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19/09/2019by EOS Intelligence EOS Intelligence No Comments

Decoding the USA-China 5G War

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The USA perceives Huawei, world’s largest telecom network equipment supplier and second largest smartphone manufacturer, as a potential threat capable of using its telecom products for hacking and cyber attacks. The US government suspects that China could exploit Huawei for cyber espionage against the USA and other countries. Amidst national security concerns, the US government has called for global boycott of Huawei, including of its 5G product range. The USA’s efforts to clamp down Huawei have rippling effect across the 5G ecosystem.

The USA and China have been trading rivals since 2012, particularly on the technology grounds. This resulted in a ban on China-based telecom equipment provider Huawei preventing it from trading with the US firms, over the accusation of espionage of critical information to the Chinese government. As a result, Huawei was barred from selling any type of equipment to be used in the US communication networks. This ban pertained to the 5G network equipment as well, and thus, Huawei’s 5G network equipment was ruled out from deployment in all parts of the USA. Few other countries, which agreed with the USA’s accusations on Huawei, also imposed a ban on the company’s 5G network equipment. The move severely affected Huawei’s exposure to some of the potential 5G markets, but it came as sigh of relief for its global competitors wary of Huawei’s growing dominance in 5G space.

Further, on May 16, 2019, the US government decided to put Huawei on the Security Entity List which restricted the company from buying any US-based technology (key hardware and software) for their 5G network equipment without approval and license from the US government, thus aggravating the 5G war. This not only brought new set of challenges for Huawei, but also created a rough path for the USA’s own technology firms involved in supplying components to Huawei. Considering impact on the US technology firms having Huawei as a key customer, on June 29, 2019, the US government announced relaxation on the Huawei ban, thereby allowing these US firms to continue their supply to Huawei for a 90-day period which got over in mid-August. The relaxation period was further extended till November 18, 2019, giving temporary relief to Huawei and its US-based business partners.

Huawei bears the brunt of USA-China 5G clash

The USA has initiated a global campaign to block Huawei from next-generation wireless communication technology over security concerns and it is pressuring other countries to keep out Huawei from 5G rollout. This invited quite a few repercussions for the company. One of the major and obvious consequences involved a major loss of potential market opportunity in the US territory as well as in other countries which are under strong influence of the USA.

After prolonged persuasion by the US government, in July 2018, Australia banned Huawei from 5G rollout in its territory. Japan also joined the league in December 2018 by imposing a ban on Huawei’s network equipment for 5G deployment, amid the security concerns to avoid hacks and intelligence leaks. Further, New Zealand and Taiwan also followed the suit in shutting out Huawei from 5G deployment.

In June 2019, the founder and CEO of Huawei, Ren Zhengfei, indicated that the company is likely to experience a drop in its revenue by US$30 billion over the next two years, which can be seen as a knock-on effect of growing US sanctions on Huawei. Also, Huawei expects its smartphone shipments to decline by 40% to 60% by the end of 2019 as compared to the total shipments in the previous year.

Despite repeated warnings from the USA, some countries have come out in support of Huawei by rejecting the USA’s claims. The regulatory bodies of countries such as Russia, Germany, Brazil, South Korea, Finland, and Switzerland have taken their decisions in favor of Huawei and allowed the company to deploy its 5G network equipment in their territories, affirming that they do not see any technical grounds to ban the company from their telecom networks.

Moreover, the US government has been persistently urging many European countries, especially the UK, to join its decision of barring 5G trade with Huawei. In March 2019, the EU recommended its member countries not to impose outright ban on Huawei, but instead assess and evaluate the risks involved in using the company’s 5G network equipment. Already earlier, in February 2019, the UK government concluded that any risks from the use of Huawei equipment in its 5G network can be mitigated through certain improvements and checks which the company will be asked to make and hence the decision of completely banning the company’s equipment from UK’s 5G network was not taken.

Among Asian countries, India, the second-largest telecom market in the region, has not decided whether to allow Huawei to sell its 5G network equipment in the country. China has warned the Indian government that the repercussions of banning Huawei equipment would include challenges in catering to the demand for low-priced 5G devices, thus causing a hindrance in rapid development of India’s telecom sector. In June 2019, the Department of Technology of India indicated that, since the matter of Huawei concerns the security of the country, they will scrutinize the company’s 5G equipment for presence of any spyware components. India will see how other countries are dealing with the potential security risks before giving a green light to the company.

