Amazon: Dragon Boat Racing With Alibaba

| About: Amazon.com, Inc. (AMZN)

Summary

Bloomberg reported that AMZN is looking to build a global logistics network code-named "Dragon Boat."

Positive LT implications to AMZN as consistent delivery network ensures LT success of the Prime ecosystem.

Potential competitive risk from BABA as cross-border e-commerce becomes the next battle ground among the e-commerce giants.

Bloomberg reported that Amazon (NASDAQ:AMZN) is in the midst of global logistics expansion, code-named "Dragon Boat," that allows AMZN to control a global delivery network, overseeing the flow of goods from factories in China and India to the last mile delivery of the customers' door steps. The project was initially mapped out in 2013 as part of the proposed expansion of the AMZN Fulfilment By Amazon service that provides storage, packing and shipping for third-party merchants selling on AMZN's website. Judging by the recent moves by AMZN that involved registration of ocean freight services, aircraft leasing and trucking operations, I believe that this news is credible. With shipments volume multiplying on the back of higher order per Prime subscriber and new subscribers, maintaining user experience in merchandise delivery is a top priority for AMZN. As such, it is necessary for AMZN to have full control of its logistics network that ensure the growth of its Prime ecosystem.

Two key implications for AMZN investors to consider:

First, AMZN's focus on building a global logistics platform will deliver positive long-term impact as it rides the global e-commerce growth and lessens the reliance on its logistics partners such as UPS (NYSE:UPS) FedEx (NYSE:FDX). During the holidays, the capabilities of AMZN's logistics partners are usually stretched due to the increased shipping volume. Given that each order under Prime has to arrive at the customer's destination within the defined shipping period, a tightly controlled/integrated logistics platform will allow AMZN to ensure a consistent experience and, more importantly, prevent churn among Prime subs. Consistency and integrity are perhaps the most important factors driving the growth of the Prime ecosystem. Although I acknowledge that media, cloud or even food delivery are essential to Prime, the long-term success ultimately depends on the logistics capability so it is important for AMZN to execute on this front. On the other hand, greater focus on logistics will extend AMZN's longer weaker profitability profile. Investors should be aware that creating a wholly-owned logistics fleet is more expensive than working with logistics partners. That said, investors who are looking for AMZN to turn profitable will likely to be disappointed in the medium term. Lack of profitability in the next five years would be a realistic expectation and the recent sell-off implies that some investors are grappling to this fact.

Second, by building its own logistics network AMZN is positioning itself to compete head-on with Alibaba's (NYSE:BABA) Cainiao logistics partnership at the global level. Unlike AMZN that is looking to gain full oversight of its logistics network, BABA's Cainiao operates under a joint-venture model between BABA and logistics services. The upside is that this model allows BABA to quickly scale up its logistics footprint around the world without heavy capex commitment. The success of BABA's Single's Day underscores this view (see - Alibaba: Still The Champ). The downside is that quality of the delivery service could be inconsistent given the various vendors whereas AMZN's wholly-owned logistics can ensure a consistent experience. In the near term, I do not see AMZN to be a material threat to BABA given that BABA's volume is multiples that of AMZN and this allows BABA to exert considerable market power over its Cainiao JV. However, BABA could exert similar pressure on merchants in China by making them to set up an exclusive store-front on TMall rather than AMZN's FBA. Such a scenario is not unheard of. Worth remembering that Fast Retailing switched from JD.com (NASDAQ:JD) to TMall before Single's Day under an exclusive agreement with BABA. That said, BABA's cross-border advantage over AMZN will likely be intact in the near future. Long-term speaking, AMZN could even the playing field given the abundance of merchants in China that are not exclusive to BABA. Although AMZN could ensure consistent logistics, the quality of products may not live up to AMZN's expectations.

What does it mean for BABA? Given that AMZN already has an aggressive roadmap on cross-border e-commerce, BABA should put greater emphasis on this area to defend its market position (see - Alibaba 2016 Outlook: The World Is Not Enough). This makes entry into North America increasingly more important in a way to counter AMZN's expansion (see - Alibaba: Scaling Up Logistics In The U.S.). In my view, owning a reputable consumer-facing platform is essential for BABA which is why I believe that a bid for eBay (NASDAQ:EBAY) could turn out in the near future. Integrating eBay and Cainiao logistics could allow BABA to drive incremental cross-border e-commerce to the US, thereby limiting AMZN's cross-border growth outlook.

Conclusion, AMZN's ramp up of cross-border e-commerce is a positive for Prime expansion but a long-term competitive risk from BABA is something investors should not easily overlook.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.