By Vijay Kumar
Amazon began its China and India operations in 2004 and 2013 respectively, however, it lost Chinese market to Alibaba. Consequently, it became important for Amazon to establish a large business in India. Grabbing market shares from the Indian players became a part of Amazons strategy.
Beginning of Amazon’s India expedition
In 2015, Alibaba entered India with a 40% stake in PayTM and a 2.93% stake in Snapdeal. After its investment in Snapdeal failed to yield returns, Alibaba set up its office in Mumbai. In retaliation, Amazon declared additional 3 billion USD war chest for India. Amazons investment came at a time when both Flipkart and Snapdeal were struggling with working capital crunches, high attrition, top-level exits, market share erosion, and their blacklisting on campuses, amongst others.
After years, India has a stable, strong, politically popular and growth-oriented government. Moodys latest report has projected Indias economy to grow at 7.5% in 2017-18 and 7.7% in 2018-19. Although the adverse demonetisation impact reduced the growth rate to 6.1%, the economy is expected to revive soon. Online sales in India are projected to reach 48 billion USD by 2020 and 64 billion USD by 2021.
Strategic sense and acquisition
Snapdeal has been losing relevance. Amazon has committed 5 billion USD, while Flipkart and Snapdeal could raise only 4.55 billion USD and 1.76 billion USD respectively. Funding opportunity has also shrunk for Flipkart and Snapdeal as investors are focusing more on profitability and rationalisation of expenses. Therefore, consolidation of Flipkart and Snapdeal only appears feasible.
With this acquisition, Flipkart gains increased market share and backing from Softbank. It will also avail itself of logistical and operational advantages (such as access to warehouses, sellers & new segments), and cost optimisation by cutting redundancies. With one player gone, sellers would be forced to toe the line of Flipkart and Amazon. Furthermore, Flipkart would get competitive insights from Jack Ma, Alibaba, and Softbank. It must be mentioned here that Jack Ma is on Softbanks board. The combination of Alibaba, Jack Ma, and Softbank initially defeated eBay and then successfully fended off Amazon in China. Softbank has also launched a mega 100 billion USD technology-focused fund to target future acquisitions. Softbanks prominence stakes around this deal.
The battle between East and West
This is global e-commerce war and India just happens to be the battleground. Eventually, only two players will survive – (Flipkart + Snapdeal) and Amazon. Alibaba India will most likely join (Flipkart + Snapdeal) entity to take Amazon head-on. In the end, the game on the Indian turf would be between the East and the West. The East team includes Softbank, Alibaba, Jack Ma, eBay, Yahoo, Foxconn, Microsoft, and (Snapdeal+ Flipkart+PayTM+Freecharge) entity. It is expected that this combined entity would eventually be controlled by Alibaba. Amazon is the sole player in the West team.
The team with more customer-centric approach would eventually win a bigger pie of the Indian market. It is an opportune moment for Indian ventures to get aligned, leverage the resources, optimise the combined entity besides learning from Alibabas successful business models and employee-engagement lessons.
Challenges to this acquisition
For any alliance to work, each partner must match up to the “7C Rule”.
With so many stakeholders, integration would be a challenge and only time will tell if the alliance really works in the long run.
Acquisition of Snapdeal by Flipkart is a signal of the changing dynamics in the global e-commerce space. Consolidation will finally end up with only two players competing in the market. Both Amazon and Alibaba, given their strong Free Cash Flows (FCF), would give each other an equally tough fight.
However, managing the East alliance would be challenging. The success mantra for Flipkart and Snapdeal entity should be to evolve from reactive engagement to proactive engagement.
Featured Image Credits: Visual Hunt