05 August 2015 Asia Pacific/India Equity Research India Internet Primer #2 Connections Series Ten lessons from China Figure 1: E-commerce in India is 4-10 years behind China on several parameters Organised retail Online shopping penetration penetration Online Internet shoppers penetration China (1999): ~10% China (2007): 0.6% India (2014): 9-10% India (2014): 0.7% China (2006): 43 mn China (2008): 23% India (2014): 38 mn India (2014): 20% Urbanisation GDP per-capita (US$) Spend per online Smartphone The Credit Suisse Connections Series buyer (US$) penetration China (1997): ~33% China (2004): 1,498 India (2014): 32% India (2014): 1,487 leverages our exceptional breadth of China (2007): 135 China (2010): 13% macro and micro research to deliver India (2014): 104 India (2014): 14% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 incisive cross-sector and cross-border (-17) (-16) (-15) (-14) (-13) (-12) (-11) (-10) (-9) (-8) (-7) (-6) (-5) (-4) thematic insights for our clients. Year (years from 2014) Source: Credit Suisse research Research Analysts Anantha Narayan ■ India at the 'tipping point', based on the China experience. While there 91 22 6777 3730 are differences, the two internet markets are similar in many ways—a large [email protected] population, growing middle class, and an underdeveloped organised market. Nitin Jain 91 22 6777 3851 From 0.2% of GDP in 2007, the Chinese e-tailing market rose to about 5% in [email protected] 2014, an 80% CAGR from US$7.4 bn to US$458 bn. India is 4-10 years Dick Wei behind on key parameters—e-tailing was US$4 bn in 2014, 0.2% of GDP. 852 2101 7339 [email protected] ■ Ten lessons from China. In our first extensive look at the sector last year (The modern day gold rush), we explored the Indian internet landscape in great detail. In this note, we explore ten lessons from the China experience. We believe that e-commerce, rather than being purely disruptive, can be significantly accretive to the Indian economy—government regulations need to take cognizance of that and traditional retail needs to move quickly on omni-channel strategies. India will be a largely mobile market and companies will need to have strategies around that. Pricing wars will cease eventually but can continue for a while. O2O (online to offline) can be an extremely big segment in a few years. And Amazon will not miss out in India! ■ Indian e-tailing can conservatively be a US$60-90 bn market by 2020. E- tailing was $4 bn of the US$15 bn e-commerce market (excluding B2B) in 2014, and growth rates are accelerating due to higher internet penetration, rising consumer aspirations, better ancillary services such as logistics and increasing comfort with online shopping. Even taking significant haircuts to 2014 China metrics—such as proportion of internet users who shop online, retail sales proportion of GDP and online retail as a portion of that—gets us to a US$60-90 bn market easily. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 05 August 2015 Focus charts and table Figure 2: India is 6-7 years behind China in internet Figure 3: E-tailing penetration is also 6-7 years behind penetration China, at <1% 50% China internet penetration 12% China: Online shopping as %age of retail sales 45% 40% India (2014): 20% 10% 35% 8% 30% India (2014): <1% 25% 6% 20% 15% 4% 10% 2% 5% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Internetlivestats, Credit Suisse estimates Source: iResearch, IAMAI, Credit Suisse estimates Figure 4: Major chunk of the retail market is unorganised Figure 5: Scale is important; larger players have gained in India; e-commerce should be additive to the economy market share in China 120% Retail market break-up China B2C online vendors market share Others Vancl 100% 100% 90% Tencent 80% 80% Amazon China 60% 70% 60% Dangdang 40% 50% Yihaodian 20% 40% Gome 30% Vipshop 0% 20% India China Indonesia Thailand Malaysia Taiwan US 10% Suning 0% JD.com Organised Unorganised 1QCY11 4QCY14 Tmall Note: Data for FY12-13. Source: KPMG, Crisil, CS research. Source: iResearch, Credit Suisse estimates Figure 6: O2O has grown into a big market in China; it Figure 7: Age and profitability are not necessarily also