Toothless Tiger: Between court cases, Trai can’t regulate the industry

These cases are being filed by incumbent operators, Airtel, Vodafone India and Idea Cellular. They say that the new Trai regulations are designed to favour one operator—Reliance Jio. Trai’s counter-argument is that these changes become necessary as India moves towards data-based networks.

But things weren’t always like this.

Trai was established 21 years ago to regulate mobile telephony, which, back then, had only 14.5 million users. Gradually, its scope was expanded to regulate multiple information and communication technologies (ICT). This included internet, television, DTH and radio. Today, all these technologies are converging on smartphones. Hence, Trai’s regulation of the industry in a neutral and impartial manner has become critical.

As a regulator, Trai has not shied away from taking bold decisions to ensure an orderly growth of the ecosystem. For example, in 2007, it passed a regulation which required all DTH operators to offer TV channels on an à la carte basis and said that they could not compel customers to subscribe to a bouquet of channels. Eventually, it fixed bouquet tariffs on DTH for consumers and also made pay channels possible.

Variety of factors

But today, that boldness looks partisan. In February, over a Telecom Tariff Order (TTO), Trai changed the definition of an SMP. The order required that SMPs (read as Airtel, Vodafone and Idea Cellular) would have to disclose all their tariffs on an online portal to prevent predatory pricing. But this new definition did not take into account two crucial parameters in place for over 20 years. “As per the earlier definition, [an SMP] had four different aspects to it. There was revenue market share, customer market share, and in addition to that, there was also the data market share which included traffic volume and switching capacity,” said a senior executive at Idea Cellular. He requested not to be named as the matter is being heard in court.

“Now, in an environment where data is the new oil and everything is leading to data, the regulator has very conveniently removed data as a base of measurement of SMPs, and seems specious at the best,” he said. But not counting Jio as an SMP is the main grouse of the incumbents. Because, be it data traffic, voice calls, or revenue (latest quarter), it’s by no means less than a significant market player. It is also estimated to overtake others in another domain—subscribers.

Trai, on the other hand, believes that the TTO had to be amended to bring in “more transparency” for customers.

“Basically, we are like a toothless tiger and we have to ask for compliance reports. If [incumbents] don’t comply with the regulations, we can’t do anything as the court said that we can’t take any coercive action till the court hears the matter,” the Trai official quoted above says. Earlier this week, Trai approached the Delhi High Court seeking relief from the Tribunal’s order, but the court saw merit in the three telcos’ argument. The Madras High Court, too, agreed with Vodafone India against the tariff order.

That’s strike one against Trai.

Call drops complication

In August 2015, Prime Minister Narendra Modi expressed concern over calls getting disconnected and urged officials and telecom companies to fix the rampant call drops in the country. RS Sharma, Trai’s chairman, issued a consultation on call drops after several consumer complaints. The regulator conducted Independent Drive Tests through June and July 2015 in Delhi and Mumbai and found that the call drop rate of most telecom service providers was higher than the benchmark of <=2%. In some operators, the rate was as high as 17.29%.

So Trai decided to wield its stick.

Two months later, it asked all telcos to pay Re 1 to compensate consumers in case of call drops. However, this was limited to three instances in a day. Unsurprisingly, carriers were upset with the new regulation and approached the Delhi High Court which upheld the regulation. The telecom operators then appealed to the Supreme Court which struck down the regulation in May 2016 saying that the fines were “arbitrary, ultra vires [or beyond their authority], unreasonable and not transparent.”

The courts don’t look favourably upon such penalties, says Rajan Mathews, the director general of telecom lobby Cellular Operators Association of India (COAI). “You have to show, first of all, the extent of the damage. So they try and parse it in terms of ‘what is the alleged harm that is being caused?’ and there has to be a proportionality to the issue, and you can’t just take the maximum penalty and then throw that at somebody,” he says.

That’s strike two against Trai.

 

What happens when regulators decide to play God

Then there are payment banks, a curious new lifeform artificially engineered by the RBI in 2014—banks that could collect deposits, but not lend. An initial stampede for licenses by India’s largest business groups in 2015 led to 11 licenses being granted that year. Fast forward to 2018: just three have been operational for more than six months. And they too, are still searching for their raison d’être.

To try and trace back the policy paternity/maternity behind floundering mobile wallets and payments banks, we have to go all the way back to 2013. That was when the RBI constituted a committee under Nachiket Mor, a wunderkind banker who now heads The Bill and Melinda Gates Foundation. Called the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, its job was to study and recommend policies to aid financial inclusion in India.

When it came to mobile wallets (part of what are called Prepaid Payment Instruments, or PPIs in RBI-ese), the committee wasn’t a fan. Money stored in wallets didn’t appear to fall within the ambit of RBI’s deposit insurance cover.

