Amazon’s internal documents reveals how it dodges Indian regulations

In a significant development that sheds some light on the inner machinations of Amazon.com Inc, the world’s largest online retailer, in early 2019, Jay Carney a senior executive at Amazon.com Inc while preparing for an important meeting with India’s ambassador in Washington, D.C, the then press secretary to U.S. President Barack Obama, Carney in a note had advised Carney what to disclose and what to hold back.

According to that note, he was advised to highlight Amazon.com’s $5.5 billion plus investment commitments in India and the benefits its online platform will provide 400,000 plus Indian sellers, he was cautioned to not divulge the fact that only 33 Amazon sellers accounted for about a third of the value of all goods sold on the company’s website; this information, the note advised was “Sensitive/not for disclosure.”

More such documents have come up with equally sensitive information that sheds light on Amazon.com Inc’s business strategy. Amazon.com Inc had indirect equity stakes in two sellers that uses its platform in India with both accounting for around 35% of sales in Amazon.com’s Indian platform in early 2019. This essentially meant, around 35 of Amazon’s more than 400,000 sellers in India, at that time, accounted for around two-thirds of its online sales.

At that time, this business intelligence was politically sensitive and if it had gotten out, it would have given ammunition to small Indian retailers who had alleged that Amazon.com Inc harms their businesses by flouting federal regulations and favors only big sellers. If the message would have gotten out then it would have undercut Amazon’s public message that it is a friend of small businesses in India.

Amazon.com Inc’s marketing slogan in India, was “transforming lives, one click at a time.”

What Carney ended up telling to the Indian ambassador in the April 2019 is unclear. Neither side commented on the specifics of the gathering.

The briefing note to Carney is contained in hundreds of Amazon.com’s internal documents. News reports of its contents is likely to deepen rifts between the company and various government that are intensifying its global clout of the world’s online market.

These internal documents lay thread bare that for years, Amazon has been giving “preferential treatment to a small group of sellers on its India platform, publicly misrepresented its ties with the sellers and used them to circumvent increasingly tough regulatory restrictions” in the Indian market.

Indian retailers, and traders, both online sellers and brick-and-mortar retailers, have since long alleged that Amazon’s platform largely benefits only select big sellers; that Amazon.com engages in predatory pricing that crushes small domestic retailers.

On its part, Amazon has rejected this allegation saying, it “complies with Indian law,” which stipulates that e-commerce platforms “can only connect sellers to buyers for a fee,” unlike in the United States, where Amazon.com inc can both act as middleman as well as a retailer.

Amazon also states, it runs its online marketplace in an transparent fashion and treats all sellers equally. This stand is however contracted by its own internal documents which document how the e-commerce giant has helped a select small number of sellers prosper, providing them discounted fees and even helping one cut special deals with big tech manufacturers including Apple Inc.

Furthermore, its internal document also show how it has exercised significant control over the inventory of some of the biggest sellers on Amazon.in, contrary to its publicly stated stand that all sellers operate independently on its platform.

These internal documents dated between 2012 and 2019 includes drafts of meeting notes, business reports, PowerPoint slides, and emails. As a whole, they document the games Amazon has played with India’s government, adjusting corporate structures each time the government imposed new restrictions on foreign e-commerce firms, midst growing agitation from small retailers.

Amazon “does not give preferential treatment to any seller on its marketplace” and “has always complied with the law,” said the company.

“The reporting appears based on unsubstantiated, incomplete, and/or factually incorrect information, likely supplied (maliciously) with the intention of creating sensation and discrediting Amazon” said the company while adding that, it “treats all sellers in a fair, transparent, and non-discriminatory manner, with each seller responsible for independently determining prices and managing their inventory.”

Neither the Prime Minister’s Office nor India’s Ministry of Commerce and Industry responded to requests for comments.

According to Forrester Research, Amazon.com Inc has emerged as one of the two biggest e-commerce platforms in India, with close to $10 billion in sales in 2019.

Amazon.com Inc is aware of the significant regulatory risks it faces as a consequence to its business practices.

In recent years, in its annual disclosure to the U.S. Securities and Exchange Commission, Amazon.com has stated, while its business structures and activities comply with Indian law, however there are “substantial uncertainties” regarding their interpretation; it is possible that the Indian government “will ultimately take a view contrary to ours”.

A violation of any existing or future regulations or a change in their interpretation could result in the business “being subject to fines and other financial penalties” or being forced to restructure or “shut down entirely.”

Establish a Strong Dawn raid Process

According to one of its internal powerpoint slides that dates back to 2014, the company should “Test the Boundaries of what is allowed by law”. The slide is titled “Risk Analysis.” This slide advised that preparations be made in the event of a visit by an enforcement body and “Establish a Strong Dawn raid Process.”

When asked to comment on this slide, Amazon replied, “dawn raid preparedness” is “standard worldwide practise” and refers to the training of employees “to handle site visits from officials pertaining to police, fire services, law enforcement and other services personnel on government duty.”

Special partnerships

In order to bypass restrictions imposed by the government on direct sales to consumers, Amazon entered into a joint venture with Cloudtail, an entity formed by one of India’s tech moguls, N.R. Narayana Murthy, founder of software services giant Infosys Ltd.

Amazon.com has previously stated, Cloudtail is an independent seller on its marketplace and that it received “the same privileges as any of the other sellers on our platform.”

In contrary to this stand, its internal documents however refer to Cloudtail as “SM,” or “Special Merchant,”.

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

“Launch, stabilize, grow Special Merchant; make it profitable,” reads that report.

According to its internal documents, Amazon had big plans for Cloudtail. It aimed to ensure that Cloudtail accounted for 40% of sales on its Indian platform “and build this into a $1+B business” in 2015, according to the report.

