Walmart's Vietnam Has Become A Reality - Forbes

Walmart paid $16 billion for a controlling stake in India's giant online retailer Flipkart in order to gain access to India's fast-growing e-commerce market. Photo Credit: Associated Press

I wrote an article titled Walmart's Vietnam on September 3, 2018, where I outlined multiple reasons why Walmart will encounter significant issues in India as a result of its acquisition of Flipkart, India's leading online retailer. The title of the article, Walmart's Vietnam, was chosen as a result of similarities I identified between Walmart's visions of grandeur in India, and the same visions of grandeur of the U.S. when it chose to enter Vietnam.

Before continuing, I advise reading Walmart's Vietnam as it will help readers better understand what I outline in the remainder of this article.

India And The New Colonists

Reality can do several things: provide relief, induce fear, confirm what was once only a suspicion and level-set a person/company regarding the facts. When I wrote my article Walmart's Vietnam, executives at Walmart reached out to me to chide me for what I wrote. In Walmart World, what I described simply couldn't become a reality.

Fast-forward five months and executives at Walmart have come to the realization that what I described as possibilities in my article have indeed become a reality. A sense of concern has crept into the voices of the same individuals who joked with me months earlier.

According to multiple reports, India's government has once again taken aim at U.S. multinational corporations in an attempt to prevent the companies from increasing market share in India. India's government has approved a new set of rules that are set to go into effect on February 1st. The rules are designed to do the following:

Prohibit e-commerce retailers from selling products from businesses they have an equity investment in.
Prohibit exclusive arrangements with those businesses.
Limit discounts and cash-back programs.

India's government claims the rules will be applied evenly but the target of the new rules are clearly Walmart and Amazon. According to a report by The Motley Fool (TMF), Amazon and Walmart have a combined e-commerce market share in excess of 70%. The government crackdown will limit the ability of how both companies can operate.

For example, Walmart was already prohibited from selling products on Flipkart that were sourced outside of India.

Economists and retail analysts I spoke with continue to be amazed that Walmart and Amazon hire employees from India via the H1B visa program. The consensus among the individuals I spoke with in off-the-record conversations is that Amazon and Walmart should make it clear that unless they are able to compete fairly in India, with no restrictions, neither company will hire any associates from India to work in the U.S.

In addition, President Trump should get involved and reinforce the same message: Allow U.S. companies operating in India to compete fairly or by executive order, President Trump will cancel the H1B visa program. (I have a different view but this isn't a debate).

India's new e-commerce rules also stipulate that businesses that own the inventory being sold on the controlling e-commerce platform will no longer be able to do so if the platform owns 25% or more of those businesses. Flipkart, which is 77% owned by Walmart, used to derive most of its sales from its subsidiary WS Retail. But apparently in anticipation of the new rules, it largely stopped selling its products on the platform according to TMF.

Amazon, though, derives around 40% of its Amazon India sales from Cloudtail India, its joint deal with Catamaran Ventures. It has another major retailer, Appario Retail, that also exceeds the 25% threshold. Under the new rules, they won't be able to sell on Amazon according to TMF.

The rules were created after intense lobbying by groups representing millions of India’s small traders and shopkeepers who believe not only are they at a disadvantage due to their small size, but more importantly, they believe India's government should favor them over foreign owned companies commonly referred to as "the new colonist."

To add insult to injury, Mukesh Ambani, Chairman of India's Reliance Industries, announced a partnership between its Reliance Retail subsidiary and the telecom unit Jio for the purpose of creating a new commerce platform to “empower and enrich India's 1.2M small retailers and shopkeepers.” In other words, instead of Indian's using e-commerce platforms owned and operated by Amazon and Flipkart/Walmart, Indian's should shop on an Indian-owned and operated e-commerce platform.

The statement from Ambani was thick with hypocrisy as the new platform will be released in Gujarat. Gujarat is the home state of both Reliance’s founder, Mr Ambani’s father Dhirubhai, and of Indian prime minister Narendra Modi, who was previously the state’s chief minister.

Mukesh Ambani has "actively been encouraging" India's Prime Minister to implement the new rules that will restrict the ability of Walmart and Amazon to compete. (Because Reliance is an Indian-owned and based company, it will not be subject to the new rules). Ambani also spoke out about the need for India to beat back colonization:

Mahatma Gandhi led India’s movement against political colonization. Today, we have to collectively launch a new movement against data colonization. India’s data must be controlled and owned by Indian people — and not by corporates, especially global corporations …we will have to migrate the control and ownership of Indian data back to India.

In plain English, what Ambani has been able to accomplish is convince the Prime Minister of India to implement rules to punish and weaken the ability of Walmart and Amazon to compete on a level playing field for no other reason than Walmart and Amazon are U.S. multinationals. Ambani is also using his position as Chairman of Reliance to leverage assets he has a direct financial interest in to create an alternative e-commerce platform to those operated by Flipkart and Amazon, while also not being required to follow the new rules he helped create.

