Last month, online giant Amazon.com Inc. (AMZN) inked a deal with Plug Power, Inc. (PLUG) marking a major investment in the struggling alternative power company and sending its shares up over 70% just after the news was announced. The deal allows for the fuel cell company to grant Amazon warrants to buy up to 55.3 million shares, or around one quarter of the company's outstanding shares, which could be worth up to $600 million according to some analysts.
In addition, Amazon committed to purchase up to $70 million of Plug Power fuel cell products for use in its enormous warehouses and distribution centers. What does an online retailer and cloud-computing technology company want with a struggling alternative energy producer? The answer may lie in its physical distribution centers, or it may lie elsewhere. We will outline Amazon's motivations for the deal here. (For more, see: Plug Power Skyrockets on News of Amazon Interest.)
Amazon.com Fulfillment Centers
When Amazon and Plug Power announced this deal in April, many analysts' first thought was to Amazon's growing network of expansive warehouses and distribution centers. Amazon has invested heavily in its so-called fulfillment centers, allowing Amazon Prime members to receive guaranteed two-day shipping on the house—a move meant to drive orders and keep people buying online rather than from the convenience of a brick-and-mortar store like Walmart Stores Inc. (WMT) or Target Corp (TGT). Amazon’s fulfillment centers have already been outfitted with custom built robots—tens of thousands of them which pick, sort and pack across global facilities with an aggregate square footage of more than than 700 football stadiums. Their use has reduced Amazon's operating expenses by some 20% since its CEO Jeff Bezos spent $775 million in 2012 to acquire robotics manufacturer Kiva for this express purpose. (For more, see also: Amazon: 10 Secrets You Didn't Know.)
At Amazon's fulfillment centers, robots and human beings work side by side in order to maximize efficiency and productivity. Like any other warehouse, forklifts are a key piece of equipment used to stock and move inventory. It is this often overlooked tool that Plug Power can most easily increase the efficiency of Amazon's operations. According to a report by Green Tech Media, "Amazon’s fuel-cell play is an extension of the flanking strategy it used to great effect with Amazon Web Service (AWS), which allowed the company to insert itself into the value chains of countless businesses it would never otherwise supply." In doing so, Green Tech points out three salient reasons why fuel cell based forklifts make sense for the company:
1. Reclaimed space: At a distribution center, battery recharging stations and infrastructure generally consume around 5% to 10% of the overall floor space, much of which can be re-purposed for more profitable uses such as inventory by storage by switching to hydrogen fuel cell power. In aggregate this means not needing as many facilities as more floor space is reclaimed in existing centers.
2. Faster forklifts: traditional electric batteries’ voltage drops as they discharge, slowing forklifts over time and causing a productivity decline in the process. Plug Power on its website estimates that battery forklifts’ speed drops an average 14% in the second half of an eight-hour shift. Problems are made worse in the case of refrigerated warehouses, where electric batteries may only last half as long. In contrast, fuel-cell forklifts can achieve a steady “pick rate,” so inventory can be turned over more quickly.
3. Leaner operations: Whereas separate personnel are needed to oversee lead-acid battery recharging and swapping, forklift drivers can refuel the hydrogen themselves, saving labor costs. (For more, see also: Why Is Amazon Interested in Plug Power?)
Controlling the Competition
While that case makes sense for Amazon's own use, it doesn't necessarily explain such a large investment. But Amazon's competitors, and in particular Wal-Mart, already use Plug Power forklifts in their distribution centers and warehouses. This means that Amazon will have a say in how these other companies that are Plug Power customers—many of whom are direct or indirect competitors of Amazon—conduct their inventory operations. Yet, none of these players has ever expressed even the slightest interest in taking a stake in Plug Power. Amazon engaged in a similar strategy when it entered the cloud-computing market, where it has grown to become the largest web hosting and services provider on the planet—by investing in and eventually taking over infrastructure resources that it relies heavily on—but which its competitors do as well.
Amazon's investment in Plug Power and its hydrogen fuel cell technology may also have something to do with the company's stated goal of entering the logistics market. Currently, Amazon relies on third-party shippers such as FedEx and UPS to deliver its items. Amazon has announced a number of strategies, including autonomous delivery drones—but also getting into the traditional logistics business, and fuel cells may provide a cheaper and more efficient alternative to gasoline or diesel. (For more, see: Why Amazon Needs to Dump FedEx & UPS.)