on August 27, 2018
Space – Ripe For Disruptive Technologies
Space is getting crowded. In 2014, OneWeb, backed by Softbank, Qualcomm, and Virgin Group, acquired a satellite constellation to provide global broadband internet. A year later, Elon Musk announced plans to develop a low-cost satellite network to deliver high speed internet to every corner of the world. In May 2018, Facebook announced that its broadband satellite project called Athena was in production. Other companies such as Jeff Bezos’ Blue Origin, Richard Branson’s Virgin Orbit, and Paul Allen’s Vulcan Aerospace are also in the race.
Blue Origin was founded in 2000 to develop and capture the space tourism market. The company has raised half a billion dollars to date. Virgin Orbit, a subsidiary of Virgin Group, is focused on the low earth orbital (LEO) launches of small satellites. Vulcan Aerospace (formerly known as Stratolaunch Systems) was founded in 2011 to lower space transportation costs by launching from a high altitude under specially designed planes.
Besides the high marquee names, there are a number of innovative companies in the wings that are positioning themselves to introduce new technologies in the space. Spinlaunch was founded in 2014 with the mission of finding an alternative to traditional rocket propulsion. The firm has raised $40 million in funding from the likes of Google Ventures, Airbus Ventures, and Kleiner Perkins to further its research on rotational acceleration. Spinlaunch hopes to demonstrate their electrically powered centrifugal propulsion by 2022. Aphelion Orbitals, founded in 2015 with only half a million dollars in angel funding, focuses on commercializing low cost launch vehicles for nanosatellites. Interstellar Technologies, a Japanese aerospace firm founded in 2013, aims to provide a telemetry system for sensors that would help communication, networking, and satellite mapping. Bellatrix Aerospace, an Indian startup founded in 2015, has primarily raised funds from the India Institute of Science and Government of Karnataka. Its mission is developing electric propulsion for satellites in orbit.
The “space race” is understandable. The space industry is a $350 billion market currently, according to market estimates, centered primarily on satellites. Bank of America Merrill Lynch predicts the size of the space industry to reach $2.7 trillion in three decades. Morgan Stanley predicts the satellite sub-segment to represent a third of the whole industry by the first half of this century.
Growing demand for faster internet connectivity, cost effective satellite deployment innovative propulsion technologies, delivery vehicles, and telemetry support are driving innovations in space technology. Future opportunities are endless as well from mining asteroid fields and space tourism, to space debris removal and other adjacent opportunities.
Overall, a vibrant ecosystem is expected to develop in the space as it increasingly becomes a hotbed of disruptive technologies and services. The future of space has arrived.
Walmart India – Second Time’s a Charm?
Walmart is taking a second shot at entering the Indian retail market. The company agreed to take a 77% controlling stake in Flipkart for $16 billion. Walmart will pump additional $2 billion in fresh investment into Flipkart as part of the deal. It could also bring in “additional potential investors” while retaining a majority stake. The deal is awaiting regulatory approval.
By acquiring a majority stake in Flipkart, Walmart gets access to a market it has been trying to crack for years. It has been restricted by local regulations to operating wholesale outlets in the world’s fastest growing economy.
The jury is still out however on the strategic value of the deal. For some, the deal makes strategic sense while others believe Walmart paid too much for a company that is unprofitable and locked in a fierce competitive battle with Amazon India.
Trade associations including the Retailers Association of India and the Confederation of All India Traders – as well as various political groups – have opposed the deal. Their chief concerns are that the deal is an attempt by Walmart to circumvent the rules and gain backdoor entry to the lucrative Indian retail market. They strongly believe that e-Walmart poses existential threat to small and medium-sized retailers and suppliers, the traditional backbone of the retail industry in India.
Leading organizations such as ASSOCHAM (the oldest and largest chamber of commerce in India) believe however that the deal is an acknowledgment of the success of an Indian start-up that pioneered online retailing in the country. The deal is also a testament to the large opportunity in the Indian retail market – the second largest in the world after China.
For perspective, India is expected to become the world’s third largest consumer economy, reaching $400 billion in consumption by 2025, according to the Boston Consulting Group (BCG). Backed by rising middle class and rapidly growing consumer spending, India was ranked first in the Global Retail Development Index in 2017. The retail market witnessed investments around $800 million by PE firms and wealth funds in 2017.
Against this backdrop, the overall retail market opportunity is very compelling. As of April 2018, ecommerce accounted for around 2.9% of the total retail market, or roughly $30 billion. Looking further out, ecommerce is expected to reach 12% or $200 billion by 2026, with participation from around 475 million online shoppers, up from 60 million in 2016, according to data from Morgan Stanley. According to Forrester Research, the online retail market in India is expected to grow at a CAGR of 29.2% to $73 billion in 2022, representing nearly 5.7% of total retail sales.
The said, Walmart will have to compete aggressively. Amazon has already gained a strong foothold and is competing aggressively against Flipkart, the incumbent leader. To its credit, Amazon timed its entry into India perfectly. It came at a time when other homegrown companies had already created the ecommerce market. It came in and effectively used the strategies that had been successful in attracting the customers elsewhere. It also adapted very well to the marketplace model as it could not sell directly, owing to government restrictions.
While Walmart is 2.5 times larger than Amazon in the US, it has a meager 3.6% ecommerce market share compared to Amazon’s commanding 43.5% share. Given the dominance of Amazon in the US and with China not being very hospitable to foreign companies, India is the only significant market where Walmart has a realistic chance to beat Amazon at its own game by leveraging a combination of advantages that come with incumbency (India is Flipkart’s home turf and has a 5-year running start over Amazon), and deep coffers.
Walmart brings to the table its procurement, sourcing, product assortment, and vendor network & infrastructure. Flipkart will benefit from Walmart’s expertise in discount retailing, logistics, supply chain management, and providing faster deliveries to compete with Amazon Prime. Flipkart will look to leverage these strengths to make inroads into Tier II and III cities.
Purely in terms of multiples, the deal values Flipkart at 4.5 times FY18 EV/sales. The deal in absolute terms and on comparison with Future Lifestyle Fashions (2 x FY18 EV/sales) and Future Retail (1.5 x FY18 EV/sales) looks overvalued. However, when compared to Avenue Supermarts’ valuation (6.1 times of FY18 EV/sales), the deal is at a discount.
Whether or not Walmart will succeed only time will tell. One thing is for sure: It was too compelling an opportunity to establish a foothold in a country that is expected to grow the fastest in the next few years.
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