low commissions. For instance, Mamaearth is
optimistic about the venture as long as the unit economics are
positive, said a manager for the brand. But since Meesho has been
pushing for higher commissions, they added, it would eat into the
already thin contribution margins.

Charging fees from brands is just one of the ways in which Meesho
wants to make money from Mall.

Not as advertised
With Meesho Mall, the company finally can double down on earning
from advertising—an avenue it could not make the most of so far.

Unbranded sellers, in general, tend to minimise their ad spending,

while brands are willing to scale it up with volumes to capture more
market share, said the first former employee.

So, Meesho sought to secure a small minimum commitment on ad

spending from brands—a percentage of their GMV on the platform.
But the results have been mixed.

A major cosmetics brand that was onboarded early onto Meesho

currently spends around 5% of its GMV from the platform on
advertising. Its return on ad spending has been “satisfactory” but
mainly because its expectations were fairly low, said a manager for
that brand.
Being a well-known “legacy” brand with a strong offline presence, it
didn’t see much value in spending a lot on ads on the platform, they
added.

The problem isn’t just how much brands spend but also what Meesho
gives them to work with.

For instance, a personal-care brand was unable to integrate Meesho

with its e-commerce software platform. That made it difficult to draw
insights into performance, said an e-commerce industry veteran who
works with the brand.

The manager of the cosmetics brand agreed. Meesho’s analytics and

data visibility fall short in comparison to platforms like Amazon and
Flipkart, they said. This leaves brands in the dark about key metrics
like the gender split of their audience or the contribution from
various geographies, they added.

The brands also lack control over how to deploy their marketing
funds in terms of ad types, said the manager at Mamaearth.

“Meesho is basically a dukaan [small shop] in a

village in terms of ads, analytics, data. It’s like
a black hole where inventory goes in, and we
don’t see the numbers come out”
 A MANAGER AT A COSMETICS BRAND

The personal-care brand mentioned above had pulled out of Meesho

in 2022 after selling on it for around a year. Mall was contributing
only around Rs 1 lakh ($1,200) to its overall monthly GMV of nearly
Rs 6 crore (~$724,000). But the more pressing issue was the lack of
robust processes in place, according to the industry veteran.

The cosmetics brand, on the other hand, saw sales of around Rs 25

crore ($3 million) a year, or around 15% of its online sales, on
Meesho. Hence, it is more bullish on the platform. But the company
had to put in more resources to balance out the shortfalls on
Meesho’s end, said the manager.

The lack of transparency makes it difficult for brands to have the

confidence to spend more money on ads, the managers at the
cosmetics brand and Mamaearth told The Ken.

When asked about these issues, Meesho’s spokesperson said: “We

are a platform that was built for small businesses. There are a lot of
[capabilities] we’ll need to build out for brands.”

Some sellers—like Mihir Parashar, co-founder of activewear brand

Chkokko—claim that Meesho has made improvements with Mall. The
company has been deriving around 5% of its GMV from Meesho Mall
since joining it three months ago.
But Meesho has another nut to crack—one that’s rooted in its DNA.

Quality control
As an online hub for budget-conscious shoppers, Meesho’s
unbranded section is stocked with knockoffs of branded products and
cheap, low-quality imports. These imports have historically driven the
company’s return rates to be much higher than its rival platforms.

All of this makes bigger brands sceptical about Meesho.

A D2C jewellery brand, for instance, opted not to sell on the platform
as it goes against its positioning as a line of trendy, aspirational
products, the company’s founder told The Ken.

“From day one, we have been clear about

where we want to sell and to whom we want
to sell. Meesho sells products that are
unbranded to consumers who are looking for a
hell of a deal”
FOUNDER, D2C JEWELLERY BRAND

“We aren’t in active conversations with premium brands for Meesho

Mall,” the Meesho spokesperson countered, adding that the
company is aware of its customers and brands and price points they
seek. They also stated that its current return rate is under 10%.
However, multiple ex-employees from Meesho believe that a key aim
of Mall was to raise the perceived standard of the products on its
platform. And branded merchandise comes with a certain guarantee
of quality and authenticity.

