Decoding Alibaba-Paytm deal: Indian e-tailers are at a new inflection point

The e-retailers are always in the news these days for the next big round of funding they are raising. While enough trees have been destroyed writing about their valuations, the bigger issue - in fact the elephant in the room - is that the segment is at an inflection point. With every round of funding that e-retailers raise, their need to go public is also increasing. Private equity investors are pumping in money so that these companies can garner higher revenues. Most of them are pumping money into two things advertising and discounts. Until now, their only competition was other e-retailers but now old brick-and-mortar companies such as the Future group are also getting into the game. In a front page story in ET Kishore Biyani has kicked off a frontal assault on the pricing and discount. [caption id=“attachment_2235066” align=“alignleft” width=“380”]  Reuters[/caption] Now, the price comparison between brick-and-mortar stores and e-tail will heighten. Both segments of the organised retail will likely bleed, notching up losses due to deep discounts. This is a real war and the only winner will be consumers and the biggest losers will be domestic manufacturers. When discount becomes deep enough, retailers will look for the lowest prices in the world. Walmart story about discounting every day lower prices is well documented. This will happen at a hyper-speed in India, because we do not have any rules and regulations to protect domestic manufacturing. Rampant signing of FTAs has created enough duty free doorways for the rush of cheaper goods into the country, especially Chinese. E-retailers allow manufacturers to bypass traditional roadblocks too. Xiaomi is a classical example of an entry of a strong Chinese brand through this route into India. The whole e-retailer model is based on cheap Chinese exports and this is a great cause of concern both for the Indian government and the future of Indo-Sino trade relationship. Earlier, these imports were only coming through Indian e-retailers. But now they are directly entering the country, again through a circuitous route. Take the recent acquisition of 25% stake by Chinese behemoth Alibaba in payment company Paytm. Alibaba did not acquire stake directly or in an e-retailer as there are laws preventing FDI in retail, which, of course, every company including Amazon.com have bypassed. The irony is that a company like Amazon.com lists these as risks and not as breaking of the country’s laws. Indian lawmakers are also turning a blind eye to such blatant violation. The inflection here is that now Alibaba vendors would be able to sell directly through Paytm. Now that Chinese vendors can sell directly to Indian consumers through Paytm officially, both because of the ownership of the company and its own thrust, Indian e-retailers should be worried about this. Chinese products are cheaper of that there is no doubt. Companies like www.lightinthebox.com have created a global e-retail model and the site is available in multiple languages and delivers across the world. It is not known to Indian consumers because it does not advertise its services in India. But it offers high quality product that are not just a threat to Indian retailers but also Indian manufacturers - particularly, small manufacturers who were hoping to get a global consumer base. A global consumer base is what Jack Ma, owner of Alibaba, had promised to prime minister Narendra Modi. And then he went and invested in Paytm opening the gateway for Chinese manufacturers into India. Jack Ma or Alibaba maybe doing what is good for their business; but is the Indian government really listening to what these companies are doing to Indian manufacturing? The trouble is that nobody in the government knows how much is being imported through export gateways that are the e-retailers. The trade data does not capture their imports into the country very well, especially how much of it is Chinese, because a bulk of it is routed through Singaporean subsidiary of these e-retailers . It is no secret that the route for Chinese low priced consumer goods is through Singapore, a country with which India has signed an FTA. The challenge is that the Indian government fails to recognize the long-term impact of this and e-retailers are so busy building revenues that they do not see it is in their interests to block the Chinese imports. K Yatish Rajawat is a senior journalist based in Delhi. He tweets @yatishrajawat