Finding a way into India's vast but vexing market has long frustrated foreign retailers. Now, overseas investors are pouring billions of dollars into e-commerce ventures that are circumventing the barriers holding back retail powers such as Wal-Mart and Ikea.
Some investors see India as the world's next big e-commerce opportunity, with the upcoming mammoth public stock offering of Chinese online giant Alibaba hinting at the potential.
Online shopping is still in its infancy in India at $2.3 billion of an overall $421 billion retail market in 2013, according to research firm Crisil. But it is growing fast and the potential of reaching a mostly untapped market of 1.2 billion people has sparked a funding-and-expansion arms race.
Flipkart, a Bangalore-based company founded in 2007 by two former Amazon employees, last month announced it had raised $1 billion in mostly foreign capital after building its registered users to 22 million.
A day later, Amazon raised the stakes with founder Jeff Bezos saying the company would pour $2 billion into developing its India business.
Snapdeal.com, another Indian e-commerce contender, has raised at least $234 million in the past year, and recently local media have reported that Rajan Tata of India's Tata Group conglomerate is considering a personal investment in the company.
The flood of overseas capital comes even though foreign investment in online retailing is not permitted in India, which would seem an even more stringent barrier than the local product sourcing requirements that caused Wal-Mart and IKEA pull back on plans to build megastores. However, e-commerce businesses that are partly or wholly foreign owned have found a way to work around the rules to offer books, clothes and electronics on their sites.
Neither Flipkart nor Amazon technically engage in online retailing. Instead, to get around the foreign investment ban, both companies serve as Internet-based hosts for thousands of third-party sellers, taking commissions in exchange for marketing and, often, arranging shipping of the products.
Even Amazon's Kindle e-reader is not sold directly by the company. On the Amazon.in site, the latest Kindle reader is sold by Infinity Retail Ltd., a subsidiary of Tata Group, which purchases the device from Amazon. Customers get the device but pay more for the extra layer of reselling: the Kindle that sells for $119 on the U.S. online store goes for 9,999 rupees ($167) on the Indian website.
India's Finance Minister Arun Jaitley mentioned liberalizing e-commerce in his July budget speech, but so far the government has not taken any steps to change the foreign investment restrictions. (continued...)
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