The relationship perspective on Amazon’s collaboration with air freighter Atlas Air

Partnerships tend to be used as catch-all for collaboration between businesses. This clutters understanding about why collaborating businesses are engaging with each other. In this post I’ll take the case of the recent Amazon and Atlas Air collaboration, and show how sifting apart their collaboration on a relationship basis, brings more understanding to how the deal is structured.

Business collaboration can take form in 3 different types of relationships, namely:

  1. customer-supplier
  2. partner
  3. investor

Each is a different type of relationship, with a discrete requirement for contribution, and of expected output. To assess the opportunity, and performance of the collaboration as a whole, each relationship needs to be judged on its own merit, rather than by an average of the mix.

By taking a relationship perspective, partnership is shown to be only 1 facet of the collaboration between Amazon and Atlas Air. Only once all the relationship types involved in their collaboration are made explicit, can we see the complete picture.

Background to the partners
Before we look at the various types of relationships at play in the Amazon-Atlas Air collaboration, lets have a look at where they’re both coming from.

Amazon is on a high-growth trajectory. It’s becoming a strong player in consumer retail. One of the drivers for their competitiveness is speed, and dependability of delivery. It is the foundation of their Prime service, for which customers pay a fixed yearly fee for faster shipping. Amazon is keen on increasing its speed, and capacity of delivery for Prime, as well as having more control over fulfilment hiccups, especially during peak seasons, like the upcoming holidays.

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More air freighting is key to increasing Amazon’s speed. Its option to realise this, would be to take control over air freighting infrastructure, something which Amazon currently depends on suppliers for, like UPS, and FedEx. But to go at it alone would mean buying the 20 planes it needs to grow, outright, at 70-80 million USD each. This is a huge risk, because Amazon does not have the capabilities to efficiently run this type of infrastructure. Partnering with specialised freighters seems to be the better option, but at the same time, Amazon is outgrowing its current delivery service suppliers’ capacity to realise Prime’s rapid, same, or two-day delivery.

Atlas Air is an air freighter. But e-commerce is a difficult game for this type of logistics company. Air freighters, in general, are not accustomed to servicing to the rhythm of e-commerce. Striking a balance between cost, and service levels is a delicate game for them. Freighters would need to adjust internal logistics to that of the e-commerce companies they work for, to perform better. But that would also increase dependencies on demand from only a select few e-commerce companies, and the according risks.

Atlas could invest in its own capability to become better at e-commerce shipping. But it would still have a difficult time catching up with competitors like UPS and DHL who are more advanced in their operations, and are actually suppliers to Amazon already.

The supplier, the customer, the partner, the investor.
The setting for collaboration is complex. But there is opportunity to gain from collaboration for both Amazon, and Atlas. There are three types of relationships at play in their collaboration.

Amazon Prime Air announcement

The first relationship concerns the lease of the planes. This is about Atlas as a supplier, and Amazon, as a customer.

The second relationship concerns the actual partnership, where Amazon is seeking a way into air freighting to scale up, and accelerate its Amazon Prime shipments. Atlas is trying to expand its entry into a new market to service e-commerce platforms with air-freighting.

The third relationship concerns an investment relationship, where Amazon has an option to invest in Atlas Air, and establish itself as a player in the logistics market. Lets go through these relationships one-by-one, and the input-to-expected output for each, before coming to a final conclusion about the collaboration.

The supplier-customer relationship
The big visible part of the collaboration are the aeroplanes. Under a so-called dry lease construction, Amazon has committed to leasing planes from Atlas for the coming 10 years. From a separate entity that falls under Atlas air, Amazon is also hiring staffing, and maintenance services: so-called wet leasing. This is a pretty straightforward arrangement. It gives Amazon control over the costs of operating an airline freighter, and Atlas has secured revenue on its planes, and staff.

But Amazon doesn’t yet know how exactly to utilise this freighting capacity for expanding its own Amazon Prime fulfilment process, nor does Atlas Air. That is where the partnership comes in.

The partnership
Atlas has capabilities for air freighting, but not in playing to rhythm of e-commerce. Generally freighting services are transactional. Freighting companies aren’t integrated with the fulfilment process of the e-commerce vendors. On top of that air-freight transportation management system are antiquated. Globally, only about 20% of airway bills are electronic. This is not the best vantage point for accelerating the e-commerce fulfilment processes.

To achieve the goal of increasing the capacity of its Amazon Prime service, Amazon has to create this new fulfilment management system, together with Atlas. The partnership relation shows how they intend to do this.

What Amazon would desire in a partner, is having access to raw air-freighting logistics management systems. Amazon would prefer a freighting partner that doesn’t have any visibility with consumers, over freighters that are already active in the consumer market.

Without any legacy of software built for shipping to consumers, Amazon has the opportunity to build its own Prime order fulfilment on top of business-to-business infrastructure. That would give Amazon more control, and a consistent presence of its service to its customers. Atlas checks all these marks.

