Battlefield India: Why Is Alibaba Looking At The Acquisition Route To Establish Itself

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In contrast to Amazon, which is investing to grow organically, Alibaba (NYSE:BABA) is looking to to build its position in the Indian e-commerce market by way of acquisitions. Reports suggest that the latter company is currently in talks with Shopclues. Valued at $1 billion, Shopclues is India’s online flea market, selling cheaper unbranded products to value shoppers. Alibaba already holds a 40% stake in Indian online payments company Paytm, which also has a small e-commerce arm. Alibaba is now looking to acquire a strong e-commerce player in the region to better establish its presence. We believe the Indian e-commerce market will likely experience strong growth in the next decade and can be a key growth driver for Alibaba. However, competition from Amazon and local giant Flipkart is tough and Alibaba’s strategy to use key acquisitions to establish itself in the region can quicken its pace of growth in the region.

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While Alibaba is an established player in China, the Indian e-commerce market has its own nuances and by acquiring a strong player in the region, Alibaba can climb the learning curve quickly. The company already holds stake in several e-commerce players in the country including PayTM and Snapdeal. However, an outright acquisition can ensure that Alibaba has complete control over the operations.  As Amazon is gaining market share in the region, it is imperative for Alibaba to establish itself sooner than in the region. The market is young but rapidly growing and it might be tough for the Chinese giant to gain a strong foot down the road. Acquisitions can ensure the fast paced growth that is the need of the hour.

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The Indian e-commerce market holds strong growth potential and both Amazon and Alibaba are looking to grab a significant share in this rich pie.  According to a Goldman Sachs report, the Indian e-commerce market will be around $ 228 billion by 2030, slightly lower than today’s U.S. e-commerce market of around $ 280 billion, but 10 times as large as India’s current e-commerce market.  As the country witnesses economic growth leading to higher per capita income and broader internet penetration, e-commerce in the country can witness exponential growth. Amazon believes that Indian e-commerce is a trillion dollar opportunity and both Amazon and Alibaba are working towards capturing this potential.

Amazon has already become the second largest player in the Indian e commerce market, dislodging Snapdeal (where Alibaba holds stake) from this position. This latter company  now holds around 24% market share, which is closer to the 37% share of Flipkart, still the top player.

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Image Source: Economictimes.com

However, experts believe that Amazon is on its way to become the leading e commerce player in India. If Alibaba needs to establish itself in the region and become a strong competitor to Amazon, it needs to quicken its pace and acquisitions can enable the company to penetrate the region faster. ShopClues and Paytm rank after the top three players – Flipkart, Amazon and Snapdeal, but are significant enough for Alibaba to gain a foot holding in the market. They are obvious targets.  We believe growing through acquisitions is the right strategy for Alibaba and will both provide fast paced growth and eliminate these smaller players from the landscape.

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