The USA’s allegations against Huawei have made all the countries cautious over dealing with the company. Despite having proven technological supremacy in 5G network equipment market, Huawei has come under strong scrutiny for its 5G network equipment across the globe.

Huawei ban: Boon for some, bane for others

Huawei’s troubles are turning into major opportunity for its competitors in the 5G network equipment and smartphones market space. However, suppliers to Huawei, particularly US-based companies providing hardware and software for 5G devices and network equipment, took a hard hit as they lost one of their key customers because of the trade ban.

Huawei ban presents increased opportunities for its global competitors in 5G network equipment market

Major competitors of Huawei in 5G network equipment manufacturing business – Samsung (South Korea), Nokia (Finland), and Ericsson (Sweden) – are positioned to get the inadvertent benefit of expanded market opportunities with one competitor less. With Huawei losing potential market in countries where it is facing backlash, its competitors managed to grab a few contracts.

For instance, in March 2019, Denmark’s leading telecom operator TDC, which had worked with Huawei since 2013, chose Ericsson for the 5G rollout. Further, in May 2019, Softbank Group Corp’s Japanese telecom unit, which had partnered with Huawei for 4G networks deployment in the past, replaced Huawei with Nokia for its end-to-end 5G solutions including 5G RAN (i.e. radio access network equipment including base stations and antennas which establish connection between individual smart devices and other parts of the network). In the USA, Samsung is gaining significant traction as it has started supplying 5G network equipment to some of the leading US telecom operators including AT&T, Verizon, and Sprint.

A report released in May 2019 by Dell’Oro (a market research firm specializing in telecom) indicated that Samsung surpassed Huawei for the first time by acquiring 37% of the share of total 5G RAN revenue in the first quarter of 2019. In the same period, Huawei stood second with 28% share, followed by Ericsson and Nokia with 27% and 8% share, respectively. Earlier, Huawei led the 5G RAN market in 2018, accounting for 31% share of total 5G RAN revenue that year. Huawei was followed by Ericsson, Nokia, ZTE (China), and Samsung with 29.2%, 23.3%, 7.4%, and 6.6% share, respectively. Due to widespread skepticism about Huawei over espionage accusations, a shift in 5G network equipment market can be expected by the end of 2019, since competitors are likely to gain more growth momentum over Huawei.

Demand for Samsung smartphones gets a boost as Google blocks Android support to Huawei

In the smartphones sector, Samsung, which is the world’s largest smartphones manufacturer, may turn out to be the winner in the Huawei ban situation. Huawei, through its low-priced Android smartphones with features similar to Samsung’s smartphones, is emerging as the largest rival of Samsung in the smartphone market.

As per IDC data, Samsung’s market share (by total smartphone shipments volume) declined from 21.7% in 2017 to 20.8% in 2018, whereas Huawei recorded 33.6% year-on-year growth as market share increased from 10.5% in 2017 to 14.7% in 2018. But since Huawei was placed on US trade blacklist, Samsung is likely to benefit from the situation because of the broken deal between Google and Huawei which led Huawei to lose access to Google’s Android operating system (OS) for its next-generation 5G smartphones.

While Google managed to get a temporary license to continue to provide update and support for existing Huawei smartphones, it prevented Google from providing Android support for Huawei’s new products including soon to be released 5G smartphones. Huawei indicated that its latest 5G smartphones Mate 30 series, which will be launched on September 19, 2019, will run on open-source version of Android 10 and it will not have any of the flagship Google apps such as Google Maps, Google Drive, Google Assistant, etc.

Huawei unveiled its own operating system named HarmonyOS on August 9, 2019, but it still seeks support of Google’s Android OS for its upcoming 5G smartphones along with access to widely popular apps such as Facebook and WhatsApp which all belong to American firms. Android OS, controlling over three-fourths of the mobile OS market as of August 2019, is widely adopted by both the app developers as well as the users. As of second quarter of 2019, Android allowed its users to choose from 2.46 million apps. Encouraging app developers to rewrite their apps as per platform-specific requirements of a new OS with low user base is challenging. Conversely, consumers prefer OS which allows them to use all the apps they like. If HarmanyOS needs to be used as Android replacement, Huawei will need considerable time and financial resources to work with app developers to add similar apps to Huawei’s HarmonyOS.

