India Forces Amazon to Choose Between Operating e-Commerce Platform and Selling Goods on that Platform

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

India’s Department of Industrial Policy and Promotion (DIPP) implemented new foreign direct investment rules on 1 February, forcing Amazon.in and Flipkart – a Walmart subsidiary – to choose between operating an e-commerce platform and selling goods on that platform.

These rules came into effect as planned and caused temporary chaos in the world’s fastest-growing digital marketplaces.

Both Amazon and flipkart scrambled to comply and remove goods for sale on their platforms offered through vendors in which they had an equity stake, according to the BBC’s report, .

The companies appear to have expected a grant of a four-month extension.

Instead, they discovered the Indian regulator intended to follow through and indeed shut down the companies’ inventory strategy under which they simultaneously controlled the digital marketplaces and supplied inventory for sale on those marketplaces.

Protectionism? Or Sound Competition Policy?

Two days before the rules came into effect, the NY Times estimated in that more than 400,000 items – approximately  a third of Amazon’s estimated $6 billion in annual sales in India would disappear from the site, at least temporarily.

The Grey Lady engaged in some epic pearl clutching about the impact these rules would have on Indian consumers:

Indian consumers may pay a price for such protectionism. A survey of common products currently available on suggests that after sales by its affiliated companies are banned, many products will disappear and others will become more expensive because they will only be sold by small merchants who lack the clout to negotiate low wholesale prices from manufacturers.

While it’s true that India’s DTPP adopted this as a foreign direct investment (FDI) regulation, it’s somewhat misleading to style it as protectionism.

Reason: Before these two US-owned companies India’s e-commerce market, no Indian company had  attempted a strategy of trying to both own a platform and control inventory on that platform.

In other words, the DTPP used FDI rules to shut down a strategy, rather than to discriminate against foreign companies per se.

Unusual Policy?

India’s not exactly breaking new ground here with this restriction. As noted in : “[T]his sort of structural separation has been a key principle in US competition policy. For example, Congress in 1906 passed a law prohibiting railroads from transporting goods they owned.”

Khan continued:

We applied a similar rule to TV networks, telecom carriers, banks. There’s good reason to debate whether structural separations should apply to digital monopolies. But framing the rule as highly invasive or exotic misunderstands our own history (& success) applying it.

Khan’s the author of an influential paper in the Yale Law Journal on Amazon,   and has a paper forthcoming in the Columbia Law Review on structural separations, .

What Actually Happened Once the Rule Was in Place?

Back to the Indian situation. By the end of last week, restructuring to comply with the new rules had occurred, and missing goods were reappearing on the online platforms.

According to the WSJ, in :

Hundreds of thousands of products are back on Inc.’s India website after the online retailer restructured its investments to get around restrictions that had forced sellers to pull items from the site this month.

The U.S. company sold part of its stake in a joint venture whose subsidiary sold products on the website, bringing it in line with the new rules because Amazon’s holding in the joint venture is now below the threshold to make it a group company, a person familiar with the matter said.

Foreign e-commerce sites aren’t permitted to sell directly to customers in India, but Amazon reached Indian shoppers by selling through a subsidiary of a company in which Amazon held a stake. In December, India clarified the rules to say that foreign companies couldn’t use that route.

The result:  at least as to availability of goods on the platform, NYT’s chicken little predictions haven’t roosted – and many of these products are already available again on the platform.

What about as to the price?

There, it’s too soon to tell.

It may very well prove to be the case that India’s plethora of Mom & Pop stores and small traders will not be able to negotiate the sort of loss-leading, cut-price deals that Amazon and Flipkart have been able to swing by investing vast sums of money. That would mean  that the price of at least some goods on these platforms might very well increase.

Is that necessarily such a bad thing?

First, e-commerce platforms are less significant, relatively speaking, to India’s retail universe than to those of the US and EU, and therefore, prices increases on these platforms would not have a huge impact on Indian customers.

Second, India’s small retail sector is the second largest employer in the country, comprising about 25 million small store owners (albeit still dwarfed by agriculture). These small firms operate on very slim margins.

To the extent that continuing to allow Amazon and Flipkart to offer goods on its platforms at artificially low prices would squeeze out retail jobs, India’s unemployment problem would worsen. Jobs are a huge issue in the forthcoming elections, due to occur no later than May. The Modi government’s 2016 demonetization exercise significantly slowed the Indian economy and cost jobs (see India: Demonetization Debacle).

According to the BBC:

Many small traders say the e-commerce giants use their buying power and control over inventory from affiliated vendors to create an unfair marketplace.

The Confederation of All India Traders expressed “deep satisfaction” over the introduction of the rules, calling them a “strong step to clean the greatly vitiated e-commerce market” in India.

But the group wants the government to go further by forming a new regulatory authority and a “special investigation team” to look into the business models of major e-commerce players.

The timing of the new FDI restrictions suggests that Indian policymakers are well aware of the importance of these small traders to Modi’s electoral prospects. Whether the confederation’s demand will be met after the election is anyone’s guess.

The Bottom Line

The effect of India’s recent action will be that going forward, neither Amazon nor Flipkart will able to use their deep pockets to sell products cheaply, at a loss, and thereby seek to force competing vendors out of business, only then to raise prices.

I note in passing that Amazon has been charged with tracking the sales of successful products on its platform, to decide what types of products it should offer itself.