The company is said to be working on fixing counterfeit issues with

algorithms but is careful not to be too aggressive against sellers of
fake items. Doing so could hurt its order numbers and top line, said
the first former employee.

And this is rubbing brands the wrong way.

Meesho wasn’t doing enough to ban those selling counterfeits of the

products manufactured by the personal-care brand that quit the
platform, claimed the expert quoted earlier.

It was damaging our brand equity, added the manager at

Mamaearth. “It has come slightly under control but is still a big
issue.”

Meesho has an artificial intelligence-driven initiative called “Project

Suraksha” that aims to keep its platform free of fake sellers. As a part
of it, over 4.2 million counterfeit product listings have been
deactivated in the past six months, said the company’s spokesperson.
Despite these concerns, Meesho Mall will have its takers. “[Most
brands want to] be present on every platform to optimise visibility
and presence,” said the e-commerce industry veteran.

Meesho makes distribution for up-and-coming brands easier,

eliminating the need for hefty investments and extensive sales teams
to reach smaller cities and towns.

While Meesho has got brands’ attention for now, winning them over
will take a whole lot more.

Lede image credit: Bastian Riccardi/Unsplash

Update: An earlier version of the story said that Meesho had return
rates of 60%. Post-publication, the company spokesperson said its
return rate is under 10%. The article has been corrected to show that.
We regret the error.
 Is jet fuel from
human poop
actually
sustainable?

A UK-based aviation company recently made jet fuel from

human poop! So in today’s Finshots, we discuss its
sustainability.

Before we begin, if you're someone who loves to keep tabs on

what's happening in the world of business and finance, then hit
subscribe if you haven't already. We strip stories off the jargon
and deliver crisp financial insights straight to your inbox. Just
one mail every morning. Promise!

If you’re already a subscriber or you’re reading this on the app,

you can just go ahead and read the story.

The Story
Taking a flight is convenient for you and me. It could be
expensive. But it saves a lot of travel time. But it’s not so
convenient for the earth.

Planes actually emit around 20 times as much CO2 per

passenger/per km as a train and 4 times as much as a bus. In
total they emit around 100 times more CO2 per hour than a
shared bus or train ride. And that could translate into about 1
billion tonnes of CO2 every year or about 4% of human-induced
global warming. So if aviation continues to boom, the earth
could be 0.1° Celsius warmer by 2050 because of planes alone.
Now, that might not seem huge. But let’s put it this way. If
aviation were a country instead of an industry, it would be the
world’s sixth-biggest emitter after China, the US, India, Russia
and Japan! Scary, we know.

So what’s the solution, you ask?

Well, people could fly less for sure. But that could hurt the
aviation industry and would be a massive pain for people in
general. So maybe Sustainable Aviation Fuel (SAF) is the way to
go. To put it another way, we use jet fuel that doesn’t come from
non-renewable energy sources like crude oil or refined
petroleum. So you could either use food crops such as rapeseed,
palm oil, soy and sugar cane to make it. Or alternatively even
convert waste into jet fuel ― it could be used cooking oils,
municipal sewage or even crop and animal waste. Basically, all
of this goes through a rigorous heating process that filters out
the oil from dirt and water. Then you throw hydrogen into the
mix. And voila! You get SAF.

This is then blended with regular fossil fuels so that it can power
planes. It could potentially cut carbon emissions by up to 80%!
What’s more? Its chemical composition is a lot like normal jet
fuel, making it compatible with engines designed for traditional
fuel. So you don’t have to worry about modifying existing plane
engines to accommodate SAF.