To address this, the regulatory framework required wallets to escrow the value outstanding from customers with a sponsor bank on a 1:1 basis. But the committee believed that this nested set-up exposed both parties to reciprocal risks.

The solution? Create a new kind of financial services player under the direct regulatory oversight of the banking regulator—payments banks.

While this reasoning was debatable, the RBI accepted the recommendation to create a new regulatory category termed ‘payment banks’ in 2014. This was a subset of the broader push towards differentiated banking that articulated a disintermediated (unbundled) view of banking.

Payment banks could offer what might be termed as deposit-side banking and up-sell other financial sector products for fee-based income. But most importantly, they could not engage in lending and were subject to CRR and SLR covenants (stringent rules that define a percentage of a financial institution’s deposits that must be kept or invested with the central bank or government-backed securities).

Wallets, bad. Payments banks, good. All would be well.

However, the initial euphoria surrounding the idea soon turned to buyer’s remorse as the 11 licensees realised the constrained operating environment left little money on the table. Three of the original 11 – Sun Pharmaceuticals, Cholamandalam Distribution Services and Tech Mahindra – surrendered their licenses without even starting operations. Today, only three of the remaining eight have completed more than six months of operations in the space—Paytm*, Fino and Airtel.

Playing God

To make payments banks attractive, the RBI needed wallets to be the opposite. So in parallel to the new regulatory moves which introduced payments banks, the RBI also came down heavily on wallet operations.

The most prominent step was a law stipulating that wallet operators execute a full KYC of their customers. This imposed an onerous requirement on wallets. The quid pro quo here was that the regulations permitted enhanced interoperability between wallets through the UPI platform.

But there is such a thing as “necessary but not sufficient”.

The RBI either didn’t realise or ignored the fact that merely enabling interoperability through regulatory mandates does not, in and of itself, guarantee inter-loop transfers. The economics of interoperability (in terms of fees between the issuing and acquiring wallet) is a necessary condition for wallet-interoperability. We are still to get there.

Moreover, while wallets were increasingly subjected to bank-like regulation, they continue to be excluded from offering open-loop products (like debit cards) and Authorised Dealer licenses that enable participation in the remittance market.

The Process

A December 2016 ASSOCHAM report had predicted that the mobile wallet market would be worth Rs 54,000 crore ($7.9 billion) by 2021. However, by playing God in the products and services market by engineering newer business models through an inorganic process, the RBI has brought us to a point where wallets find themselves incapable of delivering on their initial promise of furthering financial inclusion.

Ironically, at the same time, payments banks, purportedly designed by the RBI to be their efficient alternatives, face a constrained operating environment and appear unable to effectively rebundle financial services on one balance sheet.

Why? Because with the RBI drastically reducing the ability of payments banks to lend or make money in the manner most regular banks do, the only option left was to leverage technology to achieve scale and lower operating costs.

 

Can Walmart-Flipkart look beyond a “dark” future in India?

Immediately after the acquisition, Walmart’s share price has taken a sharp fall. Analysts all over the world are unanimous that the deal makes “zero sense” and have predicted dark days ahead for the company.

While these fears might well be true and justified for Walmart as a public-listed company in the US, at least from India’s perspective, they are largely irrelevant. Walmart’s share price and its performance in the US is of limited import to the rest of the world. The more interesting question is what does the future hold for Walmart-Flipkart in India. The answer to that can also be summed up in one word.

Dark.

But not the same metaphorical “dark” as with Walmart’s stock price. This is a far more literal dark. Specifically, it refers to Walmart’s focus, on dark stores and dark warehousing to drive the next phase of Flipkart’s growth.

How does this work?

As we had pointed out in last week’s story, the government’s Foreign Direct Investment (FDI) policies had hitherto denied Walmart the opportunity to participate in a meaningful way in the Indian retail market. Acquiring Flipkart, technically classified as an online marketplace and hence allowing 100% FDI investment, gives Walmart a back-door entry into multi-brand retail.

However, this entry comes with conditions, specifically around disallowing branded physical stores, which is one of Walmart’s key strengths. Dark stores and dark warehouses allow Walmart an alternative way to cater to the Indian market without all the legal and regulatory hassles. These dark stores are like front-end shops in every major way, but with one big difference – they are not allowed to sell goods to customers who physically come to these stores and are not allowed to have any kind of branding or advertising at the store location (hence the use of the term “dark” to describe them).

The upside though, is that unlike front-end stores that require a lot of permissions, dark stores are not regulated as stringently. In Walmart-Flipkart’s omnichannel strategy, orders are placed online and they are fulfilled from the closest dark stores in the shortest amount of time possible. The convenience of online ordering meets the speed and near real-time fulfilment of offline stores.

