E-Commerce Heats Up as Amazon, Flipkart Raise Stakes

By Dezan Shira & Associates

Posted: 6th August 2014 09:00

DELHI – After Indian e-commerce giant Flipkart raised US$1 billion in fresh funding on Tuesday, Amazon has announced it will invest a further US$2 billion to boost its India-based operations.
“We see huge potential in the Indian economy and for the growth of e-commerce in India,” said Amazon founder and CEO Jeff Bezos.

“After our first year in business, the response from customers and small and medium-sized businesses in India has far surpassed our expectations. With this additional investment of US$2 billion, our team can continue to think big, innovate and raise the bar for customers in India,” he added.

Amazon will reportedly use a large portion of the investment to increase its in-country presence by opening five new warehouses that will double its storage capacity to half a million square feet.

Currently worth around US$13 billion, India’s e-commerce market is among the fastest growing in the world.
While India permits 100 percent foreign direct investment (FDI) in business-to-business (B2B) e-commerce, FDI in business-to-consumer (B2C) e-commerce remains strictly prohibited and bound by FDI restrictions on the retail sector more generally. India’s existing FDI cap on multi-brand retail trading (which also applies to e-commerce) also limits FDI to 51 percent with prior government approval and changes made in 2013 further clarify that at least 50 percent for the first US$100 million invested must be in ‘back end infrastructure.’

Because of this, many foreign e-retailers such as Amazon and eBay have established a “marketplace model,” whereby local independent merchants sell goods directly to consumers, and the platform earns commission from those merchants.

Since launching its marketplace platform in India last June, Amazon India has expanded its product line from books and video content to toys, music and now clothing, apparel, shoes and accessories.

With over 12,000 contemporary and traditional styles from more than 90 apparel brands in Amazon’s new clothing & accessories department, the firm is giving other online retailers a run for their money.

Amazon’s foray into apparel and accessories has placed the firm in direct competition with Jabong and Myntra – India’s largest apparel e-retailers – and increased competition with existing rivals Flipkart and Snapdeal.
Founded by two former Amazon employees in 2007, Flipkart is currently India’s largest e-retailer and reports more than 10 million registered users and over 100,000 shipments daily. Acquiring Myntra earlier this year, Flipkart is commonly cited as Amazon’s primary competitor in India.

While Flipkart has raised US$760 million over the past seven years, the US$1 billion in fresh funding the firm announced this week is the largest ever for an Indian internet firm and will inevitably raise the stakes for competition in the Indian e-commerce market.

For now, however, domestic heavyweights Flipkart and Snapdeal will continue to enjoy a distinct advantage in India while the Department of Industrial Policy and Promotion (DIPP) mulls a higher FDI cap in e-commerce.
 
This article was first published on India Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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