But as cool as it sounds, here’s the thing. Despite many airlines

aspiring to meet 10% of their fuel needs through SAF by 2030,
only about 0.1% of it is in use today. And that’s because making
SAF comes with its own set of challenges.

To begin with, growing food crops solely for fuel requires vast
swathes of land. And that means mass deforestation, displacing
biodiversity such as animals and plants already under threat or
even indigenous peoples all over the world.
Another concern is that SAF doesn’t come cheap. Until
production scales up, SAF could cost two to four times more
than the historical average cost of regular jet fuel. A report by
consulting firm Bain & Company has proof. It suggests that if
the global aviation industry wants to bring down its emissions
to almost zero by 2050, it will have to invest close to a whopping
$2 trillion. And that’s also because it needs capital to build
refineries that will make SAF. It could eat up airlines' razor thin
profit margins, while even making ticket prices expensive for
flyers.

That’s why researchers are constantly looking for new ways and
sources to make SAF with minimal roadblocks. Recently, for
instance, Firefly Green Fuels, a UK-based aviation company
came up with a way to process human poop into SAF! That’s
definitely weird. But it could lower carbon footprint by 90% as
compared to standard jet fuel. It’s also may be a solution to a lot
of problems SAF production is currently grappling with.

See, we told you earlier that you could need a lot of crops or
waste to make sustainable jet fuel. But the thing is that a lot of
other industries like the automobile and energy sector have
their eyes on these resources to make sustainable fuel too. So
you need something that the aviation sector can solely rely on to
meet its needs. And human poop could solve that.

For one, it’s available in abundance. And two, flights can save
up on money they need to source SAF. Meaning, if they have to
lay their hands on crop residue or waste from oils and sewage,
they’ll have to spend money to transport these resources from
different places. But human poop could be sourced more easily
from aircraft and airports, reducing raw material costs.

But before you get too excited about this novel idea, here’s
something you might want to know.

See, the International Air Transport Association (IATA) says

that it expects to have the capacity to make at least 69 billion
litres of SAF by 2028. And to meet such expectations, we’ll need
scalable resources. Now, although human poop could be
available in plenty, you can't scale production easily. So even if
all of the UK’s sewage waste is put into making jet fuel, it would
still only meet 5% of the country’s jet fuel requirements. In case
you didn’t know, the UK has a legal mandate to meet at least
10% of its jet fuel needs through SAF by 2030. So the other half
of its needs have to be sourced from things like cooking oils and
crops.

Another problem SAF made from human waste may not solve is
contrails. We’re talking about those streaks of white cloud that
planes leave behind in clear blue skies when they fly. Actually, a
lot of heat is produced from this aesthetic emission. And it also
contributes to making temperatures warmer. For context,
between 2000 and 2018 contrails created over half of the
aviation sector’s warming impact. This was even more than the
CO2 emissions from burning the fuel itself. So that’s that.

And finally, SAF from crops could still be more sustainable

since plants absorb carbon as they grow. So eventually, they
offset the amount of carbon emitted from their use. But humans
are carbon emitters. And converting their waste into jet fuel
may not really be more sustainable than crops itself.

So yeah, human poop may not be the ultimate solution to all of

SAF’s problems, but it’s definitely one of the wheels that can get
the SAF truck going.

Until then…
 Should we blame
immigration for
Canada’s
economic woes?

Canada might be headed towards a recession and people are

blaming immigration policies.

So in today’s Finshots, we explain why Canada might be

finally putting a squeeze on its immigration policies.
Before we begin, if you're someone who loves to keep tabs on
what's happening in the world of business and finance, then hit
subscribe if you haven't already. We strip stories off the jargon
and deliver crisp financial insights straight to your inbox. Just
one mail every morning. Promise!

If you’re already a subscriber or you’re reading this on the app,

you can just go ahead and read the story.

The Story
A decade or so ago, Canada realized that it was facing a double
whammy.

