The Biggest Roadblock for Amazon in India Isn't Walmart

Earlier this year, much ink was spilled about the tussle between Amazon.com (NASDAQ:AMZN) and Walmart (NYSE:WMT) to gain control of Flipkart, one of India's largest online retailers. For months, there were unconfirmed reports of a bidding war as the two sought a foothold with the world's second-largest population of potential shoppers -- 1.3 billion people.

Walmart ultimately announced a deal to acquire a 77% stake in Flipkart for a massive $16 billion. But as the two continue to go head to head in e-commerce, it may not be Walmart that poses the biggest threat to Amazon's success in the country. Amazon should be much more concerned about legislation making its way through India's halls of government that could put up a number of roadblocks for foreign players in favor of hometown favorites. 

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Home field advantage

Current regulations forbid foreign-funded companies from keeping e-commerce inventory in India, which prevents Amazon from using its considerable logistics expertise and warehousing experience. This limits much of the advantage the company gains with its Fulfillment by Amazon operations. Though the company had hoped for newer, more favorable rules, India may enact even more stringent requirements on phantom sellers that the company uses to get around current regulations, according to a report in Bloomberg.

The proposed regulations in India state that they seek to level the playing field for local companies by "encouraging domestic innovation and boosting the domestic digital economy to find its rightful place with dominant and potentially noncompetitive global players."

Location, location, location

Another potential blow from the draft legislation is the requirement that any data generated regarding India's consumers would be required to be stored on servers in the country. This stipulation would serve to hamper progress and increase costs for a number of large technology companies, and not just in the area of e-commerce. Social media sites like Facebook, internet search providers like Google (a subsidiary of Alphabet), and payment services companies would be affected by the rules. Multinational credit card companies like Visa and Mastercard, as well as digital payment sources like PayPal have been told that information gathered on Indian customers must be stored in the country no later than October.

Additional provisions in the proposed legislation would force foreign firms to comply with the same prerequisites as companies native to India, like requiring two-factor authentication for logging into websites. The new rules also seek to restrict the significant discounts offered by online retailers.

India appears to be following in the footsteps of China, enacting measures that would benefit local technology companies over foreign competitors, and giving them a chance to thrive. For example, legislation was enacted in China that forbid non-Chinese companies from owning or operating certain technologies linked to cloud computing. This forced Amazon to sell some assets related to its Amazon Web Services (AWS) to a Chinese partner last year to comply with the new law. 

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A tougher nut to crack

Amazon has been able to parlay its head start in e-commerce into significant market share in its home country. According to some estimates, it accounted for 44% of all e-commerce sales in the U.S. last year, and 4% of all retail in the country. 

It's important to note that Amazon hasn't had the same clear runway internationally that it had domestically. The company faces significant challenges from local favorites in many foreign markets, like MercadoLibre in Latin America, Alibaba and JD.com in China, and Flipkart in India.

Now, in addition to homegrown competitors like Flipkart, Amazon may be facing regulations that increasingly favor local companies, making its path to international growth much more challenging -- and much less certain.