Deep Discounts or Deep Distress?

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I am as usual caught in a conundrum when I read some stories. On the 15th of August National Restaurant Association of India (NRAI) launched a logout campaign against the deep discount coupons that are offered by these five aggregators Zomato, EazyDinerNearbuyMagicPin and DineoutSince then, more than 2300 restaurants across the country de-listed themselves from these food apps claiming that “discount structure, terms and conditions, by the food tech companies are unjust and unsustainable.” The president of NRAI said that to stay competitive in the market, some aggregators give discount of buy one and get one free. Others have done the same thing differently; they have straight away offered a 50% discount, which means the same.  

The story does not end here. On particular Gold Card membership, such discounts are allowed on one itemBut our desi brain works interestingly. The people go to restaurant A and take starters- 50% discount. They go to another restaurant to take drinks- buy two get two free! Finally, they go to the third restaurant and order the main course- buy one get one free! Using this method, they get the whole meal at 50% discount which kills the business.   

The worst part of the whole thing is that the discounts are being borne by the restaurants and not the aggregators. The association wants these discounts to be removed so that customers get used to not getting high discounts. It is a sort of detox action that is essential, according to the association. It appears that both the sides have understood the problems created by deep discounts and they also know that it will take some time to reach normalcy and come out of the deep discount issue.  

You and I are naturally going to be unhappy with these changes. We have to now look for happy hours or special days to get good discounts. Now, these changes are going to take my outflow back to normal, which I do not like. But we should not forget that such gimmicks never work in the long term.  

I always felt as if I am an uneducated person, though I have run a small business for more than 35 years. Giant organisations like Amazon and Flipkart have been in the deep discount game for quite some time. The difference is that they give deep discounts from their pocket. For years, they offer deep discounts, give Prime memberships and so on. They keep on investing billions of dollars for years. Amazon has never made profits in the last twenty years. But they continue to invest in the business to get more and more customers all the time. Uber CEO has recently made a statement that Uber may never make profits. What is the business model of such companies? Jeff Bozos has become “poor” when he settled his divorce, and his wealth is at lowly US $ 65/ billions. He bought some time back Washington post for an all-cash deal of US $ 250/ million.  

Uneducated me does not understand the principles used in these businesses. Uber charges higher rates when demand is up. But I have seen that as a routine, they charge about 10 to 15 % more than an Auto Riksha in Pune. The price difference between an Auto Riksha and a car can be three lacs of rupees. Many Rikshas give mileage about 1.5 times more than the cars. 

On top of that, Uber takes 30% of the amount we pay to the driver. To me, the driver may break even, Uber’s figures show that they make losses. Other than making vehicles available quickly to us, are they running a charity organisation? Is it not similar to deep discounts offered by Zomato or Amazon?  Or for that matter, Oyo?

Venture capitalists, angel investors, put in their money in such companies. Venture capital is defined as capital invested in a project in which there is a substantial element of risk, typically a new or expanding business. I am sure that those who invest in such companies expect reasonable returns on their capital. By what I have described above, there are no returns, then why are the investments continued? Where is the source for such unlimited funds?  

There is no doubt that Amazon, Uber, Zomato are market disruptors. They have shown the world a new way of doing business, which even 25 years back did not exist. New methods, new ways of doing things make a lot of difference in day to day life. Consider AirbnbThe concept is so good that it is helping people all over the worldIt reduces the cost of travel and uses people’s assets which have been remaining idle.  

Amazon, WalmartJio are gamechanging companies which have made a big difference in our lives. But they are making these changes with their own money or at the cost of competitors. They are disrupting the market and making their competitors think; I am sure the competitors will come up with even newer ideas.  

But this deep discount business with own money or someone else’s money is not sustainable business model. I am not surprised that NRAI has revolted against it. I was talking to someone about these aggregators. It was felt that the aggregators probably sell the data of their customers to make money! When companies like Facebook have done it, what will stop the aggregators from selling data!  

Ultimately, market disruptors come with ideas and business models which were never seen before. But one thing will never changeSuch organisations have to make profits at some stage. Unless, of course, you are an Amazon or an Uber. But don’t forget that Amazon is the market leader in Cloud Computing business; so as a group, they make profitsBecoming Unicorn company (market value exceeding One Billion US $) is fine for publicity; it will help companies get more VC fundingBut if they don’t start making profits, such companies fall in the group of 95 % plus companies, which close down sometimes even without a whimper.  

 

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EV Conundrum!

 

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I am back to my favourite topic, Electric Vehicles or EV! A couple of days back there was a meeting called by NITI Ayog to discuss and decide EV policy for two-wheelers, in India. I am going to write only about the Indian scenario. My observation is that the electric four-vehicle of similar specification as the IC engine costs almost double the price. Plus per charge range of these vehicles is about 110 km. The specs are not good enough for the car to be used for out of station travel. With these limitations, it is going to be challenging to sell such vehicles. But in two-wheelers, I have observed that the price of EV’s is comparable with IC engine version. Distance travelled using two-wheelers is much less compared to four-wheelers. In India, parking two-wheelers at home is manageable compared to four-wheelers.