So, let’s see how this plays out by answering a series of pointed questions.

Why are dark warehouses/stores important to Walmart-Flipkart?
The entire value proposition of dark stores and dark warehouses is sharpest for one particular type of retail goods—groceries and food items.

There is a growing belief that the online groceries segment, which is a small market today, will grow significantly in both absolute and relative terms over the next three years. As we pointed out in our story earlier this week, the online grocery business today is just a half-billion dollar sliver of the total $450 billion food and grocery retail business in India. And of the total $450 billion, less than 4% of the Indian food and grocery market is organised in contrast to the overall retail market in India where 10% of the pie is in the organised sector. So there is a lot of headroom, both in terms of the expected long-term shifts from unorganised to organised as well as from offline to online. Dark stores are the arrowhead through which Walmart-Flipkart will venture to bring this market both into the organised sector and online.

But aren’t dark stores bypassing regulatory guidelines?

No. This is something that many other companies are already doing. BigBasket is a classic example. It fulfils a lot of its orders from dark stores and dark warehouses. Amazon does the same for Amazon Now’s express delivery. Nothing stops Walmart-Flipkart from doing the same.

Why couldn’t Flipkart venture into groceries on its own?

Hitherto, Flipkart has had limited success with groceries. They tried it once, years back, but quickly abandoned plans and have only recently taken baby steps to re-enter the segment. So why is groceries a hard market to crack? These items are perishable with short shelf-lives, and the imperatives around supply chains, inventory management and logistics are completely unique relative to everything else that Flipkart has sold previously. It requires an entirely different mindset around operations, economics and user behaviour. Not only are these areas Walmart’s core strengths, but they already have a Rs 4,000 crore (~$588 million) cash and carry business in India where food items and groceries are a big part of the basket.

 

Growth of the e-pharmacies in the market

“1mg may have burned less money but even though it had all the advantages, it could not take the market leader position,” he added.

Most e-pharmacies have followed Medlife’s style of acquiring customers over 1mg’s more sustainable approach. All of them rely on digital marketing via Google. Netmeds, backed by Orbimed and Systima, is focusing on the two most expensive forms of mass marketing—TV advertising and hiring a brand ambassador. They’ve gone all out too, with Indian cricket icon MS Dhoni the company’s brand ambassador. LifCare has gone a different route, focusing on heavy discounts instead.

The Market

However, these approaches aren’t without drawbacks, says Tandon. The market for e-pharmacies lies in selling drugs for chronic diseases like diabetes, hypertension and asthma, which constitute close to 40% of the pharmacy market. And these are mostly sold on prescriptions renewed month after month. The problem though, Tandon points out, is that Google does not allow promotion of prescription drugs in India. Although e-pharmacies can position themselves as sellers of medical or health products, they cannot promote prescription medicines online.

Huge discounts and mass advertising are only pushing online pharmacies further away from becoming profitable, says Rajpal*, who is now setting up another venture in addition to LifCare. “Even today, we are working on burn model because it has become a price war. The discounts are as high as 30% when branded generics offer 24-28% margins. It is not sustainable as e-pharmacies lose money on every order,” he said. This isn’t even taking into account the additional cost of logistics.

Finally, the jury is still out on offline methods for acquiring customers, such as enlisting doctors to encourage patients to buy medicines online, telemarketing and offline centres. PharmEasy became the first e-pharmacy to try the last option when it started opening stores six months ago. A typical store looks like a garage, where one or two PharmEasy employees note down orders for home delivery.

For offline, it is still early days, says Shah. “We are a chronic care platform and we realised that people had problems navigating technology, downloading the app and placing an order. Offline stores ease the resistance from a first-timer and build a relationship like a local pharmacist,” he added. PharmEasy has opened about a dozen such stores in Mumbai, and is still evaluating whether they work.

The Strategy

Contrary to the popular strategy, 1mg has proved that content is the least expensive way of effectively getting people to buy medicines online. “We are like Wikipedia on medicine information and the lion’s share of traffic comes for that content, which now brings us more than 1 billion page views every year,” said Tandon. It is these users who have led to 5X growth for 1mg in the last financial year, he claimed. 1mg may not be the market leader like Medlife, but having 2.4 million monthly active users definitely increases the likelihood that it will acquire paying customers.

E-pharmacies are also betting on services like e-diagnostics and e-consultations to help drive revenues. Health insurance provider Max Bupa’s recent tie-up with 1mg and Practo for use of their allied health services as part of an insurance product is indicative of the potential these services hold. In the next three years, Tandon expects the share of revenue from allied health services to increase from the current 20% to 40%, driving up profits as well since these pack larger margins.

