How Udaan Found the Path Towards Success Despite Crushing it One Step at A Time: Innovation!

“If you have Rs 6 lakh (US$7,943) credit and Rs 3 lakh (US$3,971) is pending, Udaan can’t do anything,” one of the employees said.

As of August 2019, the company’s loan book was around Rs 200 crore-300 crore (US$26.3 million-$39.4 million). It’s target was Rs 800 crore-900 crore (~US$105 million-$119 million) by the end of 2019, which was not met, the former credit executive said.

Udaan is already working to shore up its lending business. It approached Redington India and Ingram Micro, India’s largest IT distributors, offering to provide loans to their thousands of distributors, according to one of the current executives mentioned earlier. This offers the company a steady base of borrowers, which are potentially more reliable as well due to their ties with big companies.

The issues with its core business

The issues with its core business

With most of its ground staff laid off and only operating in two categories, Udaan is back to the basics. It intends to build out both pharma as well as food and FMCG, said multiple employees, both current and former.

Fortuitously for Udaan, food and FMCG accounted for almost 40-50% of Udaan’s revenue last year, a former business analyst in the category said. The category also offers the highest order values—between Rs 3,000-5,000 (US$39.7-66), according to two current executives—and sees organic demand. This is unlike less popular categories like toys or stationery, which Udaan shut in February, cutting 200 jobs, said one of the executives.

The problem for Udaan, though, is that the food and FMCG space is rife with competition. India’s most valuable company, Reliance Industries, is one of the claimants to the grocery throne. Its JioMart grocery service has tapped into kiranas. Amazon is also ramping up its grocery play, while there is plenty of VC-funded competition through the likes of agritech startup Ninjacart and B2B groceries startup Jumbotail. Flipkart, too, is increasingly focussed on grocery, and even made an investment in Ninjacart alongside Walmart.

B2B2C focus

In Dec 2019, Udaan’s made its first investment of $2 million in restaurant billing platform PetPooja to expand its fresh business to supply to hotels, restaurants and cafes

Udaan, meanwhile, is bracing for impact. Having already cut back on its human resources, it is looking to get more efficient. Where it once relied on swarms of ground staff to visit stores, drum up demand and upsell banner ads and credit, one city manager will now handle an entire category horizontally, two former employees said. Without ground staff, Udaan is now asking its retailers and suppliers to place their own orders and manage inventory.

It’s also looking to reinforce its logistics operations by building more warehouses, according to three former and current employees.

The good news for Udaan is that it has time. Its last big funding round in October, and a US$30 million infusion from its parent entity Trustroot Internet in March have given it a 24-48-month runway, the core member said. Now, it needs to use both, the time and money, to fix the cracks in its business.

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The flat shipping costs are to encourage higher average order values since the platform has no minimum order value, the core member mentioned above said. This has worked in Udaan’s favour, with the average order value currently hovering between Rs 5,000-6,000 (~US$66-79.4), according to one former and one current executive.

“After it becomes more robust, we can change it again,” the core member said.

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The biggest issue with managing logistics, however, is that Udaan needs to handle returns. This is a huge problem for the company, which sees a 40-50% return rate across categories, according to employees both current and former.

While several buyers we spoke to said the flat fee was attractive, Udaan’s processing of returns meant it was not worth the bargain. “They don’t approve returns easily; out of 100 items, if 10% is spoiled, we need to dump it and absorb the losses,” said the Delhi-based buyer, who used the platform to procure groceries and vegetables. He has been waiting for a Rs 1,350 (~US$17) refund for the last four months and has instead switched over to one of Udaan’s rivals, Ninjacart.

A buyer who wants to return a product has to raise a request on the Udaan app, with clear pictures of the product in the original packaging and the damaged goods post unwrapping, said Sonu Shrivastava, a computer parts retailer. Shrivastava has been on Udaan since 2016 and his only grouse is the returns and customer service. Shrivastava paid 10% of the cost of an order in advance and is still waiting for a refund.

