Why Is India Amazon's (AMZN) Next Big Opportunity? - TheStreet

NEW YORK (TheStreet) -- When Amazon (AMZN) - Get Report CEO Jeff Bezos sent Amit Agarwal to spearhead the company's entry into India, Bezos' message was clear -- India is a big deal for Amazon.

Agrawal, who's vice president and country manager of Amazon India, was once one of Bezos' "shadows," an esteemed position held by Bezos' closest employees who tend to end up in some of the most important roles in the company. Sending Agrawal to India showed how committed Bezos was to India, and that commitment has since only increased.

This week, Amazon announced that it will expand its cloud-services business, Amazon Web Services, to India in 2016, by building data centers in the country. The move represents Amazon's effort in Indian e-commerce.

In July 2014, a year after Amazon first launched in India, Bezos announced that the company would invest $2 billion more into the country. "We see huge potential in the Indian economy and for the growth of e-commerce in India," he said in a press release. "With this additional investment of US $2 billion, our team can continue to think big, innovate, and raise the bar for customers in India. At current scale and growth rates, India is on track to be our fastest country ever to a billion dollars in gross sales."

Because of government regulation, Amazon can't sell its own products in India. Instead, it has to rely on third-party merchants. Expanding its AWS business in the country helps merchants bring their products online and strengthens their relationship with Amazon. It also proves to the Indian government that Amazon can help the country's economy, putting itself in a better light as a foreign player, SunTrust Robinson Humphrey analyst Bob Peck said.

Amazon declined to comment on the current strategy in India beyond the recent press release on AWS.

India has potential. Although it's a tiny e-commerce market compared with China and the U.S., it stands to grow immensely over the next decade.

The online-shopping market in India is expected to grow to $8.5 billion in 2016 from $2 billion in 2013, according to Accel Partners. That number could grow to as much as $33 billion by 2020, according to the Boston Consulting Group and the Retailers Association of India. Of the 1.28 billion people living in India, only about 17% are online and only 9% shop online.

"India represents a potentially lucrative consumer-spending market," Morningstar analyst R.J. Hottovy said. "India's population could surpass China within the next 10 years, and urbanization and wage rate trends suggest a long consumer spending tailwind. We're starting to see the early stages shift to e-commerce."

When the e-commerce market started to heat up in China, Amazon and eBay (EBAY) - Get Report alike failed to capitalize early on and therefore lost out to the current dominant players, Alibaba (BABA) - Get Report and JD.com (JD) - Get Report. This time around, Amazon wants to do better and get in on India before any local players can gain a majority stake in the market.

That isn't to say that Amazon is unopposed. Local e-commerce retailers Flipkart, which recently raised $550 million at a $15 billion valuation, and Snapdeal, which is reportedly in talks with Alibaba and Foxconn regarding a potential investment, both present stiff competition to Amazon. Alibaba could also be a threat as it makes some moves in India as well. But because Amazon is getting in earlier this time around, it has a better chance of staving off the competition.

Amazon is poised to gain significant income from India. By 2018, it could already start to see profits of $200 million to $600 million on revenue of $300 to $700 million, the Royal Bank of Canada estimates. Hottovy said revenue could hit the billions in the next decade.

"(Amazon) missed out on China and they're trying to avoid that same mistake on India," SunTrust's Peck said. "(India) represents that next opportunity and maybe the last really large opportunity."