What should be Amazon’s Corporate Foreign Policy?
How should Amazon navigate the increasing tensions between the United States (US) and China?
Amazon is one of the five largest companies in the world. More importantly, this household name is arguably the most influential business that has transformed e-commerce, cloud computing and many other industries. Amazon Web Services (AWS) is the largest provider of cloud services in the world. Cloud-based infrastructure and platform services industry, or in short cloud services industry, is a rapidly growing industry which is also a critical enabling infrastructure for all kinds of internet services. The global market for cloud services is dominated by the following companies (market share as of 2022): AWS (34%), Microsoft Azure (21%), Google Cloud (11%), Alibaba Cloud (5%) and Tencent Cloud (3%).
With rising tensions between United States (US) and China, Amazon faces increasing challenges and risks in operating as a global company. Like most other global brands with footprints in both the US and China, Amazon will need to re-evaluate its corporate foreign policy. We are used to thinking about state foreign policies, however global companies can no longer remain ‘neutral’ and have to proactively manage for the geopolitical risks and public policies that may directly impact them. Hence, the need for a corporate foreign policy. Such a policy will have two goals: to improve a company’s ability to operate in foreign environments through effective corporate diplomacy, and to ensure its success wherever it is engaged through careful geopolitical due diligence.
In this article, I delve into Amazon’s business model, it’s strategic focus for the next 3–5 years, and its relationship with the governments of the US and China. Then, I end with recommendations for what Amazon’s corporate foreign policy should be over the next 3–5 years (medium term). I argue that Amazon must continue to have a close relationship with the US government and lobby for de-escalation and better relationship between the US and China.
Amazon’s Business Model
Amazon’s core business model can be summarized by one word: scale. Amazon aims to achieve profit in the long run by achieving scale in its businesses. Rather than one company, Amazon is in reality a collection of many different businesses. But at its core, Amazon can be divided into two main parts: e-commerce (including North America and International), and Amazon Web Services (AWS). Recently, AWS has been the main growth driver for Amazon. First, Amazon is a global leader in the retail and e-commerce space. The company has a market share of over 50% in the US e-commerce market and is expanding rapidly into other markets around the world. Amazon’s success has been driven by its innovative use of technology, its efficient logistics network, and its focus on customer service. In e-commerce, their primary goal is to make Amazon prime subscription such a compelling service, that every consumer is a prime member and thus, reach huge economies of scale. Currently, this part includes amazon prime subscription bundle, as third-party platform, fulfillment centers, etc. Second, Amazon is a major player in the cloud computing market. The company’s Amazon Web Services (AWS) platform is the largest and most popular cloud computing platform in the world. AWS offers a wide range of services, including compute, storage, networking, databases, analytics, and machine learning. These services are used by businesses of all sizes to build and deploy applications, store data, and run their businesses in the cloud. In the case of AWS as well, Amazon wants to offer the best and most affordable cloud services, which will then allow more users and revenue, which they can plough back in increasing their cloud capacity to reach even greater economies of scale. Thus, Amazon has a fly-wheel effect.
Amazon has been focusing on this core business model of achieving greater economies of scale from the beginning. Found Jeff Bezos started Amazon by selling books. He deliberately chose ‘books’ there is an infinite supply of books, but no physical bookstore has the capacity to hold all the books and make it easy for consumers to browse and order such a huge collection. Hence, selling books on the internet was a perfect match for Amazon, as Amazon’s comparative advantage was in the economies of scale that internet could provide- Amazon could have the largest catalogue of books in the world, and consumers can browse and order via the internet. The 2005 Annual Letter by Jeff Bezos also highlights the long-term thinking behind achieving economies of scale by offering lower prices and customer satisfaction obsession (Excerpt below).
