Amazon’s Plan for World Conquest: First India…

Amazon (AMZN) is doubling down on India. Actually, in the interest of accuracy, Amazon is doubling and a half down, increasing its initial investment in the country from $2 billion to $5 billion.

India is a fast-growing market. In a recent Mary Meeker Internet Trends, she reported the country was one of the few places in the world where the rate of growth is still expanding. And that’s echoed in the rapid rise of online sales.

Last year, India’s online sales exploded from $6.3 billion to more than $16 billion. That’s not bad considering its Internet connectivity can be spotty at best and most people don’t even have credit cards. Still, fast growth or not, it seems like an awfully big investment in what is still a small and relatively poor market.

At a recent Recode conference, Amazon founder Jeff Bezos spoke at length about what makes the business model work.

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He explained how people thought it was crazy to make such a huge investment in Amazon Web Services given the small footprint of its online bookselling business. Despite this, the company forged ahead, adding storage and compute power, then analytics.

As Amazon moved into other categories and its retail business expanded, AWS started to make more sense. However, the genius of it became apparent when Amazon made it available to software developers all over the world. Amazon created a business where it was the first and very best customer and only then did it sell those services to others.

Compared to the West, most of India is relatively poor and technologically backward — but it’s still one of the fastest-growing markets in the world.

In India, the cost of doing business is high. The lack of Internet and banking framework is dwarfed only by the poor physical infrastructure. Logistics is a nightmare, yet Amazon is dutifully building a network of many warehouses and distribution hubs.

Unlike in the United States, it can’t rely on the U.S. Postal Service, United Parcel Service Inc. (UPS) and FedEx Corp. (FDX) to deliver packages affordably. So, it’s finding networks to get stuff out to customers in a standard befitting the company brand. It’s even testing drones in particularly rugged terrains.

This isn’t cheap, yet Amazon pushes forward because the investment in its India logistics business is justified given its first and best customer is Amazon.com.

Recently Amazon made headlines with very large investments in logistics infrastructure. It started with talks to lease 20 Boeing 767 cargo planes. Although that raised a few eyebrows, most dismissed it as the company simply ensuring it could move goods during peak holiday sales periods. The company then had its Chinese subsidiary register as an ocean freight forwarder. That’s a technical way of saying Amazon got into the overseas shipping business. Again, most put that off as a way to help move goods from Chinese suppliers during peak times.

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But when you add in the new massive investment in India – then, the framework for a logistics business capable of efficiently reaching the fastest-growing consumer markets in the world starts to take shape. And it’s owned by Amazon.

The power of this business model is scale. Bezos has been making this argument since way back in 1997 when he wrote about scale leading to higher revenues, profitability and capital velocity. In other words, the bigger these businesses become, the greater the network effects. At the time, analysts scoffed.

Ultimately Amazon built a massive empire on the back of getting businesses to scale. When Amazon.com reached scale, it used its profits to build and its patronage to get AWS to scale. It’s now doing the same thing with logistics. Amazon is a buy on dips, as always.

Best wishes,

Jon Markman