Understanding The Shopee Debacle

Indian e-commerce space

The e-commerce space in India is one of the most happening and exciting domains that has managed to engage us with a constant feed of entertainment. The competition is so fierce that I wonder if any players will be left at the end of this battle. Amazon and Flipkart have been at each other's throats for quite a long time. Then Walmart acquired a majority stake (> 70%) in Flipkart and dragged their war with Amazon from the US to India. Walmart had lost the e-commerce game to Amazon in the US, and acquiring Flipkart seemed only obvious act of revenge.

However, with India's sluggish business-doing environment filled with red tapes, restrictions, and other hurdles, they have not been able to do much of what they had planned.

Furthermore, the news of the entry of Reliance Industries and Tata into the e-commerce space has only made the game more interesting. The only winner I see in this game is the consumer. The more the players fight to snatch the market share from each other, the more discounts for the consumers. So, quite frankly, we have another decade of bliss in line.

Now, let's move to Shopee.

Shopee is a Singapore e-commerce giant that has dominated the Singaporean market for quite some time and recently emerged as its most valuable company.

So, what's all the noise about?

1) The Geopolitical Angle

Owing to its rivalry with China, India recently started banning the operations of companies that have direct relations with the Chinese government. If the government sensed even a slight indication of the users' data being stored in China, it didn't hesitate to pull the trigger.

In Feb 2022, the government had banned a mobile gaming app called Free Fire, which was owned by Sea, which also happens to be the parent company of Shopee. The ban was that Tencent was a 20% stake owner in Sea, and it had blurted in the media once that the users' data was being stored in China, and it didn't go well with India. Soon, the ban followed, and the share prices of Sea fell by almost 18% (USD 16 billion). This injured the investor sentiments toward Sea, and Tencent immediately sold a 5% stake to hint at the intent of distancing itself from Sea.

Also, Forrest Li, the billionaire owner (USD 17 billion) of Sea Enterprises, became a citizen of Singapore just recently, which India found as another red flag. He has been trying hard to convince the government that he's more Singaporean than Chinese. This, even a child can tell, is a fake attempt to distance oneself from Chinese origin.

Now, let's move to the other angle.

2) The Financial Failure Angle

Attributing Shopee's failure to geopolitics alone will not be correct. The parent company, Sea, had suffered huge losses trying to make a mark in the Indian e-commerce space. It's speculated that it lost anywhere from USD 20-30 million a month. Indeed, it was growing in gross merchandise value (GMV), but it took a toll on its cash reserves. Along with India, the company has also commenced operations in other regions like Europe, Latin America, etc. Hence, this created pressure on its wallet. It found it hard to fight the existing e-commerce giants for market share and in its fight to disprove its associations with China. Two battles at a time can indeed be challenging.

We can totally understand if they chose to windup. Association to China turned out to be a bane in India.

These two reasons eventually led to Sea winding up its shop in India and looking for other emerging markets like Brazil.

I don't blame them.

So, now that we know what happened, what can we conclude and deduce from this incident?

The Indian e-commerce space is highly competitive, and it's only suicidal to enter it right now unless a company has a powerful value proposition or a point of difference.
India has taken its national security very seriously. It will not tolerate any company doing business and sharing/storing data in China (Chinese government).
The startups that are only dependent on funding have more to lose, making it crazier when it gets entangled in geopolitics.

Here's something that I can deduce.

This incident could create friction between Singapore and India, which might not be harmful right now, but in the long run, could negatively impact India. Singapore is an important ally to have. Its associations with China can only make it difficult for India to gain its support in times of crisis.
India can try to provide a solution to startups ready to dissociate from China. Banning is harsh and leads to mass firings.
China will now find other means to keep the money flowing into startups, picking up a stake. Their main agenda is to paralyze India in times of crisis by controlling the startups it has invested in.

Only time will tell what's in store!