On the other hand, suppliers bear the cost of returns and non-delivery. One month before the lockdown, Udaan informed suppliers that packaging delays or cancellations will now cost them Rs 50 (US$0.7), Gupta said. Suppliers are also expected to take 360-degree videos of shipments before they are picked up if they wish to contest potential returns. This isn’t par for the B2B course. “Sellers have to take 360-degree videos to say it’s not my fault it was returned,” the formal zonal manager quoted earlier said. “Their logic was that it happens with Amazon and Flipkart, but B2B doesn’t work like that.”

With both sellers and buyers on the platform feeling hard done by, Udaan’s early gains are in serious danger of coming undone.

Charting a new course

Even Udaan’s most ambitious bet, providing credit to buyers and sellers, hasn’t panned out the way it hoped. Udaan was granted a non-banking finance company (NBFC) licence in 2019, which allows it to offer small loans—from Rs 10,000-2 lakh (US$130-2,650). The loan size is increased based on a buyer’s purchasing history and frequency of transactions, a former executive at the company’s credit unit said. While buyers are charged an interest rate of 3.25%, sellers don’t pay interest at all.

Lending to small retailers, though, means that defaulting is a serious concern. Udaan doesn’t ink any formal agreement to hand out credit. Instead, executives visit stores, clicking pictures of the shop and tracking the buyers on the app, two former employees said.

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Commissions, though, make sense for Udaan. For an order of Rs 5 lakh (US$6,619), Udaan could pocket up to Rs 50,000 (US$661) simply to facilitate the transaction. This is apart from the flat fee it charges for logistics, interest on lending, and value-added services like banner ads. Amazon, for instance, charges a 16.5% commission in its business-to-consumer (B2C) mobile accessories category, though it should be noted that margins are higher in B2C.

The stages of a scaling sprint

The stages of a scaling sprint

The high commissions took a toll on Udaan’s retailers and suppliers, a former zonal manager in the clothing category said. Seller interest in the category dropped by almost half, the former manager added. In a Facebook group titled ‘All India Udaan Sellers’, several members stated that the commission was not brought up with them beforehand.

In an earlier story on Udaan, We spoke to a seller who was charged a 6% commission by the company. He said he planned to mark up his products by 6% to make up for this. That is precisely what has happened as Udaan rolled commissions out across its platform—sellers passed the commission on to buyers. For buyers, it’s a double whammy, as they also pay the platform’s logistics fees.

Sharma, who has been on Udaan for two-and-a-half years, says he stopped buying mobile accessories after this change. “Sellers increased their rates to sell on Udaan. 80% of the retailers dropped out from the category after that. I can’t buy anymore, 10% is very high,” he says.

The commissions also led to an uneven marketplace, with each seller choosing to price the product differently. In other B2B firms like ShoeKonnect and Paytm’s* B2B arm, sellers must get their updated pricing approved by the platforms’ business development managers, a Delhi-based seller of Udaan said. Not so with Udaan. Not only can prices be changed on a daily basis by sellers, there is no minimum order mandated on the platform.

The logic of logistics

Udaan’s other great monetisation hope was logistics. The company’s logistics arm, Udaan Express, delivers 60-70% of all orders across 800 cities, four former and current executives said. The remaining orders are outsourced to third-party logistics providers like Delhivery and Ecom Express.

The company also currently has 25-30 warehouses pan-India, three former and current employees said. Owning warehouses and handling inventory means that Udaan is further from Chinese B2B giant Alibaba, and closer to e-commerce leader Amazon. This isn’t great for profit margins, as evidenced by the fact that asset-light Alibaba has higher profit margins than Amazon. In fact, for the year ended March 2019, expenditure on logistics and cash collection (for credit) was Udaan’s single-largest expense at Rs 254 crore (US$33.6 million).

Udaan, though, believes that owning a logistics play improves the experience it offers. Not only does it make for a smoother supply chain, it also allows for economies of scale thanks to warehouses as pickup is streamlined.

