Amazon documents reveal secret strategy to dodge India’s regulators

Indian traders have long alleged that Amazon’s platform largely benefits a tiny number of big sellers and that the American giant engages in predatory pricing.

It was early 2019, and senior Amazon.com Inc executive Jay Carney was preparing for an important meeting. The former press secretary to U.S. President Barack Obama, Mr. Carney was scheduled to talk with India’s ambassador to the United States in Washington, D.C. In Delhi, the Indian government had just announced foreign direct investment regulations that threatened to disrupt Amazon’s business in the world’s second most populous country.

Before the meeting, Amazon employees prepared a draft note for Mr. Carney. The note, reviewed by Reuters, advised Mr. Carney what to say — and what not to say.

He should highlight the fact that Amazon had committed more than $5.5 billion in investment in India and how it provided an online platform for 400,000-plus Indian sellers. But he was cautioned not to divulge that some 33 Amazon sellers accounted for about a third of the value of all goods sold on the company’s website. That information, the note advised, was”Sensitive/not for disclosure.”

Other company documents reveal equally touchy information: Two more sellers on the e-commerce giant’s India platform — merchants in which Amazon had indirect equity stakes — accounted for around 35% of the platform’s sales revenue in early 2019. That meant some 35 of Amazon’s more than 400,000 sellers in India at the time accounted for around two-thirds of its online sales.

All this information was indeed politically sensitive. If it got out, it could give fresh ammunition to small Indian retailers who allege that Amazon harms their businesses by flouting federal regulations and favouring a few big sellers. It could have annoyed Prime Minister Narendra Modi, whose political base includes millions of these small retailers. And it would have undercut Amazon’s public messaging that it is the friend of small business in India. As the company says in one marketing slogan in India, it is “transforming lives, one click at a time”.

What Mr. Carney wound up telling the ambassador is unclear. A meeting did take place in April 2019, but neither side would comment on the specifics of the gathering.

The briefing note for Mr. Carney is contained in hundreds of internal Amazon documents that are reported for the first time. News of their contents could deepen the risks facing the company as it encounters intensifying government scrutiny in one of its fastest-growing markets. The documents lay 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 India.

Indian traders, both brick-and-mortar and smaller online sellers, have long alleged that Amazon’s platform largely benefits a tiny number of big sellers and that the American giant engages in predatory pricing that has crushed legions of retailers. Amazon rejects this: It says it complies with Indian law, which stipulates that an e-commerce platform can only connect sellers to buyers for a fee, unlike in the United States, where Amazon can both act as middleman and sell goods directly to consumers.

The company also says it runs a transparent online marketplace and treats all sellers equally. The internal Amazon documents contradict those claims, revealing how the e-commerce giant has helped a small number of sellers prosper, giving them discounted fees and helping one cut special deals with big tech manufacturers such as Apple Inc. The documents also show that the company has exercised significant control over the inventory of some of the biggest sellers on Amazon.in, even though it says publicly that all sellers operate independently on its platform.

The documents reviewed by Reuters are dated between 2012 and 2019. They include drafts of meeting notes, PowerPoint slides, business reports and emails. One of the notes contains a frank appraisal of Mr. Modi’s “straight forward” style of thinking, sizing him up as “not an intellectual”. Together, they provide a look inside a cat-and-mouse game Amazon has played with the government, adjusting corporate structures each time the government imposed new restrictions on foreign e-commerce firms, amid growing agitation from small retailers.

‘Treat all sellers in a fair, transparent, and non-discriminatory manner’

Amazon “does not give preferential treatment to any seller on its marketplace” and “has always complied with the law”, the company said in a written response to questions from Reuters. “The reporting appears based on unsubstantiated, incomplete, and/or factually incorrect information, likely supplied (maliciously) with the intention of creating sensation and discrediting Amazon.” The company added 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.”

Mr. Modi’s office and the Ministry of Commerce and Industry didn’t respond to questions from Reuters.

Amazon has become one of the two biggest e-commerce platforms in India, with close to $10 billion in sales in 2019, according to Forrester Research. The American giant knows it faces significant regulatory risks here.