Even with these though, profitability is still a while away. Tandon predicts 1mg will be profitable in three years. Medlife, meanwhile, intends to turn a profit in half that time. However, the fact that they’re both this optimistic is proof that the e-pharmacy genie is well and truly out of the bottle.

 

Death’s door to doorstep delivery, e-pharmacies are here to stay

It was not because we were doing anything illegal, but because the law was ambiguous, Rajpal says. The law in question, the archaic Drugs and Cosmetics Rules, 1945, allowed regulators to crack down on e-pharmacies since they could not monitor whether e-pharmacies were compliant with certain aspects of the law. For instance, it required stamping prescriptions to avoid someone using the same prescription to buy drugs from multiple pharmacies. Similarly, it wasn’t possible to ensure that drugs were handed over to an adult. The risks with e-pharmacies were too many, and regulators in most states decided to crack the whip.

Regulators in Haryana, meanwhile, were considerably more relaxed, giving 1mg a relatively hassle-free existence. This advantage, though, may soon be a relic of the past.

The Indian government is set to level the e-pharmacy playing field, with the health ministry suggesting new regulations that effectively legitimise e-pharmacies. The proposed new regulations will amend the Drugs and Cosmetics Rules, 1945, and recognise e-pharmacies as legal entities. These were circulated among state drug regulators last month. Traditional pharmacists, who were up in arms last year after the government suggested they digitise their supply chain in a public notice on online and offline sale of drugs, stand pacified as well. The proposed regulations no longer make a mention of the controversial suggestion.

Aggressive state regulators and resistance by traditional pharmacists were two key reasons why e-pharmacies have been unable to corner more than 1% of the Indian pharma retail market. Now, with the central regulator in their corner, Tandon hopes they can grow to control 10% of the Rs 1,20,000 crore (~$17.7 billion) market in the next three years. With the dark cloud of regulation clearing, who will emerge as the biggest fish in the e-pharma sea?

Dark days are over

While the new regulations are still only at the draft stage, optimism about the future of e-pharmacies has soared in the last year on the back of the government’s positive overtures. This is evident in VC funding of e-pharmacies, which dipped from $68 million in 2015 to just $24 million in 2016. Since the government began looking into formulating regulations for e-pharmacies early last year, VC funding in the sector surged to $53.3 million in 2017. The draft regulations have only furthered this sentiment.

The process of enacting this amendment does not require parliament’s approval so it could become law before the year ends, said a government official.

Once done, e-pharmacies would have to obtain licenses from the central government, he added. This shifts the responsibility of pharmacy regulation from the states to the Centre and lays out clear expectations for e-pharmacies. These include verifying that prescriptions are genuine, recording patient details and not advertising prescription drugs. While compliance with these regulations will undoubtedly be a challenge, it is a far cry from the wild west environment that has existed thus far.

The proposed regulations are effectively a stamp of approval from all relevant ministries in the government—information technology, home affairs and chemicals. Sure, these regulations aren’t the law, just yet, but it is enough to assure the state drug authorities that, just by definition, e-pharmacies are neither associated with substandard medicines nor the sale of medicines without prescription, says Dr Dhaval Shah, co-founder of Mumbai-based PharmEasy.

Eyes firmly focused on the future, e-pharmacies are now caught in a scramble to acquire customers. Realising the need to be creative while competing with each other as well as brick-and-mortar pharmacies, the different players are taking innovative approaches – both online and offline – to corner the market.

Selling medicines online is more art than science

“They [1mg] had two years advantage and so many downloads, but they could not generate enough business,” said Tushar Kumar, who founded e-pharmacy Medlife in 2014. While 1mg has the most active app users, Medlife has the highest revenue in the sector. He believes that Medlife attained the largest chunk of the e-pharmacy business because it acquired customers via a combination of digital marketing, mass advertising and heavy discounts.

1mg, meanwhile, focused on digital content to drive business. It offers a database of all the brands that sell a drug and at what price. For instance, aspirin is sold by 10 drug manufacturers at prices ranging from Rs 3 to Rs 159. Along with this database, 1mg also publishes articles on healthy living in both Hindi and English to get more people to use the platform.

 

Capped prices of cardiac stents haven’t benefited Indian patients

If the government settles on the first option, there is some scope for a conversation on what the trade margin should be. The margins in the graph above have been calculated at 50%, but the senior executive states that only a nuanced policy can decide the right margins for devices. What is fair for one is not fair for another.

