E-commerce: Ensuring fair practices in new marketplace concepts disrupting the linear supply chain
A brief history of supply chains in the 21st century
Traditionally, supply chains have been constructed as linear vectors with varying magnitudes but primarily unidirectional. This upstream and downstream paradigm is changing. The advent of internet, cross country supply chains, captive capability centres have ushered in a new era of commerce: E-commerce. The WTO defines e-commerce as the production, distribution, marketing, sale or delivery of goods and services by electronic means. Thus, e-commerce can potentially impact the entire value chain. Legacy monolithic ERP systems decoupled digital and physical flows but in today’s world of Artificial Intelligence, the two flows are converging with products increasingly being tracked. This owned data is restructuring business processes at a rapid pace. For example, a Fortune 500 retailer is able to better assess the inventory performance through stock digitisation; allowing it to restructure existing processes to liquidate slow-moving inventory. Similarly, heavy machinery factories are increasingly predicting wear and tear, enabling resources to repair such units while moving production to other assemblies.
New Business Models
In effect, new business models are also emanating because of digitised supply chains. The ability to track a product’s usage post purchase lends itself to an entirely new spectrum of business models. It allows us to move from a product centric business model to a service centric platform based business model. With a constant stream of data, revenue models will increasingly be based on outcomes. For example, Rolls Royce now charges Airbus and Boeing on engine hours usage instead of a flat fee or the entire gamut of subscription businesses like Apple Music or Amazon Web Services which apply the pay per use model. Secondly, value added services are lent new transparency and can thus act as an additional stream of revenue. For example, logistical firms like Rivigo can now analyse shipments and charge an increased fee if a perishable requires superior packaging or temperature control.
In conclusion, new forces in the market are shifting the traditional linear supply chain to a more networked, fluid ecosystem. Regulation thus has to keep pace with the market evolution. According to traditional theory, e-commerce through its network effects and lower search costs, allows more efficiency, lower prices, increased competition and economic surplus. As the market matures and e-commerce academic literature increases, a more holistic analysis is required.
Regulation in India
Two key stakeholders in the Indian context are the Competition Commission of India (CCI) and the Department for Promotion of Industry and Internal Trade (erstwhile DIPP). The CCI is tasked with -
Promoting and sustaining an enabling competition culture through engagement and enforcement that would inspire businesses to be fair, competitive and innovative; enhance consumer welfare; and support economic growth.
The Competition Act 2002, which gave birth to the CCI states – No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
The following agreements come into its purview -
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance.
This was drafted keeping the traditional supply chains in focus. But with the new age supply chain networks as elucidated in the previous sections, regulation needs to keep in my mind the wide range of exchanges and contracts mushrooming today. A particular distribution system – online marketplaces have scaled rapidly in India and can no longer be protected under the garb of nascent technology. Infused by VC capital and FDI (case in point - Walmart acquiring Flipkart for $16 billion), these feral platforms have stayed fairly unregulated. The spectral data being generated by such platforms is now delineated as digital capital by the DIPP in the National e-commerce Policy, conferring data the status of capital at par with financial capital of a corporation. One of the dangerous antitrust issues cropping due to digital capital is the proverbial first mover advantage in a large market driven and consumer oriented Indian economy. The more data a corporation generates, the more digital capital it possesses, which lends itself a competitive advantage to incumbents in the space. MSMEs and startups could be at an economic disadvantage due to the new kind of entry to barrier today – digital capital. Streamlining the access to data, while protecting privacy of users, in the current vibrant start-up culture would be a win- win situation for all stakeholders.
Case Examples in India
After going through multiple cases heard by the DG, CCI; two cases in this space of online marketplaces caught my attention – Case No. 61 of 2014 and Case No. 20 of 2018.
Case No. 61 of 2014 was filed by Jasper Infotech Private Limited (Snapdeal) against KAFF Appliances India (Kaff). Snapdeal is an online marketplace and Kaff is engaged in the manufacture and sale of kitchen appliances which inter alia includes chimneys and hobs. This was in light of a caution notice which Kaff published on its website stating that Kaff’s products on Snapdeal are sold without its authorization and are counterfeit. Further, Kaff would not honour any warranties of such products and Snapdeal argued this as violating Section 3(4)(d) of the Competition Act (which is Refusal to Deal). Such vertical agreements/arrangements under Section 3(4) of the Act are considered anti-competitive only when an appreciable adverse effect on competition (AAEC) is established. Kaff’s chimney sales on Snapdeal actually quadrupled and hobs sales on Snapdeal doubled in the duration of the caution notice and thus an AAEC was ruled out by the DG, CCI.
Case No. 20 of 2018 was filed by the All India Vendors Association (AIVA) against two parties – Flipkart India Private Limited (Flipkart India) and Flipkart Internet Private Limited (Flipkart Internet) again alleging inter alia contravention of the provisions of Section 4 of the Act. AIVA is a company registered under the provisions of the Companies Act, 2013, is a group of more than 2000 sellers selling on e- commerce marketplaces such as Flipkart, Amazon, Snapdeal etc. and Flipkart India (B2B) is engaged in wholesale trading/ distribution of books, mobiles, computers and related accessories whereas Flipkart Internet is engaged in e-commerce marketplace business. Flipkart Internet (B2C) connects buyers and sellers on its electronic marketplace platform and collects a platform fee from the sellers. The main contention of AIVA was that small vendors have become suppliers to bigger vendors like Cloudtail and WS Retail (owned by Flipkart founders until 2012) on platforms like Amazon and Flipkart respectively instead of directly selling to consumers on the platforms. Online platforms like Flipkart India procured the goods at a discounted price and used to sell it to companies like WS Retail, allegedly delivering preferential treatment to select sellers. (Interesting to note is 100% FDI under automatic route is permitted in marketplace model of e-commerce and not an online retail store). The fact that WS Retail Services Private. Ltd. is no longer a seller on the Flipkart Marketplace post 11 April 2017 and AIVA provided insufficient data inter alia with respect to Flipkart’s market share, led the DG, CCI to close the case.
Conclusion and Next steps
As digital capital and omni channel become more paramount in the Indian context, safeguards needs to be in place to ensure fair competition. Predatory pricing, deep discounts and loss funding are not completely unfounded claims proposed by the Confederation of All India Traders and this led the Indian government to ban e-commerce companies from selling products from companies they have invested in with effect from 1st February, 2019. Additionally, companies will be prevented from entering into exclusive agreements with e-commerce sites which implies that OnePlus will not be able to sell its OnePlus phones exclusively on Amazon and Xiaomi will also not be able to sell its products exclusively on Flipkart.
The following I believe are the need of the hour in light of increasingly complex supply chains and new business models:
1) Education and awareness of the Competition Act, 2002 is urgently required for both consumers and suppliers.
2) The ambit of Competition Act, 2002 needs to be revisited and increasing its purview in light of e-commerce needs to be discussed.