Its economic growth was anaemic. And some people blamed it

on a lack of competitiveness. The country was quite dependent
on its natural resources — stuff such as gas and uranium that it
didn’t focus on innovation. For instance, ‘high-tech’ exports of
computers and drugs were only 4% of exports for Canada. But
for other members of the Organisation for Economic Co-
operation and Development (OECD), it was nearly double that.

Another problem was that Canada’s demographic dividend was

waning. Or put another way, the ratio of senior citizens who
couldn’t contribute to the workforce was rising and it would
hurt productivity. While there were 7 workers to 1 senior in the
1970s, that number had fallen to 3 workers to 1 senior.
So when Justin Trudeau came into power in 2015, his idea was
to add an artificial sweetener to growth — immigration. He felt
that if you expand the population and workforce, it increases
the potential growth rate.

How’s that, you ask?

Well, for starters think of the potential growth rate as how much
the economy can grow without adding to inflation. And if you
want to drive growth you need three basic ingredients — capital,
productivity, and labour.

And here’s how the Deputy Governor of the Bank of Canada

explained this last month:

Every year during the holidays, my brother makes tourtière [A

French-Canadian meat pie] to give to his friends and family.
Think about potential output as the number of tourtières my
brother can make in a day. If he wants to make more people
happy, he needs to be able to make more tourtières than he
does now.

He can boost his tourtière output — or increase potential — in

three ways:

• through capital — he could buy a second, bigger stock pot to

make more of his meat filling;
• through productivity — he could rearrange part of his kitchen
and set it up like a production line to assemble the tourtières
more quickly; or
• through labour supply — he could get his kids to help out.
The kids in this analogy are the immigrants. They come in and
help make more of these meat pies and it boosts economic
output without adding to inflation.

And like we said, Canada’s demographics weren’t looking good.

1 in 5 Canadians were close to retirement. That’s a problem
because it could result in a shortage of workers for critical tasks.
Also, the dependency ratio or the number of people who rely on
the working population will rise. It could result in financial
strain on the economy.

So Canada needed outsiders to give a jolt of fresh energy. And it

worked. The economic growth jumped and started to keep pace
with its big neighbour, the US.

But what about the impact of all these immigrants on the

inflation then?

Well, it all depends on the type of immigrants coming into the

country and which sectors they end up working in. For instance,
let’s say that a fair portion of the immigrants are lower-skilled
workers who end up in manufacturing plants. The supply of
labour at a lower cost could be then passed on as lower prices
for the goods being made.

Also, it looks like immigrants are more sensitive to price

fluctuations too. If retailers increase prices, immigrants cut
back on consumption quite significantly. So in order to benefit
from more sales, retailers often end up keeping prices lower just
to attract immigrants too.
Then there’s the matter that many immigrants end up moving
to the country to save up and send money back home to family.
As a consequence, these folks spend less than the average
Canadian.

And when the Canadian central bank put all this into
perspective, they found that the ‘newcomers’ — that’s how they
referred to immigrants — have less than a 0.1% impact on
inflation.

So yeah, the idea seemed to work. And immigration turned out

to be quite a boon to the economy.

But wait…this growth was hiding two things. Two things that
are making Canadians quite unhappy now.

For starters, the International Monetary Fund (IMF) pointed

out that the growth didn’t necessarily improve the living
standards of the average Canadian. They said that since 2016,
the GDP per capita had grown by only 2.4%. In comparison, the
US saw a rise of 11.7%.

So the benefits of these new policies or immigration didn’t really

trickle down to the masses. Or as economist David Rosenberg
put it, “You can create this mirage of economic prosperity, but
in the end that’s what it is, a mirage”.

Secondly, while immigration didn’t affect broader inflation, it

might have decimated the housing market.
See, irrespective of the kind of immigrant moving to Canada,
they need housing. And the issue here is that Canada hasn’t
been able to keep pace with building new homes. The demand
for homes is far outstripping its supply.

The end result?

