Millions of Indians are set to buy smartphones.

Where's the Indian Alibaba?

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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China's Alibaba is the world's largest e-commerce platform. In 2013, its online sales totaled $248 billion, more than eBay and Amazon combined. Unsurprisingly, it's also set to become the world's most valuable e-commerce company. The firm began a roadshow in the U.S. this week ahead of its highly anticipated initial public offering, seeking a valuation of as much as $162.7 billion. That would make the company larger than 95 percent of the Standard & Poor's 500 Index.

By contrast, 20 million Indians spent a meager $2 billion shopping online in 2013, according to a report by Accel Partners. While Flipkart, the country's closest parallel to Alibaba, isn't listed on any exchange, a $1 billion injection of funds last month suggests the company is worth around $5 billion. That would make it India's most valuable e-commerce firm, worth about 3 percent of the value of Alibaba.

The reasons for India's weak e-commerce market are well-known. The biggest challenge is the country's low Internet penetration level. Around 150 million Indians are online, out of a population of 1.2 billion. That compares to more than 250 million Internet users in the U.S. and over 550 million in China. The penetration of personal computers in India is estimated at just 47 per 1,000 people, lower than other emerging economies like Mexico, Argentina and the Philippines.

India's Internet security is poor, scaring off online customers; the country has only 6 percent of the number of secure servers that Brazil and South Africa have. Broadband connectivity also continues to lag. Rural Indians, who form a majority of the population, have an Internet penetration rate that's one-twelfth the level of urban Indians.

Despite those drawbacks, competition in the nascent field of e-commerce is fierce. Flipkart was founded in 2007 by twentysomething entrepreneurs Sachin Bansal and Binny Bansal, who once worked for Amazon. The Seattle-based online retailer itself launched in India in June 2013, though it remains hobbled by regulatory restrictions that require it to source goods from Indian manufacturers. Local rivals Snapdeal and Jabong are expanding as well. Two months ago, Snapdeal raised $100 million from investors, valuing the company at $1 billion.

None of these companies has yet returned a profit in India. That could change rapidly, however. If one adds in people with Internet-capable phones, the number of Indians with access to the Internet tops 530 million. The expected rollout of 4G services toward the end of this year should greatly improve the speed of connectivity and slash costs. It could even motivate many of the 420 million mobile users who do not have Internet-enabled phones to opt for smartphones.

Affordable Chinese-made devices are already transforming the Indian market. Last month, when Xiaomi launched a smartphone that cost only $250, it sold 40,000 units in 4.2 seconds on Flipkart. A year from now, the number of Indians with easy access to e-commerce sites will almost certainly have risen exponentially.

The attraction of buying online for Indians is obvious. Local consumers are highly price-sensitive for most goods -- from toothpastes to cars -- and the discounts available online are hugely attractive. Flipkart and the others have already adjusted to security fears and the widespread lack of credit cards by offering a cash-on-demand option for deliveries. Same-day service, offered by Amazon, is a novelty in India's generally slow-moving retail world. Snapdeal is translating its site into a half-dozen local languages to attract new customers.

There's a long way to go before any of these companies can compare themselves to Alibaba, of course. While the Chinese giant commands an 80 percent market share at home, Flipkart's market share is a mere 5 percent. There will have to be a wave of consolidation before any one of these companies can emerge as a dominant force. But their odds of success are improving.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net