The passage to India for US e-commerce giants is set to get bumpier in 2019

One of the trends that emerged in 2018 was the push into India as a major new retail e-commerce battleground, with Walmart and Amazon both upping the stakes there. But 2019 looks set to become more complicated for the US outsiders.

There are obvious reasons for the interest in India - the country’s e-commerce market is looking to top $200 billion by 2026. The current market leader is FlipKart, now the mainstay of Walmart’s passage to India following a $16 billion investment to gain majority control, followed by Paytm and Amazon.

But there are also thousands of small businesses in India which have lobbied ferociously for some protection by the government to the dominance of US interlopers. That’s resulted in the emergence of new e-commerce regulations that are due to kick-in at the start of next month - and they’re not going to make life any easier for Walmart or Amazon.

The main point under consideration is a move to make it more difficult for the US firms to sell their own goods - such as Amazon’s Alexa or Echo - at heavy discounts on their own platforms and marketplaces. This is in turn, it is hoped, would curb non-Indian firms knock-on influence in setting domestic prices.

It would also potentially result in higher costs for Indian consumers, which is the counter-argument. If there’s no pressure to bring prices down in line with discounted items on the likes of Walmart or Amazon’s marketplaces, then there’s no incentive for indigenous providers to get into competitive pricing.

The new rules will also deny e-commerce firms the ability to force third-party sellers into exclusive deals on their platforms as well as limiting ownership of marketplaces. Existing regulations have meant that foreign firms can’t sell directly via online marketplaces directly - other than groceries - which has resulted in Walmart’s decision to invest in Flpikart. For its part, Amazon’s India operation is populated entirely by third party independent retailers.

The new rules were intended to prevent abuse of this situation by requiring foreign firms with a stake in any online platform from being permitted to sell their own goods on it. In other words, private label goods would be outlawed in what the Indian government hoped would be a move that would appeal to local companies and sellers. For context, Amazon India and Flipkart/Walmart have an estimated 30 private labels between them.

The Indian Department of Industrial Policy & Promotion (DIPP) stated:

An entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entities.

Objections

Of course the US providers have objected with the US-India Strategic Partnership Forum (USISPF) calling the changes bad for consumers with USISPF President and Chief Executive Officer (FPO) Mukesh Aghi warning:

The amendment to the FDI [Foreign Direct Investment] in e-commerce policy is regressive. It harms the consumer, who is ultimately the king in any retail environment. It is not the government’s business to micromanage businesses. This amendment bars Indian manufacturers and sellers from effectively competing in the global online marketplace.

But pressure from the US providers has resulted in confusion now, with only weeks to go until the new rules come into force. The DIPP now says that there won’t be a ban on private labels being sold after all. Or will there? Everything that was thought to be set in stone is now back up in the air.

The Confederation of All India Traders (CAIT) is outraged at the seeming volte face, writing an open letter to DIPP, arguing:

It is submitted that if [private labelling] is allowed, it will run contrary to the intention of the government to make e-commerce free from evils and malpractice and to provide an equal level playing field with fair competition. Such e-commerce companies will continue their ulterior motives through such loopholes as they are doing since last many years and small retailers will be killed.

CAIT added that it would oppose any compromise attempt by non-Indian firms to secure an extension to the existing regulations beyond 1 February:

The modus operandi of these e-commerce companies for seeking extension is to keep delaying fair execution of the policy and they may continue with their sinister designs of operating all kinds of malpractices. Therefore, it is strongly submitted not to fall prey under malicious agenda of such e-commerce companies and no extension should be allowed under any circumstances.

My take

This is a high stakes game all round. For the US vendors, there’s a massive market opportunity and the timing is ripe for expansion. We noted last year that Walmart’s Flipkart move wasn’t perhaps perfectly timed from the PoV of Walmart, but that it was a necessary gambit that was forced upon it. The Indian government is aware of the interest and inward investment that can come from foreign firms - some $223 billion over the past four years, according to estimates.

But at the same the authorities need to balance that against the thousands of domestic small businesses that are looking for support, small businesses whose owners get to vote in upcoming elections. The ruling Bharatiya Janata Party has been on a losing streak in recent state-level plebiscites and needs to reverse its fortunes pretty fast.

What’s emerged to date in terms of a new regulatory regime is clearly a push-and-shove approach to legislative reform, one that brings to mind the idea of a camel being a horse designed by a committee. There’s effort to appease all vested interests in evidence and that’s resulted in things like the seeming change of heart over private labels last week.

The US firms have got too much skin in the game now to back down easily. There will be a lot of lobbying going on in the months to come to safeguard their interests. Despite what CAIT says, an extension to the existing legislative regime might be the best way forward, provided that extension has a hard stop built into it.

Whatever happens, the passage to India for the likes of Walmart is only going to become more complicated in 2019 than it seemed in 2018. The prize is high though and will be regarded worth the bumpier ride.