There’s more to Flipkart’s US$1.4 billion funding by Tencent, Microsoft, and eBay than just the biggest capital infusion into any Indian internet company so far. The funding round and probable acquisition of its biggest Indian rival, Snapdeal, also represents a realignment of forces in Indian ecommerce.
Recently, Alibaba invested an additional US$200 million into Paytm’s ecommerce arm to build up Paytm Mall into an entity like Tmall in China. This pits Alibaba against its global rival Amazon, which has made huge investments in India.
Two months ago, Flipkart adopted Microsoft Azure as its exclusive public cloud platform. It hopes to use Azure’s artificial intelligence and analytics capabilities for business insights and personalized experiences for its customers. Amazon’s AWS cloud platform gives Microsoft’s Azure a good run for its money in India. So Flipkart’s partnership with Microsoft also brought together two rivals of Amazon.
Meanwhile, Tencent’s funding of Flipkart aligns two rivals of Alibaba. The Chinese giant has made a fresh investment in Paytm to take the lead in its ecommerce arm, which will compete with Flipkart. Tencent’s WeChat app has encroached on Alibaba’s ecommerce territory in China and also competes with Alipay. Now this rivalry will play out by proxy between Alibaba-Paytm and Tencent-Flipkart.
“This strategic partnership enables Tencent to participate in the exciting opportunities in ecommerce and payments in India,” said Tencent president Martin Lau in a statement on the Flipkart funding. Meanwhile, Flipkart founders Sachin Bansal and Binny Bansal said they chose Tencent, eBay, and Microsoft as investor-partners “based on their long histories of pioneering industries, and the unique expertise and insights each of them bring to Flipkart.”
How the ground shifted last year
The market dynamics changed in India with Amazon pumping US$5 billion into its Indian arm last year. Both Flipkart and Snapdeal, which were using discounts to grab market share, suddenly found Amazon rapidly build up in India with a world class customer experience coupled with competitive pricing and selection. Snapdeal was the biggest loser in this, and its main investor SoftBank is pushing for a sale to Flipkart.
The merger of Flipkart and Snapdeal, if it happens, will give the combined entity the advantage of scale in the near term. It’s likely to be an all-stock deal, where shareholders of Snapdeal will receive Flipkart shares at an agreed swap ratio. Talks are for Snapdeal to be valued at US$1 billion – a big comedown from its peak valuation of US$6.5 billion early last year.
An all-stock deal will leave Flipkart with enough funds to take on Amazon and Alibaba-Paytm. But “extracting synergies and value from this acquisition would be a challenging task for Flipkart, considering the physical distances, differing strategies and the different team cultures at both companies. However, if the post-merger integration is executed successfully, the deal could play out similar to Ola-TaxiForSure acquisition in online cabs space, which gave Ola significant funding and capability firepower to hold off Uber in India. Something which would help Flipkart fend off Amazon for much longer,” Anil Kumar, CEO of RedSeer Consulting, commented.
The acquisition would increase Flipkart’s market share, but that is ephemeral. What will count in the end is superior customer experience and understanding user behavior. Flipkart, which has focused too much on gross merchandize value (GMV) in the past, will have an opportunity to form a new gameplan with Tencent and Microsoft in its corner. The US$1.4 billion gives it a reasonable runway to do that.
Flipkart has also acquired eBay India as part of the deal along with a cash infusion from eBay in exchange for an equity stake. This will be a consolidation of their businesses in India as well as the start of a cross-border trade agreement. Flipkart gains access to eBay’s global inventory to fight Amazon and Alibaba. Flipkart sellers will also get a new global outlet for their products.
India now has over 462 million internet users – second only to China. And yet, two-thirds of the 1.3 billion population have yet to get online. Even among those accessing the internet, only about 10 percent are currently shopping on ecommerce sites. That leaves a lot of headroom for growth.
India is the fastest growing large economy in the world with its GDP rising by 7 percent annually. This is the potential opportunity that has all the big players of ecommerce converging on India – even as weaker ones get gobbled up in the consolidation phase.
Quick refresher on Flipkart’s latest $1.4 billion funding
- Flipkart raised a total of US$1.4 billion from Tencent, eBay and Microsoft.
- This is the largest ever round of funding raised by any Indian internet company.
- Flipkart’s post-funding valuation stands at US$11.6 billion.
- With this round, eBay has sold its business in India to Flipkart besides making a cash investment into the company against equity.
This is the second time that India’s ecommerce hope Flipkart is announcing a billion-dollar funding. In July 2014, it raised US$1 billion – its eighth funding round – from Tiger Global, Naspers, Accel Partners, DST Global, ICONIQ Capital, Morgan Stanley Investment Management, Sofina, and Singapore’s sovereign wealth fund GIC.
“We’re going to be the Alibaba of India,” declared the Flipkart founders, who earlier worked for Amazon, while announcing the billion-dollar funding.
But it turns out that the Alibaba of India is likely to be Alibaba itself, just as the Amazon of India is Amazon.