The vacancy rates — or the units available — collapsed. From over

7% in 2015 to a little under 4% today. In fact, it’s at a historic
low right now with everyone vying for a roof over their heads.

As a consequence of this mismatch, rents are shooting up too.

In fact, rental inflation is at a four-decade high.

Now let’s say someone had enough of these exorbitant rents.

They decide that buying a house is better because that way at
least they’ll have an asset in their hands. Well, without enough
new housing to go around, things are even more dire for buyers.
Canada’s price-to-income ratio or how much homes typically
cost when compared to average income is at whopping 9.6
times. For context, it’s at 4.2 times in the US.

So yeah, you can see why Canadians might be inclined to blame

immigration for all its woes. Even if it’s not the entire cause.

So what can the country do now?

Well, for starters, they need to urgently fix the housing issue
urgently. See, while Canada does have an immigration policy to
welcome qualified construction workers, it hasn’t moved the
needle by much. Only 0.1% of annual Permanent Residence
(PR) permits were issued to this segment. So they need more
people who can help boost this construction work now.

But more than anything, Canadians might need to realize that

it’s not immigration that’s the problem. It’s probably the shaky
corporate foundations that don’t encourage innovation. Canada
just needs to look at its neighbour, the US, again for this —
immigrants are 80% likelier than native-born folk to launch a
company. And maybe that’s the kind of competitive spirit
Canada needs to breed if it wants sustainable growth.

Until then…

Cheap products, fast

shipping, and variety.
Temu has buyers hooked to
the cart

By Lu Zhao
But who pays the price for this Chinese e-commerce platform’s secret to success—
suppliers, competitors, or the customer?

12 Jan 2024 / 10 min read

2 Comments
Lu Zhao (赵璐) is a bilingual and multimedia journalist, researcher, translator, and consultant.
READ SUMMARY

For London-based Zahra Abdesserlam’s regular shopping hauls,

Chinese online marketplace Temu has displaced American e-
commerce giant Amazon.

On her days off, the 54-year-old would routinely scroll on her phone
before getting out of bed in the morning. She would check the
delivery status of her latest purchase on Temu, a platform built
chiefly for customers in North America and Europe.

Next, she would spend another 40 minutes browsing offerings and

making other impulse purchases. With a continuous stream of new
products, unmissable deals, and manufactured FOMO, the
excitement never fades.

Abdesserlam has bought dozens of pairs of earrings and a small

collection of glowing, “funky and trendy” phone chargers, then
handed them out as gifts to family and friends.

“I think they make quite good money with me,” she quipped to The
Ken with a chuckle. “I need to stop, actually.”

Launched in Boston in September 2022, Temu is already rocking the

global e-commerce boat, with millions of users like Abdesserlam in 48
countries across six continents. The platform, operated by PDD
Holdings—the company behind the Chinese e-commerce app
Pinduoduo, which has given Alibaba a run for its money—has already
topped download charts in the US.

SEE MORE VISUAL STORIES

The US accounts for over half of Temu’s downloads and is its largest
market. By the end of 2023, the platform had nearly 70 million
monthly active users in the country.

An expensive affair // To make headway in the US, Temu ran two Super Bowl ads,
which cost up to US$7 million for 30 seconds of airtime in 2023
Temu uses the same set of techniques used by other successful e-
commerce platforms that came before it. Think Chinese fast fashion
retailer Shein’s agility and social media virality, but applied to all
types of products beyond fast fashion. Besides, it blends dark pattern
design elements such as gamified discounts and deals with
countdown timers—irresistibly drawing in customers like
Abdesserlam.

The company has also been quick to tap into Tiktok and Instagram
influencers, showering them with free packages in exchange for
social-media endorsements.
Temu is following in the footsteps of its Chinese sibling Pinduoduo
and becoming a global e-commerce force to reckon with, challenging
the likes of Amazon, Etsy, Korea’s Coupang Inc., and Japan’s Rakuten.
But it’s also putting the heat on suppliers who have found success on
the platform and helped Temu woo customers around the world.

