Accessing India’s Consumer Market: Capitalising on the E-commerce Boom
29 May 2018
India is considered a difficult market in which to do business, despite a substantial improvement in the ease of doing business there in recent years. In the World Bank’s Doing Business 2018 report, India jumped up 30 places from the year before in the international rankings measuring the ease of doing business, making it into the top 100 for the first time.
When HKTDC Research spoke to Hong Kong companies about doing business in India, some reported that they had trouble identifying credible buyers and importers for their products. Nonetheless, with the advent of mobile technology, the increased availability of affordable mobile devices and the growing prevalence of cross-border e-commerce platforms, the possibilities of selling to India are improving rapidly.
India: the World’s Second Largest Smartphone Users Market
The use of smartphones has become increasingly common in middle-to-high income economies, though smartphone penetration varies considerably across these economies. According to Newzoo's Global 2017 Mobile Market Report, the UAE, Sweden, Switzerland, Korea and Taiwan are the top five places with the greatest penetration, followed by Canada, the US, Netherlands, Germany and the UK. While China did not rank among the world’s top 20 in terms of penetration in 2017, it was the world’s largest smartphone user market, with some 717 million users (52% of the country’s population), or about three times the number of smartphone users in the US.
Smartphone penetration in India was less than half of China’s in 2017, at just 22%. However, India is already the world’s second largest smartphone user market in the world after China, with more than 300 million users. Smartphone penetration in India looks set to rise further, given the government’s policy of raising digital literacy and internet access.
The Indian government is also trying to nurture a domestic ecosystem of mobile phones production. For greater detail on this, see the HKTDC article Make in India: Phased Manufacturing Programme Fuels Demand for Electronic Parts. The first part of the article looks at the drastic change in the composition of Hong Kong’s electronic exports to India in recent years, while the second part examines further changes in the mix of such exports in the light of India’s attempts under its Digital India programme to adopt trade and investment policies designed to bring its net electronics imports to zero.
Against this background, HKTDC Research undertook a field trip to India in 2018 Q1, interviewing retailers and e-commerce operators, in order to examine the latest e-commerce developments in the country, and discover how Hong Kong companies could engage better in cross-border e-commerce.
From a much lower and later starting point than China’s, India has staged a sustained e-commerce boom. At the same time, the government has cautiously opened up its retail and e-commerce sectors to FDI participation. Given these factors, and notwithstanding the existing retail FDI restrictions and entry barriers, India presents plenty of business opportunities to Hong Kong companies that are prepared to tap into the country’s booming e-commerce market, by jumping on the online sales bandwagon and/or leveraging the online platforms that are emerging there.
As a background supplement, HKTDC Research has also published market articles on the Modi government’s policy to accelerate electronic payments usage and move the country towards becoming a cashless economy (part 1), and on India’s shifting e-commerce landscape (part 2).
India’s Retail Sales and Booming E-commerce Market
According to Euromonitor, India’s retail market is expected to grow from US$608 billion in 2017 to US$857 billion in 2020, with the value of e-commerce expected to rise from US$30 billion in 2017 to US$86 billion in 2022. E-commerce sales will grow faster than overall retail sales during this five-year period, with e-commerce’s share of the total increasing from 4.9% to just over 10%. This would be a significant level given that organised retail makes up less than 10% of total retail sales in India, a country where distribution channels remain highly fragmented and numerous small neighborhood retail stores exist.
While India’s e-commerce sales amounted to only US$30 billion in 2017 – just 6.7% of China’s total and 11.2% of that of the US – India’s e-tailing market growth is expected to outstrip that of both China and the US in the next five years.
China is the world’s largest e-commerce market, its growth boosted by a fast improving broadband infrastructure, increasingly affordable mobile devices, and a myriad of innovative services linked particularly to smartphone applications. The average annual growth rate of China’s e-commerce market for 2012-2017 was 46.2%. While such growth was truly remarkable, it actually fell short of India’s average annual growth of 59% in the same period. From 2017-2022, the difference in average annual growth rates is likely to continue to move in India’s favour, with China’s e-commerce sales expected to expand annually by 12%, only half of the growth forecast for India’s.
While India’s population is a similar size to that of China, its 2017 per capita income of US$1,852 was less than one-quarter of China’s, according to the IMF. The differences between the two countries in terms of e-commerce development and purchasing power mean that the per capita e-commerce spend in India is much lower than in China, amounting to US$23 in 2017 (just 7% of China’s figure). The ratio of per capita spend in India to that of China, however, is expected to improve slightly to more than 11% by 2022. Despite the e-commerce euphoria of the past few years and the market growth expected in the next few, Indian consumers will continue to be extremely price-sensitive. Whether purchasing online or elsewhere, the majority of them may not be able or willing to afford pricier, imported international lifestyle brands and high-end products, particularly products boasting top-of-the-range features and functionalities.