If Amazon can no longer pursue these and similar practices in India, who’s to argue?

Instead, at least in the short-term, India’s plethora of small traders will at least in theory be free to compete on the Amazon and Flipkart e-commerce platforms, without being vulnerable to such practices.

 

 

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10 comments

  1. TimH

    I think India did the right thing. I have read a lot of stories about Amazon pushing sellings out of business, and then offering very similar products themselves. Amazon also operate multiple manufacturer names, which effectively hide the ultimate profit taker.

    My favourite Amazon example recently (about a month ago) was BoingBoing mentioning a 24 pack of Sylvania LED bulbs selling on Amazon for under $1/bulb. These weren’t for sale to California (so didn’t meet CEC Title 20 and/or Title 24), and one of the reviews was actually from Sylvania saying that the bulbes were counterfeit. Yet they were still for sale!

    1. iop

      There have been stories about serious counterfeit-related issues with Amazon’s supply chains. One of the issues is that it has been reported that Amazon mixes inventory it has received from manufacturers with inventory from its marketplace sellers. So if the marketplace sellers have counterfeit inventory then now Amazon’s own stock is tainted with counterfeit products.


      1. JTMcPhee

        Personal counterfeit experience with crap from Amazon: I bought a number of “Lifestraw” personal water filters, that are used to clean pathogens and pollutants out of questionable drinking water in emergency situations or, for people in far off lands with limited and polluted water supplies, on a daily basis.

        These were “Amazon Prime” offerings, supposedly “fulfilled by Amazon.” The things duly arrived, but a couple of weeks later I got an email from the Amazon AI Mind telling me that they were counterfiet, somehow slipping through the Blob’s finest-mesh product filters, and I should discard them since they would not protect me in the event…

        These things were made and packaged to look exactly like the original, even to pretty close scrutiny. Why go to all that trouble when a little more effort would have produced a filter that did what the original did? Got to be a tiny profit margin from that kind of deception — maybe it;s like the counterfeiters who make fake pennies and nickels — lose a bit on each, but make it up on volume?

        Who knows anything, any more?

  2. Oh

    It’s like most of the media that pontificate from afar – even if they have someone local they push their neoliberal view in support “competetition” which is non existent in Capitalism. The big fish always wins and the little ones get swallowed up. Look at all out industies – only oligapolies with market carved out for themselves and prices that bebefefit themselves.

  3. TimH

    Those fake bulbs are still for sale.

    Hit reviews, and the Sylvania comment is at the top:

    Fake Bulbs not Sylvania 24 pack
    February 23, 2018
    Style: DaylightSize: 24 PackVerified Purchase
    the box is Sylvania but the bulbs don’t have the logo of Sylvania printed I think that the bulbs are fake imitations inside a box of Sylvania

    Please be advised that all of our light bulbs will have the Sylvania logo printed on the bulb or base.

    Thank you,

    The SYLVANIA Lightbulb Team
    [email protected]com
    1-800-Lightbulb
    1-800-544-4828

  4. JCC

    You’ll never guess why…

    From the article:

    The trigger for the latest downturn in trade ties was India’s new rules on e-commerce that restrict the way Amazon.com Inc and Walmart-backed Flipkart do business in a rapidly growing online market set to touch $200 billion by 2027.

    That, coming on top of a drive to force global card payments companies such as Mastercard and Visa to move their data to India and the imposition of higher tariffs on electronic products and smartphones, left a broader trade package the two sides were working on through last year in tatters.

  5. JTMcPhee

    An honest headline might have read “India Incentivizes Amazon To Get Its Lawyers and Lobbyists To Recast The Corporate Provenance Of A Minor Part Of Its Goods Being Sold Through Its Monopsonist E-Commerce Platform And Work Harder On Completing The Regulatory Capture of India’s Government.”

    1. Lambert Strether

      > an honest headline

      Common sense, not to mention the site rules (“don’t throw your drink in your host’s face”) would seem to contraindicate calling an NC poster’s work product dishonest.

      That said, it sounds like you wanted a different post to be written, much like the reviewer who criticized a book about penguins because it wasn’t about owls. If you have a case to make, make it, instead of putzing around with the headline.

  6. JTMcPhee

    Bad word choice and styling, of course. My humblest apologies. That was not intended as any criticism of Jerri-Lynn or her most valuable work product. Just frustration that the body of her article shows how the Amazon monster, aided by the tricksters who know how to defeat nearly any attempt to rein in their march to power, can just make a few adjustments to corporate linkages and “legal provenance,” while doing that lobbying thing and applying other “inducements” and threats. Thus evading whatever the goal of the regulators was, and just getting on about their rackets after disposing of aslight annoyance. Her description of the events was spot on, of course.

    How do ordinary people gain enough power in this political space to stop or redirect any of this? I don’t know, myself.

    I am hoping, in my meliorist heart, that things like the Gilets Jaunes and AOC and Omer and others might catalyze something healthy, short of the kinds of meltdowns that get presaged in much of what’s reported here. Though of course one sees the effects (“cutting away support”) in too many places, of the lawyer’s-trick of “impeachment”, like the snotballs of “reasonable doubt/PACs don’t fund most campaigns. Young lady) pitched by Mr. “But it’s all legal, right?” Smith at AOC’s stellar explication of “legal” political corruption. And this piling on to Omer regarding “antisemitism,” and the forces being brought to bear on the GJs and anyone else resisting the grand looting.

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