American megastore Walmart is engaged in a bitter battle with American mega e-retailer Amazon. The battle between the two giants underscores the changing technological landscape. Walmart has emerged as the major retailer of low-cost goods in physical stores, very often procured from China. On the other hand, Amazon has emerged as the major retailer of the same goods on the electronic platform.
The two are competing with each other in the same market but with different weapons. This is like the competition between the postman and email. So far there has been no winner. Many customers continue to buy from Walmart since they can see the product before the purchase and also make instant return in case of a faulty product. On the other hand, many prefer to make e-purchases sitting in the comfort of their homes. Both platforms are coexisting.
The same competition is taking place in India. Street corner kirana stores are the major retailer of goods. On the other hand, Flipkart and Amazon have emerged as the major retailer of the same goods on the electronic platform. Walmart has been wanting to open its megastores in India.
However, the policy of the Government of India prohibits the opening of ‘multi-brand retail’ stores by foreign investors. Walmart falls in this category because it sells goods of many brands such as Nike shoes, Apple phones and Hershey’s chocolates.
This is different than single-brand retail stores that sell products of a single brand like Samsonite baggage or Harley Davidson motorcycles. Walmart has not been able to open its megastores in India because of this policy.
This has provided some protection to the kirana stores. They only have to compete with domestic multi-brand retailers like Big Bazar, Spencer’s, SRS and More. They are protected from cheap imports from China that are the specialty of Walmart.
Walmart has found a roundabout way to enter the Indian market via its acquisition of Indian e-retailer Flipkart. Flipkart is like Amazon USA. It does not procure goods from suppliers, including those from China, and then sell to the customers. It only provides a platform where various suppliers can sell their goods. Flipkart will continue to provide this platform to various sellers after its acquisition by Walmart.
Thus, Walmart will change places in India. It is the megastore in America competing with e-retailer Amazon. In India it will become an e-retailer and compete both with the e-retailer Amazon and the kirana stores.
Walmart buys goods from China and sells in its American megastores. It is almost certain that Walmart will use its control of Flipkart to push the cheap Chinese goods that it is already procuring for sale in its American megastores.
Therefore, the acquisition of Flipkart by Walmart will become a pathway for the entry of cheap Chinese goods in the Indian market. The acquisition of Flipkart by Walmart, therefore, hides within it the growing challenge of Chinese goods in the Indian markets.
It is meaningless to oppose the Chinese imports by opposing the acquisition of Flipkart by Walmart. It is like opposing the use of tractor trailer to carry the bricks. The same bricks will then be carried by a truck. We have to catch the bull of Chinese imports by its horns.
The first reason for the surging imports from China is that the Chinese government allows the industries to pollute the air and water. Chinese industries do not have to invest in pollution control. Consequently, their cost of production is less.
China had closed down these polluting industries for a few days during the visit of President Trump, and the air in Beijing had cleared up. The Government of India should respond to this by increasing the import duties on goods being imported in large quantities from China.
The import tax, for example, on footballs can be increased if footballs are being imported from China in large quantities. I understand that our import duties on many goods being imported from China are lower than those permitted under the WTO. We will not face problems in the WTO for this.
The second reason for the import of goods from China is that the cost of production of small industries in India is high because of the bribes that have to be paid to the government officials. My talks with small industrialists indicate that the rate charged by the officials at the lower levels have been increased many times during the Modi government.
The two steps required to enable Indian small industries to face Chinese imports are imposition of high import duty and reduction in ground level corruption. We must face these issues instead of opposing the acquisition of Flipkart by Walmart.
The second dimension of the acquisition is the ongoing competition between the megastores and e-commerce. As said above, Walmart and Amazon are engaged in a bitter battle in the American market. The same battle is taking place in India between the kirana shops on the one side and Amazon and Flipkart on the other side. We do not know how this battle will be finally resolved.
Perhaps, a hybrid model will be developed. One possibility is that large e-retailers will integrate with small local shops. The order of goods placed on a national e-platform like Amazon could be transferred to the local shop, who can deliver the goods.
Such a model could enable a customer to see the product before the purchase and also make instant return in case of a faulty product. At the same time, it could enable the customer to make the e-purchase sitting in the comfort of her home.
Another model could be that of aggregation. A number of local shops could be aggregated into one system just as Ola used to aggregate a number of stand-alone taxi owners into a large network. A customer could log into the aggregator website and place an order that would automatically be transferred to the shop closest to the customer having the said product.
For example, a customer could order a one-liter pressure cooker of ‘X’ band. The aggregator website will check all the shops where the said item is available and transfer the order to the shop located closest to the customer. Such aggregation websites could be established without support of large players like Amazon and Flipkart-Amazon.
We must face the emerging e-world frontally. It will not be useful to oppose the acquisition of Flipkart by Amazon. We must push for the imposition of higher import tax on goods imported from China; we must take steps to reduce the extraction of bribes from small businesses; and we must develop home grown combinations of e-platforms and local shops. Author was formerly Professor of Economics at IIM Bengaluru
By Dr Bharat Jhunjhunwala