Clues into Amazon’s HQ2: What Does the Vancouver Announcement Tell Us? | Sherpas in Blue Shirts

Posted On November 20, 2017

In early November, Amazon announced that it will expand its presence in Vancouver from 1,000 jobs to 2,000 jobs by 2020. Although this did not receive nearly the same attention as Amazon’s request for proposals for the 50,000 employee location dubbed “HQ2”, there are some valuable clues to glean (see our earlier detailed assessment on the viability of Amazon’s HQ2 strategy and potential locations for our more complete analysis).

We read three important clues in this announcement.

  1. Vancouver is not a serious HQ2 candidate. Although Amazon is clearly comfortable enough with Vancouver to continue expanding there, it is a signal that Vancouver is not a serious candidate for the second headquarter location. If Amazon felt otherwise, the announcement did not need to be made and lose leverage in negotiating incentives for HQ2. There are multiple reasons why Vancouver may not be a strong candidate – size or cost of talent pool, too similar to Seattle, no time zone diversification, or that the complexities of operating in Canada outweigh the benefits of mainly operating in the U.S.
  2. The targeted scalability of HQ2 is going to be REALLY HARD. Assuming that Vancouver and HQ2 will have roughly similar mixes of talent, we can see that Amazon is scaling at only 15% of the rate targeted for HQ2. After setting up in 2015 and reaching 1,000 employees in 2017, Amazon is planning to reach 2,000 employees by 2020. Let’s assume that is 2,000 people over four years for an annual rate of 500 net-new employees. HQ2 is targeting 50,000 employees over 15 years, which is over 3,000 per year – 6 times what is being achieved in Vancouver. This supports our earlier view that any city under 4 million in population is clearly not viable (Vancouver is under 2.5 million) and even the largest cities (which are 7-15 million) will struggle to consistently grow at the rate indicated by Amazon for HQ2.
  3. Hmmm…is Amazon truly serious about HQ2 as stated? For purposes of our earlier analysis, we assumed that Amazon truly intended to pursue its stated vision (up to 50,000 employees in 15 years with an average salary in excess of US$100,000 and the HQ2 acting as an equal to Seattle). The announcement about Vancouver is interesting and revealing because it is inconsistent with Amazon seeking to aggregate its scale into large locations. A 2,000 employee location is certainly large, but it is much smaller than currently located in Seattle or the planned HQ2.

If centers at much smaller scale are valuable to Amazon, why even pursue the HQ2 strategy?

First, Amazon might realize that a single 50,000 location is likely too big and contemplating whether it can make “clusters” (cities within very short distances from each other) produce similar benefits as a single location, which would be multiple buildings anyway. If Amazon believes this, it might be looking to select multiple cities within a cluster for the HQ2 strategy (think Philadelphia, Baltimore, Washington, DC).

Second, Amazon may have intentionally set a very, very large 50,000 employee target to get maximum attention and creativity, but is planning to structure the eventual single location agreement to only commit to 5,000-10,000 employees. Still very large, but something it has a much easier chance to fulfill and then potentially exceed as it so desires.

In summary, we believe these clues Echo many of our earlier perspectives and underscore that the eventual outcome may be quite different than stated – we remain Primed to hear what Amazon decides in 2018.

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