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Failure of Amazon in China, an analysis

  • E-commerce market in China
  • Online consumer product retailers in China
  • Performance of Amazon in China

 

Amazon is a global e-commerce player selling a wide variety of products online. The firm is a market leader in the United States, the United Kingdom, Germany and Japan. It is a dominant player in the West, but has struggled in the Chinese market since the time of its footing in the country. China’s B2C e-commerce market size is almost identical to that of the US.

The market share of the prominent online departmental stores in China can be seen through the below chart.

Amazon occupies a mere 0.8% of this market. It is a stark contrast in relation to a very high market share that the company occupy in other nations.

Alibaba is the market leader in China’s B2C market (Tmall.com and Taobao marketplace) followed by Jingdong (jd.com).

In the present blog, Televisory examined Amazon’s failure in China. 

Amazon entered the Chinese market with the acquisition of Joyo (2004), the firm was the largest online bookseller and was acquired for $75 million. However, Amazon was not the first mover in the e-commerce business in China as shown in the above table. Alibaba and E-Commerce China Dangdang were founded five years prior to Amazon’s entry. Jingdong, which currently holds the second largest market share in China was founded in the same year (2004).  Amazon planned to replicate its growth strategy in the United States through the acquisition of the local online book retailers and expansion of its product portfolio. However, this strategy did not yield benefits for the company in China as Joyo was accused of piracy and this made matters worse for Amazon. Its competitors were local firms that had in-depth knowledge of the domestic market. Amazon found it difficult to attract the price-sensitive Chinese consumers.

The revenue of Amazon from all countries except the United States, the United Kingdom, Germany and Japan is shown in the below chart. The revenue of Jingdong, which only operates in China is significantly higher than the revenue of Amazon China. The revenue for Alibaba is less than that of Jingdong due to the difference in business models. Alibaba generates its revenue from advertisements of suppliers (Taobao) and from commissions on transactions (Tmall), whereas Jingdong recognises the transaction amount of products as revenue.

The gross merchandise value for Alibaba is much larger than Jingdong, Amazon and E-Commerce China Dangdang. Additionally, Alibaba, which until recently solely operated in China has much higher active customers than Amazon which operates worldwide. The number of active customers for Jingdong, which also operate only in China is almost 50% of the total global active customers for Amazon. This means that the success of Amazon was as a result of more repeat purchases by its active customers rather than deep penetration through the addition of new customers. The number of active customers for Jingdong (2014) doubled in a year (2015). However, global active customers for Amazon increased by mere 11% (2014-15), this was despite the entity entering new international markets. These figures highlight the increase in the reach of Jingdong and Alibaba to newer customers in the Chinese market. These numbers also strengthen the argument that regional companies understand the consumer behaviour better than international giants.

*This represents revenue for Amazon business except for the United States, the United Kingdom, Germany and Japan
**2016 data not available for Dangdang

Moreover, Amazon used the same operating model in China that it uses internationally. Furthermore, Amazon China purchases the inventory from suppliers and stores in its fulfilment centres. Amazon China and Jingdong have a very small proportion of a marketplace model for suppliers to sell their products directly to customers. Presently, Amazon China has 17 fulfilment centres as seen in the below chart. This model puts an additional burden on the company in the form of operating expenses and working capital. The fulfilment expenses account for roughly 9% of the total operating cash expenses for Amazon and 8% of its revenue.

The market leader Alibaba operates on a zero-inventory model. It acts as a middleman between the buyers and the sellers and does not operate fulfilment centres. The EBITDA of these Chinese firms correlate negatively with the number of fulfilment centres operated by these entities as seen in the below chart. Jingdong has faster-moving inventory than E-commerce China Dangdang. However, the high number of its fulfilment centres result in high fulfilment expenses and therefore, its EBITDA is much lower than that of E-commerce China Dangdang. Alibaba saves considerable storage costs and fulfilment expenses due to the zero-inventory model. These savings are passed to the sellers to help them innovate, grow and sustain. However, Amazon China has made investments year after year to build the necessary infrastructure since its entry into the nation. 

In addition, Amazon has 2 million sellers worldwide, whereas Alibaba 8.5 million. The competition among sellers is very stiff and sellers offer value to customers on price, delivery and quality in every possible way. This stiff competition results in low prices and attracts the price-sensitive consumers in China. Alibaba also encourages sellers to innovate and improve on products and logistics, while Amazon China is simply an online retailer. Hence in order to compete on prices, Amazon will have to bear the losses in China for a longer period and this will require high investment. However, considering the extent of competition and the potential of its competitors, this may not be the right strategy for Amazon China. Its business model can work well in China and Jingdong is a good example of the same. But, Amazon China has failed to grasp the market dynamics in China and has missed the opportunity. In 2015, Amazon opened a store on Alibaba’s Tmall platform to increase its customer base by paying a fee to its rival. This seemed an attempt to sustain its existing business in China.                

Amazon is becoming more diversified in its business with each passing year, it launched new businesses such as video streaming service and consumer electronics products like Kindle. The company purchased Twitch in China for USD 970 million (2014), which is a platform for organizing video game competitions. Amazon may succeed in other businesses if not the conventional business of online retailing in China.

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