Is Amazon the New China?

11/04/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

China has changed, says MoneyShow’s Jim Jubak, and he makes the case why Amazon may now be taking over China’s role in exporting deflation.

Remember the good old days, when labor and production in China was so cheap that it was forcing down prices?

We would talk about China exporting deflation. Because goods were getting cheaper, because China was so efficient and had such a large supply of low-paid labor, they were actually driving down prices around the world.

Well, labor is not so cheap and not so abundant in China anymore, and it really looks like we’re at the end of playing through that pattern of China driving down prices around the world. But fortunately, we’ve got a new China. Not quite as big, not quite as flashy.

It’s called Amazon (AMZN). Perhaps you’ve heard of it.

Amazon’s earnings for the most recent quarter are a great example of what I mean. You looked at it and you scratched your head.

OK, Jeff Bezos gets on stage and says, "Well, we’re going to sell lots of Kindles and Kindle Fires, and we’re going to increase capacity, and they’re going out the door faster than we could have ever imagined,” and that’s kind of exciting until you realize they lose $10 on every Kindle Fire that they sell. So, this is really great, but they’re not making any money.

You look at their prices in general—take another line out of their statement, and look at shipping costs. Well, Amazon took in about $330 million in shipping fees. Their shipping costs for the quarter were about $900 million. So you look at this and go, well, a lot of people got a lot of free shipping. Amazon made those goods cheaper for everybody.

So, Amazon may not be making any money. Their profit margin in the quarter came to a whopping 0.7%. At least it wasn’t in the red. They were still in the black…but it looks like red is not too far down the horizon.

But all this means that, just in the same way that China used to export deflation, now Amazon is doing it. And for that, we ought to be thankful, especially if we’re not really investors.

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