Udaan implemented a flat logistics fee for each category—around Rs 100 (US$1.3) for clothing and Rs 30 (US$0.40) for fresh produce, said one Delhi-based buyer.

The Definitive Guide to Udaan’s Current Situations and Strategies

The company hit the ground running, fuelling aggressive growth through aggressive losses. This was a strategy its founders Amod Malviya, Sujeet Kumar and Vaibhav Gupta picked up from their former employer, e-commerce giant Flipkart. Initially, it had no membership fees, no delivery charges, and no listing charges. When sellers were onboarded, the company didn’t seek to charge them until they’d transacted on the platform for a while. Unsurprisingly, this led to incredible growth and, with it, funding.

What are scaling sprints?

What are scaling sprints

Udaan made no money in its first year of operations. Fourteen months later, it became a unicorn—a startup with a valuation over US$1 billion—thanks to a US$225 million funding round led by DST Global and Lightspeed Venture Partners in September 2018. Just over a year later, it continued its fundraising hot streak with a US$585 million round in October 2019 to reach its current valuation of US$2.7 billion.

But while Udaan has scaled rapidly, sustainability is a whole other matter, according to several employees, buyers and sellers we spoke to. The company has struggled to monetise its services while simultaneously burning money to capture the market. Udaan had issues surrounding its commissions, high return rates, poor customer service and high credit defaults, several employees, sellers and buyers said.

Trustroot Internet, the company’s Singapore-based parent entity, saw its revenue from operations increase from Rs 3.24 crore (US$423,644) in the year ended March 2018 to Rs 46.36 crore (US$6.1 million) for the following year. Its total losses, though, widened from Rs 60.3 crore (~US$8 million) to Rs 779.5 crore (US$103.2 million) in the same period. Covid-19 was merely the sucker punch that ultimately staggered the B2B Goliath.

Monetisation moves

Udaan has been burning money rapidly to capture the B2B market—it had a monthly burn rate of US$15 million in 2019. But even the best-funded startups must monetise, and Udaan sought to do that by charging commissions on transactions via its platform.

In May 2019, Udaan introduced commissions between 8-10%, excluding GST, two buyers and sellers told us. Not only did this come out of the blue, they felt it was a particularly steep price to pay. In contrast, other B2B platforms like Amazon Business, ShoeKonnect, and AJIO Business charge commissions in the 2-3% range, Ramawathar Sharma, a mobile accessories retailer said.

For Udaan, it was a marked deviation from its original strategy. “We want to scale, not charge commissions,” Udaan’s co-founder Sujeet Kumar had assured a supplier at a buyer-seller event in Mumbai in September 2018, according to a video provided by a former employee. Kumar said if they charge commissions on each order, sellers will not be inclined to return again. The event was held to celebrate Udaan’s US$1 billion valuation that month.

Instead, Udaan’s stated intent was to make money from data-backed ads, the way Facebook and Google did, through financial services, and through logistics. “If we solve logistics at scale, look at any global company, like FedEx, they work at 10-15% profit after tax. Credit is not free, we charge that also. And when the platform scales, people will advertise,” Kumar, who headed logistics at Flipkart, said at the event.

REDDOORZ and Building A Local Simple But Powerful Brand of Their Own

Rippel also served as Nasper’s representative on the board of Indian e-commerce Flipkart before it was sold to Walmart in an historic $17 billion deal.

It is early days for the firm, but its involvement–which includes a seat on the board—could give RedDoorz some crucial experience as it moves towards a potential IPO, which Saberwal said could happen as soon as 2022.

Those three letters weren’t commonly uttered alongside startups in Southeast Asia. Sea’s listing on the New York Stock Exchange—under Nash’s leadership—is very much the exception to the rule. Today, though, the region’s other billion-dollar companies like Indonesian duo Gojek (ride-hailing) and Tokopedia (e-commerce) are also eyeing public listings.