has potential in India preconditions to list 80 GMV and penetration of local lifestyle O2O market 7% 20 47% 18% 16% 70 6% 15 -5% 10% 29% 0% 60 14% 5% 16% 10% -5% -1% -62% 12% -31% -1% 50 10 49% 15% 4% 46% 8% 40 -47% 3% 30 5 2% 20 0 10 1% -5 Tuniu Baidu Jumei Qihoo Qunar Weibo Boyaa 0 0% Youku 51jobs Bitauto Soufun 58.com JD.com Jiayuan Vipshop Tencent RenRen Alibaba* 2010 2011 2012 2013 2014 2015 2016 2017 500.com Autohome Dangdang GMV (US$ bn) % penetration [RHS] Age at the time of listing (in years) Source: iResearch, Credit Suisse research Note: Numbers at the top of the column represent margins at the time of listing. Source: Company data, Credit Suisse research Figure 8: India's e-tailing market can conservatively be US$60-90 bn in size by 2020 India China 2014 2020 (low case) 2020 (high case) 2007 2014 Total population (mn) 1,267 1,363 1,363 1,318 1,364 No of internet users (mn) 253 545 613 211 660 Internet penetration (US$) 20% 40% 45% 16% 47% Per capita GDP 1,631 2,889 2,889 2,651 7,330 Number of online shoppers (mn) 38 191 245 55 372 As % of internet users 15% 35% 40% 26% 56% Per capita spend on online retail (US$) 104 318 362 135 1,233 As % of per capital GDP 6% 11% 13% 5% 17% E-tailing market size (US$ bn) 4 61 89 7 458 % of retail sales 0.7% 7.1% 8.9% 0.6% 11.0% As % of GDP 0.2% 1.5% 2.3% 0.2% 4.6% Source: iResearch, IAMAI, Credit Suisse estimates India Internet Primer #2 2 05 August 2015 Ten lessons from China India at the 'tipping point', based on the China experience While there are some differences, the Indian and Chinese markets are similar in terms of From 0.2% of GDP in 2007, population, a growing middle class and rising aspirations, lack of organised retail choices Chinese e-tailing rose to 5% for a large segment of the population, poor logistics infrastructure and a cash economy. in 2014, an 80% CAGR from The Indian market seems to be behind the Chinese one by 4-10 years on several key US$7.4 bn to US$458 bn parameters—per capita nominal GDP, smartphone and internet penetration, online shopping as a proportion of retail, the number of online shoppers and their average spend, etc. The Chinese e-tailing market has leapfrogged from US$7 bn in 2007 to US$458 bn in Indian e-tailing was US$4 2014 and has grown at 80% CAGR since then—this bodes well for India. bn in 2014, 0.2% of GDP Ten lessons from China In our first extensive look at the sector last year (The modern day gold rush), we explored 1. Additive, not disruptive the Indian internet landscape in great detail. In this note, we explore ten lessons from the China experience. Structurally, the sector is well-positioned for rapid growth. While e- 2. Benign regulations commerce can be somewhat disruptive, it is likely to be net accretive for the Indian 3. Inevitable consolidation economy and Indian regulators could do well to take advantage of that. It is not curtains for the brick-and mortar-companies—those nimble enough to adopt omni-channel strategies 4. Price wars will stop, but can survive and thrive. As in China, mobile is likely to be the biggest driver of e-commerce not now and internet companies will need to structure their overall strategies around mobile. O2O Amazon: India ≠ China can be a very big segment and can offer significant opportunities to both existing and new 5. players. Ancillary services such as logistics could also witness huge growth; however, e- 6. It's all about mobile commerce companies are unlikely to be dominant players in payments, in our view. 7. O2O can be big Scale has advantages and consolidation is inevitable. The price wars will eventually 8. Logistics is the subside but that can take some time due to the availability of significant capital and current backbone profitability targets can likely get pushed out. An important difference with China is that Amazon seems to be getting it right in India! 9. E-commerce companies may not dominate Finally, the Chinese experience shows that age and profitability are not pre-conditions to payments go public. The age of the Chinese companies when they went public varied widely and many were not profitable. Also, while eventual profitability is sacrosanct in our view, share 10.