According to the latest Annual report for 2022, the most profitable part of Amazon’s business is AWS, which had an operating income of $32.9 billion, representing 63% of the total operating income of $52.1 billion. AWS also had the highest operating margin of 30%, compared to 6% for North America and 4% for International. The second most profitable part of Amazon’s business is North America, which had an operating income of $18.8 billion, representing 36% of the total operating income. North America also had the highest revenue of $97.4 billion, representing 65% of the total revenue of $149.2 billion. The least profitable part of Amazon’s business is International, which had an operating income of $0.4 billion, representing only 1% of the total operating income. International also had the lowest revenue of $33.9 billion, representing 23% of the total revenue. Some highlights from Amazon’s 2022 4th Quarter investor’s call:
· Amazon has invested heavily in expanding their logistics and fulfillment network, partly driven by the pandemic boom in e-commerce. “Over the last few years, we took a fulfillment center footprint that we’ve built over 25 years and doubled it in just a couple of years. And then we, at the same time, built out a transportation network for last mile roughly the size of UPS.”
· AWS continued its rapid deceleration in FXN growth (Free Cash Flow Net) from 40% in 4Q’21 to 37% in 1Q’22, 33% in 2Q’22, 28% in 3Q’22, and 20% in 4Q’22.
· AWS reported 35.3% operating margin in 1Q’22 whereas in 4Q’22, it came down to 24.3%! The last time they reported such a low margin was back in 2Q’17.
Amazon’s Strategy for the next 3–5 years
Below I suggest what Amazon’s strategic focus should be for the next 3–5 years:
· Guaranteed One Day Shipping: What makes Amazon special is their ambition and customer obsession, which drives innovation. Within the next 5 years, Amazon should aim for one day shipping for a new tier of subscription above Prime. Currently, Amazon guarantees two-day shipping for Prime customers. This will be an extraordinary achievement if done (even two-day shipping was thought to be impossible even few years ago), but only Amazon has the capacity to do this. Given the massive spending in expanding the logistics and transportation network, some of which might have been an over-estimation of e-commerce demand from pandemic driven buying, Amazon can further solidify their dominance in the market.
· Cost Cutting on non-AWS Businesses: It is clear from the recent data that Amazon is likely to see declining AWS margins going forward. However, AWS continues to be key driver of profit. Amazon added $281 billion revenue in 2022 vs 2018, and yet none of the operating cost line items shows any operating leverage. They even managed to increase marketing cost from ~5% in 2018 as % of revenue to ~8% in 2022. Given the trends in declining operating margin, Amazon should cut some costs in non-AWS related businesses.
· Acquire Netflix: Amazon has been investing heavily in Prime video ($7 billion in 2022 for Amazon Original shows). The streaming platform market is too competitive (Disney Plus, Netflix, Apple TV plus, Hulu, HBO Max), with low margins and high spending necessary for new content. Amazon doesn’t have a differentiated approach or any niche audience. Hence, instead of spending on Prime video, Amazon should acquire Netflix, given the recent drop in Netflix’s share price which makes it more affordable, but more importantly given Netflix’s deep content library and existing customer base. This will also bring in the younger generation who might still not be prime members.
· Focus on expanding AWS abroad: Although AWS already has footprint across the world, many countries, especially in Asia and Africa, are still in the beginning stages of adopting cloud services. In order to increase AWS’s market share, AWS should focus on capturing these international markets, as the Asian and African economies are projected to grow significantly in the coming decades.
· Focus on increasing Amazon International’s growth: Similar to AWS, Amazon barely makes any profit from its international e-commerce business. But many places are showing promise of growth. For example, growth rate from 2019 to 2022 in the UK was over 30%, in Germany over 26% and in Japan over 21%. Amazon must continue to invest and grow in these international markets and find innovative ways to compete with domestic competitors.
· Integrate AI with Amazon devices: Amazon spends huge on “other bets” but it doesn’t disclose much information on them. Part of it the other bets is AI. Amazon should bring huge improvements to existing products with integrating AI (like Alexa) but also create new products that utilize the vast data that Amazon has collected. AI should also aid Amazon in making its search and recommendations functions within Amazon platform better for customers. The next 3–5 years will see huge investments in AI related start-ups and Amazon must continue to remain vigilant in acquiring promising relevant AI start-ups.