Explore our other Perspectives on 5G

The future scenario for global 5G smartphones market will depend on the pending decision of the US government over allowing US technology firms to trade with Huawei. If the US government allows the trade, Huawei will have high chances of leading in the 5G smartphones sector owing to its competitive pricing and innovative solutions. On the other hand, if the ban still persists in future, the market of Huawei’s global competitors, Samsung in particular, is likely to swell, owing to their trusted brand name and reliability along with the support of Android OS.

US-based hardware suppliers for telecom devices face revenue loss as they lose their key customer, Huawei

The US government’s executive order issued in May 2019 blocking US exports to Huawei led to adverse effect on the revenue of the US-based companies that used to supply key hardware to Huawei for its 5G network equipment and devices.

For example, Qualcomm which was one of the largest sellers of modem chips, mobile processors, and licenses for 3G, 4G, as well as 5G technology in the Chinese market, has experienced a decline in revenue by 13% year-on-year in the third quarter of 2019 along with decline of approximately 36% in shipments of chipsets and processors. Similarly, Broadcom, which supplies switching chips used in network equipment, is also facing challenges with loss of its highest revenue-generating customer, Huawei, accounting for US$900 million of company’s revenue in 2018. Considering the Huawei blacklisting’s impact on financial results in the first two quarters of 2019, Broadcom has even cut its revenue outlook of the fiscal year 2019 from US$24.5 billion to US$22.5 billion.

In view of financial implications of Huawei blacklisting on the businesses of US-based technology firms, the US government, in June 2019, reprieved the trade ban on Huawei till November 18, 2019. Post the relaxation period, the US government may again ban Huawei from doing business with US technology firms. In case the US government puts the ban in effect owing to the security concerns, the repercussions are likely to deepen further for the US firms over losing considerable revenue coming from China’s telecom hardware industry.

Ban on Huawei means telecom operators will have to pay a higher price for 5G network equipment

Huawei ban is also seen to be impacting the US telecom operators as they face a particular challenge of increasing outlay to build the 5G networks. This is because the 5G network equipment provided by Nokia and Ericsson is more expensive than Huawei’s. In March 2019, Huawei claimed that allowing the company to compete in the telecom market in North America would reduce the total cost of wireless communication infrastructure development in the region by 15%-40% and provide an opportunity for telecom operators to save US$20 billion over the next four years.

The cost factor has also made some European countries sway their decision in favor of Huawei. In June 2019, GSMA, an industry association with over 750 telecom operators as members, indicated that shunning Chinese equipment from 5G network deployment in Europe would add EUR 55 billion (~US$61 billion) to the costs of telecom operators and will also cause the delay of about 18 months in 5G network deployment. In fact, to avoid such repercussions, many European countries have already decided to continue buying telecom equipment (including 5G network equipment) from Huawei and other Chinese firms, Greece being the latest one to join the group of countries including Switzerland, Finland, Sweden, and few more.

India, which is a huge market for low-priced smartphones and telecom network equipment, still remains undecided on the proposed ban on Huawei. The 5G network equipment supplied by Nokia and Ericsson in India is expected to be 10%-15% more expensive as compared to Huawei’s. Also, Huawei claims that imposing a ban on the company will push back 5G deployment in India by two to three years. Moreover, the prolonged decision-taking has also affected the 5G network deployment timeline of the country and thus slowing down the overall development of its telecom industry. Dilemma whether to work with Huawei is seen to have wide-reaching implications on overall development of 5G technology in some countries.

EOS Perspective

The USA-China 5G war has taken many unpredictable turns over the last year, resulting in adverse implications for Huawei and its US-based business partners. The current status of the 5G war indicates a relaxation over the Huawei ban till November 18, 2019. This allows the US companies to continue supply of their technology products including key software and hardware required by Huawei for 5G equipment manufacturing. However, the relaxation of the ban is not intended to remove Huawei from the US Department of Commerce’s Entity List and the US companies still have to apply for temporary license for exporting products to Huawei.

The USA has been targeting Huawei since 2012, and there seems to be no stopping. Considering the implications of the US sanctions, Huawei has been making notable efforts to end the ongoing discord with the US government. Huawei has always denied all the accusations and maintained that the company is willing to work with the US government to alleviate their concerns over cybersecurity. In May 2019, Huawei proposed implementation of risk mitigation programs to address potential security threats. To further appease the US government, on September 10, 2019, Huawei proposed selling its 5G technology (including licenses, codes, technical blueprints, patents, as well as production know-how) to an American firm. This is seen as one of the boldest peace-offering deals by Huawei to win back the trust of the US government. Huawei claimed that the buyer will be allowed to alter the software code and thereby eliminate any potential security threats.

