Is it possible that a purportedly business-friendly government can, in the blink of an eye, destroy — or at least severely damage — its most celebrated industry in the tech-meets-commerce space?
Also: Will Flipkart and Amazon kill India’s retail industry?
This is what seems to be unraveling, as Flipkart and Amazon face an unyielding Feb. 1st deadline to alter their business models from one that is a direct purveyor of goods (like Amazon in the US, for instance) to one that is a marketplace for them (sort of like eBay).
In other words, these two companies have to dismantle their business model almost overnight and establish completely new supply chains and vendors in order to comply with this diktat, something they would not have imagined in their wildest imaginations. Amazon has so far pumped $5.5 billion into the country, and Walmart last year forked out $16 billion on acquiring Flipkart under the assumption that the country would continue to be a future growth engine for global e-commerce.
Instead, they have fallen prey to the whimsies of a government desperate to claw its way back into political contention. Prime Minister Narendar Modi may have aspired to create a carefully manicured image as a business-minded visionary, wooing companies to set up manufacturing plants in his country. However, a string of decisions began to quickly tarnish his image including a growing authoritarianism and a tacit appeasement of communal atrocities against the Muslim population including public lynchings. The most boneheaded decision was to enforce a ban on existing currency notes and the printing of new ones in order to expunge the nation of black money but instead slowed down economic growth and caused nationwide damage to the livelihood of the poor. (Not to mention, apparently, 99.3 percent of black money found its way back into the system in just a few months.)
Now, all this was still fine and dandy for the large chunks of the middle and upper middle class, which were in thrall of Modi and his business-friendly, ‘Hindu-first’ vision for India, but the common man didn’t think so. The straw that broke the camel’s back was the recent drubbing of the BJP by its arch-rival the Congress party in local elections taking place in what should have been safe beachheads of the north. So unexpected was the defeat that the BJP government had to act immediately to resuscitate its large vote bank of shopkeepers and tradespeople whom they had taken for granted since coming to power. Until now, that is.
For two years since issuing its tweaked rules in 2016 that outlined a marketplace model and no more than 25 percent ownership in sellers of its goods, the government did nothing. In fact, as I have pointed out in this recent story, after being deluged by complaints filed by tradespeople about predatory and monopolistic pricing practices by Amazon and Flipkart, it kicked over the whole issue to industry watchdog, the Competition Commission of India. The CCI eventually declared that nothing seemed to be rotten in the states of India.
“Looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that any one player in the market is commanding any dominant position at this stage of evolution of market,” the Commission said in its decision. A BJP spokesperson followed this up by telling a local publication: “It seems that the [e-commerce] industry doesn’t need a policy, but a set of rules will help in taking the industry to the next level,” a senior Commerce Ministry Official said to Indian tech website Factordaily.
This despite an e-commerce draft policy that was making the rounds asking for the clipping of wings of monopolistic, global players with massive warchests albeit via a sunset clause that would allow them some time to rejig their business models. The fact is that Amazon and Flipkart have used VC funding to be able to flog things at ridiculously low prices in order to grab market share. The fact also is that offline retail, some $700 billion versus online’s $20 billion size, is simply unable to compete with global-capital funded steep discounts.
Another fact: Amazon and Flipkart, despite the rules, did conduct a humongous part of their operations via entities that both invested in. None of this is hotly disputed. But instead of providing clarity on this policy in advance, thereby allowing their online retailers to plan their migration to a new model methodically via a sunset clause, the government, stricken by the spectre of political defeat in the upcoming national elections in three months, has decided to resort to their own desperate measures, the health of e-commerce be damned.
The result of all of this: Amazon may well see a third of its $6 billion in sales vapourise, at least for now in order to comply to the new rules; Flipkart may see a quarter of its sales vanish. According to ratings firm CRISIL, that loss could be as high as 40 percent of revenues in two years, amounting to between Rs35,000 crore ($5 billion) and Rs40,000 crore. Flipkart Chief Executive Kalyan Krishnamurthy immediately sent a letter to the government requesting more time.
“Redesigning numerous elements of our technology systems to ensure that we can validate and evidence our compliance, in such a compressed period of time, has caused us to divert significant resources,” wrote Krishnamurthy. Flipkart ships between 500,000 and 600,000 packages a day and Amazon alone has 400,000 sellers and therefore both companies say that the new rules sans a sunset clause will cause a lot of trauma to their operations and sales.
For now, the government is resolute behind its decision, reiterating yesterday that it will not extend the Feb. 1 deadline despite Amazon and Flipkart requesting an extension. Look for this to change if the BJP wins the upcoming election.
Previous and related coverage:
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