For the ‘billionaire’ in every customer

Temu’s cut-rate prices are a prime draw for first-time visitors. Even
for bargain hunters, the prices seem too good to be true: a pair of
Boho retro earrings for US$1.18, a portable 400mL blender for
US$11.48, and a 25mm curling wand for US$14.48. Spend at least
US$10, and there’s free shipping straight from the warehouses in
China.

Many of these products are from the same Chinese manufacturers

that sell their goods on Amazon, said Ed Sander, a digital tech analyst
who operates Chinatechtrip, a company that organises tours
introducing the digital economy in China. Often enough, identical
products are listed on Temu, Amazon, and Pinduoduo, but at
drastically different prices.

SEE MORE VISUAL STORIES

The idea, as Temu’s tagline promises, is to let users “shop like a
billionaire”. But each order leads to a US$30 loss on average, per
Wired research. As a result, Temu is estimated to sustain annual
losses of 4.15–6.73 billion yuan (US$588–954 million) across all
markets in which it operates.

Temu did not respond to The Ken’s requests for comment.

While the financials may appear bleak, Sander believes the hefty
expenses make sense for an e-commerce platform that is going global
at an unprecedented pace.

“You can see that as a customer acquisition cost. If you spread that
out over the lifetime value of a customer, it’s simply an investment
into getting their first customer order,” he explained. “I think we
should look more at what Pinduoduo has been doing in China and
project that on Temu.”

Sander was referring to Pinduoduo’s meteoric rise in its home

market. Last year, it surpassed Alibaba as the country’s most valuable
e-commerce company. Now, Temu is using the same tactics across
the globe.

“They [PDD Holdings] don’t have much room to grow anymore in

China. Their customer growth has flattened out,” said Sander. “They
have to go cross-border.”
The gambit is already paying off for Temu. Sales in the third quarter
of 2023 topped US$5 billion. On its first anniversary in September, its
single-day gross merchandise value ( GMV ) hit US$80 million.

For customers, however, that “billionaire” shopping experience isn’t

turning out to be all that luxurious.

Get what you pay for

Three of the 10 products that Sander bought on Temu came with
defects. After lodging complaints, he received refunds.

Over in London, Abdesserlam also received electronics that didn’t

work or lacked clear instructions. However, she decided that pursuing
refunds would not be worth the time since the prices were so low.

“It’s hit-or-miss. For the money you pay, the quality is reasonable,”
Sander said.

For some Temu users, such compromises are offset by an alternative

blend of products and service coverage.

“Quality aside, I’ll admit I do appreciate many of the unique products

on Temu that would be difficult, if not impossible, to find in
Whitehorse [Yukon’s capital],” said shopper Matthew Bossons, who
was based in China for nearly a decade before relocating to Canada.
Bossons bought an ear-cleaning kit off Temu that comprised “the
same tiny metal scoops, spoons, and hooks one might find at a
roadside ear-cleaning booth in Vietnam.” The fact that his Temu
orders arrive at his doorstep faster than local e-commerce shipments,
even from Walmart, is an added advantage.

“Everything I’ve purchased on the app has

arrived within a week or two, which is pretty
impressive considering I live in a super remote
community in northern Canada.”
MATTEW BOSSONS, WHO RELOCATED FROM CHINA TO CANADA

The side effect

In Temu’s business model, every fraction of a cent makes a
difference. As a result, there is immense pressure on the platform’s
suppliers that stock its infinite aisles to slash their prices.

Wordplay origins // Temu’s name is a truncation of “team up, price down.” The
second phrase reflects the concept that the platform marks down the prices of
popular products. The “team up” with suppliers, however, may be ephemeral
Hunter, a China-based supplier, was among the first apparel
manufacturers to sign on with Temu. He wanted to go by his English
name to avoid legal disputes with the company.