Currently, there is no US company manufacturing 5G network equipment. Acceptance of Huawei’s proposal would enable the USA to gain footing in the 5G network equipment market and mitigate the fears over rising dominance of Huawei in global 5G space. While the move risks to create a competitor for Huawei in the 5G network equipment market, the company could also use this as an opportunity to evolve from core manufacturing business to providing technical expertise to other companies for manufacturing 5G equipment. The proposal is still subject to approval from the USA and Chinese governments.

While Huawei is ramping up its efforts to break the deadlock with the US government, at the same time, the company is also devising a parallel strategy presuming the worst possible outcome of USA-China trade tensions over 5G, i.e. the USA eventually cutting off ties with Huawei. The company is working towards a contingency plan with an ambition to take control of its supply chain and reduce its dependency on the US technologies and supplies.

One of the major actions of its plan B includes developing its own operating system HarmonyOS as a substitute to Google’s Android OS. While Huawei wants to continue with Android OS for its future 5G smartphones, in case the US government blocks Huawei’s access to Google’s services, Huawei will have to switch to own HarmonyOS.

China, Huawei’s home market, is more receptive to the company’s products, and switching to own operating system is expected to work in favor of the company. In July 2019, Canalys, a Singapore-based technology market research firm, estimated that China would account for over one-third of 5G smartphones globally by 2023. Huawei could use this opportunity to develop its proprietary OS based on the learnings in China before expanding globally to compete with more established and mature OS such as Android OS and iOS (which respectively controlled 76.23% and 22.17% of the smartphone OS market as of August 2019).

On the other hand, in anticipation of loss of partnerships with key suppliers such as Qualcomm and Broadcom, Huawei had stockpiled critical components between May 2018 and May 2019, according to a research report by Canalys. This move was aimed at ensuring the continuity of production of 5G products that rely on core technology from US-based firms for three to twelve months.

Further, Huawei has been developing proprietary chipsets for its 5G smartphones and networking products, which are being considered as alternatives for products offered by Qualcomm and Broadcom. On September 6, 2019, Huawei launched Kirin 990, a new 5G processor for smart devices, which will power Huawei’s upcoming 5G smartphone including Mate 30 series. Further, in January 2019, Huawei launched a 5G multi-mode chipset, Balong 5000 that supports a broad range of 5G products including smartphones, home broadband devices, vehicle-mounted devices, and 5G modules. The company claims this chipset to be the first to perform to industry benchmark for peak 5G download speeds.

Seeing such developments at the Huawei’s end, it is clear that the company is striving hard to remain on the top of 5G network equipment and device manufacturing sector. The USA’s efforts to derail Huawei from its path to dominance in 5G are certainly going to impact the overall growth of the company in short term, but, with its plan B, things are expected to smooth out for Huawei in future. Even if Huawei is not be able to retain its current global leading position in 5G network equipment and device manufacturing, it will certainly remain one of the strong contenders. The US sanctions are further encouraging Huawei to evolve as an all-round player in the 5G ecosystem.

On the contrary, the USA’s aggression against Huawei is expected to hit its own technology industry in the long term. For instance, the blacklisting of Huawei will not only cost the US technology firms to lose one of its largest customers, but will also result in intensified competition as Huawei ramps up its in-house capabilities to fulfill the demand of the entire 5G ecosystem. An example of this could be Huawei’s announcement in April 2019 that the company was open to selling the 5G chips to rival smartphone companies, including Apple. Moreover, if Huawei’s HarmonyOS is able to succeed in gaining significant user base, it would challenge the dominance of Android and iOS. Hence, it would be in best interest of the USA and its technology industry, if the country could take a different approach and try to control and minimize security risks related to Huawei’s engagements, rather than placing an outright ban on the company. Similar to what Germany did in December 2018, the USA could encourage telecom operators to establish verification centers and hire third-party experts to identify and resolve vulnerabilities in Huawei’s 5G network equipment and devices.

01/07/2019by EOS Intelligence EOS Intelligence No Comments

The Rapid Rise of India’s Food Tech: Yet Another Tech Bubble?

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In the past few years, food tech (online food delivery) industry in India has seen substantial growth in terms of daily order volumes (DOVs), revenue, and funding. While the business is growing for all players, they are still posting losses. A closer look into their financials and business models reveals that the current operating margins are very thin, and much of the recent rapid growth has been on the back of heavy discounting offered by players to attract customers. At present, the growth strategy is loud and clear: to acquire new customers, enter new markets, and expand current market share at any cost. This has raised a question whether such a model is sustainable in the long run or is it another tech bubble just waiting to burst?