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

In January 2020, the Competition Commission of India, announced it was investigating Amazon and Walmart Inc’s Flipkart following a complaint by an Indian trader group. The commission cited four alleged anti-competitive practices: 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 probe is currently on hold after a challenge by Amazon and Flipkart, the other major e-commerce platform in the country.

Separately, Amazon is under investigation by the Enforcement Directorate, which has been investigating the company for possible violation of foreign investment rules.

Asked about the investigations, Amazon said it was confident of its compliance and committed to cooperating with the antitrust watchdog and Enforcement Directorate. Flipkart did not respond to a request for comment.

The Competition Commission and Enforcement Directorate didn’t respond to questions.

Amazon is operating in a charged political environment. The rise to power of Mr. Modi, who first won election in 2014 on a groundswell of Hindu nationalism, has made life complicated for multinational companies. Hindu nationalist groups, suspicious of foreign influence and often critical of large multinationals, are seeking policy changes to protect domestic businesses. Companies like Alphabet Inc’s Google, Facebook Inc and Mastercard Inc have also faced stringent regulation. In the case of e-commerce, the restrictions are aimed at protecting brick-and-mortar retailers.

Explosive growth

Despite the regulatory and political obstacles, Amazon has enjoyed explosive growth in India. The expansion has been led by Amit Agarwal, a senior vice-president and the country manager for India. Mr. Agarwal, 47, who has a master’s degree in computer science from Stanford University, has risen through the ranks since joining the company in 1999.

By his early 30s, he’d become a close adviser to Amazon founder Jeff Bezos. One company document, which details his profile, includes these lines: “Amit was chosen to be Jeff’s technical Advisor at a young age of 33. ‘Technical advisors’ are a chosen few that work side by side with J Bezos and are then selected to take on some of the most critical roles at Amazon.”

Mr. Agarwal enjoys playing electric guitar and was a vocalist during his Stanford days in a rock band called Algo-Rhythms, according to a recent version of his profile on the alumni page of the Indian Institute of Technology, where he got a computer science degree. He is also a “die-hard fan” of comedian Jerry Seinfeld, according to the profile.

Under Mr. Agarwal, Amazon has ramped up investment in India. The country is one of Amazon’s most important growth markets — especially since it announced in 2019 that it would no longer operate its marketplace in the most populous nation, China, where it faced stiff local competition. On a visit to New Delhi in January 2020, Mr. Bezos announced Amazon would spend $1 billion to bring small businesses online in India. That would take the company’s total committed India investment to $6.5 billion.

But India also poses unique challenges to the business model that made Amazon the biggest online retailer on the planet. Because foreign investment regulations in India bar e-commerce firms from holding inventories of goods and selling them directly to customers, companies like Amazon can only collect fees from vendors selling products on their marketplace.

Globally, about 58% of Amazon sales of physical goods in 2018 came from third-party merchants; the rest come from direct sales to consumers, the company has disclosed. The ability to sell straight to people in the United States and elsewhere packs big benefits. It means Amazon can deal directly with manufacturers, for one, giving it greater control over its product range.

It is this barrier — the regulatory wall around the consumer — that Amazon has been trying to overcome for much of the past decade in India.

When Amazon arrived in 2004, it created a development centre aimed at servicing its global operations. Mr. Agarwal, who helped set up the operation, recalled on an Amazon blog in 2019 how his team initially rented cubicle space in another company’s office and “used to sit on the ground and write code” because they didn’t have chairs. Today, the company says it has 100,000 employees in India.

Amazon’s main foray began in 2013. It started listing books and DVDs on Amazon.in, its online platform. Since then, Amazon has taken an aggressive approach to government limits on e-commerce.

“Test the Boundaries of what is allowed by law,” said one slide in a 2014 presentation, titled “Risk Analysis”. The slide advised that preparations be made in the event of a visit by an enforcement body: “Establish a Strong Dawn raid Process.”

Asked about the slide, Amazon said that “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 Merchant’ Cloudtail

To deal with the restrictions on direct sales, Amazon found an indirect way of reaching consumers and boosting sales quickly. It entered a joint venture with an entity formed by one of India’s most famous tech moguls, N.R. Narayana Murthy, founder of software services giant Infosys Ltd. The venture was used to create a seller named Cloudtail, which began offering goods on Amazon.in after it was set up in August 2014.

