Open network for digital commerce or ONDC promises to provide a level playing field to small merchants. It’s proper and says that ONDC will move Indian e-commerce away from the current platform-centric model, dominated by market leaders, Amazon and Flipkart to an open network. When the ONDC comes in, there’s a possibility that even a very small retailer would be able to be visible immediately on multiple platforms, the government-backed open network for digital commerce or ONDC was launched last week in select cities mentored by Nandan Nilekani.
1. ONDC – Open Network for Digital Commerce
ONDC is a not-for-profit system, which the government believes will be a game-changer. On the 8th of May 2022, the government of India launched a pilot phase of something called the open network for digital commerce or ONDC. This is a freely accessible online system for traders and consumers, and the reason why this is important is that the government intends to break down the digital monopolies and duopolies of giant tech companies like Amazon, Flipkart, Zomato, Swiggy, and other companies.
While a legend like Nandan Nilekani himself is associated with this initiative on the other side, Anand Mahindra himself had all praises for the ONDC initiative. This is expected to be as revolutionary as UPI itself. So, keeping aside all the hype in this episode today, let’s try to understand what are the major problems in the market that prompted the government to start the ONDC initiative? How will it promote the small sellers and businesses against giant companies like Amazon and Flipkart and, most importantly, what are the most difficult hurdles that could turn this very same initiative into a flop project?
2. Need for ONDC
To understand this, the first thing you need to know is: why is there even a need for ONDC, because you see we already have super high-tech companies who have invested billions of dollars into researching and developing world-class tech for e-commerce in India right, then, why is the government trying to intervene? Well, there are three specific reasons for that and all these three reasons come under the canopy of just one factor, which is the abuse of aggregator superpower. So the question is: what are the problems associated with aggregator superpower? Well, this problem comes from the monopolizing model of e-commerce. There are two important models of e-commerce through which these companies operate.
The first model is the inventory model and the second is the marketplace model. The marketplace model is the model wherein there are independent buyers and independent sellers and the e-commerce company merely acts as a platform to connect them through their website and mobile app, whereas in the inventory model, the company procures products in massive quantities from the sellers at an Ultra cheap rate to sell it directly to the customer. To understand this let’s take the simple example of a bookseller in blip card.
If a bookseller makes a book at 150 rupees and sells it on Flipkart at 450 rupees in this case if Flipkart acts as a platform, it will generate a revenue of 250 rupees, and this amount also includes packaging and transportation charges. So if you see this leaves very less scope for profit, but if the blip card operates with the inventory model, then Flipkart will buy 10,000 books from the bookseller at once, and then it will use its bargaining power to buy them at just 200 rupees. After that, it will keep all these books in its warehouse and eventually sell them for 450 rupees on the website.
So this way they generate 250 rupees in revenue with a little bit of inventory cost. Therefore, they get 100 rupees extra in revenue, even for something as small as books, so when this is done for huge products that cost 10,000 or 20,000 rupees the revenue difference skyrockets by a billion dollars. Therefore, using the inventory model, the e-commerce companies generate more profit as compared to the marketplace model. So if you see, if an e-commerce platform wants to make money, it by default has to buy products at a dura, cheap cost and then increase its margins in the case of Amazon, Amazon had two companies called Apario retail, and Cloudtail. These are nothing but huge sellers through whom Amazon bought its products, stored them, and sold them in the market.
3. Government’s Regulation to use Marketplace Model
There was even an investigative report that stated that Cloudtail and Apario Retail alone contributed to 35% of the total sales on Amazon India and they even use these sellers to strike exclusive deals with smartphone companies like Apple, Xiaomi, and other tech companies to outplay both smaller players and their rivals, but in 2016 the government of India came out with a regulation, which stated that Amazon and other foreign e-commerce companies cannot use the inventory model and must use the marketplace model to operate in India. So if you’re a seller on Amazon, you don’t have to worry right now, because it’s relatively safe to sell on Amazon and even right now, Amazon and Flipkart both are incredible platforms to build your d2c brand.
