New e-commerce rules give Reliance a huge advantage over Amazon and Flipkart. But will they necessarily create more jobs?
- Reliance Industries is launching its e-commerce business from the state of Gujarat
- The business will aim to connect 3 crore small retailers and shopkeepers across India.
- Reliance Retail and Reliance Jio will be pivotal to the success of the new venture, which will work on an O2O model.
- The entry of RIL, coupled with recent changes in e-commerce policy, will make it even harder for foreign players like Amazon and Walmart to compete in India.
- While the policy changes favour domestic capital over foreign, will they also lead to domestic jobs?
The Indian e-commerce industry has traversed an interesting trajectory. It began with startups (Flipkart, Snapdeal, etc). Then came the foreign players (Amazon, Walmart). And in the third stage, India is now bracing for the entry of homegrown behemoth Reliance Industries.
Starting with Gujarat, Reliance Industries is set to launch its e-commerce business across the country. Unsurprisingly, this is expected to give the jitters to existing players like Amazon and Walmart (through Flipkart).
During the inaugural event of Vibrant Gujarat Summit, Reliance Industries Chairman Mukesh Ambani declared, “Reliance Jio and Reliance Retail will launch a unique new commerce platform to empower and enrich our 12 lakh small retailers and shopkeepers in Gujarat, which are part of the over 3 crore community in India.”
The conglomerate has devised an interesting business model that blends perfectly with its existing ventures Reliance Jio and Reliance Retail. It syncs with Ambani’s ploy to leverage a triple play of carriage, content and commerce.
Reliance Jio has already generated ripples in the telecom sector, with a subscriber base that has crossed 280 million in the quarter ending December 2018. Moreover, Reliance Jio has 4,000 outlets across India, which it plans to scale to 10,000 over time.
Reliance Retail currently has around 4,000 stores and 50 warehouses with around 350 million customers. Reliance Jio’s digital infrastructure and services combined with Reliance Retail’s physical presence will provide an excellent platform for Reliance to launch its e-commerce services.
The company is planning an online-to-offline (O2O) model, where consumers will be induced to make online searches for products that can be purchased in a physical store. It will consolidate merchants, who will serve consumers in untapped markets (tier 2, 3, 4).
These areas are outside the realm of current e-commerce firms. The physical stores of Reliance Retail and Jio will be leveraged as touch points to sign these merchants.
Currently, around 80% of Reliance sales come from its core oil & gas business. Ambani plans to increase the share of consumer businesses (Jio and Retail) to 50% of revenues over the coming 10 years.
DOUBLE TROUBLE FOR FOREIGN FIRMS?
The worth of the Indian market for global e-commerce firms like Walmart (through Flipkart) and Amazon is undeniable – it is the only billion plus consumer market open to entry.
But the entry of Reliance, coupled with a policy framework increasingly favouring domestic businesses, makes the competition tougher for foreign players.
For starters, they are not allowed to own e-commerce inventory. This prevents Amazon from leveraging its logistics strengths. This restriction won’t apply to Reliance, giving it a huge competitive advantage.
Moreover, the policy also mandates that data that is generated in India via social media, search engines or e-commerce will have to be stored in local servers. This will certainly increase costs for foreign players and is already being applied to payment companies like Visa, Mastercard and PayPal.
Mukesh Ambani has been a strong proponent of data localization himself.
WHO SAID WHAT?
“In this new world, data is the new oil. Data is the new wealth. India’s data must be controlled and owned by Indian people and not by corporates, especially global corporations. For India to succeed in this data-driven revolution, we will have to migrate the control and ownership of Indian data back to India, in other words, Indian wealth back to every Indian.”
“One thing is certain that consumers and India will be a winner, and in online retail, the fear of becoming a digital colony will recede with the entry of a formidable Indian entity – Reliance.”
“Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce.”
“The new e-commerce restrictions announced by the Government of India on December 26 are a cause for concern… we fear that these restrictions will have a far-reaching negative impact both on US investments and on Indian consumers.
E-COMMERCE POLICY FAVOURS WHOM?
Prime Minister Mr Narendra Modi had proclaimed in the 2014 elections while he stressed on standing up to global challenges, “We should not think that ‘if online trade comes, we will be finished’. You should demand (of) the government how to increase your capability to meet this new global challenge rather than telling the government, ‘shut down online trade’.”
Four years hence, the BJP faces elections as the incumbent government and has also suffered reversals in five state elections. This has compelled the PM to try and appease his core constituencies, which includes traders.
The DIPP introduced revised e-commerce regulations on December 26, which will be effective from February 1. The government has permitted 100% FDI for e-commerce marketplaces but disallowed FDI in inventory-based e-commerce.
There are five broad implications to this policy:
- Marketplace entities are not allowed to buy over 25% from one vendor.
- They cannot directly or indirectly give discounts on products.
- Entities where there is equity participation by the marketplace cannot sell their products on its (marketplace’s) platform
- E-commerce marketplace entity will not make it mandatory for any seller to sell any product exclusively on its platform.
- Marketplaces will also be mandated to submit a compliance report to the Reserve Bank of India (RBI) by September 30 every year.
Both Amazon and Flipkart are asking for additional time to implement these changes as the deadlines are too tough.
The tightening of inventory norms is a big setback for these companies. For instance, Cloudtail is the biggest retailer on Amazon’s platform. But Amazon holds a stake in it with Infosys founder Narayana Murthy’s Catmaran Advisors. Another such retailer is Appario which Amazon owns with Ashok Patni, Co-founder, Patni Computer Systems.
With the changes in policy, both Amazon and Flipkart found themselves stuck with inventories valued at around Rs 2,000-2,500 crore each. They would have to liquidate this inventory by February 1.
It is framed as a local vs foreign debate, but the timing of the changed e-commerce policy does raise suspicion of possible links with Reliance’s e-commerce foray.
Especially with norms tightened around inventory, PwC estimates that the sales of foreign e-commerce firms could come down by around US$ 46 billion by 2022 and US$ 800 million in the current fiscal. It further projects that it will lead to 1.1 million fewer jobs and reduction in tax collections by US$ 6 billion.
However, Reliance O2O model will obviously be benefited by the new rules since it has no restrictions on inventory. In fact Kishore Biyani is also setting up a hybrid retail venture by the name of Tathastu.
TO BE OR NOT TO BE
The current changes in the e-commerce policy are a definite subject of debate.
Those in favour will cite the examples of countries like China, which have stiffly opposed the entry of foreign players. Lakhs of small traders have protested against policies like deep discounting and preferential treatment by online retailers by leveraging their deep pockets.This puts domestic players at a disadvantage.
Those against the changes would say that prioritizing the domestic e-commerce players in this manner does not augur well for India’s image as an FDI destination. Moreover, the e-commerce policy should seek to encourage competition rather than stifle it.
Moreover, it is obvious that a large domestic player like RIL stands to gain the most with the tightening of norms, since it has the scale, platform, capital and first movers advantage.
But the true test will be not whether the capital being invested is foreign or Indian. Rather, the policy should be judged on how many jobs are ultimately generated within India and whether a level playing field is actually created.