Investing in supertrends

Flipkart co-founder explains why foreign companies often struggle to succeed in India

Key Points
  • India is "definitely a very different market than Western markets," said Binny Bansal, one of the co-founders of Indian e-commerce giant Flipkart.
  • Indian companies have also learnt how to operate according to how the market is structured — something that may not be the strength of Western companies, he said.
  • The constant changes in policies also make it difficult for companies to operate, Bansal added.
India's new regulations are 'bumps in the road': Flipkart co-founder
India's new regulations are 'bumps in the road': Flipkart co-founder

Many foreign companies find it tough to succeed in India. One reason, according to Flipkart co-founder Binny Bansal, is their inability to deal with India's unique environment, as well as the frequent policy changes by the government.

Bansal, one of the co-founders of the Indian e-commerce giant, told CNBC that India is "definitely a very different market than Western markets."

Speaking to CNBC's Christine Tan at the Credit Suisse Global Supertrends Conference in Singapore in April, he said: "For Flipkart, we had to start our logistics arm on our own, which is something you don't see happening globally. So you have to do things in a different way because of how the market is structured."

That ability to learn to "do things on your own" and scale up "becomes an advantage for Indian startups, (which) can compete better," said Bansal. That's not the "strength of a lot of foreign companies," he added.

Things take a lot of time and capital to really develop and mature, and if policies keep changing, then every second or third year, it becomes very hard for everyone.
Binny Bansal
co-founder of Flipkart

Flipkart's logistics arm, called eKart, was founded in 2010. Its Western competitor, Amazon, started calling itself a transportation service provider for the first time in 2016. It was only in recent years that Amazon significantly expanded its logistics footprint, leasing dozens of aircraft and thousands of trucks to handle some of its massive shipments.

New e-commerce rules

Recent developments have made it difficult for foreign companies to compete in Asia's third-largest economy.

Last December, the Indian government effectively banned Amazon and Flipkart, which is owned by Walmart, from selling products of companies in which they have an equity stake.

The government announced that e-commerce firms could no longer form exclusive selling arrangements with sellers or offer steep discounts to consumers based on those deals.

Foreign direct investments would only be allowed into e-commerce companies that provide marketplaces for buyers and sellers, according to the new rules.

The new rules took effect in February, and followed complaints from local Indian retailers and traders about anti-competitive practices from the likes of Amazon and Flipkart.

That same month, the Indian government again outlined more regulations for the sector, focusing on data measures and improved privacy safeguards. That followed a move by the central bank in 2018 that forced payments providers — such as Mastercard and Visa — to store Indian users' data locally.

Those changes in policies have made the environment even tougher to navigate, said Bansal.

"Things take a lot of time and capital to really develop and mature, and if policies keep changing, then every second or third year, it becomes very hard for everyone. For large companies it becomes hard to navigate, for small companies it just becomes hard to start and survive," he said, at the conference.

"When we started, there were very few policies. But in 2018, 19, if you want to start an e-commerce company, you have to really go through what can you do, what can you not do," Bansal continued.

Uncertainty looms

Amazon's Chief Financial Officer Brian Olsavsky said in a call with analysts in January that there is "much uncertainty" regarding the impact of the rule changes on India's e-commerce sector. "Our main issue and our main concern is trying to minimize the impact to our customers and sellers in India," he had said.

But one expert told CNBC that some sectors are more vulnerable than others, especially those that are "driven by politics."

"Generally, retail is politicized because it has a number of small businesses that can make money only if the pricing remains firm (less competition)," said Nitin Pangarkar, an associate professor at the National University of Singapore Business School.

"Retail also employs lots of people. That is why politicians will protect local retailers whose profits (and possibly existence) may be challenged by multinationals," he added. "Many other sectors may not face as much scrutiny or regulation."

What is Flipkart?
What is Flipkart?

Regardless of industry, however, India has some inherent challenges that companies have to learn to navigate.

Infrastructure is still bad, while work ethics and productivity in the country have not caught up with workers in other countries, according to Pangarkar.

Still, some companies — particularly those in the consumer goods industry — have found success and even built profits in the Indian market, he said, pointing to multinational companies such as Unilever and Nestle as examples.

But beyond looking at the traditional definition of success, Pangarkar said companies should use their India operations to benefit themselves in some way.

"The key is to have a multi-dimensional view of success — not just local profits but how the Indian operation can contribute to the whole. For example, IBM employs lots of software developers in India and the low cost software coming from the Indian labs might enhance its overall competitiveness which is not reflected in local profits," Pangarkar noted.

— CNBC's Saheli Roy Choudhury and Eugene Kim contributed to this report.