However, from the government standpoint, it clearly states how e-commerce companies will always find a way to increase their profits, so there is a dire need to do something to promote micro and small sellers. This is the first reason for the ONDC initiative. The second reason that we all know is nothing but deep, discounting. As you all know, 2200 rupees watch is available for 247 rupees, an air purifier worth 33,000 is available for 24,000 branded shoes have 60% to 80% discount, and so on. These used to be the prices during Diwali sales, and this directly hurts the brick-and-mortar stores that are not able to match these deep discounts.
4. Deep Discounts by Amazon and Flipkart
So the second reason for ONDC is deep discounting that is hurting the offline commerce economy which to us it may seem outdated, but from the government standpoint it is an important part of our economy, so the government cannot neglect it. And lastly, we have the imitation game of e-commerce platforms. Amazon is under investigation in the united states, Europe, and India for alleged anti-competitive practices that hurt other businesses.
Amazon.Com has repeatedly been accused of knocking off the products of sellers in its marketplace and rigging search, results, and exploitation of its vast trove of data to promote its merchandise at the expense of other sellers. Long story short let’s say 100 sellers are selling ACs on an e-commerce platform, called orchid cart, and there are five slabs of sellers starting from 15 to 20,000, 20 to 25,000, 25 to 35,000, 35 to 50,000 plus, and just like any other product there are various colors and certain feature differentiations like Alexa, all-weather settings, and so on. So when these sellers sell on an orchid, the orchid will easily know which price range of ac sells the most. What features do the users like, because its algorithm can read through the reviews, they would even know which color of the ac sells the most and which location registers the maximum amount of sales? And, lastly, what is the perfect timing for the discount sales? So after reading? Through this enormous amount of data, our kid would know that in Pune, white color, AC with 25 to 30,000 price range registers, the maximum sales with the favorite feature being Alexa.
So what an e-commerce company would do is it would acquire a small, AC manufacturing company near Pune and have its warehouse in Pune itself. Then it will give all the specifications to this manufacturing company and while the best-selling ac on orchid sales at 25, 000, rupees or kid will sell its ac, which is almost the same. Looking as the best-selling ac, which is white, has an Alexa feature but will be priced at 23,500 rupees and the cherry on the cake is that it will come with an orchid, bestseller label, or orchid choice label, and it will be listed on top of all other products, and the best part for an orchid is that, since their warehouse and maximum sales both happen in Pune itself, they will easily Be able to undercut other competitors in terms of delivery fees also, so, considering the price-sensitive market of India, people will buy the orchid choice products instead of other companies products in case of Amazon, a Reuters report states that Amazon studied several best-selling brands in India.
5. Discoverability of ONDC
The ONDC is a three-legged tool. The first is discoverability. The second leg is an open protocol for e-commerce platforms and interoperability, and the third leg is price comparison. So, let’s try to understand each one of these legs using a scenario: let’s start with the first leg, which is discoverability today. If you want to shop for a hair dryer, you will either look for it on Amazon or Flipkart. Why only these apps, because you’ve downloaded them you’ve, fed your card and address details in it, so by default because of this investment that you’ve made, you will rarely consider the possibility of going elsewhere and, more importantly, if you’ve got Amazon Prime then, the question of Flipkart also doesn’t come into play, but with ONDC if you look for the term hairdryer, you will see the hair dryer from hundreds of other e-commerce platforms, and here’s where you might discover an enterprise like e-Samuday, which is a tech startup that has digitalized your local electronic store in your neighborhood.
You can buy a local make hairdryer at door, at a cheap cost, and even get it delivered within just two hours. So, in short, you will have a unified search feature wherein you can get the products from all e-commerce sites without having to download them and without having to switch from one side to the other, and this brings us to the second leg, which is interoperability.
