In a world standing still due to supply chain constraints and limited means of movement, can cash scarce startups make a dent in the informal construction materials ecosystem?
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Demand for housing is outpacing supply across the globe.
Consequently, Pakistan is undergoing a housing crisis on a never-before-seen scale. Given the $3 trillion real estate industry of Pakistan, technology-based market disruptors have the opportunity to transform the accessibility of homeownership. The largest example of this is DAO PropTech, which offers fractional land or homeownership.
The annual construction industry is more than $30 billion in Pakistan, with around 40-60 percent from essential construction materials. Karachi-based Zaraye consequently appeared as a B2B commercial center that assists purchasers with obtaining unrefined components at modest and straightforward costs from merchants.
This helps organizations obtain unrefined components to accomplish cost efficiencies which are essential for getting by and flourishing in the slight net edge businesses they work in. Raw material suppliers also saw an upward trend in their sales.
Two months ago, Zaraye declared bringing $2.1 million up in a pre-seed round led by Tiger Global, which has previously made investments in Bazaar and CreditBook. It’s worth reminding readers that any amount raised is disbursed based on targets met.
With specific values attached to them, subsections of the amount raised are transferred to the respective holding companies first, usually based in Singapore or the Emirates. A failure to meet targets gives the investor every right to withhold the promised capital. This explains the quest to grow gross merchandise value at any cost, even if it disturbs small business owners.
To capture the flourishing and handsome opportunity, it is rumored that Bazaar and Dastgyr are adapting the B2B marketplace model to cover the construction industry. Sourcing steel, cement, and more raw materials directly from the supplier, and coordinating via a drop-shipping model.
In the case of Dastgyr, by connecting the dots it can be said that the addition of the construction vertical comes months after Syed Kumail Raza joined as an investor, and started his own construction solutions company at the beginning of 2022.
Given that most technology startups cut out the middleman, assuming this stakeholder retains an unfair share or mark-up of the deal being closed, doing so has historically been the precise source of disruption, impacting quality assurance and long-established market relationships.
In the case of Bazaar, Dastgyr, and Zaraye drop-shipping construction materials such as steel and cement directly to real estate developers, data shows that most of the big players do already buy from producers directly for economies of scale and the real play is being an aggregator rather than cutting the middle man.
But what the ripple effect will be due to single-digit percentage savings in real estate and the value of construction vertical is the real question.
Reasons to be bearish
“The construction market is very informal in the country,” said Ammar Habib Khan, the chief risk officer at Karandaaz Pakistan. “Any B2B e-commerce solution won’t be able to make any major impact.”
Market speculators expressed concerns regarding whether Bazaar, Dastgyr, and Zaraye have the owned or shared logistical infrastructure to even pull off projects for the construction sector, which – unlike CPG – has very little room for error or mismanagement of time. Speaking with sources at Bykea, Careem, and Swvl, Founder Pakistan was told that despite being contacted to arrange additional forms of transportation for macro or micro goods, bespoke arrangements were not financially nor operationally feasible.
“In regards to the Swvl’s B2B logistics, we will have to either utilize the free slots via a proper route planning via demand and supply teams to make the best use of the shuttles when they are free to be utilized,” said Bilal Safder, head of ancillary business at Swvl. “For this business which can bring in ancillary revenues too or maybe if this opportunity becomes so exciting to pull in measured revenue streams and a strong potential bottom line by working unit economics that we plan to launch somewhere Swvl logistics in future.”
And given the upcoming slowdown in startup funding and the already weak unit economics of most emerging startups across all classifications, being asset-light is the true advantage as is operating within the true representation of the sharing economy.
Unfortunately, as history has shown, this leaves marketplaces open to the prospect of entering a bidding war for access to the same fleet, jacking up prices to unsustainable levels, and even above what the disrupted middleman may have changed in the first place.
Will these startups have enough cash in their pockets to make sure the smooth flow of the supply chain is another thing to look around? How the logistical section will affect the glorified idea of cracking the code of low-cost raw material construction products is still not answered.
Seeing as Pakistan doesn’t even have the formula to convert adjusted international prices into local prices with an added factor of attached ripple down effect of fluctuating gas prices and dollar to PKR rate can further prove it to be a house of cards.
Another attempt to cater to the loom of logistics can be by partnering with existing players or interested ones. But, again, the construction market is not formal and there is no set of defined rules in case of fluctuation in prices internationally. But that will be a structural overhaul.
Reasons to be bullish
The price transparency is a major advantage of this but it needs to get a considerable market share before a real impact is made. Case in point, the steel rebar index (from LME) has come down to 750 per ton, from a high of 950 plus a couple of months ago but it is not fairly reflected in our domestic market pricing.
Source: LME
The price drop has been around $200 and that should also be immediately reflected in the pricing of the particular raw material. The reason the local market didn’t feel the impact of price drop stands realistic on both national and international fronts.
Price fall can be due to demand adjustments globally, rising interest rates, and the income and growth levels are in general on the decline contributing to the demand side adjustments.
Also in the supply chain crisis, the supply disruptions are adjusting post-COVID-19 resulting in increased more consistent supply channels.
And to convert these price fall impacts into price drop, there is no direct formula in place to convert the adjusted international prices into local prices and there are high taxations as well.
Relative movement in terms of prices of steel from 2010 to 2022 in Pakistan
Source: Trading Economics
“The major play with bigger and recurring consumers would be the financing options,” said Jawad Nayyar, the chief vision officer at DAO PropTech. “That will be a game-changer. In reality, tokenized asset ownership against commodities on project financing is a major play. But a collaboration there would be great, and we can sell services to all B2B customers.”
Zaraye being successful in becoming Pakistan’s first B2B solution for industrial raw material procurement has paved the way for Bazaar and Dastgyr to enter into the construction vertical. The risk factor in this sector is high and associated with the international market as well.
It is important to explore the ripple effect of even a 1% drop in the costs associated with construction and how that impacts real estate pricing. The reality that Bazaar, Dastgyr, and Zaraye will have to come to terms with is that the construction market is informal and there is no set of defined rules in case of fluctuation in prices internationally.
True disruption will require a formal structural overhaul. Let the game of incentives begin.
Despite reaching representatives of Bazaar and Dastgyr for comments relating to whether their supply chain infrastructures – owned or shared – had the operational capacity to manage the demands of large volume industries, no responses were received by the deadline. An extended deadline allows the inclusion of requested statements if they are received within 24 hours of the publishing date.
