Market realities & finding a path forward
This is a follow up to my blog post written in Manhattan in March: One to Zero : 21st Century to the Dark Ages. I’m discovering interesting details about the market for Solar Energy Installations now that I’m living back home in Pakistan after 16 years.
Startup Death and Taxes
Only 0.6 per cent of the population pays taxes in Pakistan, as against 4.7 per cent in India, 58 per cent in France and 80 per cent in Canada.
Nobody pays taxes, nobody wants to, nobody expects to.
Knowing this unfortunate fact, and misreading Sales Tax exemption laws, most competitors (who import equipment) do not charge customers the 17% equipment Sales Tax and Services Sales Tax at 16%. [1]
However, my quote will be at least 17% higher than a majority of the competition because I will be collecting and submitting these taxes, when importing equipment myself. [2] I’ve been advised that I won’t succeed if I charge Sales Tax because few customers will want to pay it and many don’t want to be associated with someone collecting it. That I should collect cash & not show that revenue when filing taxes; as competitors do. But I won’t due to principles & since I want my numbers legit if raising capital later.
I did not anticipate this. Serious oversight. By default, my market is 0.6% of the population unless I can grow it. Default dead?
Procurement pains
A major assumption is proving to be expensive. When visiting Pakistan in Dec. ’15, I determined that procurement is not a major concern, as in the U.S. Now I’m realizing how different and challenging it is here. As a result, if I resort to purchasing equipment from importers, I’ll barely break even.
Procurement is where margins are made in the Solar business in Pakistan. It is also the biggest challenge for someone without capital. New business in Pakistan is generally conducted by old money. They can afford to put down US$ 100k per shipping container of Solar Panels from manufacturers or distributors in China. And can buy multiple containers, purchasing panels at scale at 60 cents/watt, selling them in Pakistan for 85 cents/watt. These suppliers are also installers (my competition) and design & install for free as they’re making 40% margins on procurement. Efficient system design is generally not their strength as they’re mostly led by non-technical founders. They’re interested in getting rid of their inventory. Whatever it takes.
If I purchase equipment from the competition, charging even a 5% premium for my higher quality system design & installation makes me expensive to a cash paying customer.
For now, it seems I have no choice but to purchase equipment from my competition and try to make a profit on the design & installation; until I can raise capital & procure myself, aiming for healthy margins.
No fakin’ it
A huge problem affecting the industry is the prevalence of defective equipment and fakes in the market. In the absence of regulation, many local suppliers deliberately procure defective panels from Tier 1 Chinese manufacturers for pennies. They sell them cheaper than average but still as Grade A panels making > 300% margins. Suppliers & Customers go for the quick cheap win on a solution that’s meant to bring value in the long run.
As a premium provider, I must find true Grade A panels & convince customers of the long term bet they ought to be making, & paying for.
TIP : This is Pakistan
Beyond taxes, fakes, and barriers to procurement, everything takes 10x longer. Opening a business bank account took 5 weeks (couldn’t take orders). Getting a phone number transferred to a 4G network took a month.
However, two bigger issues potentially hindering long-term success are unreliability and inertia.
It’s near impossible to find a reliable answer, vendor, or partner; even if willing to pay for it. There’s always an excuse, despite commitments made. Habitual procrastination and lack of good answers are the reasons behind these excuses, I believe. It’s an opportunity to stand out but is getting frustrating on a daily basis (and compounding). This unreliability is blocking me from approaching customers. I’d prefer to hear a customer reject my sale rather than not being able to speak to the customer (since relying on a 3rd party for equipment, an answer, a service). Revenue collection from customers is a whole other ordeal; a worry for later.
The second issue is inertia, or ‘reluctance to change’. Compromising without fighting for a better life. Corruption, tax evasion, the energy crisis, unemployment, and terrorism have significantly stalled progress. Perhaps it’s the hot & fatiguing weather, the lack of better options, or belief in a better afterlife, but a majority of 200 million people has accepted the status quo.
Going to be tough convincing them of investing in renewable energy, paying taxes, and paying more for reliable equipment. This is putting to test the Make Something People Want vs. Need debate.
I’m also concerned about my standards & quality falling if away from the highly productive mediums (SV & Manhattan) that I’m used to.
Patience, and the path forward
I plan on charging a premium for exceptional system design and service. And then I’ll make a tiny margin. Next I’ll try to raise capital to procure equipment myself leading to better margins. Should be interesting.
An alternative approach is to provide high quality system design consultancy to customers and assist them with finding a local installer. This way I’ll fill a gap in system design quality, and also reduce the number of variables in my equation. Later I can diversify my offering with procurement & installations. Thinking about it. But the ‘local installer’ variable is still a wild card.
I was warned about inertia & unreliability in Pakistan before moving back. But I wanted to face them in person & then fine-tune my approach, rather than making decisions on others’ opinions.
I learnt more about the market in 3 weeks in Islamabad than I did in 5 months in Manhattan.
Love & support from parents & close friends has been priceless and keeps me happy.
I’ll continue posting my findings on Medium. Would love to hear feedback and suggestions to tackle these issues.
[1] Sales Tax exemptions via Section 13 of the Sixth Schedule of the Sales Tax Act, 1990 (amended in 2015) are not applicable for importers if the equivalent equipment is listed in the locally manufactured items & the amended items list maintained by the Federal Bureau of Revenue. Solar equipment such as Panels, Batteries, Cables, OCPDs, are already on the locally manufactured items lists. Although Inverters are manufactured locally, I couldn’t find them on the list yet.
[2] Quality and reliability of local equipment is a concern which is why suppliers tend to import.
