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, Amazon forced to pull products in India as new rules bite.

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 Amazon Users in India Will Get Less Choice and Pay More Under New Selling Rules 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 Amazon’s Indian site 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 antitrust expert Lina Khan noted in a February tweet: “[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,  Amazon’s Antitrust Paradox, and has a paper forthcoming in the Columbia Law Review on structural separations, The Separation of Platforms and Commerce.

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 Amazon’s India Site Restocked After Joint-Venture Stake Cut:

Hundreds of thousands of products are back on Amazon.com Inc.’s AMZN -1.62% 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.