Editors' pick: This article was originally published on Dec. 1.
The Amazon (AMZN) effect is not just being felt by brick-and-mortar retailers.
The world's second largest e-commerce company by valuation seems to have claimed its latest victim, India's Flipkart.
A Morgan Stanley (MS) investment fund on Wednesday slashed the valuation of its holding in India's leading local player Flipkart to $5.54 billion as opposed to $15.5 billion at its peak, according to a regulatory filing with the Securities and Exchange Commission.
The dramatic markdown comes as global e-commerce players strive to make in-roads into the world's fastest growing economy. Amazon's founder Jeff Bezos, for instance, disappointed by his company's failure to capture the massive Chinese market, continues to invest heavily in the expansion of Amazon India. Bezos invested $3 billion in Amazon India in June after pledging $2 billion in July 2014.
As the world's fastest-growing large economy, India is coveted by global e-commerce giants Amazon.com and Alibaba (BABA) as well as local players Flipkart and Snapdeal. Alibaba was first said to be interested in acquiring Flipkart and then recently reports surfaced that it was in talks with Snapdeal. Alibaba is not in talks with Snapdeal, a source familiar with the matter confirmed.
"Amazon does pose a major threat," said Anindya Ghose, Professor of Marketing at New York University's Leonard N. Stern School of Business. "It is incredibly difficult for a firm like Flipkart or Snapdeal to find a sustainable unique selling point in e-commerce retailing that will help differentiate them from the 800 pound gorilla in the room."
Facebook (FB) on Monday launched its Facebook Express Wi-fi program, which offers software that allows local entrepreneurs to work with service providers and share their internet connection with the public for a fee, meaning more of India's population will experience the internet for the first time, unlocking huge potential for internet-based businesses looking to launch in the country.
Amazon not only has much deeper pockets than Flipkart and Snapdeal to commit to marketing and educating first-time internet users about shopping online, but also enjoys the advantages of well-developed products from Amazon US such as Amazon Prime, which was launched on July 26 in India without the video and music services.
Although Bezos is reported to have proudly claimed at a conference in San Francisco that Amazon has surpassed Flipkart to become the leading player in India, experts believe that Amazon and other e-commerce players face several challenges such as poor logistics infrastructure and low credit card and mobile wallet penetration in the country.
"As of now, all major players are bleeding money in India's e-commerce. Prices are low and gross margins often negative in many categories because of the battle for market share," said Kartik Hosanagar, Professor of Technology and Digital Business at The Wharton School of the University of Pennsylvania.
Hosanagar also believes that Amazon is much better positioned in india than its global rival Alibaba whose main presence in the country has been through large investments in Indian companies. Alibaba, along with Apple's (AAPL) manufacturing supplier Foxconn and Japan's SoftBank jointly invested $500 million in Snapdeal in 2015 whereas Amazon alone has pledged $5 billion in total in the country so far.
India is widely considered as the fastest growing e-commerce market globally. With 1.3 billion people, two-thirds of them below the age of 35, and on top of that 220 million smartphone users, many experts are bullish on the prospects of e-commerce in India. Internet titans like Facebook, Alphabet (GOOGL) , Amazon, Alibaba all want to grab a slice of the market before it's too late. Even brick-and-mortar retailer WalMart (WMT) was recently reported by Reuters to be in talks to buy a minority stake in Flipkart to break into the the country's growing e-commerce market.
Flipkart's valuation by the three funds with small stakes in the company fluctuated throughout the year. Prior to the recent slash, Morgan Stanley lowered its valuation of Flipkart to $9.4 billion in May after cutting it by 27% in February. Two other investors Valic and Fidelity also marked down Flipkart shares by 11.3% and 3.2% respectively in early November, Quartz India reported.