SEATTLE — For Amazon, no country is more important to its global growth ambitions than India, the second-most-populous nation in the world behind China, where online shopping is in its infancy and growing explosively.
But Amazon’s India plans just ran into a hitch.
Late
last month, the Indian government issued additional rules governing
foreign ownership of e-commerce companies operating in the country. The
government added regulations related to pricing and the sourcing of
sales on sites that Amazon and several rivals appear to violate. What is
more, the new policy was effective immediately, giving Amazon and
others no time to comply.
“They’ve not given any timeline for enforcement,” Satish Meena,
an analyst at Forrester Research in India. “There’s no proper
instructions to companies about how to implement these things. That’s a
very open-ended question the government has left.”
A
trade group representing the Internet companies is considering sending a
letter asking the Indian government for clarification or to delay
enforcement of the rules until September.
Analysts
and Internet executives in India say they do not expect an immediate
government crackdown on Amazon and others, and it is not yet clear what
the consequences would be for breaking the new rules.
But
the regulations were at least helpful to Amazon and its rivals because
India finally clarified its murky policies regarding foreign-owned
e-commerce companies.
Uncertainty
is part of the tumult of doing business in India, which has had a flood
of foreign investment in its Internet commerce sector and a
corresponding wave of opposition from politically powerful domestic
retailers. Online spending in India is expected to jump to nearly $75
billion by 2020 from a mere $12.1 billion last year, as more of the
country’s 1.25 billion people get on the Internet, according to
Forrester.
The
stunning growth projections have led executives at Amazon, the
e-commerce giant, to predict that India could be its second-largest
market after the United States within a decade. In 2014, the company’s
chief executive, Jeffrey P. Bezos, stood atop a bus in Bangalore wearing
a jodhpuri-style Indian coat and holding a giant check for $2 billion,
representing the amount Amazon pledged to plow into its business in the
country.
“With
a growing middle class and propensity to shop oinline, the revenue
potential there is enormous,” said Colin Sebastian, an analyst at Robert
W. Baird & Company.
As
in the United States, in India brick-and-mortar retailers have
expressed alarm at the growth of e-commerce, and they have sued the
Indian government to compel it to place more restrictions on the
industry.
For
Amazon there is a special urgency to get India right after fumbling
attempts to crack the e-commerce business in China, another huge
emerging market dominated by domestic players.
From
the day it started in India in 2013, Amazon had to make big changes to
comply with its restrictive rules governing retailing.
India
essentially bars companies with substantial foreign ownership from
operating retail outlets that sell from their own inventories of goods.
Although American multinationals like Amazon, Walmart and Apple have
sought to overturn or soften those restrictions, the government has made
few changes.
To work around the restrictions, Amazon and competitors billed themselves as e-commerce marketplaces, eBay-like
websites that matched buyers with independent sellers. Amazon owns no
inventory of its own in India, though it handles the warehousing and
delivery of goods for many of its independent sellers, a model it also
employs in the United States.
Last week, Indian regulators confirmed
that online marketplaces, which had operated in a gray era, are legal.
But they added a rule saying that no single seller can account for more
than 25 percent of sales on such an e-commerce marketplace. It also
limited the influence that online marketplaces can exert over the prices
set by their sellers.
The
new regulations appear to make Amazon’s dependence on one large seller
on its site, Cloudtail, illegal, according to industry officials and
analysts. While Amazon says it has more than 80,000 sellers on its India
site, Cloudtail is estimated to account for 40 percent to 50 percent of
the site’s sales, according to Mr. Meena of Forrester.
The
parent company of Cloudtail is a partnership between Catamaran
Ventures, the investment firm of the Indian business magnate, N.R.
Narayana Murthy, and Amazon, which owns 49 percent. India’s leading
e-commerce company, Flipkart, also works closely with an affiliated
large seller and faces a similar problem.
The
agency that issued the new rules, the Department of Industrial Policy
and Promotion, declined to comment on whether any violations had
occurred. Ishtiyaque Ahmed, a director of foreign collaboration at the
agency, said he was not familiar with the details of the two companies’
business arrangements “so I cannot discuss a hypothetical situation.”
Amazon is still evaluating the new rules, said Craig Berman, a company spokesman. “Through our amazon.in
marketplace, we will continue to help small and medium businesses in
India connect with consumers,” Mr. Berman said in a statement.
Flipkart declined to comment.
One
obvious course of action for Amazon is to form more joint ventures with
Indian companies to reduce its reliance on any single seller like
Cloudtail. Arjun Narayan, managing director of Catamaran Ventures,
Amazon’s partner in Cloudtail, said in an email that he did not expect
any “abrupt business changes” for Cloudtail.
Snapdeal, one of the largest e-commerce companies, which has no large sellers, welcomed the regulations.
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