Challenges and Risks of the Strategy
Below, I outline the expected general challenges/risks to its strategy in the next 3–5 years:
· US-China Conflict: Amazon’s biggest challenge is the rising tension between US and China, which may impact Amazon’s business interests in China and China allied countries. This will be discussed later in the essay in detail.
· Anti-trust and other Regulatory Pressures: Amazon is under scrutiny from regulators and lawmakers around the world for its business practices and market dominance. Some of the issues that Amazon may face include antitrust investigations, data privacy lawsuits, tax disputes, labor rights violations, environmental concerns, and social responsibility expectations. These could result in fines, sanctions, lawsuits, or even breakups of its businesses. Amazon may need to comply with the laws and regulations of different countries and regions where it operates. Amazon must continue to lobby governments across the world to convince lawmakers that Amazon is not a monopoly, and it faces competition from other large companies like Microsoft, Google and Alibaba.
· Cyber-security Concerns: AWS security is a shared responsibility between AWS and its users. While AWS provides a secure cloud infrastructure and services, users have to ensure that their applications and data are protected from threats and vulnerabilities. Giving rising cybersecurity incidents and increasing use of cybercrimes by state or state backed actors, AWS may need to enhance its security features and capabilities, such as encryption, identity management, compliance, monitoring, and incident response, to help users secure their cloud environments. Especially given that AWS manages a lot of cloud resources for the government agencies in US and internationally, these government servers contain highly sensitive information that may be increasingly subject to cyber threats.
· Increased Competition: AWS is the leader in the public cloud market, but it faces increasing competition from other cloud providers such as Microsoft Azure, Google Cloud, Alibaba Cloud, and Tencent Cloud. These providers are offering similar or better services, features, prices, and support to attract customers from AWS. AWS may need to differentiate itself from its competitors by offering more value-added services, exclusive products, innovative features, and customer satisfaction. In the retail space as well, Amazon faces increasing competition from other retailers such as Walmart, Target, Costco, and Best Buy. These retailers are using their own physical stores as shipping hubs and offering fast delivery, curbside pickup, and other services to attract online shoppers. They are also investing in their own e-commerce platforms and expanding their product assortments. Amazon needs to continue innovating and promising better product choice and pricing to customers.
Amazon’s Relations with Governments
The United States
Amazon is the largest e-commerce platform and the largest provider of cloud services by market share in the US. Similarly, the US is by far Amazon’s biggest market in terms of revenue. However, given Amazon doesn’t provide revenue data for specific countries, we can only speculate. According to the 2022 Annual letter, Amazon’s North America (comprised of US, Canada and Mexico) segment had the highest revenue of $97.4 billion. Amazon is headquartered in Seattle and has large logistics and transport network across the US. Amazon employs over one million full time workers in the US, being the second largest employer just behind Walmart. Amazon is one of the largest infrastructure investors in the US with over $34 billion in investments in 2020 alone. The US government and its agencies are one of the largest group of customers for AWS. AWS has invested heavily to build local data infrastructure to support US government agencies, including the Navy, Air Force, State Department, Army Cloud. Amazon also partners with various federal agencies on innovative projects, such as NASA’s Jet Propulsion Laboratory (JPL). Amazon has received at least US$4.18 billion in economic-development subsidies in the US, much of which came from subsidies to build local data centers, or from tax benefits offered to entire Amazon building infrastructure in local economies.
On the other hand, Amazon also faces regulatory pressure in the US. California’s attorney general filed an antitrust lawsuit against Amazon in September 2022, arguing that Amazon had a ‘price floor’ for things sold on their platform. Previously, another antitrust lawsuit was brought against Amazon by D.C. attorney general, which was dismissed in the court. As recently as March 2023, there has been increasing speculation that the Federal Trade Commission (FTC) will file a lawsuit against Amazon, including for violation of privacy through ring cameras and Alexa digital assistant, and Amazon’s purchase of robot vacuum maker iRobot. All these antitrust and regulatory action against Amazon in the US points to not only increased scrutiny from the government, but also increasing dominance and influence of Amazon in the US.
