Alibaba refuses Paytm Mall funding
Alibaba (BABA) has refused to put more money in Indian e-commerce provider Paytm Mall, according to a report from BloombergQuint. Investors should not confuse Paytm Mall with its sister firm Paytm, which focuses on digital payment services. Alibaba owns stakes in both Paytm Mall and Paytm. Its stake in Paytm Mall is about 46%. Alibaba’s decision to refuse more Paytm Mall funding stems from it realizing that the investment isn’t paying off.
Paytm Mall is struggling to cope in India’s e-commerce market dominated by Amazon (AMZN) and Walmart’s (WMT) Flipkart. It has long relied on heavy discounts to boost sales, but that strategy has become very expensive. Therefore, the business is losing money. The dilemma is that without deep discounts, Paytm Mall is unable to attract shoppers. Paytm Mall’s share of India’s e-commerce market dropped to 3.4% in 2018 from 5.6% in 2017, according to Forrester estimates.
Besides shrinking market share, Paytm Mall is also deep in the red. The business made a loss of about $270 million in 2018. Paytm Mall generated revenue of $116 million for that period, according to filings cited by the Economic Times. Paytm Mall’s loss could go up in 2019.
India’s retail e-commerce market is booming
Ironically, Paytm Mall is struggling at a time when India’s e-commerce industry is booming. India’s retail e-commerce market was worth $32.7 billion in 2018. It is on track to grow to $72 billion by 2022, according to data from eMarketer. Expanded access to smartphones and Internet, and consumers’ desire for more shopping convenience are fueling uptake of e-commerce in India.
Paytm Mall launched in 2016. Within two years of launching, Paytm Mall raised $645 million from investors including Alibaba and SoftBank (SFTBF). SoftBank is a Japanese conglomerate with interest in telecom, e-commerce, digital payment, and many more. Also, SoftBank is the parent of American mobile operator Sprint (S), which wants to combine with its rival T-Mobile (TMUS). Sprint and T-Mobile struck their merger deal more than a year ago but are still awaiting regulatory approval.
Besides tough competition from Amazon and Flipkart, Paytm Mall’s troubles are also resulting from a talent drain. Several senior executives at Paytm Mall have left in the last year.
More trouble may be awaiting Paytm Mall as Reliance Industries is also gearing up to enter India’s e-commerce market. This move would result in more competition for the already injured Paytm Mall. Reliance Industries is an Indian conglomerate overseen by billionaire Mukesh Ambani. Reliance chief Ambani is a business leader in the mold of Amazon’s Jeff Bezos in terms of disrupting industries. Ambani’s telecom company Reliance Jio has greatly shaken up India’s telecom industry. Due to Jio’s disruptive moves, Vodafone (VOD) had to merge its Indian subsidiary with a domestic rival to try to counter the growing competitive threat.
Alibaba doubted Paytm Mall’s e-commerce venture
Before it decided to refuse Paytm Mall more funding, Alibaba expressed reservation with the e-commerce venture, the Economic Times reported. Perhaps that stemmed from Alibaba’s bad experience from its e-commerce bets in India. Snapdeal, the other Indian e-commerce business Alibaba has invested in, is struggling to keep up with the competition. Snapdeal at one point explored selling itself to Flipkart, one of its competitors in India.
But Alibaba is not the only foreign company that appears to be struggling to crack India’s e-commerce market. In 2017, eBay (EBAY) folded up its India unit and merged it with its rival Flipkart. Although eBay is returning to India again, the company is following a different script than it launched with in the country originally. eBay’s return to India will see it focus on cross-border e-commerce rather than operating a domestic market. Alibaba’s decision to withhold further funding to Paytm Mall comes as the company is reviewing its India investment strategy. According to a May report in Indian newspaper Mint, Alibaba wants to dial down on big-ticket investments in India.
India remains an important market for Alibaba
Although Alibaba has suffered disappointments from some of its Indian investments, India remains an important market for the company. At the moment, Alibaba relies heavily on its domestic market of China for its revenue. In the March quarter, for instance, China operations accounted for about 80% of the company’s total revenue. However, Alibaba’s goal is to become a global company, one that is both geographically and operationally diversified. And India is a promising market for Alibaba’s ambitions.
India is one of the fastest-growing global markets for digital products and services. Some of the booming digital sectors in India outside e-commerce are digital payment and cloud computing. The adoption of online shopping in India is also driving uptake of digital payment services. Credit Suisse predicts that the mobile payment market in India will expand five times in a span of five years. That means India’s mobile payment would reach $1.0 trillion by 2023 from $200 billion in 2017.
Alibaba has invested in one of the leading mobile payment providers in India: Paytm. According to data from Kalagato cited in Indian media, Paytm handled 72% of all mobile payments in India in March. PhonePe, the mobile payment arm of Walmart-owned Flipkart, accounted for 12.3% of India’s mobile payment transaction in March.
Also vying for a slice of the mobile payment market in India are Amazon and Google (GOOGL). Amazon runs a mobile payment service called Amazon Pay, which allows people to pay for shopping on Amazon’s marketplace and settle bills. In addition, Amazon Pay supports flight booking in India. Google runs an India-specific mobile payment service called Tez, which it rebranded last year as Google Pay. The reason for the rebranding was to allow Google to roll out the payment service outside India.
Buffett puts money in Paytm
Paytm also counts billionaire Warren Buffett among its backers. The Buffett-led Berkshire Hathaway (BRK) invested around $350 million for a stake of roughly 4.0% of One97 Communications last year, CNBC reported. One97 Communications is the parent of both Paytm and Paytm Mall.
While handling e-commerce payments has been a major market for Paytm, the firm is diversifying. Education is one sector where Paytm sees a massive growth opportunity. Already working with over 10,000 education institutions across India, Paytm plans to bring thousands more education customers to its network. Paytm provides its education customers with an array of services, including job recruitment, according to a report from Times Now.
Alibaba sets sight on India’s cloud market
Alibaba also has its sight on India’s cloud computing market. As Indian businesses digitalize their workloads for more efficiency, demand for cloud services is on the rise in the country. Data from Nasscom show the cloud computing market in India will triple to $7.1 billion by 2022.
Alibaba has set up several data centers in India as it pursues the cloud rupees in the country. Having data centers in India has many advantages for Alibaba. It allows Alibaba to speed up its cloud services to better serve its cloud clients in the country. Also, it makes Alibaba compliant with India’s data storage rules. India requires companies operating in the country to store digital data on its people and businesses locally.
Facing competition from Alibaba, Amazon is also setting up more data centers in India to expand its cloud capacity. Alibaba currently dominates the cloud market in Asia-Pacific. The company is now looking to markets like India to cement its cloud computing lead in the Asia region.
While Alibaba refusing Paytm Mall funding could hurt the Indian business, the move could have strategic benefits for the company. For example, Alibaba could gain more financial flexibility to invest in more promising businesses.