Amazon’s dominance in e-commerce in North America and most of Europe is untouchable; in the U.S., 50 percent of all e-commerce sales happen through Amazon, with its closest competitor, eBay, pulling in just 6 percent. And so, like many other huge companies hitting growth plateaus in western markets, it’s turned its eyes toward India, a country of 1.3 billion with a rapidly growing middle class that has eagerly embraced online shopping.
But Amazon and Walmart-backed e-commerce platform Flipkart’s hopes in India have both slammed into a wall, in the form of India’s new foreign direct investment (FDI) policy on e-commerce. In late December, the Indian government announced rules that ban e-commerce sites from offering exclusive sales, heavily restrict the ability to offer discounts, and make it illegal for online retail platforms to sell products from companies that they have more than a 25 percent stake in.
The consequences for both companies are significant. Amazon’s exclusive deal to sell Xiaomi smartphones, the most popular brand of phones in India, is now dead in the water. The same goes for Flipkart’s deal to sell Oppo phones, the third-most popular brand in India. The inability to offer deep discounts makes Amazon and Walmart’s huge cash reserves and ability to subsidize losses on popular products to draw in customers irrelevant.
And Amazon in particular has a significant problem on its hands thanks to the rules prohibiting platforms from selling products from companies it owns more than a 25 percent stake in. Cloudtail India is Amazon’s biggest seller, but Amazon also owns a 49 percent stake in the company. It also owns a 49 percent stake in Appario Retail, another extremely popular seller on Amazon India. Both companies will now need to be transformed into independent wholesalers outside of Amazon India, creating significant additional operating costs and delays as Amazon disentangles itself from both sellers.
Both Amazon and Flipkart have faced charges of abusing their large market position. The All India Online Vendors Association, which represents over 3,500 online sellers, accused Amazon and Flipkart in the Competition Commission of India court of using their dominant market position to favor certain sellers.
The motive behind the new rules is clear: to hamstring the ability of companies like Amazon and Walmart to use their market dominance and cash reserves to muscle out smaller competitors. (Put more bluntly, the rules prevent Amazon and Flipkart from engaging in predatory pricing.) The rules also bolster support for Prime Minister Modi and his Bharatiya Janata Party among small businesses as India heads to the polls in the spring.
Both companies frantically tried to appeal the ruling, or at least seek a few months of reprieve before the rules were implemented, but the Indian government held firm and the new rules kicked in on February 1. Amazon’s NASDAQ shares fell by 5 percent the same day, and per CRISIL Ratings, Amazon and Flipkart could lose up to 40 percent of their revenue by 2020 due to the new FDI policy — between $5 and $5.5 billion in sales.
In the grand scheme of things, $5 billion in lost revenue isn’t much to Amazon or Walmart — Morgan Stanley estimated that even if Amazon India stopped growing, it would lose just a half a percent of its total revenue — but it would still sting. Amazon has spent an estimated $5 billion to get into the Indian market, while Walmart spent $16 billion for a 77 percent stake in Flipkart, a homegrown Indian e-commerce platform.
The end result of these policies is that Amazon and Flipkart will now largely have to compete purely on how well they can perform as e-commerce platforms, without many of the tools both would normally rely on to drive customers and revenue. “[The FDI policies] will kill competition and there will be nothing for online retailers to differentiate on,” said Amarjeet Singh, a partner at KPMG, speaking to Quartz. Meanwhile, Indian e-commerce company Reliance, which is based out of Prime Minister Modi’s home state of Gujarat, is preparing to roll up small merchants into a large online platform and take on Amazon and Flipkart. And because Reliance is a wholly Indian company, the same restrictions against selling products where a company holds more than a 25 percent stake don’t apply.
While both Amazon and Walmart will now make significantly less in India than they were expecting to at the beginning of 2018, they likely won’t abandon the Indian market. E-commerce as a whole is still expected to explode in the country over the next decade; Morgan Stanley estimated, before the FDI policies, that e-commerce would grow by 30 percent a year to $200 billion by 2027. Amazon and Walmart may be hamstrung, but there’s still money to be made — just not as much of it. And the U.S. government has already registered its discontent with India’s policy; much of this may get ironed out as India and the U.S. negotiate broader trade agreements.
On a broader scale, one can’t help but wonder what would happen if an antitrust administration were to come to power in the U.S. and do even half of what India has done. The same rules that are in place in India, if applied to the U.S. e-commerce market, would be disastrous for Amazon. (They would also likely be hung up in the courts for decades, but let’s ignore that for the moment.)
Rules against discounts would mean Amazon Prime would have to be shuttered. The rule against selling products from companies where Amazon owns more than a 25 percent stake would make AmazonBasics and a whole host of other private-label brands verboten. India’s regulations were an unabashed gift from Prime Minister Modi and his party to both Indian e-commerce companies and brick-and-mortar retailers, a way of shoring up support before the spring elections. With the “retail apocalypse” shuttering stores across America partially due to companies like Amazon and Walmart, would an American politician ever think of making the same populist appeal here?
Update, 2/7/2019: We have updated the article to more accurately reflect the position of the All India Online Vendors Association. We previously reported they advocated for the FDI policies; they did not. The organization did accuse Amazon and Walmart of using their dominant market position to favor certain sellers.