India’s growing e-commerce industry attracts more Chinese investment, this time from Tencent, but is it the right investment model?

Written by Leilei Wang || April 21 2017

A press announcement on April 10th 2017 showed that Tencent, a Chinese online giant, led an investment in India’s electronic commerce company Flipkart, alongside eBay and Microsoft. The total amount was $1.4 billion and Tencent contributed $700 million, eBay $500 million and Microsoft $200 million. This was the first investment for Tencent into India’s e-commerce market. But the question remains, will it be a good move for the company?

A growing market

Benefiting from a population of 1.3 billion people, increasing household revenue, rising smart phone penetration and improving internet access, India’s e-commerce market is developing rapidly. According to India Kotak Securities, by 2020, the market will be worth US$28 billion with a compound annual growth rate of 45%.

This promising market is already very crowded with many big players. Flipkart is the leading player, followed by Amazon, Snapdeal and eBay. Most of them have strong capital backing and after the round of $1.4 billion led by Tencent, Microsoft and eBay, Flipkart is valued at US$11.6 billion. As a comparison, Amazon invested US$2 billion into the Indian market in 2014 and another US$3 billion in June 2016. Alibaba invested US$200 million into Snapdeal at a valuation of US$5 billion. In Feb 2016, Snapdeal received additional funding of US$200 million led by the Canada Ontario Pension and Singapore Brother Fortune Apparel, at a valuation of US$7 billion.

Is making a strategic investment in Flipkart the right approach?

Although the segment is already very competitive, attracted by this market opportunity, Tencent, Microsoft and eBay entered the market by cooperating with India’s biggest homegrown company. Each of the three is bringing something special to the investment.

Tencent led the investment in Flipkart, showing its intention to take an active part in India’s rapidly developing e-commerce and payment market. Tencent hopes to leverage its China experience to drive Flipkart’s business, providing experience on how to combine social functions and online payment solutions together, where Tencent has done a good job in China.

eBay, as the second biggest investor, provided US$500 million and sold their Indian e-commerce business to Flipkart although the eBay India business will stay independent from Flipkart, but Flipkart will gain access to the overseas market currently serviced by eBay.

The third biggest investor in the round, Microsoft takes advantages of their technology. Apart from the US$200 million investment, Microsoft has already been the exclusive cloud service provider to Flipkart since February 2017. Flipkart uses cloud computing platform Azure for analysis such as sales trend and payment preference.

The three are well-known for their spirit of innovation and technology expertise, as well as holding successful experience in their competitive market. For example, Tencent changed direction itself by releasing their instant message app Wechat in 2011, after having run QQ, another message app, successfully for over 20 years. On September 26th 2014, Wechat Wallet went online and it developed quickly as Wechat developed spending options on the wallet. For instance, Wechat worked with mobile platform taxi-calling application Didi and provided allowance for users. Users now can even open an online shop or go shopping through the WeChat platform.

This time, when Tencent cooperates with Flipkart, both will need to work to localize their products to suit the Indian market better. Tencent can take advantage of their previous experience to help Flipkart with their technology and product design, thus gaining more market share.

Apart from new challenge raised from this cooperation in the market, many other players are looking for chances as well. Mark Zuckerberg has already planned to develop mobile payments through the most popular social app WhatsApp in India, owned by Facebook. Compared with the similar model of WeChat in China, WhatsApp could potentially take advantage of the app’s popularity to drive success.

Which entry-model will win in the e-commerce competition? Independent or partnership model?

Independent model example: Amazon
The Indian government allows foreign investment in online retail. Amazon establishes and maintains the platform, sells goods through vendors, holds all the technology and most of the delivery service.

Partner model example: Alibaba / Tencent
The two Chinese companies invest in an established India homegrown platform, provide funding and strategic help. They do not run the local business but they can provide successful experience and help them get more international source.

The partnership model seems to be more welcomed by homegrown companies. Last December at the Carnegie India Global Technology Summit in Bengaluru, the co-founder of Flipkart urged the government to make policy to promote local business and said “What we need to do is what China did and tell the world: we need your capital, but we don’t need your companies”. Although the government allows foreign investment, they issued regulation which prevents the foreign company from having a dominant stake in any partnership and limited the size of any vendor to be below 25% on the marketplace.

Also, there are rumors that Flipkart and Snapdeal are considering collaboration to defend against Amazon. If this turns out to be the case, can Amazon break through the challenge? It looked like neither the policy nor the competitors in India are friendly to Amazon. But even with this situation, Amazon focused on the e-commerce market and became the second largest e-commerce player in 2016. Amazon invested a huge amount in the market, which has provided a good result so far.

The rapidly developing India e-commerce market is still a blue ocean, attracting capitals and eagle-eyed investors. It is unclear which one will be the winner. But we will keep updating any findings.