For instance, he says, the margin for a product priced at Rs 100,000 ($1,465) could be 20%, but for a smaller product, say, a syringe, priced at Rs 5 (7 cents), 20% margin won’t work. Rs 1 (1 cent) won’t work for most dealers to recover transportation and inventory costs as these could need Rs 2-3 (3-4 cents) per syringe.

If the government agrees to this policy, MNCs can sell innovative products right to the last mile, and then, doors can be opened for a conversation. Until then, with medical devices, MNCs are bearing the cost of capped prices.

Weak knees

Since the National Pharmaceutical Pricing Authority (NPPA) capped the prices of knee implants at Rs 54,720 ($801) and Rs 76,600 ($1,122) in August 2017, the revenues of the multinational knee implant manufacturers have been squeezed by 30-40%, says a former senior executive of a Michigan-based medical device company who resigned recently. The Ken could not independently verify this, apart from the drop of $9 million in American MNC Johnson & Johnson’s international quarterly earnings from knee implants, which the company attributed to the price control policy in India. The executive was the head of India operations when the price of knee implants was capped in August 2017.

Among different models of knee implants, the sale has shifted to the lower-end products. The sale of most high-end products has halved in the last quarter, he says. The cost of transportation and logistics also means that Tier 2 and 3 cities will remain underserved, if not unserved altogether. “We do sell those but are not replenishing the stocks, and we are not servicing surgeons in Tier 2 and 3 cities as it would mean incurring losses. It is no longer viable to go and sell knee implants in Hisar or Rohtak,” he explains. The capped prices also ensure distributors have fewer resources to invest in expanding to these places.

“We once had close to 2,000 surgeons who would use our knee implants. They utilised the instruments by conducting two to four surgeries in a day, but now we have shrunk this to 300 customers just to break even,” he adds.

Right now, he says, knee implant manufacturers are waiting for the inventory to finish. Once it is exhausted by the end of the year, high-end models — such as like Triathlon by Stryker, Attune by DePuy Synthes and Persona by Zimmer Biomet — will either disappear from the market or become scarce. Just like stents. Any plan to expand is scrapped, he concludes. “We are not even considering bringing newer products to India.”

The future looks bleak as the Government of India has not favoured the idea of deciding trade margins at the first point of sale. At least, not yet. While the industry is hanging its hopes on the government changing its stance, the government is keen on the other two options.

Divided opinion

The government, for its part, wants to enact the second option, but it is willing to settle for the third option, says a source working closely with the government, who did not want to be named. “Over the last six months, in all the meetings between the industry and Niti Aayog or the Department of Pharmaceuticals, the bureaucrats have pushed for the second option,” he says. And there’s merit to that. Because option one would mean that everyone in the supply chain of medical devices, be it the manufacturer, the distributor or the hospital, all bear the burden of controlled margins equally.

“It was when the trade negotiations started building up that the government added the third creative option that may appease the MNCs, distributors and the hospitals,” he says. It is this option that the government intends to put its weight behind. It requires the device manufacturers to declare their markups and allows distributors and hospitals to pre-determine margins.

The device manufacturers agree that unlike the NPPA, which could never justify how it determined the capped price for drug-eluting and bare metal stents at Rs 7,660 ($112) and Rs 28,000 ($410) and cobalt-chromium knee implant at Rs 54,720 ($801), respectively, the three policy options are transparent.

 

India up for a trade war over price control, but there’s a Plan B

With this development, the timing of the Niti Aayog’s alternate price control policy has become curiouser. The discussion to change the price control policy has been doing the rounds for about a year, says a representative of an American industry body. But the government chose this month to share the proposed policy because the pressure from the US is mounting, he adds.

It all began in October, last year. The global medical device association AdvaMed, headquartered in Washington DC, filed a petition with the USTR. AdvaMed, which represents medtech majors such as Abbott, Boston Scientific Corporation, Medtronic and BD, asked the USTR to withdraw trade benefits that the US accords to Indian industries. This was followed by eight months of conversations, meetings and letters between the Indian Government, US President Donald Trump, industry bodies and the USTR. All of this culminated in the 19 June public hearing.

Now, all that is left is the USTR’s decision. This could take anywhere from three months to over a year, depending on how strongly the two countries stick to their guns. The Government of India, for its part, has suggested that it will drag the US to the World Trade Organisation because it has the right to make devices accessible to the poor. Battle lines drawn, the dispute threatens to turn into a trade war.

The new price control policy could defuse this ticking time bomb. It is the lifeline on which the future of the $5.2 billion Indian medical device sector—growing at 15.8% each year—rests, as over two-thirds of India’s medical devices are imported, and the majority of those are from the US. With the government intending to buy medical devices on a large scale for expanding healthcare under its ambitious Ayushman Bharat programme, it is hopeful that this new price control approach can get medtech multinationals to continue selling quality products in India.

