Mukesh Ambani Sets Out To Dominate Digital India

For all the publicity blitz accompanying Mukesh Ambani’s $30bn charge into the digital economy, the details of his long-term strategy remain a closely guarded secret.

Mr Ambani’s Reliance Jio venture has upended India’s telecom sector, devastating the profits of incumbent operators and attracting more than 300m users with cut-price mobile data.

Asia’s richest man has made clear that telecoms is just the beginning of a new vision for his refining giant Reliance Industries while remaining tight-lipped on the full scope of the plans.

Yet he has given clues with an acquisition spree that has gathered pace in recent months — snapping up groups from Indian broadband network Hathway to Hamleys, the UK toy store chain. The buyouts give an insight into the strategy driving one of global business’s most ambitious projects: to transform an oil products behemoth into one of the world’s most powerful consumer-facing companies.

“They’re trying to capture the spending of Indian households, creating an ecosystem for data, content and retail,” said Satish Meena, an analyst at Forrester Research. “But they’re coming from a business-to-business background as a petroleum company. They know they can’t build everything on their own.”

One of Mr Ambani’s more telling acquisitions was one never publicly announced: the technology portfolio of the tiny e-commerce start-up AaramShop, acquired in 2017 according to corporate records.

New Delhi-based AaramShop had set out to supercharge India’s vast number of small neighborhood shops with technology. Its system enabled consumers to order goods online for delivery from their local stores, while allowing shopkeepers to track inventory and offer digital discount vouchers.

While AaramShop failed to build a national presence, Reliance is poised to pursue its concept at far larger scale. People directly involved in its strategy say that it is focused on building deep connections with the small shops that still account for the vast bulk of Indian retail sales.

“That’s the big strategy,” one of the people said. “Find the pain points across [traditional] retail and address them with an injection of technology, innovation and capital.”

At a scattering of shops near Jio’s sprawling headquarters in suburban Mumbai, Reliance is testing lightweight point-of-sale machines that enable small retailers to manage stock and accept digital payments.

Just as it offered subsidised handsets and free data to attract consumers to its mobile business, Reliance’s payment machines are far cheaper than others on the market, and it is waiving merchant fees on digital transactions below Rs2,000 ($29). Reliance is planning to help local shops source stock, capitalising on the huge logistics network of its Reliance Retail unit, already the country’s largest retail chain with annual revenue of $19bn.

Taking on Amazon and Flipkart

The $15m acquisition in March of Grab a Grub, a start-up that delivers goods for small retailers, pointed to what analysts see as the next stage in Mr Ambani’s plan: a digital platform enabling consumers to order products that will be delivered by their local shops. That could help Jio to avoid the losses incurred by e-commerce incumbents.

Another recent buyout — the $27m acquisition of Reverie, a start-up building digital platforms in local Indian languages — will help Reliance develop an interface for consumers outside the urban English-speaking elite, now a crucial source of growth for Indian e-commerce. Reliance further deepened its retail presence this year through the $88m acquisition of Hamleys and the purchase of John Players, a large Indian fashion brand, from conglomerate ITC.

Sanchit Vir Gogia, founder of technology advisory firm Greyhound Research, said Reliance’s plan for its consumer business appeared to be a work in constant progress. “Right now they are in invest and integration mode,” he said. “The details of what happens on the ground [in various new business segments] will be dealt with only as and when they get there. But they have a broad architectural vision of where they want the business to go.”

Some industry insiders saw the hand of Reliance lobbyists in the government’s recent imposition of tighter restrictions on discounts funded by Amazon and Walmart-owned Flipkart, the two leaders in Indian e-commerce. Because it is not controlled by foreign owners, Reliance will not be subject to the restrictions.

But while his entry to e-commerce may be eased by the disruption to the incumbent leaders, Mr Ambani has no plans to emulate the persistently lossmaking discount-fuelled model pursued by Amazon and Flipkart, according to one person involved in Reliance’s strategic planning.

“If Amazon and Flipkart want to kill each other, Reliance is very happy to stand by and watch,” the person said.

The biggest swoop in Mr Ambani’s recent buying spree came in October, when Reliance paid $750m for majority stakes in Hathway and Den, two of the country’s largest wired broadband providers. The acquisitions tightened its grip on India’s soaring consumption of media content, triggered by Jio’s cut-price data plans.

Last year Jio bought Saavn, popular Indian music streaming app, and a key question is how deep a presence Mr Ambani wants in the biggest driver of data consumption in India: video. Reliance has spent more than $100m on minority stakes in Indian production houses Balaji Telefilms and Eros International, prompting speculation as to whether Reliance is poised to become a serious creator of video content in its own right, following Amazon’s example.

One Indian media executive argues that a large-scale move into content production is unlikely, pointing as evidence to acquisition that Mr Ambani chose not to make: Zee Entertainment, one of the country’s largest film and television groups, whose parent group has been plunged into crisis by unsustainable levels of debt.

“He could have got Zee for a song. But Mukesh is smart enough to have figured out that making money from video content is bloody difficult,” the executive said. “He’s looking at Jio as a platform, with huge amounts of customer information and data. He wants to be the gatekeeper, who will charge a toll from anyone who wants to come in.”

Performance under scrutiny

Reliance’s long-term plans to profit from its digital businesses have come under scrutiny amid the mounting costs incurred by Jio, in which it has now invested more than $30bn — the most expensive new venture of its kind by any global company.

Mr Ambani’s company reported a profit for Jio as early as the quarter ending December 2017 — just 15 months after its commercial launch. But analysts at Bernstein warned that Reliance had applied a far slower rate of depreciation than was normally applied in the telecom industry, where capital assets become obsolete more quickly than in other sectors.

The losses incurred by heavily subsidized handsets were attributed to Reliance Retail, further boosting Jio’s reported performance, they noted — while stressing that Reliance did not appear to have breached accounting regulations. Applying industry-standard depreciation rates and factoring in the handset costs, Bernstein estimated a loss for Jio of $2.2bn in the 12 months to March.

Reliance questioned the “underlying motive” behind Bernstein’s calculations. It said that Jio’s accounting treatment was based on applicable standards and had been reviewed by Reliance’s audit committee and its auditors.

Even as he has sought acquisitions, Mr Ambani has also been wooing investors to shore up a balance sheet stretched by the vast investment in Jio. Reliance’s net debt stood at Rs1.8tn ($25.7bn) at the end of March, almost triple the level five years earlier.

Reliance has been in discussions with oil company Saudi Aramco to sell a large minority stake in its refining and petrochemical business, by far the company’s largest source of revenue. It has sold a gas pipeline to Canada’s Brookfield for $2bn, and is seeking to shed a further $1bn of liabilities by spinning out telecom fibre and tower assets into separate units for which it is seeking external investors.

Meanwhile, media speculation is swirling about a possible multi-billion-dollar investment in Jio by SoftBank’s giant Vision Fund.

Despite these moves to pare back debt, analysts say that the strong flow of profits from Reliance’s core oil products business — $7.5bn in the past financial year — is set to bankroll years more of aggressive investment, as Mr Ambani looks to build his group into the dominant force in India’s new digital economy.

“They might not be making money from the current Jio model, but they’re getting people hooked on using data, and once they monopolize the industry they can start monetizing that,” said Jayanth Kolla, co-founder of technology consultancy Convergence Catalyst. “They want to own the digital life of the Indian consumer.”―Financial Times