Hunter’s business is based in Yiwu, an eastern China city known for

its sprawling wholesale markets. It is one of the top 20 apparel
manufacturers in the country by output volume. His crew specialises
in making products that are exported to the US. They process 30,000
to 50,000 orders each day.

Hunter found success by offering his services through Alibaba.com,

which connects China-based suppliers with buyers around the world.
He was then poached by Temu in September 2022, when the
platform was launched. The selling point for him was the fact that
Temu would handle shipments, marketing, and customer service. All
he had to do was ensure apparel rolled off from his production line as
speedily as possible.

“In the initial phase, it was smooth as [Temu] lacked manufacturers

and products, and we could generate a good profit of 20–25%,” he
said.

The holiday season that year turned out to be overwhelming. Temu’s

warehouses in Guangdong, a coastal province of southeast China,
were too small to store enough products to fulfil the incoming orders
from the US. Hunter went on to finance his own warehouse for
Temu, 3km away from one of the platform’s facilities, to keep the
supply chain flowing.

At the time, Temu worked with 3,000–4,000 suppliers in Yiwu. But

when Covid restrictions in China were lifted at the onset of 2023, it
embarked on a road show to recruit more across the country. By
March 2023, its supplier count in Yiwu was over 20,000. By the end of
the year, 11 million merchants were listing products on the platform.

Then came Temu’s squeeze. The largest manufacturers—the first

ones to sign on—were hit the hardest. “I had tens of thousands of
products in my warehouse, so Temu demanded that I either lower
prices or face restricted product promotions on the platform that
would hinder sales,” said Hunter. “It was essentially a threat.”

He ended their working relationship in June 2023. “The platform

cannot thrive if it fails to nurture top sellers.”

A similar mould // PDD designed Temu to replicate the success of Pinduoduo in

China, where it attained US$15 billion GMV two years after its 2015 launch, but on a
global scale
Departures like Hunter’s hardly matter at Temu’s scale.
Manufacturers and merchants continue to join the platform.

One of them is He Wen, the head of a newly formed cross-border e-

commerce department at a Yiwu-based company. She ventured into
selling household goods as a small-scale merchant on Temu last May.
She has experience placing products on Amazon and Shopee but
found greater advantages in Temu’s economies of scale and fully
managed model.

He sources products from online firms, such as Alibaba’s B2B

platform 1688 or Pinduoduo, and directly from factories in Yiwu. She
manages the labelling, packaging, and logistics up to the goods’
arrival at Temu’s warehouses in Guangdong.

He gets 7,000 orders per month, with a 40% profit margin. She plans
to launch more shops on Temu and sell high-margin products such as
electronics and toys.

But like Hunter, the goalposts were moved for He; Temu asked her to
lower prices once her sales numbers rose high enough. However, she
hasn’t made any adjustments and, for now, is still selling products
through Temu.

Meanwhile, He came to a crucial realisation—Temu now holds sway

over her products’ life cycles, and sellers have limited control over
how long they can last on the platform if Temu deems their offerings
out of favour.

Globally, Temu is leading e-commerce in a more competitive

direction than ever before. It is already the go-to place for students
to outfit their dorm rooms, young white-collar workers to stock their
wardrobes, and landlords to source everything they need to furnish
their properties.

While it burns cash in a bonfire, it also surpasses Amazon and

Walmart as the most downloaded app in the US and is taking on
dollar stores.
“I’m not a big fan of PDD or Temu as a company, but I am very
impressed by the business models that they come up with. They’re
very smart, and they’re extremely efficient,” Sander said.

The combination of ultra-low prices, relatively fast global shipping,

and an Amazonesque product range has developed die-hard
customers—but it has become easy for those same buyers to go
overboard.

In London, Abdesserlam reflected on how much she had bought from

Temu over the past few months and said, “I deleted the app. I need
to stop.”