China
Amazon does not have significant market presence in China. Amazon entered the Chinese e-commerce market in 2004 but it always struggled against Chinese competitors who offered cheaper prices and free shipping without minimum order requirements. In 2019, Amazon closed its e-commerce platform in China (Amazon.cn). Amazon continues to have AWS, sales of Kindle devices and eBook content, and accessibility to third-party sellers in China who want to reach global buyers. Chinese customers are also allowed to use nearby Amazon platforms (such as Amazon Japan) to order international products. Amazon emphasizes cross-border sales for Chinese customers as it doesn’t want to compete with Chinese e-commerce giants such as Alibaba and JD. Amazon does not report its revenues from China separately, but it includes China in its International segment, which also covers Europe, Japan, India, Australia, Brazil, and other countries. In 2020, the international segment accounted for 27% of Amazon’s total net sales1, but China’s share of that segment was estimated to be less than 1%. This means that China contributed less than 0.3% of Amazon’s total net sales in 2020. AWS also does not report its revenues from China separately, but it includes China in its Asia-Pacific (APAC) region, which also covers Japan, Australia, India, Singapore, South Korea, and other countries. In 2020, the APAC region accounted for 11% of AWS’s total net sales, but China’s share of that region was estimated to be around 5%. This means that China contributed around 0.6% of AWS’s total net sales in 2020.
Moreover, foreign companies cannot own data centers in China and China has strong data localization requirements, which means AWS needs local partners to operate within China. In 2013, AWS partnered with ‘Sinnet’ to launch AWS China in Beijing. Subsequently, AWS have partnered with more Chinese companies to provide cloud services in other regions. AWS also collaborates with local partners such as Alibaba Cloud, Tencent Cloud, Baidu Cloud to offer cross-cloud solutions that enhance interoperability and customer choice. Although Amazon faces tough regulatory regime and intense competition in China, it is one of the largest and fastest-growing markets in the world. Hence, Amazon continues to look for opportunities to expand its AWS business in China, partnering with local companies.
What does a Worsening US-China Relationship Mean for Amazon?
After the end of the Cold War, the US as a hegemon presided over the world with a ‘liberal’ theory of international relations, which argued that greater global trade integration would restrain international conflict going forward. Given this belief, US and its allies were the main proponents of China’s admission to the World Trade Organization (WTO) and opening up China’s economy to the world. They intentionally ignored a number of things that might have given them pause about trading with China, such as currency manipulation in the 2000s, various mercantilist policies, and poor labor and environmental standards. As a result of China’s admission and trade with the world, that made China “the factory of the world”, the global economy underwent a titanic shift. Whereas global manufacturing, trading networks, and supply chains had once been dominated by the US, Japan, and Germany, China rapidly took their place. Despite China’s dominance in manufacturing, US and its companies were happy to let China be the factory, while they designed products and led in many services industries. The hope still was that China will eventually become more democratic, as it got prosperous. However, this theory has not been proved right so far. The tacit understanding between US and China also broke down in the mid 2010s as US faced domestic political backlash from the long-term decline of good manufacturing jobs. The world has changed significantly in the past decade, especially in the past few years with increasing tensions between US and China, with many claiming it to be the new “Cold War”. Anti-China sentiment was a big part of President Trump’s election campaign. Once he got elected, the Trump administration put tariffs on Chinese goods which raised prices for US consumers and manufacturers but had a much more significant impact on China’s economy. The US also began to scrutinize and block Chinese investment more aggressively under the Committee on Foreign Investment in the United States (CFIUS), while export controls were put in place to restrict China’s flagship electronics company Huawei. On the other hand, Chinese leader Xi Jinping, who consolidated his grip on power at the 20th Party Congress, has made it clear that China’s era of “reform and opening up” is over. Joerg Wuttke, President of the EU Chamber of Commerce in China who attended the Congress, warned that China’s foreign policy will become more assertive and confrontational, and that China will become more self-sufficient and less reliant on foreign technology. He also said that China will fight for future markets and technologies, and that it will use all means necessary to achieve its goals, including military force. This escalation of actions and rhetoric has only continued. More recently, the Biden administration has responded by imposing sweeping export controls on the semiconductor industry (CHIPS Act), which covers not just chips, but also chipmaking tools and personnel. This is seen as a zero-sum move to cripple China’s technological ambitions.
