New foreign direct investment (FDI) rules regarding online marketplaces may put a spanner in the Walmart-Flipkart merger. According to investment bank Morgan Stanley, Walmart may back out of its merger with Indian e-commerce giant Flipkart.
“An exit is likely, not completely out of the question, with the Indian e-commerce market becoming more complicated,” the report by Morgan Stanley said late Monday.
According to the report, Walmart-Flipkart saga might turn out to similar to what happened with Amazon in China in late 2017.
“There is a precedent for an exit as Amazon retreated from China in late 2017 after seeing that the model no longer worked for them,” the report read.
“We estimate that Flipkart derives 50 per cent of its revenue from this category, meaning Flipkart could face meaningful disruption and top-line pressure in the near term,” it added.
The new FDI regulations are expected to heavily impact Flipkart as the e-commerce giant may have to remove up to 25 per cent of its products from its site. The biggest effect will be on the smartphone and electronic inventory of the website, a high earning segment for the website, due to the government targetting exclusive deals.
Amazon too echoed a positive sentiment saying that it sees “very good long-term prospects” in the Indian market. “We feel very good about the long-term prospects in India and doing a good job for both Indian customers and Indian sellers. The new regulations need to be interpreted…need to make sure they don’t have unintended consequences,” Amazon CFO Brian Olsavsky asserted.
Both Amazon and Flipkart had extensively lobbied (directly as well as through associations and trade bodies) with government officials seeking an extension in deadline after the proposed changes were announced in December. They had also written to the government seeking more time to understand the details of the new framework. According to a Crisil report, nearly 35-40 per cent of e-retail industry sales – amounting to Rs 35,000-40,000 crore – could be hit due to the tightened norms.