Less than five years ago, the way Indians consumed food was completely different. Eating out was predominantly occasion-driven, while ordering food was limited to calling local restaurants or ordering a pizza from Dominos or Pizza Hut through their own websites. Online food ordering through apps was not at all a part of consumers’ culinary vocabulary.

However, this has been transforming over the past few years. There is a growing trend among Indians to order their food online via food aggregation apps. Today, Indian consumers, especially in metro and larger cities, are ordering food online more often than before. As a result of this, food tech has become one of the fastest growing internet sectors in India with an astonishing triple-digit growth rate in gross merchandize value (GMV) and DOVs in 2017 and 2018.

Huge potential waiting to materialize

After an initial hype among entrepreneurs and investors in 2015, the food tech industry saw a slump and market consolidation in 2016 and 2017. Yet in 2018, India’s food tech industry rekindled investors’ appetite for the sector with huge spending spree. Driven primarily by rising disposable income, rapidly growing internet and smart-phone penetration, urbanization, and a young and working-class consumer base, India’s food tech industry stood at around US$700 million in 2017 and is expected to reach US$4 billion by 2020. In 2018, DOVs went up to 1.7 million orders from 0.2 million in 2016. The current market consists of four key players. Leaders Swiggy and Zomato currently hold a combined market share of ~70%.

The market still in its infancy

While order volumes have gone up significantly in the last 12-18 months, the industry is still in its infancy considering its outreach and adoption rates across the nation. At present, online food ordering is available in just over 200 cities across India and contributes to merely around 5% of the total food delivery business.

Further, India’s US$1.7 billion food tech market is pretty small compared to US$10.5 billion in the USA and US$36 billion in neighboring China. Out of the 90 meals consumed each month, Indians eat out or get their food delivered less than five times a month as compared to around 40-50 meals in countries such as Singapore, China, and the USA. In a nutshell, food aggregators have just begun to scratch the surface in India and there is a long road ahead for the industry to develop and grow further.

Growth driven by deep discounts

While the recent growth numbers draw a compelling picture of the industry, it should be noted that much of the current growth is driven primarily by deep discounts that are offered by the players to attract customers onto their platforms. With the recent funding boom, all players are deep-pocketed. In a fierce battle for market share, companies are spending heavily on advertising, low-cost and complimentary deliveries, and discounts as their primary growth strategy. Given the huge potential of the internet economy, even investors are willing to throw in money and keep the incentives going. However, recent history in India as well as similar experiences from other internet companies globally reveal that while this can be a good strategy to attract customers and penetrate markets, it is unlikely to be sustainable.

The recent growth is not entirely organic. A significant part of it is inorganic, pushed by discounts and offers, as players focus more towards acquiring new customers, increasing their order frequency, and entering new geographies.
– Satish Meena, Senior Analyst, Forrester

Again, customer loyalty is very hard to come by in the food tech industry. With India being a price-sensitive market, consumers will often flock to the platform that offers the best deal. Just like in India’s cab aggregation industry, it will be interesting to see how the food aggregators find their revenue and DOVs impacted once these offers will start to disappear.

Penetration beyond tier-II cities

Till 2018, orders were highly concentrated among top ten cities of India. These markets accounted for around three-fourths of the total business for all players. In order to move away from these gradually saturating markets, and to scale up their outreach across India, food tech players are pushing to capture the untapped potential in tier-III cities and smaller towns with first-mover advantage. While they consider these markets to be lucrative with improving demand appetite, rising spending power, and profitability, these cities are very different from metros in terms of size and customer preferences. E-commerce adoption rates as well as user base in these cities are relatively small, and therefore it will be challenging for food aggregators to create demand here, as consumers are not acquainted to online food ordering.

On the demand side, it will be difficult for aggregators to generate order volumes from smaller cities in India. Considering that Indians are very price sensitive, once these offers are gone, the drop-out rates will be much higher in these markets as compared to metros. –
Satish Meena, Senior Analyst, Forrester

Back in 2016, Zomato tested the potential in smaller cities and had to shut down its business in four cities including Lucknow, Coimbatore, and Indore due to poor demand. Similarly, Grofers, an online grocery delivery platform expanded into several tier-II and tier-III cities. But they also had to suspend operations in nine cities, citing the same reason. While the advent of Jio (an Indian mobile network operator) and its cheap internet data packages are proving to be a boon for e-commerce players, the question still remains how food aggregators will be able to create a sustainable demand in cities where population prefers to cook its food every day.

