The hype over the location of Amazon’s
HQ2 has died down, but the e-commerce giant actually just opened
its biggest office building yet. This one though, isn’t in the U.S. The new campus is
in Hyderabad, India. It covers 9.5 acres with 1.8 million square feet of office space,
making it the largest Amazon building by total area. It has the capacity to
hold some 15,000 workers. Even its headquarters, individual buildings
in its hometown of Seattle, can’t hold that many
people in one building. The building out of the new campus in
India just is another sign of how committed Amazon is to the market, how
aggressively they plan to invest in the market, how much of a
commitment they’re making to India. India is seen as one of the
last major growth markets for the retail giant. Amazon began its retail operations
in India back in 2013. Since then, the company has invested
more than five billion dollars into the country. Now, the reason that Amazon
is so interested in this market is because it represents
enormous untapped potential. Right now, e-commerce represents just 3
percent of total consumption in India. While India’s population has
swelled to 1.3 billion, less than half are online. The country recently rolled out its
4G network, and as Internet penetration rates continue to climb, Amazon
hopes to edge out local and international competitors. They’re sinking a lot of money
into India because the projections are crazy. I mean, analysts say that this is
a market that’s going to be worth 100 billion dollars by 2022. However, Amazon faces steep competition
from Walmart, which completed its 16 billion dollar acquisition of
domestic e-commerce company Flipkart in 2018. Before the acquisition, Flipkart
controlled an estimated 40 percent of the Indian e-commerce market, bolstered
by its fashion and apparel brands. Now Amazon and Walmart are
locked in a tight competition for market share. Yet despite their growing
influence, roughly 90 percent of India’s retail market is still controlled
by small mom and pop stores. These local retailers wield a lot of
political power, which has led to updated e-commerce regulations that make
it much tougher for multinational corporations to take
on domestic competitors. Direct to consumer sales were
already banned for foreign-owned retailers, leading Amazon and Walmart to set up
a network of affiliate companies that allowed them to continue
selling their own products. But after Walmart’s Flipkart acquisition,
the Indian government banned foreign e-commerce companies from selling
products through affiliates that they owned a majority stake in
and from negotiating exclusive deals with sellers. Amazon has a lot of its own
private label products like the Echo, like batteries, like a lot of things, and
groceries as well, that it’s trying to sell in the Indian market. So when the government put in regulations
that said it wasn’t able to even sell its own products through merchants that
it had a stake in, that led Amazon to take down thousands
of products on its website. The New York Times estimated that Amazon
would have to pull about 400,000 items in total, accounting for nearly a
third of its sales in the country. However, these regulations could only
be a short term setback. Some analysts say it’s just a matter
of time before Amazon finds clever ways to reconfigure its business
models and partnerships to comply. Amazon is pouring a lot
of money into the country. Could that all be
stifled by these regulations? That is a big question. I think probably Amazon is going to figure
out a way to work its way through the regulatory obstacles. There’s a reasonable track record they
have of executing well despite some obstacles, whether they are economic
or cultural or logistic or regulatory. Amazon is already taking major steps to
adapt by expanding its brick and mortar presence in the country. In August, it signed a deal to
buy a minority stake in Future Retail, which operates over 900 stores and
owns several large supermarket brands. With this investment, Amazon is really
taking this hybrid retail approach. By combining the brick and mortar,
the localization of an Indian partner and its own e-commerce experience,
that’s what Amazon believes will hopefully lead it to
success in this market. The company is also expanding
its online grocery business, AmazonFresh. Now, grocery deliveries will be available
in some parts of Bengaluru and eventually in other cities too. Food and grocery is by far
the largest retail segment in India. It is the biggest market in India. It’s almost 55 or 60 percent of
household spends is still grocery items. So, you know, without that, it’s very
difficult for Amazon to capture the market. Amazon also hopes to
learn from past mistakes. The company shut down its e-commerce
operations in China this summer after it failed to make
headway in the market. They faced really good entrenched competition
from companies that did a much better job fitting their products
and their services to that market. And so we’re talking about JD.com, and of course, Alibaba. In India, it’s taking
a different strategy. There’s more of an
emphasis on rural customers. In fact, 80 percent of Amazon’s
customers currently in India live outside of the country’s biggest cities. Amazon has actually set up these sort
of really tiny stores in rural areas so that Indian customers can go in
and actually learn how to purchase things and order things
on their smartphones. Now, Amazon even offers an alternate version
of its app designed to run on inexpensive smartphones with
spotty Internet access. It also launched its Hindi website last year
and hopes to add a variety of regional languages soon. But whether it’s designing new apps,
setting up small brick and mortar retail stores or building huge new
campuses, these long term investments don’t come cheap. And it may be
awhile before these efforts are reflected in profits. Look, it’s going to be a very
expensive market and I think they’re willing to sustain losses in that market for a
long period of time, I would guess 10 years. So I think we still
have several years ahead of losses. Amazon’s international e-commerce unit consistently
operates at a loss. But as growth slows in North
America, the company hopes that eventually India can be another cash cow. When you think about Amazon opening
up a campus for 15,000 employees anywhere else, it wouldn’t be
able to fill it. I mean, Amazon’s international business can
be doing well in Europe and Australia, but it needs a big market
like India for its future growth.