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From the Walmart-Flipkart deal in May to the multi-million-dollar investments and record-breaking festival sales, 2018 was a good year for e-commerce players.
Walmart’s $16-billion acquisition of a 77 per cent stake in Flipkart — the regulatory hiccups and traders bodies’ vociferous objections notwithstanding — pushed the sector several notches higher.
While industry experts see the segment continuing to grow, 2019 might be a year to tread with caution, with stringent policies in the pipeline and a challenging funding scene in the horizon.
The domestic e-commerce industry is expected to surpass the US to become the second largest in the world by 2034, according to a India Brand Equity Foundation (IBEF) report.
From $38.5 billion in 2017, it is expected to reach $200 billion by 2026. It has the potential to grow four-fold, supported by rising incomes and a surge in internet users, the report stated.
This is reflected in the investments by venture capitalists — Indian and foreign — in consumer-facing start-ups.
E-commerce start-ups in India received about $786.9 million in funding in the first half of 2018, said the IBEF report. Apart from that, the Walmart-Flipkart deal paved the way for the promoters and investors of the Bengaluru-based firm to make a profitable exit.
The year also saw other multi-million-dollar investments by foreign players. Hospitality start-up OYO raised $1 billion from Japan’s SoftBank whereas Warren Buffet’s Berkshire Hathway picked up a 3-4 per cent stake in Paytm at an estimated $300-350 million.
Advantage consumers
A rapid increase in mobile and internet penetration is driving online shopping significantly, observed Arun Gupta, founder of mobile internet company MoMagic Technologies.
While the e-commerce firms benefit largely from this, the consumers are at an advantage, too, he noted. “With so much competition all the e-commerce companies are vying for market share, offering better services. It is benefiting the customers,” he said.
While the metro and big cities continue to be the key e-commerce markets, tier 2 and 3 cities could be a significant growth driver going forward, say experts. However, these geographies require a more trained focus, as their e-commerce needs are different — poor accessibility and greater cost-consciousness could, for instance, need to be factored in.
The new year poses challenges from the policy and business perspective.
Policy challenges
Recently, the Centre came out with a review policy on FDI in e-commerce. While it has been welcomed by the majority of domestic players, the foreign ones are less than happy. There are also concerns that it might have a negative impact on the industry.
Particularly causing a stir is Clause IV of the policy, which states that the inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity if more than 25 per cent of purchases of the vendor are through the marketplace entity or its group companies.
“This will have a large impact,” said Gupta of MoMagic. E-commerce players may have to place restrictions on how much a vendor can sell.
“This is beneficial for those who do business both online and offline but not for players (vendors) who solely depend on such platforms,” he added. The policy is also not friendly for newer e-commerce players, he further said.
“The need of the hour is to have a balanced and cohesive national framework for e-commerce in India. The DIPP has to play a balancing act between protecting domestic interests and promoting investment in the sector,” said a senior advocate with law firm Khaitan & Co.
China impact
Another major issue in 2019 could be funding, especially from China. Indian firms raised about $2 billion from Chinese investors last year, led by the likes of Alibaba Group and Tencent, mostly in e-commerce start-ups. However, in 2019, the Chinese investors will be more cautious, said experts.
Venture capitalists in China are under pressure due to regulatory crackdowns and the US-China trade war. Chinese firm Tencent, one of the largest investors in the Indian start-up ecosystem, lost business worth $178 million as the Chinese government restricted licences to online games citing ‘health’ concerns. Gaming is one of Tencent’s largest businesses. Beijing’s move could therefore impact its capacity to invest overseas.
In another move, the Chinese government tightened e-payment regulations. Alibaba’s AliPay and Tencent’s WeChat Pay — which control the majority of the Chinese digital payment space — now need to have reserve funds of 50 per cent as opposed to the earlier 20 per cent. It will gradually be increased to 100 per cent, again impacting their investment ability.
“This means that they will have less cash flow. So Chinese investors will be more cautious before investing, given the restrictions imposed,” said an expert.
The influx of Chinese e-commerce in India could pose a challenge as well. According to a recent report by RSS-affiliated Swadeshi Jagran Manch (SJM) in partnership with community-focused social media network LocalCircles, close to two lakh orders from India are fulfilled everyday by Chinese e-commerce platforms such as AliExpress, Shein and Club Factory.
They eat into the business of small and medium traders, said Ashwani Mahajan, national co-convenor of SJM.
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