It may seem premature for RedDoorz to harbour such lofty goals, but Saberwal is typically matter-of-fact with his response. “I’m not here to build a $100 billion business,” he said. “I want to build a $2-3 billion company with decent returns for our investors that’s known across its region and is the biggest in Southeast Asia.

“We 49-year-olds make companies with good returns, but maybe we won’t change the world,” he added with a laugh.

RedDoorz hopes to draw inspiration from Sea’s 2017 IPO

It’s tough to predict startups reaching the IPO stage—just ask SoftBank, which has bet billions on WeWork and other similarly controversial companies. RedDoorz and others in Southeast Asia, however, have prevailing winds in their favour.

“For the first time, companies in Southeast Asia are able to focus on everything the region can offer,” Asia Partners’ Rippel told us. “A decade ago, it was ‘This company is interesting but it is only the market leader in, for example, the Philippines or Thailand.’”

“Founders also didn’t have the ambition or perhaps skills to go regional. But that playbook has been written and now we see more entrepreneurs executing this playbook,” Rippel added. “Today, it’s common to see a company successfully penetrate at least 3-4 countries across the region. That’s exactly what RedDoorz has done.”

The RedDoorz-OYO clash might be a notable parallel to the Uber-Grab battle.

Uber’s retreat from Southeast Asia is widely acknowledged to be down to cutting losses ahead of its IPO this year, while Grab had just one focus—Southeast Asia.

Hitching a lift

Hitching a lift

OYO is yet to tap its relationship with Grab, the $14 billion company that is Southeast Asia’s top ride-railing service and an investor in OYO. Grab has steadily added travel options within its app as it evolves from transport app to super app. Adding OYO bookings to that selection would make sense for both companies.

OYO, meanwhile, has many distractions. Not only is it going after expansion in every continent bar Africa (at least for now) but its core vision of budget hotels is being stretched to cover businesses as diverse as cloud kitchens, coffee chains, event management, co-working and more. RedDoorz, however, is laser-focused on cracking Southeast Asia. According to Saberwal, Qiming, which has seen OYO’s entry and alleged stumbles in the Chinese market up close, is confident that OYO isn’t something to worry about.

We believe that community building is the most critical aspect of RedDoorz because it replicates what we have learnt at OYO to

There’s little doubt that the company can afford to pay these vendors back—aside from the aforementioned regional investment pledges, OYO is in talks to raise $1.5 billion, which would take its total funds raised past $3 billion.

With its expansion in the region hitting hurdles, OYO announced in August that Mandar Vaidya, a 15-year veteran of McKinsey, would head its Southeast Asia and Middle East operations. The firm is keen to dismiss any suggestion that there could be a repeat of China, where OYO is reported to have made layoffs due to “unethical practices” despite initial claims of rapid success. OYO has denied the allegations of layoffs in China.

While OYO’s issues in the region are cause for hope for RedDoorz, investors are still treading with caution. “We thought they were the best performing in that sector, particularly in terms of reducing dependence on OTAs (online travel agencies) for customers. But there was still a lot of noise and competition in the region, most notably from OYO,” a prominent investor who passed on investing in RedDoorz told us on condition of anonymity.

According to one VC professional, uncertainty around the viability of RedDoorz business model put their firm off a potential deal. Despite that, the person said that RedDoorz now “has a good window of opportunity” given OYO’s broad focus on global markets.

But there’s also a wider concern around the more fundamentals elements of the business.

By the wayside

By the wayside

Tinggal, a rival in Indonesia that previously raised $1 million from one-time OYO India competitor Wudstay, is no longer around. Nida Rooms is another that was forced to make cutbacks after struggling with financial problems. Founded by ex-SpiceJet executive Kaneswaran Avili, it downed shutters despite raising some $12.2 million, according to data from company tracker Crunchbase. (Image via Mike Rasching/Unsplash)

“By combining single hotels under one brand and using one technology stack, the budget hotel network definitely creates synergies of scale. These are hotels that would no way have mobile solution or new types of POS individually,” said Bart Bellers, CEO of Singapore-based travel, tourism and hospitality fund Xpdite Capital Partners.