The new policy is touted as a new chapter in price control policy-making, a hopeful new direction for the industry and the government. But can the government bring device manufacturers back to the table?

The fourth wave of price control

The first wave of price control was meant for essential drugs. The prices of popular devices, namely stents and knee implants, were controlled in 2016 and 2017, respectively. This was the second wave of price control. After these, now state governments have begun controlling medical procedure costs, marking a third wave. This latest policy, marks the fourth.

To ensure its success, the government is taking a consultative rather than an autocratic approach to drafting this policy. Indeed, the document released by the Niti Aayog asks the industry to choose from three different forms of ‘rationalising margins’ on medical devices. Industry stakeholders have been presented with the the following options:

  • MRP = Price at the first point of sale + percentage of trade margins (as decided by the government)
  • MRP = Landed cost + percentage of trade margins (as decided by the government)
  • MRP = Landed cost + markup due to services rendered (as declared by the manufacturer) + percentage of trade margins (as decided by the government)

Of these three, MNCs have unanimously backed the first option. For the new policy to work, the government must rationalise trade margins at the first point of sale, says a senior executive at a London-based device manufacturing company with a significant presence in India.

Some serious claims!

In 2016, the government’s own committee had suggested this very approach. The senior executive sees this as a ‘win-win’. It brings down the price of the device but it does not force a manufacturer to incur losses as the margin, rather than the price, is capped for every product. The policy is more nuanced than a one-size-fits-all, he says. As is evident in the graph above, the price of the device under the proposed policy diminishes significantly, thereby squeezing the margins earned by the hospitals rather than medical device manufacturers.

The Medical Technology Association of India (Mtai) represents the likes of Boston Scientific and Johnson & Johnson, who sell stents and knee implants in India, is also convinced (see graph below). Mtai, in a 19 June press release, notes that these MNCs do not favour any formula based on the landed cost as these formulas depends on the transfer price—the price at which the devices are transferred internally from the parent company to its subsidiary. The executive quoted above refers to the landed cost of a product as a gift that a father gives to his son, since it is determined internally by the parent company. It should not be the basis for calculating margins, he insists.

 

For Cisco, India is no longer all that special

That means Cisco is doing away with some business, acquiring newer ones, changing reporting structures and letting people go. And all of this is manifesting in India, the company’s second and only headquarters outside of San Jose, California.

The Ken learnt that Cisco sold its digital software TV unit NDS to engineering company Larsen & Toubro (L&T) group around November, from three people familiar with the sale. It was an Israeli company that had about 2000 engineers in India. And Cisco paid $5 billion to buy it in 2012. (Cisco has been letting go of people from this division since 2014.) And with the deal, about 600 engineers also became L&T employees.

The networking giant is also shutting product lines gradually. The Mobile Wireless Group is one, and the small-cell technology group—cells that help bring mobile network capacity close to the user—is another, confirmed two directors, one former and another in the company. These divisions have whittled down from a 200-300 member team to a 20-30 size over the last two-three years.

The News!

“Every Friday, we would get news that someone or the other has been let go,” said a former senior executive, who quit in the second half of 2017. While accurate numbers of the layoffs in India are not available, at least two senior employees pegged it at 500.

And with the latest round of reorganisation, Cisco India will not have an engineering head anymore.

The last engineering head, Amit Phadnis, quit the company in January 2017, as staying on would have meant a diminished responsibility. His role has not yet been filled. As senior vice president, he was responsible for core engineering with close to 3000 people reporting to him.

But immediately after Phadnis left, at the all-hands meeting, it was announced that no one will be taking Phadnis’ position, said a Cisco director. The Ken spoke to five senior Cisco India executives to confirm this. All of them wanted to stay anonymous as they are not authorised to speak to the media. Phadnis did not respond to messages where he was asked for his viewpoint.

The resounding message to Cisco India from this is one that it no longer gets any special treatment and is like any of the other hundreds of ‘sites’ Cisco has across the globe. The company is moving from a site-centric strategy to one focused on business units.

This is something that many other MNCs that set up in India go through.

“This is a cycle through which firms pass. Initially, when you enter a country, it makes sense to have a head to oversee all the business under one roof,” says Rajiv Krishnan MD of Korn Ferry Hay Group, an HR consulting firm. But as firms grow, different businesses grow at different rates and have different needs. “The reporting into a business unit is better than having a local reporting head. That way, a particular business is managed in a consistent way across the world,” he adds.

While for business reasons this could be the right call, the role of India for multinationals is not what it was originally made out to be. “Earlier, because of the cost arbitrage, India automatically was the chosen destination where projects would be assigned to get executed,” said a senior IBM executive. But that’s no longer the case. “India has to prove its worth as there is competition from numerous destinations like China, Central and Eastern Europe. No one is giving anything to India on a platter anymore.”

