Club Factory and Shein may scale down Indian operations

The plans of some Chinese e-commerce companies to build their online businesses in India have come undone in the last few months due to the tightening of the regulatory framework by the Indian government. The massive shrinkage of business in the Covid-19 disrupted world has compounded the problem and seems to be forcing firms like Club Factory and Shein to scale down their Indian operations.

The latest in government measures is the decision by India’s Ministry of Commerce in April 2020, disallowing any fresh investment under the automatic route by countries that share a border with India.

FDI from these countries now requires prior approval from the government of India. While the requirement is for all countries with a shared border with India, it’s intent and impact seems to be directed against investments from China.

“E-commerce companies which are funded by their respective parent companies based in China are hit hard because they no longer have automatic access to these funds,” said one of the sources requesting anonymity. The new rules are a body blow to these loss-making companies because they rely on regular external funding to keep their operations going.

In current times, when the coronavirus outbreak has nearly decimated their businesses, lack of access to funds is now leading them to downscale further.

“Such restrictions also reduce the appetite of other investors to invest in these companies as they sense the mood shifting away from Chinese enterprises in India,” said an analyst who tracks e-commerce vertical for one of the big four consulting firms.

The government’s intention to effectively enforce this is evident from the speed at which it moved - framing policy and changing the law within 4 days and also plugging any possible loopholes by including investments via Hong Kong under the new restriction. 

Specifically, according to sources, Club Factory and Shein are unable to bring money into India given the FDI restrictions as per Press Note 3, 2020 given its source of funds are from China.

“Owing to the current scenario, Club Factory owes a significant amount to e-commerce focused logistics companies. As a result, the courier companies are extremely hesitant about carrying any of their volume going forward,” said the second person aware with the details. He also wished not to be named.

Sellers are also anxious in dealing with Club Factory and Shein. Both companies are making partial payments to sellers, citing technical issues. Similar issues they face with Shein as well.

Large losses have been uncovered at Club Factory on account of logistics costs. Sellers have been charged less towards shipment than what it actually paid to the courier companies. Now suddenly the company is trying to claw back these ‘excess charges’ from the sellers for old shipments. In some cases, they are also holding back payments.

Entrackr has seen the company’s email sent to sellers regarding payments.

As of now, both companies are mostly allowing only prepaid options with very limited COD options. If the company runs out of cash, there could be a risk potentially for consumers who have already paid for the products.

Club Factory had made multiple claims in the past around the scale of their app downloads. However, its download numbers have fallen by 90% in March-April. According to SensorTower data, the rate of daily downloads for the company used to be in the range of 20,0000 downloads a day in January-February but it has fallen to 20,000 in the last three months.

“Covid-19 is a global issue that has brought the world to its knees, hampering supply chain and disrupting deliveries. It has been a global concern and India is no different. We would like to steer clear of speculation and not comment on rumours,” said Club Factory’s spokesperson in a response to Entrackr's detailed questionnaire. Shein hasn’t responded to our queries.

Last year in December, the government had prohibited the duty-free import of ‘gifts & samples’ including those purchased from e-commerce portals. This was a big setback to companies like Club Factory, Shein and AliExpress as most of their shipments into India were categorised as gifts and samples in order to evade customs duty. “Once the rules were notified, such imports shrunk to a trickle because after paying customs duty, there was no price advantage for such imports,” added the above-quoted analyst.

Earlier in May-June 2019, the government had seized various shipments of Shein and Club Factory for trying to bring in bulk imports from China by under-declaring the value of such imports. The government’s measures had an immediate impact and led Shein to partially shut down operations in July 2019. It also disrupted Club Factory because of its heavy emphasis on importing products from China.

Club Factory’s attempt to make up for lost imports by enrolling vendors in India has also hit a roadblock with the platform getting flooded by fakes. The reviews on Google Play Store are replete with customers complaining about being duped by fake goods. Its lack of control on its operations was evident recently for flouting govt’s price control for masks and sanitizers.

The business volumes at Club Factory and Shein have shrunk significantly given the fact that they primarily sell fashion and accessories and these are not part of the essential list mandated by government authorities.

“With near-zero revenue from operations, high cash burn and lack of access to fresh funds, the future isn't looking promising for these two companies. Operational troubles like high rate of returns and mounting seller claims for delayed payments is causing further disquiet at Club Factory and Shein, where the staff have been asked to brace for some tough decisions on the business front,” said the second person quoted above.