“But basically they are building their own hotel, and ultimately they are stuck with long term leases. What if there is a downturn in the tourism industry? That’s a big big risk.

“Sometimes it has me wondering if this has similar high risks as the WeWork model,” Bellers said in an interview. “Scalable? Yes. Sustainable? To be seen.”

An IPO for RedDoorz

Those concerns didn’t weigh down Asia Partners, a new growth stage fund that announced a $70 million first close of its maiden fund in June. The firm led the RedDoorz Series C deal in what was the first public investment for its fund, which is believed to be targeting a final close of up to $300 million.

Growth funds are a new trend in Southeast Asia venture capital, and this new kid on the block has serious credibility. Asia Partners is founded by ex-Sea President Nick Nash, the man widely credited for taking the Singapore-based gaming and e-commerce company public in 2017, and Oliver Rippel, whose past includes leading Nasper’s business-to-consumer and online services businesses.

How RedDoorz Revolutionized the Hotel Industry in Southeast Asia

He did have his doubts over this conservative approach though. Especially in 2016, when competition peaked with players like Rocket Internet-backed Zen Rooms and OYO prowling the region. “I was thinking something was wrong,” he said. “We hadn’t figured out how to do business in Jakarta, let alone the rest of Indonesia or Southeast Asia.”

Still, RedDoorz stayed true to its ethos, refining its business model. Today its business is comprised of a combination of revenue-share models to suit different types of hotel owners and operators. That is typically full-lease, with revenue-share options including a split of gross revenue, or specific sharing of revenue once it passes a minimum threshold.

Saberwal said he keeps just 70% of the business model “set” because flexibility of the remainder is “what makes the difference.”

RedDoorz- The Unknown Hotel Giant To OYO?

RedDoorz- The Unknown Hotel Giant To OYO

“The market isn’t a one-size fits all, that’s what makes it defensible and sticky,” he said. “Owners are different, owner psyche is different and customers are different. I can’t make a business on the dead bodies of my suppliers.”

With this degree of optionality baked into its model, the company began expanding to Singapore, Vietnam and the Philippines.

Today, RedDoorz is up there with the market leaders. The company claims to have more than 1,500 hotels on its platform, ahead of rival Singapore and Philippines-based Zen Rooms—which claims “over 1,000”—and on par with OYO, which also says it has over 1,500.

RedDoorz has focused on Indonesia, which has been its primary market since its inception. The country is the most attractive in Southeast Asia for internet companies, which are drawn by its 260-million population, and that makes for plenty of competition.

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Just weeks after RedDoorz announced its Series C funding round, OYO one-upped it by stating that it would invest $100 million into the country. That’s part of a wider strategy to deploy $200 million in Southeast Asia over the next two years, another hostile announcement.

The ‘my number is bigger than yours’ tactic is increasingly common for SoftBank-backed companies. This year has seen Grab and Gojek embark on a game of one-upmanship waged through press releases announcing funding rounds and new investors. This peaked with SoftBank increasing Grab’s Series H round to $6.5 billion by pumping in an additional $2 billion. There have also been country-specific pledges. SoftBank has promised to invest $2 billion into infrastructure in Indonesia via Grab, while Grab itself announced that it will deploy $500 million to bolster its business in Vietnam.

But OYO isn’t the only competitor to worry about. Zen Rooms, also founded in 2015, is another. Zen Rooms ran into financial trouble last year after a funding round from an undisclosed Chinese investor fell through at the last minute, a source with knowledge of events told us. Consequently, the company downsized its business in Thailand—having already exited several markets outside Southeast Asia. It eventually found a saviour in Yanolja, a South Korean hospitality company valued at $1 billion.

Initially, Yanolja invested $15 million into Zen Rooms in July 2018 in exchange for an undisclosed “strategic non-controlling stake” with the option to buy 100% of the business. Just this month—October 2019—it followed up with a second undisclosed investment.

