The Unseen Value in Your Business

In a shared economy, where value is shifting to intangibles, the new wave companies are going baggage-free.

As the Indian economy evolves, how businesses are built, run and valued is changing too. While it is hard to determine, who drives and who follows the change, one thing is sure, that over the years, intrinsic value in business has shifted from tangibles to intangibles.

In the past 75 years, India was focused on building foundations – infrastructure, policies and systems. People wanted basic necessities of life – food, clothing and housing. Entrepreneurs rushed to get access to government contracts, licenses and natural resources such as coal, cement, petroleum, ships, telecom spectrum, banking licenses and the like. These companies invested heavily, built factories and owned heavy equipment. Access to opportunity and capital were critical factors for success.

As the world economy evolved, the second wave of companies emerged that built consumer products such as Parachute Hair Oil, Dalda cooking oil, Parle biscuits and Thumbs Up. Their core advantages were brand, distribution, product design and quality control while they started outsourcing production. Service sector businesses such as Oberoi hotels, Apollo Hospitals, Infosys Technologies meanwhile started deriving their competitive advantage from training people and building processes.

Then came the third wave of change, when technology and know-how became the ultimate advantage with companies such as Apple, Google, Facebook, Pfizer, Illumina, Volkswagen and Nestle. These companies operate “platforms” controlling the customer experience, owning product design and setting up processing and supply chain. They outsource all the tangible machinery – components, manufacturing, assembly and logistics.

Of late, there has been a fourth wave of players, such as Swiggy, Flipkart, 1MG and Oyo, all largely built on technology. They are near zero in physical asset ownership and compete on the basis of their brand, customer experience and price. Their business model is based on improving utilisation of existing fixed assets at “societal-scale”. These new-age behemoths do not own a single piece of asset despite the fact that they operate in very asset-heavy business categories. Yet, they command huge valuations. For example, the taxi hailing company, Uber, that does not own its fleet of cars, is all set to list its shares. Any guesses on what Uber’s potential IPO valuation is? $120 billion! That is more than the value of TCS ($110 Billion) or Reliance Industries ($107 billion)!

Another good example of an asset-light company is Oyo Rooms founded in India in 2013. It has over 8500 hotel properties under its belt compared to the Wyndham Hotel Group with only a slightly higher number of hotel properties after almost a century in this business. Closer home, India’s largest chain, Marriott (world # 3 with over 6500 properties worldwide) has around 100 properties in India to boast of after decades of operation in the business. Oyo Rooms, that unlike its conventional adversaries, does not own any of its properties, is valued at $5 billion, whereas Oberoi Hotels is valued at $1.2 billion and Taj Hotel at $2.05 billion.

It is a little perplexing that these newcomers, with little or no tangible assets, have grown so rapidly and are valued so highly. Uber does not own a single car. Oyo does not own hotels; WhatsApp does not own mobile towers/ licenses. YouTube does not have studios, nor does it have to tackle the whims of temperamental actors.

Surprisingly, this trend of value shifting to intangibles has been goings unnoticed for the last 30-40 years. For instance, Nike outsources its production to 3rd party sports shoe manufacturers and franchises its stores to achieve scale faster and with lesser.

To be a successful business owner today, you don’t need to own huge blocks of assets or have access to scarce natural resources but you can partner with those who do. Not only does this free up your capital, it allows both you and your asset partner to focus your funds and energy on your core-competencies. Your partner manages the asset and provides the actual service to your customers, while you, as the brand owner, provide the back-end technology that operates the business and owns the customer. For all practical purposes, the customer rents an Uber vehicle or an OYO room irrespective of who the actual owner of the vehicle or room is.

The Win-Win Model

Initially, businesses saw that their valuation was entirely based on the physical assets they owned. Then came those with a mix of tangible and intangible assets. Now is the phase of the near intangible asset companies. Let us enumerate a few benefits for all in the asset-light model:

Better returns on assets: The foremost benefit of an asset-light model is that the capital requirement is lower, so the same capital can be deployed into running the operations better. By doing this, the cost of capital goes down and the returns on asset go up.

Diversification of risk: Since, the assets and operations get spread over a number of geographies and asset-owners, the business gets de-risked and the chances of all assets under performing are slim. At any given point in time, there would always be assets that are outperforming others.

Quick response to change: Being asset light makes you very agile, particularly in addressing rapid changes in a dynamic business ethos, where new technologies and newer opportunities are replacing the old, each day. Not having a huge chunk of your capital locked in illiquid assets makes you flexible enough to best capitalise on these emerging set of opportunities. For example, Emami picked up 30% stake in men’s grooming platform ‘The Man Company’ in order to leverage online opportunities in the fast growing men’s grooming segment.

Higher scale, lower costs: Scale in this model, can easily be achieved in a very short span, without a massive outflow of capital expenditure. Further, as scale further absorbs costs, the operating cost at a unit level comes down.

But everything is not hunky-dory While there are numerous examples from across the world of businesses flourishing on the asset-light model and scaling up successfully, on the flip side, there are instances galore of business failures too. In our understanding, the asset-light model may not have a working in situations where the product/service being provided is scarce or special in nature (e.g. Darjeeling Tea production cannot go asset-light due to the IP attached), or when the demand is unpredictable or the cost of customisation is steep (e.g. Lego - Flextronics broke up when Denmark’s Lego needed customisation but Flextronics, its manufacturing outsourcing partner needed standardisation). Their needs clearly didn’t match.

For some traditional businesses like Zara and IKEA that derive all their salience from their exclusive products, going baggage-free would be too much of a brand dilution, so they continue owning every piece of the asset in their business.

There are plenty of examples where a poorly-managed, asset-light outfit went bust, leaving the investors high and dry. Some of the examples include shipping company shyp.com, used car marketplace beepi.com, which had deployed asset-light models and drew significant investor interest, but eventually could not manage their business well and fizzled out.

Also, with every other start-up opting to go asset-light, the space is becoming too crowded and noisy. Today, it’s becoming difficult, if not altogether impossible to distinguish between the ‘fly-by-night’ and ‘also-rans’ operators from the super performers.

But overall, the asset-light model is working and early investors are still reaping its benefits. In some cases, their investments have grown 10X. The success mantra lies in identifying service lines that besides being asset-light also have a good management team in place to run the show.

From an investor’s point of view, the call has to be made very closely and judiciously before investing in some of these models.

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