Article / 19 August 2015 at 5:59 GMT

Alibaba advances on India with backdoor deal

China Watcher / Shanghai
  • SnapDeal raised $500m from its fundraising round, led by Alibaba and SoftBank
  • This isn’t Alibaba’s only online investment as it acquired a stake in Paytm
  • Alibaba is making strategic investments overseas not wholesale expansions

By Neil Flynn

The Indian online retail SnapDeal has announced that it raised $500m from its latest fundraising round, led by the usual suspects Alibaba (BABA: nxys) and SoftBank. This isn’t Alibaba’s first investment in the firm, and its support has been fundamental in building the market share of the domestic Indian firm. As a result of the latest fundraising round, the firm is now valued at $5 billion.

Snapdeal is forecasting strong growth for the year, which will certainly be based on the back of Alibaba’s support. Last year saw 150,000 vendors selling over 12 million products, and the firm is forecasting that it will sell $3 billion worth of products this year.

The domestic Indian ecommerce market is hotly contested, with the two largest players each backed by one of the world’s largest firms. Snapdeal is competing with FlipKart, which is backed by Amazon (AMZN:xnas), which indicates the potential for growth in the country. It also suggests that as with China, it is difficult for a foreign online retailer to build a large presence in India, and hence investing in a domestic firm is a more effective option.

Snapdeal mobile
Source: Snapdeal

Snapdeal’s founder hasn’t been shy of stating his admiration of Alibaba, and the development of his firm shows strong similarities to Jack Ma’s behemoth. In addition to a general retail marketplace, Snapdeal has developed a financial services platform called RupeePower, as well as acquiring a mobile transactions platform called FreeCharge.

The resemblance to Alipay is uncanny, but it is a business that is vastly under-exploited in India. In addition, if there was one firm in the world that you would want to support to build a mobile transactions platform, it is Alibaba. This isn’t Alibaba’s only online investment in India, as it acquired a stake in Paytm, the Indian mobile payments platform, and will presumably back the firm with its Alipay infrastructure.

One area of future collaboration is online grocery shopping. China and India both have parallels in the industry, and online retailers in both countries are actively expanding their services to cater for the demand.

The issue for both Alibaba and Snapdeal is that neither have an established online grocery platform yet, which means that as both firms continue to make investments in this business line, investors should expect to see collaborations and synergies between the two firms.

Fingers in foreign pies

There has been a common assumption that Alibaba will expand into overseas markets in order to grow, but the reality is that we aren’t really seeing that. The cross border ecommerce business is connecting overseas suppliers and producers to Chinese consumers, but it is unlikely that we will see Alibaba launch its Tmall or Taobao platform abroad, simply because the likes of Amazon and eBay already offer similar services.

Investments such as SingPost, the Singaporean logistics provider, and the launch of an office and site in Russia appear to be contrary to the firm’s current investment trend. What we are seeing is that Alibaba is making strategic investments in overseas markets, which will see the domestic firm grow on the back of Alibaba financial and structural support.

 Moving in on India: Jack Ma is leveraging Alibaba's experience and infrastructure: Photo: Flickr

Alibaba’s investment in the US messaging app SnapChat is in-line with its messaging app investment policy in China. It is also the best way for the firm to generate return from the Western social network market.

Despite Tencent WeChat’s dominance in China, I have serious doubts as to whether it could become successful in developed Western markets. Established players such as Whatsapp already boast a strong user base, and I believe that users would be concerned about their private data being sent to servers in China. This is an issue that has already raised concerns in India with the army banning Xiaomi smartphones due to Beijing-based servers.

Investors should expect this investment policy to continue. Alibaba will focus on helping domestic firms grow in their respective markets by providing them with the benefit of its established infrastructure and experience.

The continued investment in both Indian online retail and online and mobile payments will be a major growth area for the firm in the long, and investors should expect to see both participation in future fundraising rounds and investment in more firms.

-- Edited by Adam Courtenay

Neil Flynn
is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.


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