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While the battle may not centre around taxis, the budget hotel opportunity is no less impressive. Still in its infancy, revenue from online hotel bookings in Southeast Asia is tipped to grow to $38 billion per year by 2025, according to a report jointly produced by Google, Singapore sovereign fund Temasek and Bain & Company. This is up from an estimated $13.6 billion in 2019. RedDoorz wants to ride this wave to every founder’s ultimate dream—an initial public offering (IPO).

Starting up

Starting up

Saberwal is nearly old enough to be 25-year-old Agarwal’s father—his undergraduate daughter is just a few years younger than the OYO CEO. In fact, when OYO was officially founded in 2013 (a pivot from Agarwal’s original startup, Oravel), Saberwal was still employed by online travel platform MakeMyTrip (MMT), which had gone public that January.

Based out of Singapore, Saberwal headed the company’s Southeast Asia operations, successfully building out the supply side of MMT’s business in the region. Saberwal, though, couldn’t shake the urge to build something new in a region that he believed had vast potential.

At the end of 2013, on a business trip to Phuket, Saberwal bit the bullet and ended his nine-year stint at MMT. “I’m a builder by nature, MakeMyTrip was a great story and I loved every minute,” Saberwal told us in an interview. “I enjoyed being at a public limited company and expat life for the first year or two, but then began to feel I wasn’t doing enough with my time.”

Saberwal’s next move was to call his friend and former colleague Kunwar Asheesh Saxena, who had left MMT nearly a year earlier. Alongside Saxena, now the CTO of RedDoorz, he brainstormed ideas in the travel sector. Seven months later, the duo launched Commeasure in July 2014. A business-to-business service, the company allowed hotels to take online bookings in July 2014. But while the business raised a $1 million seed round led by Singapore’s Jungle Ventures and grew to 450 hotels, Saberwal felt the growth “wasn’t exciting”.

Battlelines drawn

Unlike its Indian rival, however, it took a more conservative approach to growth, focused instead on understanding the space. “Our investor Jungle had done studies on Southeast Asia, showing it was better to focus on city-by-city rather than a six-country focus. So, we went hotel by hotel in [Indonesia’s capital] Jakarta, and built our technology around the problems,” Saberwal recalls.

More fundamentally, there was a lot of hand-holding required. Hotels simply weren’t comfortable using the system despite its considerable benefits. This sowed the seeds of what would eventually become RedDoorz, a business that goes well beyond aggregating bookings to offer standardised features and a common brand for smaller hotels. A la its Indian rival OYO.

The Right Event for the Major Considerations

According to market research firm IDC, the PSG grant is most helpful to micro-SMEs—businesses with fewer than 10 employees and annual revenues under S$1 million (US$710,000). “These are typically family-run shops in the heartlands that have difficulty in digitally mechanising their products and services for sale, and automating parts of their business process,” said Sandra Ng, group vice president heading IDC’s Asia/Pacific Practice Group.

In 2016, Singapore also launched a S$4.5 billion (US$3.17 billion ) Industry Transformation Programme, which has roadmaps to help each industry be more competitive and utilise digital solutions. The government has also formulated Industry Digital Plans, which provide SMEs with step-by-step guides on evolving digitally. They also have training programs to enhance employees’ digital skills.

The resistance

The resistance

Despite the significant incentives provided by the government, Singapore’s SMEs have long resisted digitisation as it still involves time and monetary investment from them, said Ecosystm’s Gupta. “The need to retrain and upskill their teams is also a perceived roadblock to the uptake,” he added.

Just throwing money at it might not always be the answer, as some digital solutions require scale before the economics make sense. The F&B owner quoted earlier recounted a seminar he attended, where a speaker demonstrated automated cooking solutions. However, the solutions only made sense for large restaurant groups. “Not everyone has the volumes to invest in it,” the owner said.

