Wednesday, June 15, 2016

How will Amazon spend the $3 bn?

I had blogged earlier raising doubts on how Amazon would be able to deploy the $ 3bn it proposes to invest in India, in addition to the $2 bn committed two years back. Now, $ 3 bn or Rs 200 bn is a huge amount of money.

It was easy to burn through $2 bn by offering heavy discounts to acquire customers. But now, with deep-discounts and all forms of indirect support to sellers off the table, the likes of Amazon will have to confine their expenditures to logistics management. But here the story may be different.

The IT applications in logistics management would largely be a replication of its proprietary solution and hardly cost much. This leaves them with investments in warehousing and building transportation fleet. It more likely that e-commerce firms would contract in transportation as a service and invest in warehousing. The former would therefore become part of the operating expenditure.

That leaves us with warehousing. But how much can this soak up? Consider this. There are currently just 5381 cold storages in India with a capacity of 24.45 MT. Assuming the average prevailing cost of cold storage at Rs 15 million per 5000 tonnes, the total investment made till date would be less than Rs 50 bn. In other words, the cumulative cold storage investment in the country is just a fourth of what Amazon alone proposes to invest in the country over the next few years!

One estimate of India's organized industrial and retail warehousing capacity in 2015 was 178 million sqft. This market has been growing at 25-30% or adding about 54 million sqft each year. Assuming a cost of Rs 1000 per sqft, organized retail capacity addition investment each year would be about Rs 54 bn. But e-tail formed just 1.7% of all retail sales in 2015 (or about 8-10 million sqft of warehouse space) and is expected to reach 4.4% by 2019. From this very low baseline, even with a 50% increase in e-commerce warehousing capacity (or 5 million sqft each year), the total annual investments would be about Rs 5 bn. All these figures are orders of magnitude off from what just Amazon alone proposes to bring in.

Am I missing something here? Or is it that for an economy of India's level of capital accumulation, Rs 200 bn is a huge amount? Is this then an opportunity to signal to investors like Amazon that India will allow unhindered automatic foreign investment in areas like farm produce retailing, where the likelihood of external sourcing is likely to be minimal?


Anonymous said...

This might help.

They may go for inorganic growth. Some poster boys of Indian start up scene may become prey.

Gulzar Natarajan said...

Thanks Anon. I agree that this may be the most likely possibility. In fact, may be almost inevitable.

But that would not add to productive capacity, except in releasing capital that would be invested elsewhere, including in manufacturing.