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Entrepreneurship in India – Lessons from the Indian Solar Sector

Entrepreneurship in India – Lessons from the Indian Solar Sector

Jan 24, 2012

 

In November 2009, the Prime Minister of India announced the country’s first national solar policy. Christened the Jawaharlal Nehru National Solar Mission, the plan envisioned the installation of an ambitious 20,000 MW of solar power nationwide by 2022. It signaled the arrival of large-scale solar in India, and with it attracted tremendous entrepreneurial interest in downstream project development. It is still very early stage for solar in the country, but the experience thus far has already suggested some of the keys to entrepreneurial success in a place like India.

Low-cost business models in a price-conscious market

One of the interesting aspects of the power sector is that no matter what source you use, the end product – electrons – is the same. As with many developing nations, the Indian government subsidizes the price of this end product. It is well understood that solar requires government support in the short term, as today’s solar technology costs are not competitive with those of more conventional sources of peak power such as natural gas. However, the idea is that stimulating demand through government subsidies will result in economies of scale and lead to reduction in technology costs, eventually making solar competitive on its own. There is encouraging proof for this, as evidenced by the greater than 50% reduction [1] in solar photovoltaic system costs over the past decade driven primarily by well-constructed subsidy schemes in countries such as Germany. 

While the Indian government has moved to offer similarly valuable subsidies, solar panels still need to be produced substantially cheaper in India vis-a-vis global benchmarks in order to be financially viable. This is because the cost of capital in India is much higher than in established western markets [2-4], registering at an eye-popping 11-16% compared to 4-8% in Europe or the U.S. This calls for business models that combine the right level of locally sourced materials with global technologies, secure access to competitive financing, and minimize the initial “cash burn” phase of the startup’s growth cycle as much as possible.

This lesson observed in the solar sector is reflective of a larger truism in the Indian entrepreneurial space – India is a high volume, low margin market, and the faster a company can scale up and lighten its cost structure, the lower its chances of failure.

Scale – an opportunity and a challenge 

Nearly four out of ten Indians lack access to electricity. That is massive in a nation with over one billion people. With government support for the sector picking up rapidly – albeit with some hiccups along the way – the scale opportunity is not lost in the eyes of entrepreneurs. Unlike many Western nations, India’s energy deficit is so large and the country is so dependent externally for its energy needs that the government has a compelling need to promote homegrown, abundant sources of power such as solar. As a result, India’s central and state governments have come out with a series of solar capacity allocations to private sector players over the past three years. So far, such disbursements of licenses have been oversubscribed, reflecting the long-term profit potential that private players see. A significant number of applicants have been newly incorporated project developers or newly created solar subsidiaries of traditional power companies. This is illustrative of contemporary India in general, a nation with growth written all over it.

Beneath this glowing veneer, however, is a tough reality: in India, scale offers significantly disproportionate advantages, making it difficult for startups to compete. While established players with financial muscle have advantages over newcomers everywhere, this differential is especially huge in India. For instance, in order for developers to qualify for government-issued licenses, they must meet certain criteria, which include minimum net worth thresholds, a demonstrated track record, and an established shareholding pattern, among other requirements. Although these are well-intentioned criteria designed to attract only the most serious developers, they unfortunately translate into prohibitively difficult hurdles for entrepreneurial organizations. 

So is it all doom and gloom for start-ups? Certainly not – the pie is large enough for multiple players, so rather than compete with incumbents, new businesses should think about differentiating themselves. For instance, a developer may identify a competitive advantage in thin-film solar photovoltaics, a technology that isn’t currently abundantly available in India, but which is well suited for the climatic conditions in many parts of the country. Sourcing such technology from reputed and established global technology providers can offer the Indian government a value proposition that is not readily available otherwise. By differentiating itself and by leveraging the strength of its technical partnership, the developer is better able to meet the qualification criteria. Over time, the advantages of scale will accrue, but getting the foundation right should be the priority.

Partner to win

That example also illustrates the power of partnerships in large markets such as India. One of the best ways to scale up in a sustainable manner is to strike the right partnerships with those who complement the company’s capabilities. Partners include not just investors, but also suppliers, customers, and advisors. The key is to strive for strategic partners as much as possible – i.e. those who have a vested interest in the success of the company that goes beyond the financial returns. For instance, this could include an overseas company that is looking to tap into the Indian market but lacks the local know-how. Such a company not only brings the financial or technological muscle that the startup may desire, but also has the same objective of developing the market in the long run. This can already be observed in India, with European renewable energy companies such as Areva, T-Solar, and Abengoa partnering with local power companies to participate in the market.

The emotional quotient – patience and resilience

Imagine that you are a budding entrepreneur nurturing your business idea in India. You have identified a specific market niche, assembled the right team, developed a competitive business model, and brought on board the right set of partners. Presumably, you have sufficient capital to sustain you for the next phase of growth. What next? Besides the obvious focus on execution, prepare yourself for the challenges of working in a developing market. Of course, successful entrepreneurs the world over possess deep reserves of resilience and courage – but this is especially called for in emerging markets like India.

To illustrate this case, let us look again at the Indian solar market. Although the National Solar Mission was announced in Nov 2009, it took nearly one year for the details of its implementation to be worked out. It generally takes another year for solar power plants to be financed and constructed. In the meantime, there have been various amendments to key elements of the policy. This is not surprising – infrastructure projects conventionally run into changes and delays – and it is in fact impressive how much progress solar is making in India in a relatively short period of time. However, such situations demonstrate the need for patience and the ability to weather uncertainties in emerging markets.

In the end, India offers tremendous growth opportunities in many sectors. The nascent solar sector is just one example. For passionate and ambitious entrepreneurs who have a long-term mindset, India is a great place to be. There can never be a comprehensive manual on entrepreneurship – by nature, it is a line of work where one learns by doing – but it helps to keep in mind some of the lessons observed from Indian solar.

 

[1] http://solarbuzz.com/facts-and-figures/retail-price-environment/module-prices
[2] http://www.rbi.org.in/home.aspx#
[3] http://www.cercind.gov.in/2010/ORDER/February2010/53-2010_Suo-Motu_RE_Tariff_Order_FY2010-11.pdf
[4] http://www.exim.gov/tools/cirr_rates.cfm

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