Online Sales by Product Type
The two biggest categories of online retail in India are apparel/footwear and consumer electronics. Mobile devices including smartphones make up a large part of the consumer electronics purchased online. Buying a smartphone makes it easier for consumers to conduct online purchases, and gives them greater ability to see and compare prices from different vendors. As some of these vendors are situated abroad, rising smartphone sales are likely to lead to an increase in cross-border e-commerce.
Smartphone Sales in a Price-Sensitive Market
Spending constraints and price consciousness on the part of Indian consumers have helped sustain a rapidly growing smartphone market in India, creating market opportunities for both regional and international brands selling less costly models, most of which are domestically produced or assembled. Hong Kong companies should note that this may also bode well for the demand for electronic and fashionable accessory items. The success of the Chinese brand Xiaomi is a prime example. Three years ago, Xiaomi’s quarterly shipments to India amounted to less than 0.5 million units, but in 2017 Q4 it shipped more than eight million units to take a 27% share of the entire Indian smartphone market.
Increased retail presence and intensified promotion and marketing, including celebrity endorsement of its selfie-centric smartphone series, have helped Xiaomi penetrate the India market with its competitively priced products. However, Xiaomi has also made good use of online platforms like Flipkart, selling many more smartphones online than any other brand in India.
During HKTDC Research’s market trip to India, we were also struck by the massive, ongoing marketing campaigns by other Chinese smartphone companies such as Vivo and Oppo. Hong Kong companies supplying related accessories and peripheral products may also find new business opportunities in the wake of India’s e-commerce bonanza.
The phenomenal growth of Xiaomi in India is evidence of the importance of not only having price-competitive products, but also a successful sales strategy to leverage one’s brand on online platforms and marketplaces in the local market. Xiaomi’s global market share more than doubled in 2017, thanks to the sales surge in markets outside China, and in particular India. The company made good use of India’s online platforms to seal its position as the leading smartphones brand in 2017 Q4, outpacing Samsung which had been the market leader in India for six years.
The Xiaomi success story highlights the importance of deploying an effective online-cum-offline strategy as well as selling price-competitive models. For example, the Redmi 5A of Xiaomi was launched in India at just US$78, selling more than a million devices within a month. The brand has continued to expand its retail presence by adding more preferred partners and new Mi stores and service centres, along with partnering with large format retail stores. When trying to make a significant inroad into India’s retail and online market, Hong Kong companies should recognise the importance of mounting both online and offline marketing and sales strategies.
FDI Restrictions on Retail Operations in India
Although Chinese smartphone brands have made strong inroads into the Indian market, it should not be overlooked that India still places certain FDI restrictions on foreign companies trying to tap into the country’s retail market. Chinese smartphone brands which sell well in India basically have their phones assembled or manufactured in India, after registering as local entities in the country. Rather than importing finished products to sell to the Indian market, these Chinese companies import parts and components for local assembly and manufacturing, thereby avoiding the punitive tariff and other duties being levied on finished products and, increasingly, on some targeted parts and components.
Single Brand and Multi Brands Retail Trade for Foreign Investment
Generally speaking, India allows foreign investment to engage in single brand retail trading (SBRT), as in the case of foreign companies like Ikea, Uniqlo or Starbucks, and – to a much lesser extent – in multi brands retail trading (MBRT). Hong Kong companies looking to cultivate the Indian market should consider SRBT as an entry pathway. A government decision in January 2018 has made it easier to operate SBRT entities in India completely through FDI, by eliminating licensing hurdles.
Before then, foreign companies applying for SBRT operations in India had to go through the Department of Industrial Policy and Promotion (DIPP) to get government approval to set up an entity with FDI of between 49% and 100%. Joint ventures with 49% FDI or below were allowed to apply under the automatic route and simply required to file the requisite documents with the Reserve Bank of India within 30 days of receipt of funds. Under the 2018 SBRT rule, this automatic route for approval now applies to all FDI-backed entities, even those backed 100% by FDI.
