According to the Wall Street Journal, in its first strategic investment in India, Alibaba Group Holding Ltd (BABA) and its unit Alipay have agreed to pay $575 million for a 30% stake in One97 Communications.
One97 owns Paytm, an online platform that users can access through mobile apps. According to the report, the deal is likely to be closed by the end of the month.
“Namastey” India!
In 2014, India benefited from an e-commerce investment boom as important Silicon Valley-based funds began pouring fresh funds into fast-growing domestic start-ups, such as e-retailer Flipkart and online marketplace Snapdeal, at multibillion-dollar valuations.
India, with a big population of 1.2 billion, has encouraging demographics and the economy is also improving as a result of the investment friendly approach of the new government.
The election of Narendra Modi as India’s Prime Minister has attracted global business leaders. From Facebook.com’s (FB) Mark Zuckerberg to Google’s (GOOGL) Sundar Pichai, top leaders have visited India recently.
The entry of Alibaba, the world’s largest e-commerce group by revenues, is expected to increase the excitement over the sector’s prospects. It will also put the Chinese e-commerce giant up against U.S.-based Amazon.com (AMZN), which invested $2 billion in its local subsidiary last year.
According to Satish Meena, a forecast analyst at Forrester, Paytm, is vital for Alibaba's expansion outside China as it offers a platform to capture the mobile-first users in India. He noted that over 40% of Paytm sales come through smartphones. He also added that the deal would enable Alibaba to bypass Indian e-commerce limitations like low credit card penetration.
This investment by the Chinese company comes at an opportune time in a country that has the third-largest number of Internet users. The fact that the Indian e-commerce market is still at a nascent stage is a huge advantage for Alibaba.
According to Forrester research, Alibaba has the opportunity to export its existing model to India and put together a brand, given the fact that customer acquisition costs are small and market leaders are less ingrained, unlike the U.S., where high customer acquisition costs make it extremely expensive to establish a brand name from the beginning.
Alibaba’s Global Stratagem
According to Meena, subsequent to its record shattering $25 billion initial public offering last year, Alibaba is likely to focus on both developing and mature e-commerce markets outside of China.
Apart from China, Alibaba currently has operations in the U.S., South Korea, Turkey, Taiwan, Japan, Malaysia, Thailand and Vietnam.
The Hangzhou-based firm currently has an international version of its online marketplace, Taobao, and in recent times initiated an invite-only boutique shopping site in the U.S.
According to Mu Zhi Li, Internet equity analyst at Arete Research, Alibaba is focusing on less developed markets since they are similar to what China was 5-10 years ago.
Li considers Alibaba's expansion strategy a concern, saying that it raises a doubt about China's own e-commerce market, which he says averages around 30% annual growth.
He is of the opinion that growth has already reached its peak and is now converging towards China's overall macro growth. Alibaba already has 80% share of the country's e-commerce market and therefore needs other growth drivers.
But this is what makes its investments in relatively nascent and growing markets like India and Brazil sensible. Getting in early will enable the company to take share, thus generating higher revenue and profits.
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