To this end, the report states, Amazon helped Cloudtail “acquire key relationships” with major tech companies, including Apple, Microsoft and OnePlus. “This included exclusive deals with these companies to sell their products, such as smartphones. The tech companies got a big new sales channel, while Cloudtail got coveted products that it listed on Amazon.in.”

In its statement Amazon had said, it facilitates “the introduction of brands to sellers” in accordance with the brands’ requirements.

Cloudtail’s spokesperson declined comment. Neither Apple nor OnePlus declined to respond to requests for comments.

According to Arvinder Khurana, president of the All India Mobile Retailers Association, deals facilitated by Amazon with select smartphone makers, along with deep discounts offered by Cloudtail hit India’s offline mobile sellers hard.

“The entire market was disturbed,” said Khurana, whose trade group represents 150,000 mobile retail stores. He went on to add, “There’s been a year-on-year decline in sales”.

According to Forrester Research, India’s e-commerce accounts for 4% of India’s roughly $900 billion retail market and is growing at a rapid pace.

Case in point: while in 2013 only 10% of smartphones in India were being sold online, in 2016 that figure jumped to 30%; by 2019 it was 44%. According to Forrester analyst Satish Meena, the online smartphone sales are dominated by Amazon and Flipkart. Brick-and-mortar retailers are struggling to compete with the online retailers.

According to an offline mobile seller from the city of Ahmedabad, Gujarat, while he was selling an iPhone 11 for $769 (INR 56,000), the same is being sold on Amazon.in for $645 (INR 47,000).

Hand in the cookie jar

In recent years, the Indian government had announced an overhaul of its investment rules and capped online marketplace sales from a single seller at 25% of total sales, in an attempt to level the playing field for small retailers. In order for Cloudtail to comply with this cap, it had to bring down its sales on Amazon.in to 25% or less. Further, the new rules also required that an e-commerce platform “will not exercise ownership over the inventory”.

According to internal documents from Amazon.com, it was effectively treating Cloudtail’s inventory as its own at that time. Case in point: in a document dated May 2016, Amazon.com Inc explains that “we will need to move a subset of this selection” of smartphones from Cloudtail “to other sellers,” to comply with the 25% limit.

And this is exactly what it did. Amazon.com Inc moved the procurement of some mobile phone brands Cloudtail was offering to Amazon Wholesale, a wholesale business-to-business operation in India which did not fall under the foreign investment restrictions.

According to a 2016 internal global regulatory update, Amazon Wholesale supplied these products to “certain” sellers, who in turn sold them on Amazon.in,

“As government policies have continued to evolve, we have consistently made the necessary changes to ensure compliance at all times,” said Amazon when queried on the maneuvers laid out in its internal documents.

“The so-called facts stated here fail to show any non-compliance” with foreign investment rules, said Amazon.

DEEP DISCOUNTS

In 2016, the Indian govnerment had introduced rules which explicitly stated “e-commerce entities providing [a] marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain [a] level playing field”.

Amazon has repeatedly stated, it did not play any role in the pricing of goods sold online in India and that prices are determined by sellers.

However, after the change in rules, Amazon lowered the fees it charged to select big sellers on its platform to enable them to make more competitive offerings.

“We adjusted our business model by activating a fee incentive program (Platinum Seller Program or PSP) to provide discounted fees to a subset of large managed sellers (Platinum Sellers) to help them match” prices of e-commerce rivals, states Amazon’s global regulatory update document.

Addressing the 25% sales cap on a single seller, Amazon proposed to have a second special merchant, in addition to Cloudtail, estimating that in combination both would together account for nearly 50% of sales on its platform.

In 2017, a new special merchant named Appario, referred to as “SM2” in its internal document, was created. It then entered into another joint venture, with an entity backed by the family of Ashok Patni, another software pioneer in the Indian IT outsourcing space.

According to one of Amazon’s internal document dated 2019, the two SMs will get “subsidized fees” and access to Amazon global retail tools. Which are typically used for invoice and inventory management.

Despite the details in its internal document, Amazon maintains that its marketplace fees depend on the category of product and the season of the year, and are “uniformly applicable to all like sellers.”

Neither Patni nor Appario responded to requests for comments.

In December 2018, India announced fresh rules that prohibited vendors in marketplaces, including Amazon to have an equity interest in an attempt to deter deep discounts by big online retailers.

According to Amazon’s internal documents, these new rules forced it to restructure its relationships with Appario and Cloudtail – the two special merchants which together controlled 35% of Amazon.in’s sales and in which Amazon.com Inc held indirect stakes.

On February 1, 2019, thousands of products sold by Cloudtail and Appario vanished from Amazon.in, so as to comply with the new rules. Days later they returned after Amazon reduced its equity stake in the parent companies of the two sellers. Internal documents from Amazon show that the maneuver was made to comply with the new rules.

Aware of these machinations, in June 2019, Indian Commerce Minister Piyush Goyal gave a dressing down to Amazon.in’s executive in a meeting stating bluntly that Amazon India must comply with the new rules.

“We will not let e-commerce impact small shopkeepers… I know there have been many issues of non-compliance,” said an executive who was at that meeting. “So think about it, set it right. If you don’t, we will make things public, it will be put in the public domain and you will be embarrassed.”

In January 2020, the Indian government started an antitrust probe into Amazon and Flipkart.

In August 2020, a group of more than 2,000 online sellers filed an antitrust lawsuit against Amazon and Cloudtail, alleging that Amazon favors select retailers.

Both, Cloudtail and Amazon stated they comply with all laws; the Competition Commission of India has yet to decide whether to order an investigation into the matter.



Categories: Creativity, Economy & Finance, Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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