At one time, India was the crown jewel of Amazon Inc.'s (AMZN) - Get Report international growth strategy, but a new law that is set to take effect this year could hamper the e-commerce giant's long-term prospects on the subcontinent.
Amazon has spent billions of dollars to compete in India as the e-commerce market there is forecast to grow to as large as $50 billion by 2023. Among its main competitors are Flipkart, which was bought by Walmart (WMT) - Get Report last year.
But a new law that just went into effect to protect domestic sellers in India threatens both of them. The law bans foreign e-commerce companies from negotiating exclusive agreements with vendors, as well as from selling items through vendors that they hold an equity stake in. As a result, both companies have had to remove thousands of items from their websites.
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The New York Times reported that 400,000+ items representing almost a third of Amazon's estimated $6 billion in annual sales in India will likely be removed from Amazon's site in India, at least temporarily.
The uncertainty over its business in India is likely one reason why Amazon issued weaker-than-expected guidance for its current quarter of between $56 billion to $60 billion, below analyst consensus estimates of $60.83 billion. Amazon's stock was falling 3.7% on Friday following the earnings release.
On the company's call with analysts on Thursday evening, Amazon's CFO Brian Olsavsky noted that Amazon has factored in the best estimate they have for Q1 in India into their guidance estimate. However, he acknowledged that "there is much uncertainty as to what the impact of the government rule change is going to have on the e-commerce sector there."
But Olsavsky emphasized that Amazon feels "very good about the long term prospects in India and doing a good job for both Indian customers and Indian sellers. The new regulations need to be interpreted...to make sure they don't have unintended consequences."
Zev Fima, research analyst for Jim Cramer's Action Alerts Plus Portfolio, which owns Amazon, said the ultimate impact of the rule changes remain to be seen.
"It is a bit concerning given the expectations for growth out of the region, but they are adjusting," said Fima. "It doesn't appear to impact their ability to be the medium through which buying and selling occurs, so that's positive, but we will have to see how the impact on the merchants that can sell (those in which they have an equity stake) will impact growth going forward -- that is still a bit of an unknown."