Covid solutions

Recognising the changed environment, the IMDA set aside S$10 million (US$7.05 million) to help businesses move from paper invoices to digital ones

Digital solutions also require buy-in from not just the senior management, but also the staff using them on a daily basis. With the median age of Singapore’s resident labour force being 44, there is a significant chunk of the economically active population that is older and less likely to be receptive to changes in their routine.

The pandemic and the ensuing economic slowdown, though, has turned everything on its head. Digitisation is not so much a choice as an imperative. SMEs, after all, are among the most vulnerable during slowdowns, as many live paycheck to paycheck, said IDC’s Ng. “Most non-essential SMEs will feel the brunt of this shutdown as their costs continue to pile while zero revenues come in [assuming they do not have a digital presence],” she added.

The move to digital is also unlikely to be a one-off blip, said Ecosystm’s Gupta. As consumers get used to interacting with businesses online and via apps, the trend is likely to continue even after the restrictions are lifted. From a talent standpoint as well, employers that lag behind their counterparts in the uptake of digital technology will find themselves at a disadvantage in the future, he added.

“It’s unfortunate that you have a forced situation,” said Sean Liao, founder and CEO of Imaginato, a technology development partner for web and mobile platforms. “People had time, they could have been investing in transformation, investing in connectivity outside of brick and mortar.”

Now, with companies forced to make remote working a reality, and customers no longer coming in via the traditional avenues, digital solutions are beginning to catch on among SMEs.

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The Singapore government can’t be blamed for this institutional inertia. It has been pushing companies to board the digital bus for years. The government has introduced various policies and grants, such as the Productivity and Innovation Credit Scheme (PIC), SME Go Digital, and the Productivity Solutions Grant (PSG). However, the bulk of SMEs have resisted modernising for various reasons, like costs and integration issues.

Launching off to the ISM event in Amsterdam

The current pandemic could be the watershed moment that sees small business owners finally make the jump online. The impact of Covid-19 on the Singaporean economy is already looking serious, with a 2.2% year-on-year contraction in the first quarter of the year ending December 2020 alone.

The Infocomm Media Development Authority of Singapore (IMDA) has worked with the Information Technology industry to provide remote working solutions for companies. The government has offered free trial periods of between 1-6 months for these digital solutions.

Now, with the need for digitisation greater than ever on account of the pandemic, the government is stepping up its efforts. Government agencies have stepped up their outreach efforts to SMEs, publishing pieces evangelising digitisation in leading dailies. In March, the Singaporean government increased its portion of funding for digital solutions under PSG from 70% to 80% of the costs until December 31, 2020. This means the companies only have to pay 20% of the cost to procure these solutions.

The scope of the grant has also expanded, covering tools for online collaboration as well as accounting, enterprise resource planning, and HR software.

For some companies, it might still be too little too late. But others that were already in the midst of digital transformation could emerge better positioned for opportunities both during and after the pandemic.

Policy push

Policy push

The most popular Singapore government policy in its digital push was the Productivity and Innovation Credit Scheme (PIC). Introduced by the Inland Revenue Authority of Singapore in 2010, it allowed companies to claim 400% tax deductions or a 60% cash payout for a variety of things, ranging from procuring IT or automation equipment to training employees and acquiring and licensing intellectual property rights.

While some companies were able to improve their productivity by procuring automated machinery and equipment under the scheme, loopholes in the programme led to widespread fraud. Companies misused the scheme by marking up prices of equipment to take advantage of grants, a food and beverage company owner told us, on condition of anonymity.

In 2016, more than S$5.8 billion (US$4.1 billion) was given out in tax savings, cash payouts and bonuses to over 143,000 companies under PIC. In 2017, more than S$332 million (US$234.1 million) was recovered in taxes and penalties from non-compliant taxpayers, including fraudulent PIC claims.

The scheme was finally phased out in 2018. In its place came an initiative specifically targeting SMEs—SME Go Digital. This sought to pre-approve solutions eligible for the Productivity Solutions Grant (PSG), which was also implemented in 2018. This sought to plug the holes in PIC, where companies were given more say in which solutions they procured.