Amazon has said that Cloudtail is an independent seller on its marketplace. A year after Cloudtail was created, Amazon told Mint that Cloudtail received “the same privileges as any of the other sellers on our platform”.

But Amazon has been deeply involved in expanding Cloudtail — often referred to as “SM,” or “Special Merchant,” in the documents.

“The Special Merchant (SM) was launched in Aug-14 and we helped SM quickly ramp up and gain scale through Q4,” stated an Amazon India report, dated February 23, 2015. “Launch, stabilize, grow Special Merchant; make it profitable,” the report said.

Amazon had big plans for Cloudtail. The target was to ensure Cloudtail accounted for 40% of Amazon.in sales, “and build this into a $1+B business” in 2015, according to the report. To that end, the report reveals, 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.

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

A spokesperson for Cloudtail and Mr. Murthy said they had no comment. Apple and OnePlus didn’t respond to questions. Microsoft had no comment.

The deals Amazon facilitated with smartphone makers, coupled with deep discounts Cloudtail was offering on the Amazon website, hit India’s offline mobile sellers hard, said Arvinder Khurana, president of the All India Mobile Retailers Association.

“The entire market was disturbed,” said Mr. Khurana, whose trade group represents 150,000 mobile retail stores. “There’s been a year-on-year decline in sales” at brick-and-mortar shops, he added.

Currently, e-commerce accounts for 4% of India’s roughly $900 billion retail market, according to Forrester Research. But it’s growing fast.

While some 10% of smartphones in India were being sold online in 2013, by 2016 that figure had jumped to 30%, according to Forrester. By 2019 it was 44%. And Amazon and Flipkart dominate these sales, accounting for roughly 90% of all online smartphone sales, said Forrester analyst Satish Meena.

Brick-and-mortar retailers told Reuters they’re struggling to compete with the online giants. One mobile phone seller in Ahmedabad said that while he was selling an iPhone 11 for ₹56,000, a customer told him it was going for around ₹47,000 rupees on Amazon.

Online ‘competition was ruinous’

For Mumbai mobile phone merchant Narendra Gada, the competition was ruinous. In 2013, he said, his business was doing well. It enabled the 44-year-old to support his family of three, selling around 20 phones a day at his store in the upmarket Colaba area. His monthly sales, he said, were around ₹1 crore. “Margins were good at that time,” Mr. Gada recalled, as high as 25% on some models.

Everything changed in 2015 with the expansion of online sales of smartphones, he said. He couldn’t compete with the exclusive launch of smartphone models online or the discounts being offered, he said.

By 2016, his sales had dropped some 40%. Customers would come to his shop to try smartphones, ask for the WiFi password and then go online to buy the model they’d just sampled, he said. In 2018, Mr. Gada began selling at lower margins and on credit to keep sales alive. Late in 2020, he shut the shop he’d started in 1998. The final straw was the pandemic-induced lockdown. But he said it was the advent of online sales that killed his business.

“There is no walk-in now,” he said. “There is no business.”

Facts communicate a different reality, says Amazon

In its statement, Amazon said, “Facts communicate a different reality. Small businesses are increasingly embracing technology and finding success online.”

The company said that it now had over 7,00,000 sellers on its platform, most of them small and medium businesses, and had “no incentive” to keep the number of sellers down. It also said that tens of thousands of Indian manufacturers are using Amazon to sell to consumers abroad, so far generating cumulative sales of $2 billion. And for millions of consumers, of course, the discounts offered on Amazon’s platform are a boon.

About two months after Cloudtail’s launch in August 2014, Mr. Bezos met Mr. Modi in New Delhi. A draft document containing talking points was prepared for the October 3 meeting. It makes no mention of Cloudtail or its plans.

One key objective of the meeting, according to the document, was to discuss barriers to foreign investment in the e-commerce sector.

The document also included a brief appraisal of the Indian leader. “PM Modi is not an intellectual or an academic but believes that strong administration and governance is the key to running a successful government,” it said. “He is known to like simple, logical, straight forward thinking without excessive academic jargon.”

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