By Eric Bellman and Dhanya Ann Thoppil
BANGALORE, India--In the past two days, Amazon.com Inc. and
local rival Flipkart Internet Pvt. have both made billion-dollar
bets that online shopping is poised to take off in India, the
world's second-most-populous country.
Amazon said Wednesday that it would invest $2 billion to expand
its India operations, a day after Flipkart, India's biggest
homegrown e-commerce company, said it had raised $1 billion from
backers to help it grow.
"We see huge potential in the Indian economy and for the growth
of e-commerce in India," Amazon CEO Jeff Bezos said Wednesday. The
company didn't give a time-frame for the investment.
Potential is the key word. Amazon, Flipkart, eBay Inc.-backed
Snapdeal.com and others are battling for the early lead in an
online market that now amounts to just about $2 billion in sales a
year. By 2020, analysts forecast, annual Internet sales could hit
$30 billion, but that is still relatively small.
In contrast, last year, China racked up $300 billion in online
sales, according to iResearch, which tracks Internet activity in
China, while in the U.S., Internet retail transactions totaled more
than $260 billion.
Asia is becoming a hotbed of e-commerce investment and
experimentation. China's Alibaba Group Holding Ltd., which is
preparing a mammoth stock listing in the U.S., runs the world's
busiest online marketplaces. It is also vying with Chinese rival
Tencent Holdings Ltd. to offer things as diverse as taxi rides and
mutual funds through Internet-linked payment services.
Meanwhile, a host of chat and social-networking applications
like Japan's Line and South Korea's Kakao Talk are pushing into
e-commerce as well, offering a broadening range of goods and
services to their users.
India remains far behind. About a third of India's 1.2 billion
people live below the World Bank's $1.25-a-day threshold for
extreme poverty. Many others have neither the disposable income,
nor the Internet connection, computer or smartphone they would need
to become an online shopper.
Still, the South Asian nation is home to a burgeoning consumer
class estimated at 300 million that does have money to spend on
electronics, clothes and other products. And that, online sellers
hope, is enough critical mass for e-commerce to start taking
off.
"We are seeing a gold rush," said Sharad Sharma, a founder of
the Bangalore-based iSpirit Foundation, which helps nurture Indian
startups. Companies such as Amazon "are making a bet that [India's]
shallow Internet usage will deepen."
In 2012, the World Bank estimated that just 13% of Indians used
the Internet. About 1.5% of the population made an online purchase
that year, according to eMarketer, a New York-based research
company.
Indeed, India poses a host of challenges. Approximately half of
Indians don't have bank accounts. The country's creaking
infrastructure can make deliveries costly and time-consuming.
Companies such as Flipkart--which was started in 2007 by two
Indians who formerly worked at Amazon--have gradually begun to
persuade cautious shoppers that it is safe to buy online by setting
up their own distribution networks and accepting cash on delivery.
This allows consumers without credit cards to shop online and gives
skeptics the ability to see products before paying for them.
Flipkart also has won substantial international financial
backing.
A surge in the number of smartphones available for less than
$100 has also improved the outlook for the industry. Flipkart says
it already gets close to half of its orders through its mobile
app.
Flipkart says it has 22 million registered users and hosts 3,000
merchants selling millions of products, from electronics to clothes
and books. Flipkart says more than $1 billion of goods have been
sold through its website in the year ended March 31, making it
India's largest online marketplace.
The company says it isn't profitable now. Flipkart Chief
Executive and co-founder Sachin Bansal said Tuesday he doesn't plan
to focus on making a profit until it has signed up more than 100
million users.
Analysts and people close to Flipkart estimate the company's
latest fundraising round values it at $5 billion to $7 billion. At
$7 billion, it would rank as one of the 10 most valuable
venture-backed companies in the world today.
Speaking about Amazon's expansion plans in India, Flipkart's Mr.
Bansal said all the new investment shows excitement for the market.
He said local companies will still have an advantage in the Indian
market. "As outside investors look to deploy capital in India,
we're confident that as a local entrepreneurial company, Flipkart
has the advantage of being on the ground and better connected to
the market we serve," he said.
Amazon launched its own India website a year ago. It had
previously entered India in 2012 through the price-comparison
website Junglee.com. More than 17 million products are sold on its
website.
Because both are majority-owned by foreign investors, Amazon and
Flipkart can't sell products directly to customers in India. Indian
law bars foreign direct investment of more than 51% in multibrand
retail companies.
To get around the restrictions, both companies allow merchants
to use their websites, storage facilities and logistics networks to
sell and deliver their products. They then make money by charging
those retailers fees for this service.
Amazon, a pioneer in online retailing, is likely to be a
formidable competitor, analysts say.
"Amazon's strength is they are a company which has figured this
out in the U.S. They can come and replicate that technology
capability in India, " said Sanjeev Aggarwal, senior managing
partner of venture-capital firm Helion Advisors. "But it won't be a
lift and shift. I'm sure they will still have to do a lot of
customization to the local needs from a delivery, logistics and
payment standpoint."
Amazon has struggled to win market share in China, where local
companies dominate the industry. But in India, the path could be
easier, since many Indian consumers speak English and often prefer
international brands to local ones. For example Facebook is India's
biggest social-networking site and Google is its most popular
search site.
"It is primarily an English-speaking market so it is fair game
for most international firms," said Ankur Rudra, analyst at CLSA.
"Not every company will be able to raise as much capital (as
Amazon) so it will be a game of who has got the deepest
pockets."
Kenan Machado in Mumbai and Juro Osawa in Hong Kong contributed
to this article.
Write to Eric Bellman at eric.bellman@wsj.com and Dhanya Ann
Thoppil at dhanya.thoppil@wsj.com
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