April 20, 2017 10:00 am JST

India's Flipkart karts in $1.4bn from Tencent, eBay and Microsoft

Homegrown e-tailing leader builds war chest to fend off Amazon

KIRAN SHARMA, Nikkei staff writer

Flipkart's office in Bangalore © Getty Images

NEW DELHI India's e-commerce boom has triggered an intense battle for supremacy, with the top two players pulling no punches and deep-pocketed global investors swooping in.

The homegrown Flipkart, India's largest e-tailer, on April 10 announced it had raised $1.4 billion from Chinese internet company Tencent Holdings and technology multinationals eBay and Microsoft. The funding round was Flipkart's biggest since its inception a decade ago, and should help it take on bitter rival Amazon.com more aggressively.

The latest funding puts Flipkart's value at $11.6 billion -- down from its peak of $15 billion in 2015 -- and comes amid speculation that the company is in talks to buy smaller competitor Snapdeal, another homegrown e-tailer backed by Japan's SoftBank Group.

Flipkart, whose existing investors include Tiger Global Management, Naspers Group, Accel Partners and DST Global, will also acquire eBay's India operations. "In exchange for an equity stake in Flipkart, eBay is making a cash investment in and selling its eBay.in business to Flipkart," a statement issued by the Indian company said, adding that eBay will continue to operate as an independent entity.

Flipkart and eBay have signed an exclusive cross-border trade agreement, under which their customers will be able to access each other's inventory. "The combination of eBay's position as a leading global e-commerce company and Flipkart's market stature will allow us to accelerate and maximize the opportunity for both companies in India," said Devin Wenig, president and chief executive of eBay.

FLIPKART'S "LANDMARK" In a statement on the fundraising, Flipkart founders Sachin Bansal and Binny Bansal said this is "a landmark deal" for the company and also for India, "as it endorses our tech prowess, our innovative mindset and the potential we have to disrupt traditional markets."

"It is a resounding acknowledgment that the homegrown tech ecosystem is indeed thriving and succeeding in solving genuine problems in people's daily lives across all of India."

Describing Tencent, eBay and Microsoft as "innovation powerhouses," they said they have chosen these partners based on their long histories of pioneering industries, and the unique expertise and insights each of them brings to Flipkart. "This deal reaffirms our resolve to hasten the transformation of commerce in India through technology."

This is also the largest funding round in the Indian internet sector, where some companies, such as Snapdeal, are struggling to drum up cash. Snapdeal, which has suffered mounting losses due to heavy discount offers and advertisement spending, is the third-largest e-commerce player in the country, after Flipkart and Amazon.

The local media is abuzz with reports that Snapdeal's largest investor, SoftBank, is keen to sell its stake to Flipkart. An announcement is expected in one to two months.

According to the Economic Times newspaper, the proposed Snapdeal sale to Flipkart could see SoftBank pick up a 20% stake in India's largest online retailer for about $1.5 billion. Some reports also say Paytm, a mobile payments startup backed by China's Alibaba Group Holding, is in the running to buy Snapdeal.

AMAZON'S POWER PLAY Amazon, too, is betting big on India. The cash-rich U.S. company last year announced plans to pump an additional $3 billion into its local business, raising the total investment commitment to $5 billion.

It recently received approval from the Reserve Bank of India, the central bank, to launch its own digital wallet service. This will put it in direct competition with Paytm, the Flipkart-owned PhonePe and Snapdeal's Freecharge in the growing digital payments market in Asia's third-largest economy. Cashless transactions have surged since the demonetization of 500- and 1,000-rupee notes in November.

Sriram Jagannathan, vice president for payments at Amazon India, confirmed receiving a prepaid payment instrument license from the RBI.

"Our focus is providing customers a convenient and trusted cashless payments experience," he said. "We hope the government and RBI would continue to encourage multiple ways to shift consumers from cash behavior by recognizing the value of digital wallets, used especially for making small-value payments to large merchants" like e-commerce players, utilities, insurance companies and so on.

TENCENT'S STRATEGY Analysts say India, a country of 1.25 billion with over 400 million internet users, is showing remarkable progress in deploying technology. This presents tremendous opportunities to companies like Tencent and Alibaba in fields like digital payments and e-commerce.

According to a study by Google and Boston Consulting Group, digital payments in India will grow tenfold to $500 billion by 2020. This is thanks to increasing smartphone penetration, greater access to the internet, a rise in consumption and rapid development of payments infrastructure.

Consulting firm KPMG forecasts India's $41 billion e-commerce market will reach $103 billion by 2020, contributing 4% to the country's gross domestic product.

"Tencent is one of the biggest technology companies in the world," said Arvind Singhal, chairman and managing director of retail consultancy Technopak Advisors. "Its investment in Flipkart allows it to play a larger game in India, which is rapidly moving toward becoming a digital economy."

The Chinese company may just be getting warmed up. "In years to come, we are expected to see Tencent putting more money [in India]," Singhal said.

Whether it is Alibaba, Amazon, Google, Microsoft, SoftBank or Tencent, everybody sees India as an "attractive" investment destination, he said. These are diversified companies with multiple business streams, he added, and India, which is growing at an impressive rate of over 7% annually, has a lot to offer them.

Last year, Tencent and Taiwanese contract manufacturer Hon Hai Precision Industry, also known as Foxconn, led a $175 million funding round for Indian messaging platform Hike Messenger. The company was founded in December 2012 by Kavin Bharti Mittal, son of Sunil Mittal -- the chairman of Bharti Enterprises, which in turn owns telecom giant Bharti Airtel. SoftBank is also a key investor in Hike.

Tencent said the strategic partnership with Flipkart enables it to participate in the "exciting opportunities in e-commerce and payments in India."

"We look forward to helping Flipkart to deliver compelling experiences to users throughout India, and to contribute to the development of the internet ecosystem there," Martin Lau, Tencent's president, said.

SNAPDEAL'S ANXIETY Meanwhile, Snapdeal has sought to reassure its jittery staff amid reports of a possible takeover in the near future, telling them there will be "no disruption" to their employment.

In an email sent to employees on April 9, Snapdeal founders Kunal Bahl and Rohit Bansal said the well-being of the company's entire team was their top and only priority "while our investors are driving the discussions around the way forward."

Though there has been no official confirmation yet from Flipkart and Snapdeal about any merger talks, the content of the email indicates that the latter company is set to be acquired soon.

Asia300

Tencent Holdings Ltd.

China

Market(Ticker): HKG(700)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 337,239.34M
Shares: 9,477.48M
Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 300,442.28M
Shares: 2,430.17M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 60,522.51M
Shares: 17,328.73M
Asia300

Bharti Airtel Ltd.

India

Market(Ticker): BOM(532454)
Sector:
Industry:
Communications
Wireless Telecommunications
Market cap(USD): 22,860.40M
Shares: 3,997.39M
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