Let’s take the simple example of delivery choice: let’s say you want to order Dal Makhni now when we use Zomato. Although Zomato gives us an amazing advantage of getting all the restaurants listed on a single platform. If Zomato decides to charge a higher delivery cost, then you can’t do anything, and this is because Zomato might have lesser delirious boys in a particular area and if Zomato does not have any delivery boys in that particular restaurant's area, then you cannot place the order, but With ONDC, even delivery companies will be listed along with aggregators customers and restaurants. So ONDC will tell you that Zomatos valley is not available, but dunzo delivery agents are available in that area.
6. Price Comparison – another Feature of ONDC
So you can place your order through Zomato, but have it picked up by dunzo or you can directly ask your dunzo or any other delivery partner to pick up your order from the restaurant? Similarly, you can place your order through e-Samuday, which has all the mom and pop stores listed, and get it delivered by dunzo. So this way there is a huge lacuna that the delivery companies can fill in, which will further prevent companies like Zomato and Swiggy from monopolizing the delivery space. And lastly, we have the Trivago feature, which is nothing but a price comparison online hotel search.
Long story short, if you remember, there was a time when hundreds of websites had hundreds of hotels listed with different prices, so Trivago came in and said you choose the hotel and we will list all the prices from all the websites and then you can choose the most economical option of all, this is exactly what ONDC intends to do for e-commerce. So if Amazon secretly pushes up its prices, you will not be blindsided by Amazon’s ecosystem and you will have the opportunity to see other e-commerce companies at a lesser cost. This is how the government intends to empower merchants and consumers, to form a single network to drive both innovation and skill, eventually transforming all the businesses from retail goods and foods to even mobility, and the reason why I’m looking forward to this project Is that this is one of the most complex problems the government has ever solved and with brilliant minds like Nandan Nilekani. It would be very interesting to see how the government solves this problem to break the monopolies and police giant tech companies.
7. Challenges for ONDC
Moving on to my points of skepticism, the first thing you need to understand is the fact that the biggest factor for e-commerce companies' success is not their product, but their suitable listing based on consumer preferences, as you know in the case of youtube creators. They often complain about the fact that the video listings on youtube are not done equally, as in mega creators are given way more preference or entertainment content is recommended way more than educational content. But if you look at it from the perspective of an engineer, who’s working on this problem, if I give you 10 000 videos – and I give you only 100 slots to list them – obviously you will list them based on comments likes, and views right. So the scarcity of screen space itself brings in inequality. Similarly, a seller with maximum reviews.
Maximum sales will get listed way ahead of the smaller sellers because when it comes to those sellers, the possibility of sales is way higher, so listing in itself drives inequality. So I don’t know how this is going to be tackled by ONDC. Secondly, when price comparison is done like Trivago on the outside, it might look like an amazing idea, but if you look at the fighters in this prize war, you will see that we have big companies like dunzo and Zomato and on the other side, we’ve got smaller local aggregator services, now over here, Zomato or dunzo, would take another billion-dollar funding and it will undercut all its competitors by which these smaller players will be forced to decrease their costs. Eventually, those companies will train out of cash and then be out of business. So this way the purpose of price comparison could be defeated if bigger players engage in predatory pricing lastly, after all the cash drain that Amazon, Zomato, and sugar have engaged in after they have spent thousands of crores with the hope of becoming profitable.
Now the government itself is closing down its avenues of profits, and this could be a disaster. For example, Zomato cannot open up its cloud kitchen because it looks anti-competitive. Zomato has a good chance of making money through delivery because it could use its platform advantage to rack up the prices, but now through ONDC, it might have to compete so even delivery price has to go down. So, at the end of the day, this gold mine of data that Zomato, Swiggy, and Amazon, like companies, have that’s not being unleashed for profit at all, creates a paradox. So if these companies run profitably, sellers and restaurants might face losses, but if they don’t run profitably, since they have billion-dollar funding, the logistics companies and the small aggregators will face losses, and I have no idea how ONDC is going to solve these problems.