The Covid-19 crisis has highlighted how Amazon has become part of the fabric of modern commerce – and is likely to become increasingly so post-pandemic. However, challenges lie ahead as well as new areas for investment and expansion.
Amazon reported net sales of $88.9bn in the second quarter of 2020, a 40% increase on the previous year, largely driven by the Covid-19 pandemic. In his letter to investors earlier in 2020, Amazon founder Jeff Bezos addressed how the Covid-19 crisis had shown just how “important Amazon was to its customers”.
In March, the company opened 100,000 new positions across its global fulfilment and delivery network to address increasing demands placed on the supply chain by the pandemic. After filling those roles, the company announced it would create a further 75,000 jobs to respond to customer demand. The company saw overall year-on-year growth of 20% in 2019 before the pandemic hit. Questions now arise about where the engine of growth lies for a company with tentacles across much of the world.
Amazon’s investment in second US headquarters
Amazon achieved net sales of $170.77bn in 2019 in its home market of the US compared with international sales of $74.72bn. While the company is headquartered in Seattle alongside fellow tech giant Microsoft, Amazon’s growth in the US is marked by the addition of a second headquarters in Arlington, Virginia. Amazon plans to invest $2.5bn in primary and associated development plans for its new Metropolitan Park headquarter campus. The company currently has 492 jobs open in Arlington but has said it will create at least 25,000 new full-time positions over the next decade to occupy 270,000m2 of office space.
Amazon directly employs 840,000 workers worldwide, including more than 590,000 in the US, 115,000 in Europe and 95,000 in Asia. The company has 62 locations in North America, 108 in Europe, 37 in Asia-Pacific, 37 in the Middle East and Africa, and four in Latin America.
Consolidated net sales generated from international online stores reflect Amazon’s staff vacancies. Amazon’s German operations currently have 788 job openings, the UK has 1,064 (777 of which are in the London or Greater London area) and Japan has 324.
Does Amazon’s growth lie in cloud computing?
In terms of growth potential, Amazon Web Services (AWS) is the fastest-growing part of the business, with a year-on-year growth rate of 37%, compared with the company’s online marketplace sales in the North American market at 21% or international sales at 17%. AWS revenue represented 12.5% of the company’s income in 2019, up from 11% in 2018.
This significant growth area for Amazon may signal an increased focus for the company on its AWS cloud services, particularly as the pandemic has accelerated the adoption of cloud services globally. Prior to the Covid-19 pandemic, emerging markets had very low cloud adoption, partly because of the lack of presence of major hyper-scalers such as AWS, according to Alfie Amir, principal analyst at GlobalData. When it comes to the ASEAN market, AWS only has a presence in Singapore and is building another in Jakarta. “This is a huge opportunity for cloud providers,” says Amir.
Migration to remote working, 5G and edge computing are all drivers that could maintain the acceleration momentum in emerging markets. According to the GlobalData ICT Forecast, the Association of South East Asian Nations cloud market will grow 9.3% from $13.3bn in 2019 to $20.6bn in 2024. Amir points out there is strong competition not only from other US hyper-scalers such as Google and Microsoft but also from Alibaba Cloud, which has a wider footprint in the region and stronger relationships with governments.
Amazon bets on autonomous vehicles
Apart from geographical expansion, Amazon continues to diversify outside its core marketplace business, as was seen in its acquisitions of Wholefoods in 2017 and online health services start-up Health Navigator in 2019. In June this year the company bought self-driving start-up Zoox for a reported $1.2bn, entering the autonomous vehicle space to compete with Elon Musk’s Tesla and Alphabet subsidiary Waymo. The global autonomous vehicle market demand is estimated to have a compound annual growth rate of 63.5% during the forecast period 2020–27, according to Precedence Research. However, there is speculation as to whether Amazon will grow Zoox on a large scale or use the technology for its own delivery network.
Early indicators of Amazon entering the autonomous vehicle sector included the company’s participation in February 2019 in a venture capitalist-led $530m investment in Aurora, which is developing hardware, software and data services to power self-driving technology. However, the Zoox acquisition is an even clearer signal that Amazon has thrown its hat into this particular ring.
Too big to fail?
Alhough global expansion is the engine of Amazon’s business, it also carries the risk of reputational damage as well as a host of other business challenges. The challenges lie in the complexity from the sheer scale of the business, which the company says in its 2019 annual report can “place significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions”.
Amazon has faced criticism for its environmental impact, everything from packaging waste to data centre energy consumption. In September 2019, a group called Amazon Employees for Climate Justice organised a walkout as part of the Global Climate Strike, with more than 1,800 workers in 25 cities and 14 countries participating. The company co-founded the Climate Pledge in 2018 encouraging other businesses to commit to the goals of the Paris Agreement. Amazon aims to have a delivery fleet of 100,000 new electric vans and 100% renewable energy by 2030. In February 2020, the company launched the $10bn Earth Fund to combat the effects of climate change with grants to scientists, activists and environmental organisations. Bezos immediately announced the first 16 recipients, which will receive $791m between them.
The company also faces regulatory challenges. As Amazon’s market share in e-commerce expands, its record on data privacy will come under increasing scrutiny, according to thematic research by GlobalData. In 2019, the EU launched a formal investigation into whether Amazon violates antitrust rules for the way it uses data on its third-party merchants.
Along with other Big Tech competitors, Amazon also faces increasing calls for tax fairness overseas. Big Tech companies that aggressively avoid tax by moving digital assets and intellectual property to low tax jurisdictions are coming under intense scrutiny. In October 2014, the European Commission opened a formal investigation into whether the tax paid to Luxembourg tax authorities complied with EU rules on state aid. The European Commission ruled a recovery of $297m plus interest was due for the period from May 2006 to June 2014. Amazon appealed the decision in 2018, stating: “We believe the European Commission’s decision to be without merit and will continue to defend ourselves vigorously in this matter.” Closer to home, the company is also under investigation by the US Internal Revenue Service for tax liabilities from 2007 onwards.
Whatever the outcome of these investigations, given the increased reliance on e-commerce during the pandemic and its acceleration of an existing digitisation of the global marketplace, Amazon will no doubt continue its growth trajectory beyond Covid-19 while continuing to mitigate its tax and regulatory risks.
This is the second in a series of articles looking at the trends and opportunities associated with Big Tech companies. Click here to read our profile of Google.
Join Our Newsletter
Want more FDI insights?
Sign up to Investment Monitor's weekly newsletter, Eye on FDI, to receive a round-up of the most important stories.