Coming a circle

Cessna Business Park in Bengaluru’s traffic-ridden IT corridor along the outer ring road has eight Cisco buildings packed with about 10,000 employees. Each time a new building came up on the campus, Cisco had the first right to refusal. And for the first time in a decade, in 2017, it said it didn’t want any more building space.

For years, its ebullient former CEO Chambers sold the dream to successive Indian governments that the company will hire more. It has now come to a point where Cisco will clearly not be expanding its headcount at the same rate as it once did in India.

“Cisco’s headcount has been more or less flattened over the years, and moreover, it grows through acquisitions, so it won’t hire at the same pace it did earlier,” says a director at the company.

 

PolicyBazaar.com wants to take insurance back to its roots

This combination of endurance and impatience has seemingly paid off. PolicyBazaar, India’s largest insurance aggregator, just raised a mammoth $200 million venture round. From arguably the world’s most sought-after VC fund, SoftBank. A venture round that saw the company enter the unicorn club—startups with a valuation of $1 billion or more.

Dahiya is also a maverick. He pooh-poohs the most investible theme floating around when it comes to insurance—“insurtech”. You know, the use of technology to unbundle and disrupt traditional insurance through apps, wearables, nifty micro-insurance policies and entirely software-based processes? Heck, SoftBank’s most prestigious insurance investment globally is ZhongAn, the Chinese insurtech pioneer that went from starting up to IPO to a $10 billion valuation in just over four years.

“These are tick-box products,” he says, pointing to one of the most popular micro-insurances these days—domestic travel insurance. “The claims ratio is 5%. Why would you ever pay for something like that? A good insurance product has 75-80%. ”

The world is moving to small, impulse-driven insurance products like flight delay insurance or e-commerce returns insurance (ZhongAn’s top seller). Likewise, PolicyBazaar’s younger and nimbler competitors are partnering with e-commerce sites to upsell tiny policies along with a bigger purchase (show delay insurance with a movie ticket, for example).

Dahiya, however, wants to go in a different direction. Back to selling the classic idea of insurance—as genuine protection against death, disease and disability. He is doubling down on trying to make PolicyBazaar a destination for customers to educate themselves and buy insurance. When every insurance startup worth its salt is figuring out how to not just distribute third-party policies, but also create newer ones, Dahiya says he will “never” create his own policies, “ever”.

And then there’s his co-founder and CFO, Alok Bansal. “We didn’t really have a need for the $200 million. Or a very clear use of those funds,” Bansal says. “In fact, our existing investors were willing to invest up to $500 million, but we took the money from SoftBank in order for an ecosystem alignment with an important player like it,” he says.

None of this makes sense. It flies in the face of everything we understand about insurance, venture funding and unicorns.

“I will be at odds with everybody, I don’t care,” says Dahiya, underlining his conviction in the mission he has embarked on.

Insurance is the subject matter of…

The fundamental problem with insurance in India is that people do not know what they’ve bought, says Dahiya. “Take 100 life insurance policies holders, and 98 will not be able to tell what they bought. They only know how much they have paid.”

The fault for this lies with a legacy industry, still selling insurance in the guise of investment, or, perhaps, investment in the guise of insurance. They do this because Indians, like others the world over, are notoriously wary of paying money to protect themselves from an event that may not happen. Their irrational minds tell them it’s a waste of money.

So, insurance companies package life insurance policies as investment products, offering “guaranteed returns” over the returns. Because no one wants to “waste” money on pure insurance. And because these lemons come with commissions for the agents and brokers who sell them to unsuspecting customers. These commissions can be as much as 30-60% of a lemon policy’s first year premium.

The relationship between insurers and agents is a curious one, part symbiotic, part parasitic.

The industry uses agents to mis-sell investment products masquerading as insurance to customers. But the same agents also mis-sell customers to insurers, masking their true risk profiles in order to make a sale. It’s a dodgy proposition for both customers and insurers.

Meanwhile, the elephant in the room, says Dahiya, is that many Indians spend 80% of their life’s wealth in the last 40 days of their life. Out of pocket expenditure constitutes 62% of healthcare costs. Which is why PolicyBazaar wants to focus on health insurance. “When we started, sales of health insurance were higher than life and motor insurance; then life insurance increased. Now, motor is the largest. But we want to make health insurance the next big thing,” says Dahiya.

