Amazon in the Indian e-commerce market has grown exponentially, but a recent report by Reuters has shed light on how the company has been innovatively dodging new e-commerce guidelines brought in by the Modi Government to protect the small businesses.

The company, from the very first day of its business in India, has run on the motto of strengthening the small business owners of the country; to give them a platform that helps their businesses grow, but it seems its strategy is far from the mission or vision that it has been selling to the Indian public.

The report by Reuters draws out how Amazon, for the longest time in India, has favoured a small group of sellers, rather than treating every seller on the platform equally which they claim to do on paper. The documents which were reported on by Reuters date back between 2012 and 2019 clearly paint a picture of how Amazon India has played the cat and mouse game with the GOI, adjusting its corporate structure every time the Government brought in a new e-commerce regulation in the country.

Indian traders, retail store owners, and small business owners have always claimed that Amazon has a biased marketplace, which benefits a tiny group of businesses, and that the company has consistently engaged in deep discounting and predatory pricing which have crushed many brick-and-mortar retailers.

Although, Amazon has been insistent that it complies with all e-commerce laws in India which only allows it to connect the seller and the buyer, unlike in America, where it is also allowed to sell its products, internal documents reveal a conflicting story.

They reveal how the American giant has consistently helped a small number of businesses with discounted fees or with important exclusive deals with big tech companies like Apple, One Plus, etc. These ‘preferred’ sellers in the marketplace sometimes being companies where Amazon has indirect stakes.

Globally, only about 58% of Amazon’s business came from selling third-party products, the rest is from direct sales to consumers, but in India, the company has been trying for a long time to navigate the laws which disallow direct selling.

Cloudtail & Appario – The game of cat and mouse

Trying to deal with the restrictions of direct sales, Amazon entered a joint venture with a famous tech mogul, founder of Infosys, NR Narayana Murthy. The venture called Cloudtail which began to sell products on ‘Amazon.in’ in 2014 soon after it was made.

Although, Amazon publicly maintains, Cloudtail is an independent merchant and is treated equally, it has been deeply involved in expanding Cloudtail’s business, often referring to it as “SM” or “Special Merchants” in their internal documents.

“The Special Merchant (SM) was launched on Aug-14 and we helped SM quickly ramp up and gain scale through Q4,” stated an Amazon India report, dated Feb. 23, 2015.

To that measure, the report also suggests that Amazon had helped Cloudtail to acquire key relationships with big tech companies to sell their products such as smartphones. The companies got a new sales channel, while Cloudtail struck exclusive deals and listed these products on Amazon’s platform. This model of operations was largely successful, as by March 2016 Cloudtail accounted for 47% of the business on the platform.

2016 also came with new regulations which meant that the company needed to shift gears again. The Government capped the online marketplace sales for a single seller to 25% to level the playing fields and persuade the protesting retailers. This also meant that Cloudtail’s sales on Amazon were to be bought down.

The new rules also required that e-commerce platforms “will not exercise ownership over the inventory” sold on its site. This also created an extra obstacle as reports show Amazon was treating Cloudtail inventory as its own at that time.

Amazon, to comply with the 25% cap, moved the procurement of some smartphones which were being sold by Cloudtail to ‘Amazon Wholesale’, a wholesale business-to-business operation which was not affected by the foreign investment restrictions. Amazon, in turn, supplied these products to ‘certain’ sellers who in turn listed them on Amazon's e-commerce platform.

Addressing the 25% cap, Amazon also opened another “Special Merchant” called Appario in 2017, predicting both Cloudtail and Appario would account for 50% of the sales on the platform.One internal Amazon document from 2019 states that the two special merchants get “subsidised fees”, and access to Amazon global retail tools.

In 2018 December, with the election looming in 2019, and major protests by Indian traders and retailers, the Modi government brought in another restriction, prohibiting vendors in which marketplaces such as Amazon have equity interests from selling on such marketplaces. This meant Amazon again had to restructure their relationship with the two special merchants which accounted for 35% of the sales on their platform by then.

In early February 2019, Amazon bought down thousands of products sold by Cloudtail and Appario on their website, and relaunched those days later after they had reduced their stakes in the parent companies of the two vendors, maneuvering through the new laws for the third time.

The larger problem here, rather than Amazon maneuvering through the Centre’s laws which were supposed to protect the small and medium retailers from total annihilation by giant e-commerce companies, is the on-ground reality that disallows the law to work its course in protecting the small retailer.

While in 2013, 10% of the sales of smartphones were made online, by 2016, it jumped to 30%, and 2020 saw the highest at 45%. This growth in online sales of smartphones is also dominated by Flipkart and Amazon, accounting for around 90% of online smartphone sales.

Consequently, brick-and-mortar retailers are struggling to survive, as customers often opt for the e-commerce platforms that sell the same products at around 3000 INR less than the retailer can offer to make ends meet. This discounting often comes from deep discounting, or even as a report from Amazon suggests, cheaper fees for “some” sellers so that they could offer a more “competitive” price.

Company’s response

In a statement, Amazon addressed this by saying that to them, the reality is the opposite as retailers are discovering technology only to boost their business. Thus, these discounts are a boon to a lot of Indian consumers.

The current market share for all e-commerce is at 4% of the roughly 900 million dollars Indian retail market, according to Forrester Research, but experts suggest that with the pandemic and changing marketplaces for such new circumstances, the share will only increase.

However, Amazon, which made sales worth 10 billion dollars in India in 2019, with charged political environments, can face regulatory risks, which they have been able to avoid for 5 years now.

India’s resistance

India’s Union Minister of Commerce and Industry, Piyush Goyal has also been actively vocal about Amazon’s maneuvering. In a meeting in June 2019, with e-commerce executives, he had made it clear that the Government will not stand a negative impact of e-commerce on the small Indian retailers.

In January 2020, India’s antitrust watchdog, the Competition Commission of India had announced an investigation into Amazon and Flipkart following complaints by many trader groups. The investigation was to be conducted on four anti-competitive practices, namely the exclusive launch of mobile phones by the e-commerce firms, promoting preferred sellers on their websites, deep discounting, and prioritizing some seller listings over others. 

The investigation, however, has been put on hold after it was challenged by Amazon and Flipkart.

Amazon has also been the focus of another investigation by the Enforcement Directorate, the federal financial crime-fighting agency, which has been investigating the company for possible violation of foreign investment rules, although the details have not been made public.

The feud between Amazon and the Indian Government over the years has only become more and more complex. The Trump administration had always been silent and let the law take its course, but with the change in the administration, the new government in Washington seems to want to take a more proactive stance in defending the American giant’s functioning in India.

When Biden’s envoy, John Kerry, was scheduled to meet Piyush Goyal, the US administration thought that the latter could bring up the issue with the former. This prompted the US Govt to prepare a note in defence of the stance took by Amazon.

“If Asked: Allegations of Amazon E-Commerce Violations,” the note stated, “We have seen a February 17 Reuters report raising concerns about US e-commerce companies’ practices in India and note many of the allegations have been previously reviewed by the Competition Commission of India without any negative findings.”

Amazon’s relationship with the Indian Government for the past few years has been in a Gordian knot, but there remains another looming concern, as Reliance, owned by Mukesh Ambani, has shown interests in capitalising on the e-commerce market as well. Reliance, being a local player is also not bound by regulation that restricts Amazon and Flipkart.

Despite all such challenges, Amazon has been able to grow its business in India. It has started multiple new ventures, offering insurances, launching online pharma services, and along with it, continuing to trumpet itself to be the platform for the little guy.