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The online marketplace is meant to be a platform which democratizes retail selling. In the push for a digital economy, the likes of Amazon and Flipkart provide small businesses with a unique channel to the rest of the country. Such an opportunity would be unimaginable without the internet. Instead of only being able to serve your own locality, you now have access to the full population of the country. The potential for growth and profit is unbelievable.

Brick-and-mortar stores were looking over their shoulders during the early years of the 21st century with the growing potential of the internet. Within a few years, it became clear to them that they were very much at a disadvantage when compared to their digital equals. The convenience of buying something online is unmatched by anything a physical store has to offer, other than the fact that you might be able to buy what you’re looking for immediately. Even that depends on availability.

Amazon's Corporate Gymnastics!

With the rise of e-commerce giants like Amazon, these retailers had to radically change their strategies. Selling goods at a physical location could no longer be the main avenue through which business was conducted. The interaction had to move online. On the surface level, we might guess that once the transition is complete, the businesses could only thrive. That is if they had all their other affairs in order. According to Indian law, e-commerce platforms can only act as a middleman between a buyer and a seller. With the kind of infrastructure that Amazon and Flipkart have built, all the small retailer has to do is list his products online and ensure that stock is available and the online retailer will do the rest. Or at least that is how it is supposed to be.

A recent report published by Reuters reveals the corporate gymnastics that Amazon routinely performs in order to evade the Indian government’s regulatory hurdles. In the public eye, the relationship between Jeff Bezos and Narendra Modi appears to be on good terms, but behind closed doors the story is quite different. One of the most damning findings of the investigation is the extent of the anti-competitive practices that Amazon partakes in.

For instance, it was revealed that 35 sellers on Amazon’s Indian platform, out of a total of 400,000, accounted for ⅔ of all its sales.  What this shows is that a small group of sellers clearly enjoy preferential treatment from the host website, something that is illegal under Indian business law. Small businesses in India have been complaining about this for a while, claiming that not only does Amazon favour certain sellers, but it also engages in predatory pricing which leads to fatal outcomes for these businesses.

Once the investigators dug a little deeper, it became clear what the motivation for Amazon to do this was. As mentioned earlier, Indian law only allows for e-commerce platforms to connect buyers to sellers. In the US, e-commerce is allowed to also sell goods directly to customers. This is important because in 2018, 42% of Amazon’s global sales of physical goods was its own direct sales to consumers while the rest was through 3rd party sellers. Considering that it cannot do this in India, it needed to find a way around the regulations. In 2014, Amazon entered into a joint venture with NR Narayan Murthy in order to create a seller named Cloudtail which started offering goods on Amazon India soon after.

Internal documents reveal that Amazon has made a very deliberate attempt to ensure that Cloudtail thrives. In fact, the target was for Cloudtail to eventually make up 40% of all of Amazon’s sales. Amazon helped Cloudtail acquire key relationships with companies like Apple, Microsoft, OnePlus and so on which it gave it an unfair advantage over all the other sellers. Cloudtail is basically just Amazon disguised as an independent seller and by 2016, it accounted for 47% of all sales that happen on its platform.

But a few months later that same year, the Indian government seemed to have caught wind of what was happening and introduced some regulatory changes. It capped online marketplace sales from a single seller at 25%. So in response, Amazon decided to reduce its sales from Cloudtail to meet the new 25% requirement, and simply shifted sales to other sellers that were its own. In 2017, it created another seller named Appario.  

Once again, the Indian government had to react and it did so in late 2018 when it declared that online retailers cannot host sellers in whom they have an equity interest in. Amazon held indirect stakes in Cloudtail and Appario and as such was forced to restructure its relationships with these two entities. By Feb 2019, thousands of products being sold by these two sellers suddenly vanished from Amazon’s website. Then, a couple of weeks later, they returned. In this time Amazon had managed to reduce its equity stakes in the parent companies of these two sellers which made it compliant under the new regulations.

Amazon not doing favour by investing $1 billion: Piyush Goyal

Later that year Commerce Minister Piyush Goyal met with executives from the e-commerce industry and gave them a very direct warning. If they were to continue finding ways to circumvent Indian laws, then the Indian government would make public all the information it had on these companies which he warned would be very embarrassing for them.

The ball is currently in Amazon’s court. They not only face challenges from the government, but also from Mukesh Ambani who is looking to make serious inroads into the e-commerce space in India. Amazon’s reputation has also taken a hit and it faces anti-trust suits from over 2000 online sellers due to their anti-competitive practices. The company continues to do well in India, however, and that isn’t likely to change. It has already given up on China and as such India has become a point of serious focus for the tech giant. With the size of India’s market, Amazon is more likely to compromise and comply with laws rather than take on the government and thousands of other sellers

For feedback, comments and views, write to pavan@bclindia.in

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Kalyan S
Kalyan S
5 months ago

Good one Pavan:) Short & Crisp