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Comment by nunez | Hacker News Reader

This was inevitable. Shipping stuff with a third party is incredibly expensive. You're essentially paying for their logistics and channels. Amazon has more than enough money and data to build this themselves, and doing so will save them a significant amount over time

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It's not that UPS and FedEx are too expensive, it's that Amazon ships so much stuff that the carriers don't have enough capacity. And when they start demanding that Amazon help them expand their capacity (by raising rates?), it becomes cheaper for Amazon to build some capacity themselves.

It seems unlikely if UPS & FedEx have trouble serving all of Amazon's needs that Amazon themselves are going to build out capacity to replace all their use of UPS & FedEx's.

UPS and FedEx don't really seem to be printing money. I would think that Amazon tends to be one of their worst customers (margin wise).

Obviously Amazon still benefits if they can capture some of that margin (and probably from being able to specialize to themselves and find efficiencies there), but is it a huge opportunity or is it just a worthwhile place to optimize their business?

I don't think this is Amazon's current plan, but removing a large revenue stream from other shipping companies and then growing their own shipping operation on their captive business could end up driving one or more of the current incumbents either out of business or, more likely, to merge. With less competition, overall shipping rates rise, magnifying Amazon's advantage, and possibly allowing them to offer their infrastructure as a general service. Voila, another profit center. This is kind of where Amazon's cloud services came from.

That AWS was built on Amazon's existing internal infrastructure is mostly apocryphal. However they do offer order fulfillment as a service (you can have Amazon ship and handle returns for products sold on your own webstore). What you describe seems more like that to me

I agree they are bad margin wise but it is also a solid predictable (and large) amount of money. They can make more money on other smaller shippers. The large amount of revenue allows them better reach (routes/drivers) for all their customers. If Amazon drops UPS, how many jobs do they need to cut? They may have a lot more routes/drivers that make much smaller margins or (worse yet) lose money until they reallocate the work by cutting some.

I think Amazon's play (while financial) is also about control. If all shippers start charging more, they have to eat it. If they control it, they know their margins at all times and can adjust things. Also, this makes it much more likely for them to switch to a completely gig economy based model which could reduce costs in a way that UPS could likely never match, even internally.

Anecdotal , but I heard from UPS employees that they essentially break even on their ground network, and essentially all their profit comes from airmail. FDX might do slightly better on their ground, given they pay their drivers < 1/2 of what UPS pays.

Interestingly, if Amazon scales back on UPS and FedEx as they ramp up their own logistics, this would leave both companies with a lot of excess capacity and infrastructure to maintain unless there is equivalent growth from the rest of the market. Given how much Amazon ships, that a big potential problem. It also gives Amazon even more leverage with both shipping companies when it does need to use them.

I'm curious if this eventually could create market problems like we are seeing with excess shipping capacity. The World Container Index hit a 5 year low this past year due to excess capacity.

I'm thinking network capacity is easy to sell off / write-off in domestic shipping, isn't it ? Trucks and trailers are "consumables" (not sure what the proper econ term is), UPS could just stop buying new trucks for a while (not the case with cargo jets though, those will burn a hole in anyone's pocket).

I think where it counts is the "last mile", similar to the cost of telecom. But I dont see that many package car drivers being laid off, since the demand is "inelastic". The driver still needs to cruise the neighborhood whether 1 guy or 100 guys are getting packages. If UPS's volume gets cut by 20%, there's no way they're going to need to cut 20% of their drivers.

What I predict amazon will do is just have delivery stations. I would gladly drive a mile or two to pick up my stuff from an automated locker, versus contend with some of the tricks that I hear about so much with at-home delivery (that I'm thankful has never happened to me).

If you eliminated the "last mile" package cars, all you'd need is hubs (which UPS is well on their way to fully automating for pkg sorting), long-haul drivers/pilots, and a few delivery drivers to load up the "automated lockers" in each neighborhood.

Re: world container index, I'm assuming that includes marine shipping, which should be independent of amazons network?

They actually do print money but most of it is spent on OpEx. They are basically airline, trucking and shipping companies, and all of those things are $$$$$$$

In the build-vs.-buy decision analysis: I always considered they'd explore buying UPS since they have a 4x market cap. Why build from scratch when you can acquihire a logistics company with lots of experience and global reach? Sure there's always merging pains of integration, but it seems faster than just rediscovering hundreds of years of operational experience (and yes idiosyncrasies / bad habits / inefficiencies too).

Edit: Amazon may not have enough cash to buy UPS, and would rather build what it needs, when it needs it.

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