There are many angles to this issues. First and foremost is the fuel. With limited petroleum product reserves, there is bound to be a tough situation for the whole world if no action is taken, we will have difficulties. Add to this a new dimension; the US has threatened India to stop buying oil from Iran or else! If the US is so much worried about the whole world vis a vis Iran, then they should sell Oil to India at the same price as sold by Iran and that too in Rupees! But the US can get away with anything in diplomacy.

Petroleum product based fuels are adding to pollution is a known fact. The whole world is trying to reduce pollution by tightening the pollution norms, but apparently, there are limitations of investments to achieve the goals. Again the US has opted out of the body which is trying to track pollution world over. Again, it is the act of a bully.

All the nations are trying to reduce pollution in their cities and India is also trying its best. NITI Ayog meeting was held for the same purpose. Four-wheelers are still miles away from reaching the balance between the price targets and the cost. As four-wheelers will be expensive, their sales will not match current sales volumes at a price expected today. The second most crucial aspect in India is the challenge of charging the car batteries. Majority of the cars in India are parked in public places. Many of them are parked on roads and streets. How to provide a facility to charge batteries for such vehicles? Do we provide charging points on roads like we have parking meters? I don’t think that is a practical way of doing it. Another issue is that fast charging techniques are coming up but are still not good enough. With such limitations, NITI Ayog is trying to put pressure on the two-wheeler segment.

As already discussed, EV’s in this segment will have a comparable price, and because of lesser parking issues, charging the batteries using home electrical outlets may be possible. Charging is manageable; costs are manageable, and the number of these vehicles produced is very high. The number of two and three-wheelers manufactured in the latest financial year is 30 million plus. Total of fuel used by these vehicles is massive.  If totally converted to EVs, there can be a significant impact on pollution.

There are two groups in this segment. First and the main is the group of established manufacturers like Honda, Hero and Bajaj. They are already developing EVs. The second segment is the startups who are in the process of developing EVs. They have no hangups and are trying to support the government. But the established ones have the issue of scaling up. NITI Ayog is insisting that by 2025, majority two-wheelers manufactured should be EV’s. The Giants have a vast experience in manufacturing and can visualise or foresee the issues. Startups really don’t have manufacturing expertise and experience. They probably do not understand the meaning of manufacturing 2.5 million vehicles a month.

Now here is a complicated situation. Established manufacturers have to keep on producing IC Engine vehicles and ramp up EV production. Tremendous efforts and money will be needed. Startups may know the EV technology but do not have the wherewithal to manufacture one hundred thousand vehicles a month. Selling these numbers without the right experience is going to be very tough. What about funding? They are solely dependent on financing by VCs. Today I read an article about VCs trying to go away from electric vehicle manufacturers, in China, as there are too many variables. These startups will never get bank funding. Don’t forget that even Tesla is still a VC funded company! They are already facing production bottlenecks, and their sales are going down!

Will Lithium producers make a cartel like the petroleum cartel? It is a million dollar question. India does not have Lithium reserves, but China has done brilliantly. They have taken controlling shares in many mines across the globe. Till foreseeable future, it looks like the Lithium, and to some extent, Cobalt is going to be the key elements. Their control will be the key to success.

https://www.mordorintelligence.com/industry-reports/india-lithium-ion-battery-market

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The cost of the battery pack was the US $1000/ kW-hr in 2010. In the year 2016, it came down $273. At this rate, the EV’s will become affordable over a period. By 2020 it is expected to be sub $200/. By 2026 the price is projected to be $100/. But till that time it is going to be a tricky question about change over. Those who can afford will buy the EV’s, but the mass production models will take some time to become affordable. In the countries, where parking of cars is an issue, it is difficult to predict what the solution will be.

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One pertinent point discussed by NITI Ayog was that if the pollution goes out of hand, then the courts will intervene. Once that happens then, the discussion will be between manufacturers and the courts. NITI Ayog suggested that some policy decisions need to be taken while interested parties are involved in the debate; it will enable both sides to come to an excellent resolution.

It is more of a chicken and egg situation. It is known that EVs are good for pollution management. On one side, nobody even knows which startups will even survive five years hence. Hence there is no point in putting your money on them. But the existing giants have their issues. They need to run their current business, which has its unique problems. They have to simultaneously scale down and scale up for old and new business. Hence they have shown their apprehension with the year 2025. How will they come out of this conundrum is anybody’s guess.

Are Electric buses the real solution for pollution control and to take people away from personal vehicles?