In addition, unorganized players dominate food delivery in these markets. It will be tough for aggregators to compete with them, especially in terms of pricing, since the local players operate with very low overhead costs without the need to worry too much about hygiene, safety, and other quality standards.

Weaker financials and unit economics

With the ongoing discounts and offers, the cost of customer acquisition is very high at present. A closer look at the financials of Zomato and Swiggy reveals that their monthly cash burn has increased five times within 2018, as they resort to aggressive discounting to grow further across the country. At present, all players are posting losses. This is very common even in the global food tech industry where most players are still operating with losses. For example, China’s Meituan-Dianping and ele.me are still far from reaching the break-even point, even after 10 years in the business. The story is the same even in developed markets such as USA and the UK. The aggressive cash burn model requires food aggregators to keep raising funds at regular intervals in order to further scale up and grow. This is a major concern raised by many industry experts.

Look at China! The top two players have still not managed to turn profitable even with far superior market penetration and order volume rates as compared to India. – Former Executive, Swiggy

Another major challenge faced by all the players are the inefficiencies in their operations, a fact that has a direct impact on their unit economics and thereby profitability. Although food delivery logistics is slowly getting better, it still constitutes a major chunk of the overall cost. Players are in a dire need to leverage innovative technologies and processes to streamline their logistics operations and make the most out of their logistics infrastructure and assets.

In order to improve their unit economics and operational margins, everyone is trying to streamline their logistics operations and to make the most out of their current infrastructure and assets. –
Vaibhav Arora, Former Associate General Manager,
RedSeer Consulting

Playing by the same playbook?

For the Indian market, food tech industry’s current growth story may seem to be a flashback from the ride-hailing industry, which really took off in the early days. On the back of heavy discounts and attractive offers, it looked like a win-win situation for all. In recent years, when cab aggregators slowly started to move away from discounts, at the same time increased fares for customers on one hand, while reducing incentives for drivers on the other, they started to witness challenges on both demand and supply sides of their business.

Strategies such as surge pricing, hike in fares, cutting-down driver salaries and incentives, etc., have impacted their businesses and resulted in unhappy customers and driver partners, unreliability in services, and a tussle with local associations. Cab aggregators in India have still not found the right balance to continue to grow without leaking money.

Many industry experts believe that food aggregators will also face the same set of challenges in the coming years, as players will start moving away from discounts along with hike in delivery charges and restaurant commission in order to improve their operating margins. This is already becoming evident as delivery partners from Swiggy in Chennai went on a strike for wage-related demands in December 2018, while UberEats faced a similar situation in April 2019 in Ahmedabad.

You can connect the dots with cab aggregation business and foresee similar challenges coming up for the food tech sector. In the long run, they will start charging higher delivery fees from customers and higher commissions from partner restaurants. –
Vaibhav Arora, Former Associate General Manager,
RedSeer Consulting

EOS Perspective

In recent years, food aggregators in India have definitely created a market for themselves by inculcating consumers with online food ordering concept. There is no doubt that the Indian food tech market is still developing and has a huge potential. But it is also a difficult one to crack. As seen in the past few years, many start-ups folded up early on. Similarly to India’s cab aggregators and e-tailers, food tech companies have started to believe that discounts are the way to a customer’s heart and eventually increasing their market shares.

None of the major players within the Indian internet sector is profitable yet. Even for Indian food tech players, profitability looks elusive, at least in the short to medium term. They will require massive funding injected regularly to finance their aggressive growth strategies. Uber in its recent initial public offering (IPO) prospectus made a bold statement admitting that if may never be profitable. This is one of the deepest concerns across the industry, and many industry experts are not sure whether sustainable growth can be achieved with the present business models.

In India, it looks like a certainty that both Swiggy and Zomato will be still posting losses for at least the next two to three years. –
Former Executive, Swiggy

There are many areas which are not streamlined enough, and therefore a significant amount of money is lost there. In order to grow, players will have to address the fundamental issues around unit economics and operational efficiencies. Companies will have to find multiple ways to improve their operational efficiencies such as looking at alternative revenue streams, monetizing their fleets, building other businesses, etc. Therefore, Swiggy has ventured into hyperlocal business by starting deliveries of groceries and medicines to further optimize its current delivery fleet. Similarly, Zomato has started Hyperpure, a service wherein they deliver food products to restaurant partners in order to grow further.

