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Alex Cho

Amazon Plus India Equals The Next Dutch East India Company

Amazon’s next major initiative isn’t drones, groceries, or video streaming. It’s India, and yeah, the most populated country in the world is fetching the attention of Google, Amazon and Facebook. Yet in its own backyard it doesn’t even know it’s confronting large scale globalization. Westernized technology firms are out to conquer the world one user at a time, which operates on a model that's built for economies of scale. The opportunity is compelling, as Fortune recently wrote an exclusive piece on Amazon through its usual high-quality investigative reporting.

Quoted from Fortune:

One reason for India’s huge potential is that it starts from such a small base. Barely one-quarter of India’s population has access to the Internet at home, whether on a smartphone or computer, and only a small fraction of those have ever shopped online. For e-commerce, that means explosive room for growth. Morgan Stanley estimates that revenue could soar to $137 billion by 2020, more than 10 times the 2013 level of $11 billion. That is partly thanks to plummeting prices for smartphones (there are cut-rate deals online for Chinese models like OnePlus and Xiaomi), which about 350 million Indians now own.

The interesting thing to keep in mind is that India has created laws to prevent foreign companies from directly selling to Indian consumers. In other words, Amazon needs to develop a networked retail business model like Alibaba (Taobao), which Amazon refers to as fulfillment by Amazon. Since the market for retail is fairly fragmented it’s fair to assume that Amazon’s more focused on building out the network effect and underlying infrastructure for warehouses and distribution. Assuming Amazon takes a modest take rate of 2% to 3% similar to Alibaba the impact on revenue won’t necessarily be as material, which will make it difficult for analysts to model out Amazon’s consolidated sales growth inclusive of India. However, if it’s a take-rate model similar to Alibaba the company stands to benefit quite significantly through heightened gross margins, which should be north of 60%. In that case, the impact on profitability will be quite noticeable, as we had witnessed recently with Amazon Web Services.

Since the vast majority of smartphone adds are projected to come from India over the next five-years, I think it’s fair to assume that Amazon’s focus is on mobile, which they’re already dominant in. I don’t think competitors within the Indian space stand much of a stance, as Amazon already supplanted the world’s biggest retail giant in the world i.e. Wal-Mart both online and offline. People like to buy things on the Internet, and when you tie that into an ecosystem of vendors and a loyalty program like Amazon Prime, it’s fair to assume that Amazon is set to become the modern equivalent of Dutch East India Company. 

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