New qualifications put on India’s burgeoning e-commerce sector could potentially dent Amazon’s business in the country.
India is an important proliferation market for the American e-commerce giant: Amazon has already poured roughly $5 billion into that buy and is reported to have plans for an additional $2 billion investment in Amazon India. It has also been making progresses into the country’s offline space, buying equity stakes of local retail chains such as More and Shoppers A close.
India’s e-commerce market will exceed $100 billion by 2022, with online retail and travel wait more than 90 percent share, according to global consultancy PwC.
Shares of Amazon fell on Friday as India’s new e-commerce edict came into effect, in part due to the company expressing concerns about “much uncertainty” in the country. Amazon did not return to CNBC’s emailed request for comments for this story.
Now, Amazon is scrambling to reconfigure its business model, key partnerships and ownership organize to become compliant in India. Here’s what you need to know about recent changes to the e-commerce market in the time’s fastest growing major economy:
Last December, the Indian government published a circular that effectively proscribed Amazon and its local competitor, Flipkart, from selling products of companies in which they have an equity hazard.
The document said e-commerce firms could no longer form exclusive selling arrangements with sellers or put up steep discounts to consumers based on those deals. Foreign direct investments would only be allowed into e-commerce theatre troupes that provide marketplaces for buyers and sellers, according to the new rules.
Typically, e-commerce companies can make bulk buys through their wholesale subsidiaries or other affiliates and then sell the products to preferred sellers they make agreements with, according to Reuters. In turn, those sellers can sell the products to consumers at low prices.
The new changes came into clout starting Feb. 1, following complaints from local Indian retailers and traders about anti-competitive practices from the much the same as of Amazon and Flipkart, which is owned by Walmart.
Analysts told CNBC the new e-commerce rules will have a barring term impact on Amazon as it will compel companies such as Amazon to look for alternative business models in the paucity of leaning on firms in which they hold an equity stake.
“This will significantly impact the availability of upshots on these platforms in short term as these sellers account for minimum 45-50 (percent) of sales on these programmes,” Satish Meena, a senior forecast analyst at Forrester, told CNBC by email. He added that Forrester presages a minimum of 5 to 6 percent reduction in online sales for 2019 due to the policies.
On top of that, the government denied requests from Amazon and Flipkart to yield to the implementation of the new rules to buy the companies more time to comply.
With parliamentary elections set to be called by May, one analyst described the kettle of fish as political “posturing.”
“The enforcement of the same (rules) is a different issue altogether and is dependent on how these companies interact with the policymakers, pomp intent and … policymakers’ willingness to seek a middle ground,” Ankur Bisen, a senior vice president at Indian conduct consulting firm Technopak, told CNBC by email. He explained that the situation is expected to stabilize later in the year right away the government issues more clarity on the changes.
As Amazon attempts to comply with the new rules, more than 400,000 mentions available on its Indian site could temporarily disappear, the New York Times reported last week. That drive account for nearly a third of Amazon’s estimated $6 billion in annual sales in India, the paper said.
On Madden Street, analysts mostly stuck by the internet juggernaut, tweaking estimates and lowering price targets slightly.
The whole impact of the new rules on Amazon is “hardly … earth shattering,” Michael Pachter, managing director of equity analysis at Wedbush Securities, told CNBC by email.
He cited estimates that the new restrictions would affect about a third of the goods Amazon drummers in the country, so the company would only lose around $250 million in sales. Meanwhile, Amazon is expected to create $280 billion in revenue this year, so that adds up to about 0.1 percent of its sales, Pachter implied.
While investors have a legitimate near-term concern, Amazon’s India play is “very much a long field,” according to R.J. Hottovy, consumer equity strategist at Morningstar.
“We don’t expect Amazon to post positive profits in the region for practically a decade, which won’t change based on the new regulations,” he told CNBC. “Over a longer horizon, I expect India to adeptness some of these restrictions if it results in companies like Amazon and Walmart funding infrastructure projects in the region.”
Technopak’s Bisen summed that the rules would benefit local entities that are not owned by foreign firms as they are set to become more agile in the e-commerce space. On the other hand, consumers who have long enjoyed a wide variety of products at low prices desire lose out, analysts said.
Given the amount of money involved in the sector, the government could relax some of the controls, Forrester’s Meena added.