On the one hand, the above mentioned strategies seem to be logical for food aggregators and the way forward to scale up their businesses. On the other hand, this approach also raises concerns whether they are trying to juggle too many balls with just one pair of hands. Are players diversifying too early and rapidly, considering that they have not yet mastered the trade of online food delivery? Will these diversifications shift their focus away from the core business? Do they have the bandwidth as well as the expertise to manage these new businesses?

Furthermore, it will be also difficult for players to continue their current growth momentum beyond 2019, since they have penetrated all metros as well as tier-I and tier-II cities in India. Growing in smaller cities with low e-commerce penetration will be a daunting task, especially without the discounts. All these challenges are likely to cause the industry growth to slow down. To continue the growth momentum, food aggregators will also have to customize their strategies for smaller towns in India. Since availability of cuisines and quality of food is the biggest pain-point in these markets, players will have to compete by offering more choices with higher quality standards. Variety and quality of food will be one of the key differentiators for them to succeed in these markets.

In order to succeed in the long run, players will have to leverage the vast consumption pattern data at their disposal, and convert them into insights. By harnessing technologies, they can smartly identify the demand-supply gaps in each market, and address them by launching relevant products and services. For example, aggregators can assess and identify particular cuisines, dishes, order time-slots, etc. that are trending in each market, based on which they can either collaborate with restaurants and push them to expand their offerings and outreach to meet the increasing demand, or themselves start to move up the value chain by setting up own cloud kitchens (delivery-only kitchens) to fill such gaps, and thus further improve their profitability.

Additionally, players will have to further innovate their offerings. For instance, since migrant workers and students are the prime target, introducing subscription based meals in this segment could allow players to gain customer loyalty as well as earn steady stream of revenue. Similarly in the B2B (business-to-business) space, they can forge partnerships with small and medium enterprises (e.g. Indian Railways) to supply meals to their employees and customers. This is another market segment with huge latent demand where variety and quality of food is the need of the hour.

While these are early days to comment on the long-term growth potential of the industry, we can expect the market and current players evolve over the next few years. Considering that no one in the Indian aggregation space is profitable yet, and the fact that the path followed by food aggregators closely resembles to the one followed by cab aggregators in India, who have found it to be bumpy, unless players can build a solid business model with a clear path to profitability, for now, the rapid rise of food tech sector looks like another tech buzz that will eventually slowly down over the years to come.

03/04/2019by EOS Intelligence EOS Intelligence No Comments

Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

19/01/2017by EOS Intelligence EOS Intelligence No Comments

Fintech Paving the Way for Financial Inclusion in Indonesia

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Over the past two decades, financial sector in Indonesia has witnessed a massive transformation with the introduction of fintech solutions, fuelled by growing digital market and increasing investments in the fintech market. The sector’s growth offers tremendous opportunities and has led to the emergence of various start-ups offering online financial services. Fintech promises technological solutions to various challenges within the financial sector and offers value-added services such as transaction analysis and customer engagement initiatives. However, challenges such as poor financial literacy among Indonesians and cumbersome regulatory processes continue to pose a threat to the market growth.

Fintech is increasingly gaining traction in Indonesia and changing the way financial companies do business. Gone are the days when banks were the only source of financial transactions in the country. Fintech has revolutionized the financial sector with the emergence of various technological start-ups in areas of mobile payment, loans, money transfers, asset management, etc.

Fintech sector’s growth in Indonesia is largely driven by the rapidly increasing internet penetration and rising smartphone usage, as well as solid and continuous investments – over 2013-2018, investments in the fintech industry are forecast to reach US$ 8 billion, growing at a CAGR of 21.7%. Despite these growth drivers, the sector faces several hurdles such as inexperienced financial personnel, lengthy regulatory processes, and poor financial knowledge among the Indonesian population.

Nevertheless, the country has been taking measures to tackle the challenges to create banks of the future. In November 2016, Bank Indonesia, central bank of the country, set up a fintech office in Jakarta to boost development of the industry. The office is aimed to optimize technological advancements across the fintech sector, assist players in understanding the regulations, and increase industry’s competitiveness by sharing its developments with international institutions. In addition, Indonesia’s Financial Services Authority is in the process of developing regulations to govern the industry, a significant step to enable both the fintech players as well as the regulators to function cohesively. Further, the industry is also receiving support from conventional financial institutions, which have started adopting digital innovations by initiating collaborations with fintech companies.

