Can there be a situation where large domestic e-commerce players like Flipkart and Snapdeal fear being overtaken by global e-commerce giants like Amazon ? Can there be a situation where government supports global players so as to promote its vision and campaign ? Can there be a situation where policies are biased based upon the channels such as brick-and-mortar stores or e-commerce ?
The situation has arrived. We are talking about allowing FDI in e-commerce and its implications.
The government recently conducted talks with online retailers and industry lobby groups on allowing foreign direct investment (FDI) in e-commerce. Online retailers such as Flipkart, Snapdeal, Amazon, eBay, Ikea and industry associates such as CII, FICCI, Nasscom, E-Commerce Coalition of India, US India Business Council, Internet and Mobile Association of India and Indian Venture Capital Association were present in the meeting. Currently government allows 100 percent FDI on B2B( Business to Business) sector but not on B2C( Business to Consumer) sector, which means that e-tailers could not sell their goods directly to the consumers and have to follow marketplace model where they act as an intermediary between buyers and sellers . Let's explore what effects would FDI in e-commerce have on various stakeholders.
Domestic companies like Flipkart and Snapdeal have showed reservations and do not favor FDI in e-commerce whereas global player Amazon is in favor of FDI. According to Flipkart, FDI will help those e-tailers who are currently running their business on marketplace model but are willing to opt for inventory based model,indirectly referring to Amazon. If we consider Snapdeal's view, they said they are committed to enabling MSME( micro, small and medium enterprise) across the country to grow by providing them nationwide reach for their products and services through their marketplace platform and will continue to connect dots benefit between demand and supply. But according to Amazon, FDI would be good for consumers as it would let the company to partner with local manufacturers and source the items from them which are not carried by other retailers on the marketplace. Also Amazon is committed to invest $2 billion in India operations. In simple terms, FDI would increase the competition between different e-tailers and it would benefit Amazon to some extent as it could sell its own products through its platform, as it does in USA and UK. Some of the angel investors and private equity investors who are currently investing lot of money in Snapdeal and Flipkart may turn away and could invest in inventory based models. Moreover Snapdeal and Flipkart may have to again restructure their platform from marketplace model to inventory based model. The move will also benefit many small e-commerce players who are currently running on inventory based model as they could easily raise foreign funds now. Increased competition between e-tailers will eventually provide a large pool of products to the consumers and also a better customer service.
But why is government so interested in the deal ? Government can implement its vision of 'Make In India'. As said by Amazon, it will source the products directly from local manufacturers and sell it on its platform and hence promoting local manufacturing. The move will also boost infrastructure development as foreign funds would help companies to setup better infrastructure.
But there are some issues that has to be tackled. There could be price war between e-tailers and retailers. E-tailers maintain huge inventory and their profits are based upon the volume, as we saw in my previous post How do e-commerce companies make money. So e-tailers could reduce the price of products to such an extent that local retailers could not compete with it and it would drive competitors out of the market. It would cause unemployment and would be disadvantageous to MSME (micro, small and medium enterprise). Another issue is FDI norms of multibrand retail. According to the norm, selling of multibrand retail is being restricted to cities with population of more than 1 million or any other city as per choice of consenting states. Through FDI in e-commerce, e-tailers get access to sell their products anywhere in India, hence going against the norm.
Now to decide if it's a boon or bane, it would completely depend upon the stakeholders involved. For e-tailers like Flipkart and Snapdeal, it will be bane as they face tough competition from global players and moreover they have to restructure their model from marketplace to inventory based. For MSME, it will be bane as it would be difficult for them to survive the predatory pricing. For global players like Amazon, it will be boon as they can procure materials from local manufacturers and also sell their own goods through its platform. For government, it will be boon as the move would boost infrastructure and promote its vision of Make In India. For consumers, it would definitely be boon as consumers get the benefit of large range of discounted products and improved customer service.
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