The Indian government also relaxed the local sourcing rule for foreign retailers, which is considered a breakthrough as it had been a major entry barrier for many foreign retailers eyeing the Indian market. For foreign companies, including MNCs, running SBRT operations are subject to a 30% minimum threshold for local sourcing. But under the new rule, their SBRT units can adopt incremental increases in local sourcing under the 30% threshold for the first five years, if they are already doing so for their global operations. Furthermore, the local sourcing rule will not be applied to foreign companies of high-tech products for up to three years after they open their first SBRT store in India, if and where their products have state-of-the-art and cutting-edge technologies and where local sourcing is not possible.
These rule changes give prospective foreign brands or retailers entering the Indian market more time and flexibility in planning their local sourcing, instead of being instantly subject to the 30% threshold. The changes also benefit foreign SBRT brands with an existing presence in the Indian market, as they can strengthen their brand positions by setting up flagship stores to project their brand images. It is anticipated that lifestyle product companies selling fashion apparel, beauty, personal care and baby product brands will be the major beneficiaries, as long as they can adhere to the relaxed sourcing rule.
MBRT Remains Practically Off-Limits to FDI
In 2013, the previous Congress-led federal government made FDI in MBRT permissible up to 51%, while leaving implementation to individual states. In the same year, the UK’s Tesco entered into a joint venture with Tata Group to operate the first MBRT supermarkets. India also permits 100% FDI in wholesale business, with Walmart now running more than 20 such wholesale stores in India.
While retail is reckoned to be a key growth sector in India, which can also spur other economic activities including investment, manufacturing, local sourcing and technology transfer, the incumbent federal government led by Narendra Modi is adamant that it will not break its 2014 election manifesto opposition to MBRT. It fears that a large number of small neighborhood retail stores, known as kirana stores, would be adversely affected by the increased presence of MBRT operators from abroad. As a consequence, it has adopted a policy of not encouraging FDI for MBRT.
However, to try to help farmers and curtail inflation, the Modi government has since 2016 permitted 100% FDI in the retail trade of domestically-produced food products (i.e. with local sourcing of food items up the value chain, say from farmers). Recently, there has been pressure from industry to allow FDI-run supermarkets to sell non-food products up to a level of 25% of their total sales. Advocates for this change argued that MBRT would not adversely affect the kirana sector and instead would benefit consumers by allowing them to buy cheaper branded products.
However, further relaxation of MBRT restrictions did not feature in the Federal Budget in February 2018. With the next federal elections due in 2019, it is apparent that the chances of foreign companies being allowed to sell a sizeable portion of non-food items under the MBRT format remains low while the current government is in power.
FDI Retail Restrictions and Rise of E-commerce Marketplaces
The regulations on FDI in e-commerce activity are similar to those on FDI in the retail trade sector. For example, FDI in multi-brand B2C websites is practically off-limits, given the 51% cap on FDI in MBRT and the Modi government’s unwillingness to promote such FDI in order to protect the kirana sector.
While 100% FDI is allowed in SBRT operations, it is only permitted for B2C e-commerce websites which are associated with a brick-and-mortar establishment which sources at least 30% of its goods in India. The position regarding FDI in B2C e-commerce websites was clarified in March 2016 when the Indian government issued guidelines relating to the Marketplace E-commerce Model (MEM) and Inventory-based E-commerce Model (IEM).
To summarise these guidelines, FDI is not allowed to operate an IEM – that is, a model in which the inventory of goods is owned and sold by the e-commerce entity to consumers directly, with no physical retail entity.
However, 100% FDI is allowed in MEM online marketplaces as long as no more than 25% sales are generated from one single vendor. One example of how this has worked in practice is Indian e-marketplace Flipkart, which has worked towards complying with this requirement by lowering its sourcing from its largest vendor WS Retail, while revamping sourcing arrangements with other sellers like Omnitech Retail, TrueCom Retail, IndiFlash Market and RetailNet. Details of MEM operational parameters are provided below:
- An e-commerce entity providing a marketplace will not exercise ownership over the goods to be sold.
- An e-commerce entity will not be permitted to sell more than 25% of the sales through its marketplace from one vendor or their group companies.
- Guidelines on cash and carry wholesale trade under the FDI Policy shall apply also to B2B e-commerce also.
- Sellers’ contact information is to be displayed online by the e-commerce entities.
- An e-commerce marketplace entity will be permitted to enter into transactions with sellers registered on its platform on B2B basis.
- Support services to the sellers, like warehousing, logistics, call centre etc., may also be provided by the e-commerce entities.
- The warranty/guarantee of products or services sold online will be borne by the sellers, not the e-commerce entity. In addition, the seller alone shall be responsible for delivery of goods and satisfaction of customer.