The OPD opportunity

Most Indians do not buy healthcare insurance because most policies sold only cover serious ailments that require hospitalisation. Being the irrational human beings that we are, we tend to underestimate the impact or likelihood of serious health problems. Instead, we wonder why insurers rarely cover primary care. Logically, we should need insurance for unforeseen events that have the lowest incidence, but the highest severity. Instead, people want insurance for exactly the opposite—OPD (the Out Patient Departments in hospitals that treat patients that leave the same day they walk in).

 

The regulations on tele-consultation in India are unclear

In the past, insurers didn’t offer OPD cover with their policies because they were susceptible to fraud. Outpatient expenses include doctor consultation, diagnosis, medicines and even medical procedures which do not require hospitalisation. This creates lots of bills, says Prashant Tandon, founder of Gurgaon-based e-pharmacy 1mg. Max Bupa has tied up with 1mg to get digitised bills instead of paper bills as the incidence of fake bills and fraud is higher in outpatient insurance, says Tandon. The cost of detecting fraud is what makes it unviable for insurance companies to price policies in a way that people would benefit from the insurance.

Keeping crime rate in check

The only way fraud can be controlled is via proprietary and trusted channels or digital networks of doctors, labs and pharmacies. That’s why in January 2018, ICICI Lombard launched outpatient health insurance powered by Practo’s network of doctors. A month later, Max Bupa introduced a digitally-enabled ‘Everyday Use’ Health Insurance Plan by partnering with Practo for its network of doctors, GOQii for personalised health coaching and 1mg for medicine delivery.

Others, such as Apollo Munich and Religare Health, are relying on HealthAssure. HealthAssure spent seven years painstakingly building a network of 3,100-odd centres, including clinics, diagnostics and pharmacists in 1,100 cities. It even negotiated discounted rates at each of these centres. It earned a revenue of Rs 17.8 crore ($2.6 million) in FY16-17.

“It is not an easy product to create in terms of inventory and quality since the margin of error is not 5% or 10%. It is sub 1%,” says Varun Gera, CEO of HealthAssure. “A healthcare client remembers one bad incident and that breaks the trust,” he adds. It is not easy to deliver quality healthcare without standards and protocols developed and implemented. In PolicyBazaar’s case, it will also include training 1,000 doctors. The process takes time.”

This is why private health insurers prefer tie-ups with companies who have already developed these networks. Using the network of, say, Practo or HealthAssure, they can offer OPD insurance products. Last year, The Ken reported that US health insurance major Aetna acquired Delhi-based Indian Health Organisation (IHO) because it saw a market in financing outpatient expenses in India. IHO was seen as a means to this end since it had developed a network of 16,500 clinical partners in 38 Indian cities. It was also able to minimise the misuse of this network through digitisation.

Dahiya, however, wants his own network. While this flies in the face of conventional wisdom, that doesn’t seem to faze Dahiya. He says he started building it three months ago. It’ll be ready in another three. “We have the network in place. It’s very easy. Building it was not what was complicated, but controlling it is,” says Dahiya.

Dahiya is confident. And this confidence stems from a secret weapon.

Driving demand

By Diwali this year (November), PolicyBazaar’s parent company, Etechaces Marketing and Consulting Pvt. Ltd, is launching a new entity. Called DocPrime, it’s a virtual doctor consultation platform in the same vein as China’s online healthcare platform Ping An’s Good Doctor. The fact that Ping An’s Good Doctor is also backed by SoftBank is no coincidence.

ETechaces is betting big on DocPrime. DocPrime will scale up to a service powered by 1,000 in-house doctors who will offer teleconsultations and offer e-prescriptions where possible.

The platform could also have an artificial intelligence (AI) offering as well. Talks have already begun with Babylon Health, the UK-based healthcare startup that uses AI to diagnose diseases via symptoms entered into its apps. A joint venture could be on the cards, with Babylon providing the AI to disintermediate physical doctors and DocPrime bringing in and taking care of customers.

DocPrime is a free service. So, it won’t make money. At least not in the short-term. But that’s okay because that’s not the point of DocPrime. Instead, DocPrime is designed to be a massive organic customer funnel for PolicyBazaar.

“I will create that (demand) through a mechanism of 1,000 doctors who will not give false bills. Like Uber (did with its automated billing on behalf of drivers),” says Dahiya. These in-house doctors will be PolicyBazaar’s wedge to disrupt its prized target of healthcare insurance.

By March 2019, Dahiya says he expects 100,000 users will enquire with DocPrime’s doctors each day. That’s three million each month. He’s hoping that roughly 20% of them will require some sort of physical support, which means DocPrime will generate 20,000 (in-person) appointments daily. These 20,000 users are Dahiya’s real target. “We expect to sell a healthcare subscription to 15% of them at around Rs 200-300 ($2.9 – $4.4) a month,” says Dahiya, nonchalantly.