Even as the new foreign direct investment (FDI) in e-commerce guidelines increase the cost of doing business and add uncertainty over Flipkart’s losses, a Morgan Stanley report indicates that Walmart is not considering walking away from its investment in Flipkart—at least, not yet.
“Walmart is financially and strategically invested in India via Flipkart," read the report, dated 4 February, adding, “We do not think it is considering walking away from its investment at this stage."
This report comes just a few days after Indian e-commerce companies, including Amazon India and Walmart-backed Flipkart, came under updated FDI guidelines which took effect on 1 February.
Two of the biggest roadblocks from the new guidelines for Flipkart have been that marketplace entities cannot buy more than 25% from a single vendor, and restriction of striking exclusive deals on the platform. Flipkart and Walmart are already looking at ways to work around the new guidelines, according to multiple lawyers Mint spoke with. “Flipkart doesn’t have the equity issue but its wholesale arm has been selling to preferred sellers who, in turn, would sell on the platform," said a lawyer working with the e-commerce companies, who did not wish to be named. “For Flipkart, interspersing another B2B (business to business) entity—a version two of Flipkart’s current wholesale entity—would effectively work."
However, the changes in FDI rules are bound to increase the cost of doing business. The report anticipates a 7% jump in Flipkart’s operating costs as it will have to ensure sales from its B2B arm to sellers do not cross the 25% threshold. The report also expects an incremental $280 million in Flipkart’s losses due to compliance costs above the guidance of around $1.5 billion for 2019.
Flipkart CEO Kalyan Krishnamurthy sent an email to the company’s employees on Tuesday evening saying Walmart remains confident in the potential of Indian e-commerce and Flipkart. “By partnering with Flipkart, Walmart has taken a long-term view of the opportunities, “And hence is unfazed with any short-term hurdles" the email read. Flipkart did not respond to queries sent by Mint till the time of going to press.
Walmart spent $16 billion in August to buy 77% in Flipkart, making it one of the biggest M&A deals of all time. However, things may change now as industry experts are concerned if new and potential investors would come to India following the FDI guidelines.
The Morgan Stanley report said the current situation is “fluid and may evolve positively or negatively." Referring to how Amazon retreated from China in late 2017 after it realized that the model no longer worked for it, the report says it would be easier for Walmart to take a similar route in India.
“If all else fails, Walmart could potentially exit India," says the report. “Although we mention above that we do not think this is likely, an exit is likely not completely out of the question with the India e-commerce market becoming more complicated."