India Curbs Power of Amazon and Walmart to Sell Products Online

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The Indian government dealt a surprise blow on Wednesday to the e-commerce ambitions of Amazon and Walmart, effectively barring the American companies from selling products supplied by affiliated companies on their Indian shopping sites and from offering their customers special discounts or exclusive products.

If strictly interpreted, the new policies could force significant changes in the India strategies of the retail giants. Amazon might have to stop competing with independent sellers and end its offerings of proprietary products like its Echo smart speakers in India, its top emerging market.

For Walmart, which spent $16 billion this year to buy 77 percent of Flipkart, India’s leading online retailer, the new rules could hamper its strategy of selling clothing and other products under its own private brands and prevent it from using its supply-chain expertise and clout with retailers to drive down prices for Indian consumers.

Representatives for Amazon and Flipkart in India declined to comment on the new rules, saying the companies were still assessing them. The government posted the changes, which go into effect Feb. 1, without warning on Wednesday evening in New Delhi, while much of the business world in both countries was on vacation.

“Ultimately, the customer is going to suffer because Indian sellers are not at the scale where they can provide a good experience to customers,” said Satish Meena, a senior forecaster in New Delhi for Forrester, a global technology research firm. “This is a very regressive strategy by the government.”

Prime Minister Narendra Modi of India initially courted foreign companies to invest more in the country after his 2014 election victory, but his administration has turned protectionist as his party’s re-election prospects have dimmed in recent months. Mr. Modi has increasingly sought to bolster Indian firms and curb foreign ones through new policies, including one that requires foreign companies like Visa, Mastercard and American Express to store all data about Indians on computers inside the country. The government has also declared its intention to impose tough new rules on the technology industry.

The new e-commerce rules seemed to be an attempt by Mr. Modi to placate small traders, who have been hurt by his tax and financial policies, ahead of national elections next May, analysts said. The changes would also help Paytm, a local payments company that operates a digital mall, and Reliance Industries, an Indian conglomerate with online retail ambitions that is controlled by Mukesh Ambani, India’s richest man and a political patron of Mr. Modi.

Under Indian law, foreign-owned retailers were already barred from selling any products directly on their own e-commerce sites. In response, Amazon and Flipkart, which has long had foreign investors, set up partially owned affiliated companies to sell products like groceries, electronics and books on their sites. The arrangements gave them more control over customer service and allowed them to sell some products at prices below those offered by independent sellers.

The new policies appear to close that loophole. They also prevent the online platforms from striking deals to sell products exclusively, which they frequently do now for hot items like new phone models.

Salman Waris, a lawyer at TechLegis in New Delhi who specializes in international technology law, said the actual impact of the policy changes remained to be seen, because the language was vague and in some cases contradictory.

Amazon, which operates through a maze of interrelated entities in India, has also been deft at finding ways to structure its operations to comply with the letter of the law while retaining maximum flexibility to run its business as it sees fit.

Still, the new policy is set to drive up costs for Amazon and Walmart in India and may affirm many investors’ fears that Walmart’s costly acquisition of Flipkart was misguided.

At the time of the deal in May, Walmart’s chief executive, Doug McMillon, said India offered a unique opportunity for the retailer to tap into a young, growing and digitally savvy market. But analysts have been concerned about the amount of money Walmart will need to spend to help Flipkart grow and eventually become profitable.

Amazon and its investors have long hoped the company could replicate its domestic success in fast-growing emerging markets like India, particularly as the growth of its core e-commerce business in the United States has slowed. The Seattle company has invested more than $7 billion in India, according to Morgan Stanley.

After Prime and Alexa, India was the third most frequently mentioned term in Amazon’s shareholder letters in the last few years, according to the research firm Gartner L2. Amazon’s international operations lost about $2.4 billion over the past four quarters, although profit margins have improved.

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