Walmart’s union with Flipkart could soon come to an ignoble end. The new FDI(Foreign Direct Investment Rules) which came into effect on February 1 have left India’s eCommerce industry reeling. Now according to Morgan Stanley if the cost of doing business in India gets any trickier, an exit is not completely out of the question.
Morgan Stanley estimates Flipkart’s losses may go up 20-25 percent, according to a report titled ‘Assessing Flipkart Risk To Walmart earnings per share—Bloomberg Quint. Already Walmart expects Flipkart to report a loss of at least Rs 5,300 crore in the ongoing financial year after it revised earnings per share estimate for the financial year ended March 2019 last October.
The Modi Government still recovering from electoral losses in the previous State Elections, decided to shore up its support among small business owners by introducing the new rules ahead of the high stakes Federal Elections in May.
Thousands of products have vanished overnight as online retailers contemplate how to comply with the new regime. Online retailers are barred from promoting products of companies where they hold ownership stakes, exclusive tie ups are no longer permitted and the era of deep discount might be gone forever.
Walmart in particular has a lot at stake as it has withdrawn from regions like UK and Brazil and has focused the bulk of its investments in India and China. Both countries are touted to become economic powerhouses in the next twenty years, and while China’s growth seems to be stalling, the Indian economy will only gather more steam as time passes.
India’s e-commerce market’s value will reach a trillion dollars by 2020 and both Amazon and Flipkart will be loath to relinquish it. Walmart’s investment in Flipkart despite huge potential gains in the future was received poorly by investors. The current setback is likely to aggravate them even further.
And there is precedent-Amazon pulled out of China after grasping that its China business model was no longer feasible. If things get even more trying in the future who is to say Walmart under pressure from agitated investors could decide to pull out.
Smartphones and electronics contribute nearly 50 percent of the revenue to online retailers, and also gives Flipkart an edge over Amazon. Flipkart will have to make changes in the supply chains and current exclusivity agreements. The new rules are expected to increase operational cost by 3-11 percent.
The horizon though isn’t quite as bleak as it appears however. Flipkart and Amazon could bring in more sellers to their platforms, reduce the number of business-to-business transactions they partake in and negotiate new contracts among sellers and brands and independent wholesale entities, it said. “Exclusivity can be lost and minority stakes could be sold at a reduced value but this could be viewed as a one-time cost of compliance”. Some companies have indicated that they will stick with their current online partners.
One Plus has said in a statement that it’s decision to sell its product on Amazon was never due to any exclusivity tie up and that it will continue to sell its product on the platform in the future.