Online giant Amazon (AMZN​) inked a deal with alternative energy company Plug Power (PLUG​) in 2017. It marked a major investment in the struggling small-cap company, with news of the deal sending the company's shares up over 70% immediately after it was announced. But what does an online retailer that also operates cloud-computing technology company want with an alternative energy producer? In this article, we outline Amazon's motivations for making the lucrative deal.

Key Takeaways

  • Plug Power is an alternative energy company that designs and manufactures hydrogen fuel cell systems.
  • Amazon agreed to purchase up to $70 million worth of Plug Power equipment and was granted warrants to buy up to 55.3 million Plug Power shares in a deal announced in April 2017.
  • Some analysts believed the deal would help boost efficiency and productivity at Amazon's fulfillment centers.
  • Amazon could also leverage its investment in Plug Power to control how the alternative energy company services competitors like Walmart.

Plug Power: A Brief History

There's probably a good chance that you haven't heard of Plug Power. After all, it isn't a household name like Amazon. The company was founded in 1997 and is headquartered in Latham, New York. It designs and manufactures hydrogen fuel cell systems that replace traditional batteries in vehicles and other pieces of equipment used by major companies like the e-retailer.

The company went public in 1999 and trades on the Nasdaq under the ticker symbol PLUG. As of Sept. 2, 2020, Plug Power had a market capitalization of $5.76 billion. Some of its major customers include Walmart, BMW, Carrefour, and The Southern Company—all of which used Plug Power forklifts for their operations.

The alternative energy industry is made up of companies whose offerings don't rely on fossil fuels such as wind and solar energy, as well as biofuels.

The Deal

As mentioned above, the deal between Amazon and Plug Power excited the small alternative energy company's shareholders. It allowed the fuel cell company to grant Amazon warrants to buy up to 55.3 million shares—around one-quarter of the company's outstanding shares—which could amount to about $600 million according to some analysts. Amazon also committed to purchase up to $70 million of Plug Power fuel cell products for use in its enormous warehouses and distribution centers. That equated to equipment for 11 of the online company's warehouses.

Amazon Fulfillment Centers

When Amazon and Plug Power announced the deal in April 2017, many analysts' first thought was to Amazon's growing network of expansive warehouses and distribution centers. Amazon has invested heavily in its fulfillment centers, allowing 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 brick-and-mortar stores like Walmart (WMT​) and Target (TGT). Amazon’s fulfillment centers are already outfitted with custom-built robots—tens of thousands that pick, sort, and pack across global facilities with an aggregate square footage of more than than 2,500 football stadiums. Their use has reduced Amazon's operating expenses by some 20% since chief executive officer (CEO) Jeff Bezos spent $775 million to acquire robotics manufacturer Kiva for this express purpose in 2012.

Robots and human beings work side by side at the company's fulfillment centers. This helps maximize efficiency and productivity. Like any other warehouse, forklifts are a key piece of equipment used to stock and move inventory. This is how 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:

  • 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.
  • Faster Forklifts: The voltage of traditional electric batteries drops as they discharge, slowing forklifts over time and causing a productivity decline in the process. On its website, Plug Power estimates that battery forklifts’ speed drops an average 14% in the second half of an 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.
  • Leaner Operations: Whereas separate personnel is needed to oversee lead-acid battery recharging and swapping, forklift drivers can refuel the hydrogen themselves, saving labor costs.

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—Walmart in particular—already use Plug Power forklifts in their distribution centers and warehouses. This means 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—something 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. 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.