- Payments for sale shall be facilitated by the e-commerce entity in conformity with the RBI guidelines.
- The price of goods or services shall not be, directly or indirectly, influenced by the e-commerce entities providing marketplace.
As mentioned above, 100% FDI is permitted in the retail trade of food products manufactured or produced in India, and a similar provision exists for e-commerce. In July 2017, online retail giant Amazon.com obtained government approval to invest about US$500 million to build a food retail business in India, and this was followed by the granting of approval for online grocery service providers Grofers and BigBasket.
Big online marketplaces like Flipkart, Amazon and Snapdeal have witnessed tremendous growth in the last three to four years. Since the new rules on single vendor and MEM were introduced in 2016, significant FDI has been drawn into India’s online marketplaces like Flipkart and Snapdeal. Walmart, which failed to secure entry into the Indian market via the MBRT route, secured a significant interest in Flipkart in May 2018.
Flipkart, along with its owned e-tailers Myntra and Jabone, currently leads the market in online sales in India. Jasper, Snapdeal’s parent company, has seen its share of online sales plunge in each of the last three years.
Not all major Indian retail groups operate B2C websites, because of the challenge of competing against the big online marketplaces. However, some retail groups selectively set up B2C websites for certain business lines. Those who organise their own B2C online stores include Pantaloons and E-zone of Future Group; Titan, Tanishq and Skinn of Tata Group; Reliance Mart of Reliance Retail; and Shoppers Stop of K Raheja Corp Group.
Cross-Border E-commerce Opportunities for Hong Kong Companies
Hong Kong companies eyeing India’s retail market potential, particularly that of the super-charged e-commerce segment, should have a clear understanding of how cross-border e-commerce could be adopted in practice.
Any FDI-invested SBRT operation in India is subject to a 30% local sourcing requirement, but also has the added option of operating an associated single-brand B2C website. However, any foreign company failing to register in India and/or source locally will not be permitted to operate a single brand B2C e-commerce website in the country.
Indian consumers browse and shop from overseas or non-Indian B2C e-commerce websites, and it may be practically difficult to require those non-Indian websites to observe the 30% local sourcing requirement. However, overseas B2C websites that are committed to selling to India need to effectively reach out to Indian consumers with marketing campaigns and promotional activity, and they will be better off staying close to the market with their local SBRT setup. Hong Kong companies keen to sell to India via a local presence may find it a practical step in making contact with Indian consumers.
As became clear from HKTDC Research’s recent field trip to India, successful e-commerce operators have adopted both online and offline marketing initiatives to boost online sales. It is difficult to orchestrate an overall sales and marketing strategy without securing a local business identity in India, and a further difficulty to overcome is the local sourcing requirements imposed by the regulatory authorities. That said, Hong Kong companies interested in selling to India may be able to identify a third party in India with a registered business entity to help facilitate selling, in order to avoid incurring heavy capital commitment upfront.
In the next article, we will examine the practical case of a business tie-up between Hong Kong’s Buy For Me and DTDC, one of India’s leading logistics and express companies, and how Hong Kong companies can test the water of the Indian retail market by tapping into their online platform Bfme.In.
 The World Bank ascribed the improvement in India’s ranking to the sustained business reforms adopted by the Modi government over the past three years. Most recently, the government introduced 37 reforms in areas spanning insolvency resolution, protecting the interest of minority shareholders, and simplifying taxation processes.
 Before the change, foreign retailers with Indian SBRT units had to purchase 30% of the value of goods from local suppliers as an average over five years, after which they would be required to meet the requirement on a yearly basis.
 The Indian government did not define what constitutes the state-of-the-art and cutting-edge technology required of high-tech companies to open SBRT stores. However, it is understood that the government turned down Apple’s application under that provision, citing that Apple’s technology was not cutting-edge.
 Walmart’s MBRT plans with Bharti Retail fell apart in 2014. This was followed by the exits of French retailers Carrefour and Auchan, citing policy uncertainty and/or differences with Indian partners.
 Japan's SoftBank reported in 2017 of a combined loss of US$1.4 billion from its Indian portfolio comprising ANI Technologies, which runs taxi aggregator Ola and Jasper Infotech, the parent company of Snapdeal. The bulk of SoftBank’s losses came from Snapdeal. In 2017, Softbank failed to reach an agreement with Snapdeal’s early investors on a valuation for the company and thus a proposed plan to merge with Flipkart, now the dominant e-tailer in India, fell through.
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