Protectionism in India: How New eCommerce Laws Will Impact Brands
In recent years, online shopping has taken India by storm — so much so that global payments facilitator Worldpay has tipped the country to become a global leader in eCommerce within two decades, surpassing the US and second only to China.
Industry leaders have responded with significant investments in the subcontinent. Amazon has committed $5 billion to the market, while Walmart, the world’s biggest retailer, acquired 77% of Indian online retailer Flipkart for $16 billion.
The influence that comes with this level of investment doesn’t sit well with India’s government, however. In December, Indian Prime Minister Narendra Modi announced changes to India’s Foreign Direct Investment Policy designed to restrict the influence of international eCommerce companies and provide a boost to the country’s small businesses.
How Has India’s Foreign Direct Investment Policy Changed?
India’s attitude toward foreign investment was complicated before the new rule changes that came into effect on February 1, 2019.
While the country did allow foreign companies to fully own and operate eCommerce marketplaces that connect buyers and sellers, it did not allow them to sell their own inventory. This led to a network of complex deals that sidestepped the rules and allowed Amazon and Walmart to invest in third-party companies that carried and sold inventory on their behalf.
The new rules make it harder for eCommerce companies to circumvent regulations, explains Reuters’ Sankalp Phartiyal. Under the new policy:
- eCommerce platforms are not allowed to sell more than 25% of a vendor’s inventory, putting a block on exclusive deals and substantial wholesale discounts.
- One vendor’s sales cannot equate to more than 25% of the total sales of a marketplace.
- Marketplaces cannot sell any inventory from firms in which they have any direct investment.
- Additional services offered by marketplaces — such as fulfillment, logistics and payments — must be provided to all sellers in a fair manner.
There is also an additional bureaucratic layer, notes Livemint’s Asit Ranjan Mishra. It is not enough for marketplaces to abide by these restrictions. They will also need to complete a compliance report for the Reserve Bank of India by September 30 every year.
Why Has India Tightened Regulations?
The Wall Street Journal’s Corinne Abrams writes that the new rules are a continuation of efforts made by India’s ruling BJP party to limit the influence of established US tech companies in the country. This and other policy changes have all come in a general election year, when Modi is seeking to win a second term in office.
In particular, Modi and the BJP are taking into account the concerns of India’s small business owners, who are concerned about the dominance of companies like Amazon and who have frequently campaigned for tighter restrictions in the past, Ellen Tannam at Silicon Republic reports.
Lobbying from India’s small businesses has been constant, reports CNN’s Rishi Iyengar. It didn’t stop with the announcement of the policy change, either. Amid requests from both Walmart and Amazon for an extension, The Confederation of All India Traders (which represents millions of retailers) successfully lobbied Modi not to delay implementing the new policy.
Modi has been courting India’s small businesses for years, says the team at PYMNTS. There are more than 50 million small businesses in the country, and many are only now starting to come online. Three years ago, his government established the Startup India program, which has recognized 15,400 companies and created almost 150,000 jobs.
Amazon and Walmart Were Hit Immediately
When the changes came into effect on February 1, the fallout was instant. Amazon removed thousands of products sold by leading vendor Cloudtail, reports Bloomberg’s Saritha Rai.
“That includes its Echo smart speaker, Fire TV Stick and Kindle devices.”
Walmart has also removed thousands of its own labels, as well as products from brands with preferred or exclusive agreements.
The hard work is only just beginning, though, note New York Magazine’s Jake Swearingen and Stephan Kozub. “Both retailers will have to draw up new contracts with thousands of merchants and brands, deleting wording such as ‘exclusive.’ And they may have to develop India-specific private labels, which the government allows.”
Both companies have recently signed exclusive deals with smartphone manufacturers (Xiamoi with Amazon and Oppo with Flipkart) and these, too, will need to be torn up. Customer acquisition strategies built around huge discounts backed by both companies’ significant cash reserves will also need to be revised.
Both companies’ stock prices also took a hit, Stephanie Findlay and Amy Kazmin at The Financial Times write. Amazon shares fell by more than 4% on the following Friday after the company lowered its sales guidance for the first quarter. Walmart’s shares were down 2.4% the same day.
In the long run, both companies will now find it harder to dominate the Indian market. That’s because the new rules directly target the strategies Amazon used to build a virtual online monopoly in both the US and Europe, Wired’s Paris Martineau writes. This includes tactics such as “promoting and selling your own products (or the products of a company you control), pushing other companies to sell products exclusively through your marketplace, giving certain sellers preferential treatment or placement, and abusing your market power to undercut your competitors by offering hard-to-beat discounts.”
Should eCommerce Brands Stay Away?
Things were already hard for international brands looking to enter the Indian market, but now they will be even harder, writes Fortune’s Erik Sherman. Before these rules came into force, brands had to work with third-party companies that would hold and sell the stock on their behalf.
The new rules only further empower these third-party affiliates, continues Sherman. “Now, big foreign firms will no longer be able to treat the third parties, such as RetailNet, Super-ComNet, and OmniTech Retail, as effective extensions of their businesses.”
With third parties in control, international brands may be forced to share even more of their profits. They might also end up ceding significant market share, too. TNW’s Abhimanyu Ghoshal reports that Reliance Industries, one of those leading third-party sellers, is planning to launch its own eCommerce platform that will rival Amazon and Walmart without being beholden to the same strict regulations.
Certainly, any brand with plans to sell directly to Indian consumers through Amazon or Flipkart will have to think again. Exclusive sales are now a thing of the past, writes TechCrunch’s Jon Russell. In fact, brands will now have to work out how to split inventory across multiple eCommerce platforms. For some eCommerce brands, these regulations may prove to be one hoop too many.
Further, brand strategist Harish Bijoor believes that protectionism in India and the current regulatory environment present key challenges for international business. If this move is evidence of anything, it’s that careful planning and strategic relationships can come undone with a single new policy.
Brands and investors may have been bullish on India, but many now may want to think again.