A Passage for India

Advances in transport and communications infrastructure have facilitated an explosion in global trade during the last 50 years. By enabling production to be co-ordinated across vast distances, and goods moved quickly and easily across the planet, companies no longer had to go through the arduous process of building out whole supply chains. Manufacturing activities were therefore rapidly outsourced en masse to low-cost exporters. Another spur was containerisation. In isolation, the advent of standardised inter-modal containers boosted bilateral trade by 790% in the first 20 years following their introduction. By plugging into global supply chains in this way, countries such as China, South Korea and Taiwan developed at a speed not previously seen.

But times are changing. China’s meteoric rise was facilitated by technological progress in transport and communication, yet India’s may be hampered by progress in automation. Those countries wishing to play the cheap labour card must navigate the growing challenge from robotics. India’s abundant supply of low-cost labour, where factory costs are 40% lower than in China, is no longer a game changer. Where once an importer would have kept costs down by seeking out the cheapest source of labour, they now also have the option of replacing workers with machines.

The word ‘automation’ used to conjure up images of slick factories in Japan, but this is an outdated assumption. Factories around the world are employing fewer staff. For example, the world’s largest contract electronics manufacturer recently announced it will replace 60,000 workers with robots in China. And in Germany, Europe’s largest sportswear manufacturer is to produce its running shoes in a factory operated largely by robots. Even Indian companies are doing the same – Rajasthan is now home to a factory operated by a skeleton crew using robotic arms, where automated storage and retrieval systems do most of the work. And these changes may only be the beginning. 3D printing is in its infancy, but will revolutionise manufacturing processes.

Long-term trends in value and volume of merchandise exports
1950 – 2010 (Index numbers, 2000=100)

Source: UNCTAD secretariat calculations, based on UNCTADstat and CPB Netherlands Bureau of Economic Policy Analysis, World trade database.From Development and Globailization, Facts and Figures 2012, by United Nations Conference on Trade and Development, © 2012 United Nations. Reprinted with the permission of the United Nations.

The word ‘automation’ used to conjure up images of slick factories in Japan, but this is an outdated assumption. Factories around the world are employing fewer staff.

The overriding characteristic of India today is its lack of formalisation. Around 90% of all employment is in the informal sector; 60% of Indians do not have a bank account; only 3% pay income tax; and 90% of retail is unorganised, consisting of cramped shops and roadside vendors. The section of society that pays its taxes, takes out loans and saves is a thin layer on top of an invisible, but vast, self-organised economy.

What if by combining India’s large self-organised sector and the mobile internet, the country could produce an alternative development path for itself that would bypass the need for big, formal companies to accelerate economic growth, but rely instead on network-based companies to drive the economy?

India has already taken tentative steps in this direction. An Indian taxi-hailing smartphone app has already attracted hundreds of thousands of self-employed drivers on its mobile platform. For the drivers, the benefits of large-scale aggregation come not just from operating under the umbrella of a relatively trusted brand, but also from the ability to access big data analytics and the scale it gives in areas such as payment. It should also bring them into the formal economy. The network provides an audit trail – including both verified income levels and customers’ reviews – which the drivers can then use to apply for personal or business loans. For even greater security, lenders can become part of the network and so take loan instalments directly from a driver’s revenue. The government benefits too, because it both becomes harder for the drivers to avoid paying tax and easier for them to pay it.

Separately, India’s largest e-commerce marketplace, which was started by two Indian entrepreneurs in 2007, now offers 40 million products across 80+ categories. Through its network, 85,000 sellers reach an audience of 75 million registered users. In addition to accessing its traffic, the small merchants benefit from hosting, big analytics and logistics capabilities.

Fortunately for India, not only are these networks potentially a more efficient form of organising labour, but they can also be created far more easily and rapidly than scaling up a company in the traditional way. The advent of business models based on the ‘sharing economy’ provides a template. In the US, the leading online accommodation-sharing company now has more rooms available than some of the world’s largest traditional hotel groups but has only 800 direct employees. The same could hold true for Indian companies and we have already seen one Indian-based accommodation-sharing business establish a network of more than 6,000 properties in just three years.

These companies are also notable for the fact that they are not listed. Capital light business models, network effects and rapid growth rates have allowed these and other online companies to achieve significant scale while remaining in private hands. It may be some time before they come to the public market but, in the meantime, it is important to continue tracking their rise, not only as possible future investment opportunities, but also in recognition that they are re-shaping their respective industries, which has knock-on implications for investing in companies
more generally.