Another day, another milestone for Alibaba

Adam Jeffery | CNBC

Reports that Alibaba may ink a deal to link two of the world's fastest-growing e-commerce markets, India and China, is a shot in the arm for the firm's global expansion plans, analysts say.

Media outlets reported this week that Alibaba is in discussions with Indian internet firm One97 Communications to invest $575 million in its e-payment service Paytm, which has 25 million registered users and boasts high-profile clients including Uber, Expedia and Airbnb.

The deal would allow Indian customers to use Paytm to pay for goods on Alibaba sites, while Chinese users could use Alipay on Paytm's marketplace. Merchants on both platforms would also be able to list their products on each other's marketplaces.

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"If the news were to prove true, we believe such an investment could mark another important step in Alibaba's global expansion strategy," analysts at Barclays said in a note on Tuesday, referring to expanded market opportunities for Chinese sellers. It also allows Alibaba to penetrate India's booming e-commerce market, which is expected to reach $30 billion by 2020, versus $17 billion in 2014, according to Barclays.

Alibaba’s global strategy

Following a record $25 billion initial public offering last year, Alibaba is expected to turn its attention to both emerging and mature e-commerce markets outside of China, Satish Meena, forecast analyst at Forrester, told CNBC. The Hangzhou-based firm currently has an international version of its online marketplace, Taobao, and recently launched an invite-only boutique shopping site in the U.S.

"This mobile marketplace [Paytm] is crucial for Alibaba's growth outside China and provides a platform to capture the mobile first users in India," Meena said, noting that over 40 percent of Indian online retail sales come through smartphones. The deal would also allow Alibaba to bypass Indian e-commerce limitations like low credit card penetration, he added.

In developing markets like India, Alibaba has an opportunity to export its existing model and build a brand given that customer acquisition costs are low and market leaders are less entrenched, as opposed to mature markets like the U.S., where high customer acquisition costs make it extremely expensive to establish a brand name from scratch, Forrester research showed.

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"Alibaba is trying to moving into less developed markets since they are similar to China 5-10 years ago. It gives the company a better chance to succeed, but whether these markets can replicate China's success remains to be seen," said Mu Zhi Li, Internet equity analyst at Arete Research.

Li believes Alibaba's expansion strategy is actually worrisome since it casts doubt on China's e-commerce space, which he says averages around 30 percent annual growth.

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"Growth already reached its peak and is now converging towards China's overall macro growth. Alibaba owns 80 percent of the country's e-commerce space so its growth rate cannot exceed the market. Unless the market grows exponentially, Alibaba needs other revenue drivers."

The concern is that if Alibaba continues its pace of strategic investments, it could gradually become an e-commerce related venture capitalist, rather than a true business, Li noted.

Rise of Alipay

The investment in Paytm could also enable Alibaba to attract India-based sellers to start adopting the Alipay payment mechanism, Barclays noted, referring to the Chinese firm's online payment system.

Meena of Forrester Research echoed that view: "In terms of online payment solution, Alibaba is looking to make Paytm the Alipay of India."

The Indian service is widely used to pay utility bills and mobile recharge and it's also applied for a bank license. "In both these areas Alibaba has significant expertise and instead of starting from scratch, Paytm gives Alibaba a good starting point in India," Meena said.

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