All these means that global companies like Amazon can no longer ignore the rising tension between US and China. The U.S. imposed 15% tariffs on $112 billions of goods imported from China on Sept. 1, 2019, with additional tariffs scheduled to take effect in December. According to a recent report from Bank of America, “e-commerce has the most tariff risk due to the impact on product pricing.” The report estimates that prices for goods sold in the U.S. through Amazon must rise by an average of 2.1% to 2.6% to offset the cost of the new tariffs. Perhaps this is the greatest risk facing most global businesses, given how deeply intertwined US and Chinese economies were in terms of supply chains before the recent escalations.
One demonstration of how deep the ties is that the trade volume between US and China has not declined significantly, despite the government’s rhetoric and interventions. Although Amazon’s e-commerce business does not have a significant presence in China, Amazon cannot just exit the Chinese market completely given its significant investments of cloud services in China; but perhaps even more importantly, given the size of the Chinese market. If Amazon’s business model is based on achieving economies of scale, then ignoring Chinese market without being forced to do so, will be definitely impede Amazon and more specifically, AWS’s growth. Of course, in the next few years, if the tension continues to escalate, Amazon may have to make a choice. The era of global supply chains will not come to an end. Instead, there will be two blocks. And if Amazon chooses to be part of the US bloc, it will not only loose access to Chinese market, but will also be challenged in many China allied markets such as those in Southeast Asia.
Here are some possible scenarios of a conflict between US and China, and what Amazon may face, as examples:
· Scenario 1: Trade war escalates: The trade war between the US and China could have a significant impact on Amazon, leading to higher costs, lower revenues, and increased regulatory scrutiny. Amazon imports a large amount of goods from China, and any increase in tariffs on these goods would likely be passed on to consumers in the form of higher prices. This could lead to a decrease in demand for Amazon products, as consumers become less willing to pay higher prices. Additionally, Amazon could face increased regulatory scrutiny in China, as the Chinese government may view it as an American company that supports US policies against China. This could lead to increased taxes or other restrictions on Amazon’s operations in China. On the other hand, if Amazon continues to operate in China, it may face increased scrutiny from the government and people in the US for continuing to provide services to a government which is considered hostile to the US, increasing reputational cost.
· Scenario 2: Cyberattacks intensify: Cyberattacks between the US and China could also have a significant impact on Amazon, leading to data breaches, data theft, and reputational damage. Amazon stores a vast amount of data on its servers, and any breach of this data could have a significant impact on the company. Data breaches could expose customer information, intellectual property, and trade secrets to competitors or adversaries. Additionally, data theft could lead to reputational damage for Amazon, as customers may become less willing to trust the company with their personal information.
· Scenario 3: Military conflict starts: A military conflict between the US and China could also have a significant impact on Amazon, leading to supply chain disruptions and operational risks. Amazon relies on a global network of suppliers, warehouses, and delivery services to provide its customers with a wide range of products. Any disruption to this network could lead to delays in delivery, higher prices, and a decrease in customer satisfaction. Additionally, operational risks could arise from increased geopolitical uncertainties, violence, or instability that affect Amazon’s employees, customers, or assets in both countries.
