5 Reasons Amazon’s Plans for China Fell Through

5 Reasons Amazon’s Plans for China Fell Through

Amazon Ceding China to Local E-Commerce Leaders Alibaba & JD.com

In July 2019, Amazon shuttered its online store in China after failing to make a mark on consumers. The move indicates that the e-commerce titan is recalibrating its strategy in the Asia/Pacific, leaving China to entrenched local leaders Alibaba and JD.com – which together account for the vast majority of e-commerce sales in the country – while pursuing other large, nascent markets in the region, notably India.

Amazon’s new 1.8 million square foot office in Hyderabad – the largest it operates globally, and the only site the company fully owns outside of the US – in addition to a 100,000-square-foot fulfillment center in Singapore puts it in a strong position to do just that. And the company will continue to sell cross-border into China through its online stores in other countries.

Still, the question remains: What about Amazon’s strategy – which has been so successful virtually everywhere else in the world – got lost in translation in China, especially considering the great fanfare with which Costco’s recent entry into the market was met?

According to the Freedonia Group study Global E-Commerce, a number of factors likely came into play to drive the company’s decision to vacate the $1.4 trillion Chinese e-commerce market.

1. Bad Timing

Amazon entered the Chinese market in 2004 with the purchase of Joyo.com, which it rebranded as Amazon China in 2011. By then, both Alibaba and JD were already well established in the country, benefiting from:

  • stronger name-recognition and trust among Chinese consumers
  • more intimate knowledge of the needs of the market
  • more developed relationships with larger numbers of third-party vendors (and thus a more diverse product mix)
  • the backing of major Chinese technology firms, such as Baidu and Tencent in the case of JD

2. Local Competitor Advantages

Amazon is not the first major US-based e-tailer to give up on China; Walmart sold its online storefront to JD.com in 2016 to focus on its brick-and-mortar presence in the country. What has kept these large companies with seemingly infinite resources from being stronger competitors in China’s e-commerce market?

For starters, the model of these platforms differs from local ones like Alibaba, which may have created a competitive liability. For example, where Amazon operates warehouses and offers direct sales as well as a third-party marketplace, Alibaba focuses more on connecting small businesses and large brands with buyers – evidently a more popular format among Chinese consumers. In tacit acknowledgment of the stronger position of domestically based platforms, Amazon even opened an online store on Alibaba in 2015.

3. High Mobile Payment Usage Rates

Another major advantage local concerns have had over outsiders like Amazon in China is that most e-commerce users in the country access the internet through smartphones instead of other devices like laptops or tablets, and credit and debit cardholders are relatively rare. As a result, mobile payments are much more prevalent in China and similarly developed countries than elsewhere in the world, and crucial to the viability of e-commerce operations in these areas. For example:

  • Tencent’s WeChat app – which includes a mobile payment feature – hosts more than a billion monthly users, the vast majority of which live in China.
  • This not only gives Tencent’s e-commerce partner JD.com a significant leg up, but also limits the ability of other companies to compete by offering their own mobile payment option – i.e., imagine trying to convince a billion Facebook users to switch to a new, unfamiliar platform.

4. Narrowing Opportunities in China

At this point, the Chinese e-commerce market is mostly developed (despite lots of ground still to be covered beyond large cities), and the victors – Alibaba and JD.com – have largely been declared by their formidable sales shares. With limited room to grow in the face of local competition, Amazon’s departure from China looked increasingly inevitable.

While Amazon will continue to serve China through its other websites (e.g., Amazon.com, Amazon.co.uk), the closure of the Amazon.cn storefront means the end of its partnerships with local third-party vendors, which will ultimately serve to:

  • slow down delivery times and limit product selection in China
  • further strengthen local leaders, since choosing Amazon will only benefit consumers seeking niche and/or imported goods unavailable locally

5. Better Opportunities Elsewhere

Unable to capture much share of the Chinese market, Amazon is turning to other countries in the Asia/Pacific where smartphone and internet penetration remains low and the presence of other online retailers is minimal to nonexistent.

Hoping to replicate Alibaba and JD’s relative monopoly on e-commerce in China by being the first to enter these developing markets, Amazon is ramping up investment in a number of countries, including spending billions of dollars in India, Indonesia, Malaysia, and Vietnam. However, recent developments in India may be a negative harbinger for this strategy:

  • In 2018, Amazon and Flipkart (in which Walmart owns a controlling stake) were the leaders of the Indian e-commerce market.
  • However, both companies were affected by regulations enacted in February 2019 that prevent online retailers from selling products through vendors in which they hold a stake, forcing Amazon and Flipkart to remove many products from their websites.
  • The regulations are intended to reduce foreign influence over India’s nascent e-commerce market and give advantages to domestic firms (though both Amazon and Flipkart recently denied experiencing a slowdown in consumer spending amidst reports of an online shopping dip in India).

In spite of these headwinds, India remains a top target for Amazon, considering the magnitude of the potential return on investment. India may reach 627 million internet users in 2019, and yet the majority of its population is still not online. The company looks to lure new customers with a strategy that includes expanding its Amazon Fresh online grocery business, creation of more Indian content for its Prime Video streaming service, and making its mobile app available in Hindi.

Thus, the newly constructed Hyderabad campus – with its capacity to house around 15,000 of the company’s 62,000-strong full-time Indian workforce – is just the beginning for the next phase of Amazon in India.

Want to Learn More?

The Freedonia Group’s recent Global E-Commerce study offers industry-leading business intelligence on these hot-growth markets, including historical demand trends and sales forecasts for 2023 and 2028, as well as country-by-country analysis of key market opportunities and threats.

Also provided are comprehensive profiles of global market leaders, technological and regulatory developments, and a range of other insights that will provide the big-picture view companies need in order to make important decisions.

About the Author:

Peter Kusnic is a Content Writer with The Freedonia Group, where he researches and writes studies focused on the consumer goods and packaging industries.

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