India is home to 1.2M small retailers and shopkeepers. India's government continues to introduce rules to protect its small retailers and shopkeepers from being negatively impacted by multinational companies like Amazon and Walmart. Photo Credit: GettyGetty

According to an economist I spoke with: "India didn't gain a reputation for being one of the most corrupt and protectionist countries in the world by accident, It worked very hard to gain the distinction."

Walmart and all multinational corporations operating in India better prepare for a future of increased rules designed to limit their ability to compete. India is moving closer and closer to China. The potential impact on U.S. multinationals is staggering if India and China increase collaboration and partnerships.

Note to Walmart: You better become much more aggressive in India. There are several strategies that can be implemented that will completely negate the effectiveness of the new e-commerce rules in India. In addition, the strategies will convince India's 1.2M small retailers and shopkeepers that Flipkart/Walmart should be its preferred business partner, not Reliance and Jio.

The Best Intentions Don't Matter

Am I surprised by what's taking place in India? No. I warned in my article Walmart's Vietnam that it could happen.

As for Amazon, it has invested $7B in India, far less than the $20B invested by Walmart. (Walmart continues to state that it outbid Amazon for Flipkart. Completely false. Amazon had no intention of acquiring Flipkart. Amazon's bid was a form of guerilla warfare designed to change the narrative away from Walmart back to Amazon. It worked. Media analysts confirmed that Amazon received the majority of press coverage during the process of Flipkart being acquired, not Walmart. The press coverage greatly increased Amazon's brand awareness in India.)

Based on my knowledge of what Amazon has planned for India as well as the fact Amazon-India is being run by highly skilled executives, I am confident that Amazon will be able to quickly pivot and implement changes that will reduce but not eliminate the impact of India's new e-commerce rules. This is why I didn't write an article titled Amazon's Vietnam.

I do not have the same level of confidence in Flipkart. Here's why.

Binny Bansal, Flipkart's co-founder and former CEO, was forced to resign from Flipkart after Walmart discovered Bansal had hid details related to a possible sexual assault. I wrote about Bansal's resignation in this article. (I've been asked if I think Bansal has been working with India's government to craft the new e-commerce rules as a form of "payback" against Walmart. I have no evidence to support such a charge.)

Based on off-the-record discussions with contacts at Flipkart, Flipkart has not recovered from the resignation of Bansal. There is also concern that many of Flipkart's most-skilled associates will defect to the new Reliance/Jio partnership. In fact, Flipkart is struggling to retain and attract the best talent.

In the article about Bansal, I stressed that forces within India would conspire against Walmart to drag the company "into deep water." The forces I listed were Amazon, India's government and India's business leaders such as Ambani). I specifically made the recommendation for Walmart to minimize the role of Judith McKenna, President and CEO of Walmart International, in India and instead, greatly increase the responsibilities of Marc Lore, President and CEO, Walmart E-Commerce U.S.

Walmart is facing a future where it may have no choice but to write down some if not all of its investment in India. (Indian economists I spoke with are convinced this is going to occur). In Walmart's Vietnam, I pointed out that no matter how badly the U.S. wanted to be in Vietnam, the Vietnamese always viewed America as being an invader. I can make the same argument of Walmart in India. Walmart may want to be in India but India clearly doesn't want Walmart.

Of all the countries on earth, few if any come close to India's fervent nationalism. The phrase "Forever Indian" isn't a slogan, it's a deeply held belief. (An Indian economist I know said it best: When Walmart acquired Flipkart, Flipkart stopped being an Indian company).

Walmart needs a new strategy for India and Marc Lore is the only person at Walmart who can create it. I stand behind my recommendation that Lore become the CEO of Flipkart. Lore is highly respected in India even if Walmart isn't. Lore is also Walmart's most capable executive as it relates to e-commerce. Frankly, I believe Lore's title should be CEO of Global E-Commerce Operations and Strategy. Lore should have complete authority to design, implement and manage India's e-commerce business.

I also stand behind my recommendation for Walmart's Board of Directors to get involved by seeking outside experts to audit Flipkart's operations and assess Walmart's strategy in India. You read it here first: It is not beyond the realm of possibility that a recommendation could be made for Walmart to divest Flipkart if losses mount. In other words, withdraw from India. Sound familiar? Those who read Walmart's Vietnam will think so.

Walmart may have the best intentions in India but the best intentions don't matter when operating in a country that makes the rules and can change the rules to its benefit at any time.

Conclusion

The water is getting deeper for Walmart in India. Lobbying India's government to rescind the new regulations won't work. Offering to make increased investments in infrastructure projects to win the hearts and minds of India's population won't work.

Walmart is in a precarious situation whether it wants to admit or not.

I warned that India could become Walmart's Vietnam. And it has.

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