Amazon’s Corporate Foreign Policy over the next 3–5 years
As a publicly owned company, Amazon’s principal goal is to maximize its profits in the long run for its shareholders. As Jeff Bezos famously said, every day is “Day One” for Amazon, with its constant focus on innovation, customer obsession and focus on achieving greater economies of scale. Given the risks and challenges facing Amazon, especially with regards to rising tension between US and China, below are my recommendations for Amazon’s corporate foreign policy, which will enable Amazon to continue its dominance and growth:
· Deepen relationship with the US government and be their preferred cloud services provider. Continue spending on lobbying efforts against anti-trust action to break up Amazon; and continue to push narrative about the strategic importance of Amazon and AWS in the US economy as a large employer and US based competitor competing against Chinese competitors. Handle the regulatory pressure and lawsuits from different entities by pursuing a strategy that minimizes the chances of confrontation with the government or upsetting a specific political party. Finally, be the most preferred cloud services provider for the government and its agencies. Amazon spent around $4 million in federal lobbying in the third quarter of 2018. Amazon is also building its second HQ in Northern Virginia, across the Potomac from Congress and the White House and just downriver from the Pentagon, close to the federal government.
· Assure the Chinese government that Amazon respects China’s data sovereignty, culture and laws. Amazon should continue to operate in China, as long as the business there is feasible and profitable. Amazon should also increase its lobbying efforts in China, by partnering with local governments and investing in local data centers. Amazon must also strengthen its current partnership with Sinnet, and aggressively try to expand the market share within China’s growing cloud services market. Real risk of US-China war remains, but Amazon can continue to navigate the tension between US and China and continue to provide services to Chinese customers and businesses.
· Lobby for continued cooperation between US and China on global challenges. Amazon should lobby for continued cooperation between the US and China on global challenges, such as climate change, public health, cybersecurity, and non-proliferation. It should emphasize that both countries have common interests and responsibilities that require cooperation. If US and China can return to a more amicable relationship, that will not only be a great boon for Amazon, but for global commerce. A possibility of serious escalation to military conflict is not good for anyone, especially given the many other global challenges that risk the existence of human life on earth.
· Address proactively the risks of US-China conflict and prepare for the different scenarios presented. Three different scenarios were presented in the previous section and Amazon must prepare for all the scenarios. Some of the proactive actions that Amazon can take, given the current vulnerabilities: diversify the supply chain given that currently, 20% of Amazon’s first-party sales and 25% of their third-party sales represent goods imported from China. Moreover, Amazon must invest in local data centers even if that means reaching more local economies of scale and not global economies of scale, as it is unlikely that data localization policies will be unwinded. Finally, Amazon should continue to be engaged with relevant stakeholders, and prepare contingency plans for various scenarios.
· Amazon should continue to invest in research and development to stay ahead of the competition. Amazon currently spends a lot of resources on ‘Other bets’ that explore new products and technologies. Even if most of them fail, Amazon has succeeded in the past with coming up with new and disruptive products from these future bets, such as Kindle and AWS projects. Hence, Amazon must continue to emphasize innovation and before taking on any project, it must ask, if Amazon is successful, will this move the needle for Amazon’s standard (need to have really high revenue potential and large economies of scale effects). If the answer is yes, Amazon must pursue these products/markets.
· Finally, Amazon should also continue to expand its global presence, particularly in emerging markets. While most of the corporate foreign policy recommendations focused on US and China, in order to grow faster, Amazon also needs to expand and continue its momentum in the emerging markets. While this may take time and investments in building relationships with local governments in these countries and to build the cloud infrastructure, Amazon should continue to aim high and if feasible, try to compete in any market that promises economies of scale and profitable businesses.
In conclusion, Amazon should continue to pursue a corporate foreign policy that is focused on maintaining good relations with the US and Chinese governments, while also expanding its global presence. Additionally, Amazon should continue to invest in research and development, as this will help it stay ahead of the competition. As Jeff Bezos wrote in his 2016 Letter to Shareholders, “Staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight.”