Indonesia’s high dependency on cash-based transactions along with low financial penetration rate serve as untapped opportunity areas for fintech players to explore. As of 2014, only 36% of the adult Indonesian population had bank accounts. Additionally, 89.7% of all transactions are still conducted in cash. Fintech players have gradually started leveraging these opportunity areas by expanding services with introduction of various start-ups offering a range of online financial products. As of 2016, the country hosted around 140 independent start-ups, an improvement from just a handful a few years ago, representing a steady growth of the industry. Some of the prominent players of the industry include HaloMoney, Cekaja, and Kartuku, among others.

EOS Perspective

Fintech is the answer to the need for a more secure, fast, and practical financial processing system. It has the potential to transform Indonesia’s financial industry by creating a paradigm shift in the way financial services sector operates. However, certain measures need to be taken to realize its full potential. In order to cultivate skilled personnel, the government should collaborate with universities across the country and promote fintech courses to develop the required skill set among people. Additionally, the government should encourage the association between conventional financial institutions and fintech companies to promote collaborative training and communication, which could help to improve financial education among players in the market. The association would also help both parties to improve their own areas of expertise.

Fintech industry has slowly started changing the way financial services are being accessed in Indonesia. Gradual yet steady on-going efforts to overcome hurdles are likely to result in a larger population enjoying benefits of digital financial services.

19/10/2016by EOS Intelligence EOS Intelligence No Comments

China’s Digital Single Market – Internet of Things

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Underpinned by immense government support, private investments, as well as the highest number of machine-to-machine (M2M) mobile connections globally, China has potential to get to the forefront of IoT (Internet of Things) development. While most countries are still beginning to understand the benefits of IoT, China already embraced the technology as early as 2010, when it built a national IoT center and aimed to create a market worth US$160 billion by 2020. IoT, with its promise of delivering continuous connectivity, is likely to usher an industrial revolution in China resulting in improved productivity, global competitiveness across industries, and higher economic growth.

IoT is helping China to build momentum and succeed in the digital age, fostering development across various industries by revitalizing manufacturing, boosting connectivity through smart cars and buildings, crafting a new consumer market for wearable devices, enhancing healthcare services, and stimulating energy efficiency.

China seeks to integrate various industries with IoT technology for economic gains and efficient management. Industries such as logistics, manufacturing, transportation, and utilities and resources, in particular, are likely to witness improved efficiency, lower costs, and better-managed infrastructure through real-time information provided by IoT technology.

Chinese consumers are very open to adopting IoT technology, which results in growing penetration of smart devices. Smart home appliances, cars, meters, and retail devices are likely to witness tremendous success in China.

Industry dynamics are improving driven by launches of new smart devices by private companies, pivotal government support, and several digital drivers (including growing M2M connections as well as smart phone and Internet users). However, there a few factors such as security and infrastructure issues, fragmentation in the market, and lack of standardization that are slowing down IoT development.

Despite IoT’s immense potential, several driving factors, and promises of economic gains across industries, a 2015 study conducted by Accenture revealed some deterring factors such as lack of specialized skills, low R&D investments, and substandard infrastructure, which may hold back IoT development in China.

EOS Perspective

Undoubtedly, China is likely to witness unrivalled opportunities in terms of productivity improvements and economic development as IoT technology spreads across the country. Efforts made by the Chinese government are stimulating the IoT growth – ‘Made in China 2025’ initiative launched in 2015 aims to integrate production with Internet to deliver smart manufacturing and higher manufacturing value. Further, with the ‘Internet Plus’ strategy, China plans to integrate mobile Internet, cloud computing, big data, and IoT with manufacturing.

However, Chinese business leaders and policymakers cannot expect to reap benefits of IoT technology without the right enabling conditions. In order to ensure development, it is imperative for China to overcome the gap in technical skill set, infrastructure, as well as focus on promoting IoT investments. To address the shortage of critical skills, China needs to improve the number and quality of tertiary graduates in science and engineering fields. Beyond that, building a cross-industry ecosystem is also essential for IoT-led growth, which requires development of an integrated communication system along with cluster of secured networks for data transmission.

China’s IoT industry, still at a developing stage, has promising growth potential that could materialize only if the country takes all necessary measures to improve its infrastructure and technological platform, which will allow IoT to diffuse through its industries and completely transform them.

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