By integrating airline freighting logistics software with Amazon’s own warehouse fulfilment, and micro distribution network, a complete supply chain is shaped for faster delivery (a logistics supply chain that is unheard of as of yet). For Atlas, this collaboration adds to its resources to support other e-commerce customers with similar air-freighting services.

Below you can find an overview of this partnership design, made with the partnership canvas.

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The Amazon-Atlas Air partnership design, depicted using the partnership canvas, and the business model canvas (Strategyzer.com)

 

The investor
The last part of the collaboration consists of an option for Amazon to also buy Atlas Air stock. Over the duration of the collaboration this option is vested to grow into a 30% stake.

Why are stock options involved in the deal? The answer is that it forges long-term commitment between the 2 companies. Atlas signals that it is committed to a long term arrangement. Procurement of stock would also provide Atlas with some financial leverage, needed to procure extra planes as more planes are demanded later on in the lease arrangement.

For Amazon this arrangement increases its influence over the future direction of Atlas Air’s development, and creates an option for full procurement of the company if the success becomes really big. But this will only be vested over a period of 7 years, which means that there is enough time to substantiate the business case for acquisition.

Conclusion
By teasing apart the various relationships at play in this collaboration, we can start to see the overall design of the collaboration. Air freighters are generally not suited for e-commerce velocity shipments. Atlas Air is not guaranteed to succeed with either. Therefore there are some contingencies built in the collaboration, with the various layers of relationships that are forged between Amazon, and Atlas.

Amazon is technically only tied to the lease of the planes. It can wind down the other parts of the collaboration at 180 days notice. Worst case scenario is that Amazon needs to find another logistics partner who can coordinate the freighting if the collaboration with Atlas doesn’t work out. In that case the costs of operations area clear.

Looking at just the partnership facet of the relationship, you can see that it designed around learning about optimising fulfilment. Both parties stand to learn about how to best collaborate to achieve better e-commerce velocity fulfilment. If the partnership fails, then there’s the fall-back. If it succeeds, then Amazon will likely utilise its stock procurement options.

There’s no question that Amazon needs to figure out air freighting to grow. But the big question remains why this type collaboration with B2B freighters (there is another collaboration Amazon is running in parallel, with Air Transport Services Group) is Amazon’s only bet to expand its Amazon Prime service.

Amazon is known for its frequent business experimentation. It wouldn’t be that difficult to create a bidding process for shipping services at check-out. Customers could then hire whatever delivery service they would need, based on the estimations that various freighters, including Amazon Prime would provide. That would provide an interesting benchmark to see whether existing freighters, or Amazon itself will be the most effective in winning the game of e-commerce logistics.


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Taobao villages; how the internet is blurring rural-urban boundaries

Taobao Marketplace is China’s premier online consumer-to-consumer market place. It is owned by the Alibaba Group, a company that grew in fame for its online wholesale platform. Recently, Taobao was covered by The Financial Times in an article describing how the marketplace spurs entrepreneurship in rural areas.

Village epicenters called Taobao villages, where 10% or more of the families are involved in e-commerce operations with joint revenue of over 1.5 million USD, are mushrooming. Entrepreneurs are investing in order processing operations, and hiring people to make sure that products are packaged properly and on time for shipment. There are even reports of youth returning to the village from the city after their studies to help grow the business.

Taobao advertisements are seen in Qinghe village, Hebei province. Photographer: Tianyi Li/Alibaba Group Holding Ltd. via Bloomberg

 

What’s under the hood?
One element that drives success for the platform is a demand for authentic and healthy products, directly from the countryside with Chinese rural consumers. A backlash following the stream of food scandals in the country’s food industry. The platform can now link producers and consumers directly together, and they are able to forge deals based on trust.

But this is not the most compelling element of the platform. What the FT article also mentions is that poor and less-developed rural areas are spurring sales growth the most. What I thus suspect to be the real driver underlying these new rural business models is revealed by what this rural e-shop owner says in this short video. As the most import problem that Taobao solves, he states:

“With a real shop, the worst thing is that customers pay on credit. The advantage of Taobao is that you can’t pay on credit”

Instantly you can see the value that the platform has been able to create. Before, a rural shopkeeper’s market was tightly geographically constrained to where the influence of the next village took over. No wonder that many of its customers could get away with putting their purchases on the tab. With the internet enabled marketplace, this geographic constraint is lifted. Shopkeepers are now able to filter out rural dwellers who have cash in hand to directly pay for their purchases, amongst a population of a couple of 100 million people.

Through creating new and expansive market connections, the internet has been able to accommodate a new revenue stream, and to accelerate cash flow within a rural economy. It is a classic mechanism that creates economic development, just like cash accelerated trade in the barter economy. And it all flows naturally from what people on both sides of the trade aspire to achieve.

Take-aways:

  • the internet is blurring urban-rural boundaries; an e-commerce site can contribute to rural development!
  • expansive social networks generate new opportunities for value creation
  • value creation can only be achieved if these networks allow people to fulfill their own purposes.