In an interesting development, Chinese e-commerce giant Alibaba Group Holding Co. and Foxconn Technology Group, the prime iPhone assembler, are in talks to make a joint investment of $500 million in Indian e-commerce major, Snapdeal. The deal is subject to regulatory approvals and if it happens, it will mark a significant development in further catalysing the growth of the Indian e-commerce market.
Interestingly, Alibaba was earlier in talks to pick up stake in Snapdeal but the deal fell through since Alibaba was interested in a larger stake in Jasper Infotech Pvt. Ltd., the company that owns Snapdeal.
Snapdeal, a company launched about five years ago, is likely to see its valuation shoot up to $5 billion. The investment will mark a significant escalation in confidence in the India growth story and is likely to impact all stakeholders in the e-commerce supply chain.
Jack Ma, Founder and Chairman, set up Alibaba in 1999 and went on to build Alibaba into a major e-commerce giant. He is now in the process of taking Alibaba global through outright acquisitions, partnerships and joint ventures.
With India emerging as one the fastest growing e-commerce markets, it was only natural for Jack Ma to look towards India. In November 2014, he made his first trip to the country. In his several meetings with various policymakers in India, he expressed Alibaba’s interest in working to develop the entire ecosystem for e-commerce by bringing in their experience to India.
As a follow-up to his visit, in January 2015, Alibaba signed a Memorandum of Understanding (MOU) with Confederation of Indian Industries (CII) to facilitate greater business co-operation between Chinese and Indian SMEs.
In a move that drew a lot of attention, Ant Financial Services, a subsidiary of Alibaba, picked up a 25% stake with a $200-million investment in One97 Communications, the company that owns Paytm. This is the same company in which Ratan Tata made a personal investment earlier this year. He holds a small stake in Snapdeal as well.
Foxconn already had three mobile phone manufacturing plants located in the outskirts of Chennai, which subsequently shut down when Nokia was taken over by Microsoft. The company’s Chairman, Terry Gou has now announced his intention to set up 10-12 mobile phone manufacturing plants in India by 2020 to manufacture Apple and other smartphones.
What’s Driving Chinese Investment in Indian e-Commerce Companies?
The answer is: India’s growth story and the opportunity it represents. China, today, is sitting on a major cash pile largely driven by its export-based manufacturing industry. With rising costs and a slowing domestic economy, China has been strategically driving investments into countries that can ensure a steady supply of raw materials to meets its ever growing demand back home.
However, the Chinese industry is also looking at developing newer markets for its products and wants to take an early lead in markets, as they develop. That’s been its approach in various countries in the African continent, Latin America, South East Asia and Australia.
With India emerging as a rapidly maturing market, China sees an opportunity to identify synergies with Indian companies and make sizeable investment in them. China understands the advantages of joining hands with India, both as a market for its products as well as a manufacturing base for export to other countries.
But beyond manufacturing, China has also developed its technology and processes in warehousing & logistics, packaging, and payment gateways. Companies specialising in all these segments are looking to share their technologies and experience with India, as they seek to expand their business horizons. And as India continues to experience explosive growth, it will have to rapidly upgrade its entire e-commerce chain. The potential to collaborate between Chinese and Indian companies is tremendous.
But India is yet to see major investments in manufacturing, which depends on several factors like land reforms, labour laws and infrastructure that are still work in progress. However, e-commerce is one vertical that is racing ahead with an exploding product range and deeper market penetration. Having established the Chinese e-commerce market, which continues to grow, Chinese firms are now keen to cash in on the opportunity that India presents.
The India Story: Join It or Miss It
China recognizes that the Indian growth story is here to stay. The fastest growing middle class, a large trained labour workforce along with established institutions make India the best bet for Chinese firms.
Compare the potential. By the end of 2014, the Chinese e-commerce market size was around $426.26 billion, while the Indian market was around $5.3 billion! This year, India is poised to cross $16.3 billion and by 2020, India is expected to cross $100 billion!
What’s Driving This Massive Growth?
Access to internet and phenomenal rise in mobile phone penetration are two major factors. The pace of mobile penetration being witnessed in India now far outpaces what China experienced between 2000 and 2010 as the mobile market was still evolving.
India is likely to cross 250 million mobile users this year and cross 600 million by 2020, which means a far greater number of persons will have access to online goods and services. However, the Indian buyers are yet to fully utilise the benefits of e-commerce, mainly on account of user hesitation to switch to online payments. 60% of online purchasers still use Cash-on-Delivery (COD) instead of making online payments through credit/debit cards or mobile wallets.
As the market in India matures and users begin to build confidence in online payment systems, new businesses such as Paytm and MobiKwik are likely to benefit the most. That’s the reason Chinese companies such as Alibaba have invested early in Paytm. Furthermore, several Chinese companies are looking at the logistics and distribution market in India and this sector, too, shall witness a lot of Chinese investment in the times ahead.
Interestingly, the online travel industry dominates the Indian e-commerce market with a 61% share and the non-travel business represents the rest 39%. China sees this gap as an opportunity and wants to bring in its range of solutions across the e-commerce value chain.
Growing Chinese investment in India will also mean increased opportunities for the Indian manufacturing and services sector to get a foothold in the Chinese market and companies like Alibaba can play a significant part in making that happen. Jack Ma has seized this opportunity and in the near future a lot of other Chinese firms are likely to follow suit. The Indian e-commerce market is open for play.