Amazon's Expansion into China: Opportunities and Challenges

This report highlights Amazon’s opportunities and challenges in China. With the worlds fastest growing and changing e-commerce market, Amazon China faces the e-commerce giant Alibaba and struggles to gain adequate market share. Leading the world’s online retail, however, Amazon exposes a remarkably low presence in the country. Since 2004, the company has failed to adapt to Chinese models and infrastructures, going through different strategic routes has not alleviated the company’s growth. Amazon has become an exemplar for many B2C, B2B and C2C foreign companies who want to enter the Chinese e-commerce market, the distribution channel that leads to billions of online shoppers is attracting many foreign brands to both launch their e-commerce cite or open up a digital shop in one of Alibaba’s e-commerce platforms. Amazon has been in China for over fifteen years and no sign of growth has occurred yet they chose to endure in the Chinese market. Findings show that the company’s determination to continue to dwell in China is based upon the long run, within the years Amazon sought to position itself as a premium platform to meet Chinese demands of oversees products.

Introduction

E-commerce in China

Nowadays, the difference between e-business and e-commerce drastically matters for companies. The “e” that represents the function of electronic network technology has evolved to new business processes and practices. (Bartels 2000) In a large bubble, e-commerce highlights the reach of customers across suppliers, marketing, customer service, distribution through different business models (B2B, B2C, C2C, B2G, C2B, P2P, m-commerce). Whilst e-business comprises of e-commerce however it is more associated with the internal developments such as recruitment, finance, customer correlation management, information management, supply chain managements etc.

“E-commerce is in fact not just a commercial tool in China. It has become a model for economic development.” (Marco Gervasi 2016) East Commerce, a journey through China e-commerce and the internet of things by Marco Gervasi gives us indications on how China will continue to form and ultimately conquer the e-world in the following years. China’s underdeveloped infrastructures and uncivilized marketplaces in the past decade urged the country to implement America’s embryonic e-commerce and e-business models. However, the American model was naturally designed to fit in a developed market rather than a developing one, therefore China was unqualified to adopt such model. (Gervasi 2016)

Alibaba, the first digital platform that successfully used a model adjusted to Chinese conditions and specifications. Alibaba’s success arose from the idea of building a platform similar to EBay’s by linking shoppers and vendors while leaving the trading costs to them. Tao Bao, a subset of Alibaba, with its shrewd alteration from an Amazon-like model to an EBay-like model triggered Chinese e-commerce to launch regardless of its unfledged and underdeveloped infrastructure. (Gervasi 2016)   

M-commerce or mobile commerce plays a major role in Chinese e-commerce, due to the country’s rapid spread of smart devices, the Chinese online world is increasing in a revolutionary manner. With the influence of m-commerce, Chinese e-commerce has unintentionally created online shopping into a social activity. (Gervasi 2016) E-commerce and social activities are now merging, as a matter of fact, the number of mobile users has surpassed the number of internet users in 2008. (Chong, Chan and Ooi 2011) Chinese participants in online social activities have shown that the more people purchase online products/services the more it revolves around a social experience.  Posting pictures on their purchased products, ratings and writing reviews on the products and so on has created a radical e-commerce model in China. (Gervasi 2016) In a nutshell, social influence has shown to be a key principle of Chinese consumer decisions to embrace the m-commerce model. (Chong et al. 2011) 

Amazon

Amazon, known today as the world’s leader in online retail, founded by Jeff Bezos in 1994, starting as a bookseller, the founder was never pleased of it being only a book distributor. The Everything Store (2013) by Brad Stone terms the founder’ s vision as quarrelsome; Bezos wanted Amazon to offer a limitless variety of goods with the best convenience at the lowest prices. (Stone 2013) Amazon’s success in the United States only led the company to expand and generate international revenue, with its promising numbers in the US, the company believed that expanding globally would only overpower the world of e-commerce.

After expanding to Europe, Amazon was hungry for more expansion. An entry to India’s market utterly grasped the company’s attention. Entry to India’s world of e-commerce comprised of a young population (65% under the age of 35), increasing numbers of mobile users (80%) and growing levels of disposable income (individual and household). However, most of the population lives in countryside regions under an underdeveloped infrastructure and only 35% of the population are internet users. (Govindarajan and Warren 2016) India’s e-commerce model could be a suitable comparative analytical tool to China’s e-commerce model as they both characterize of underdeveloped infrastructures. Amazon entered the Indian e-commerce market only after it witnessed an insignificant performance in China, Amazon’s devastation in China taught the company how to adapt its model and platform within underdeveloped infrastructures, such as customizing products in the local markets. With that said, Amazon India owns a larger portion of the e-commerce market share in India, taking over the competitors such as Flipchart and Snapdeal. (Vishrut Shah 2016)

Amazon has clearly shown an exceptionally low presence in China due to its primary competitor Alibaba, but why has Amazon chose to remain in China, heedlessly?  An analysis of the industry and the market, the current business models/technologies used and the strategies implemented to survive the ongoing struggle will be highlighted to demonstrate the company’s decision and determination to continue to dwell in China.  

Amazon China Case Analysis

Amazon.cn

Amazon is not the only western company that struggled and continues to battle in China’s e-commerce market. Other companies like Yahoo and and Google have also failed at gaining adequate market share. Amazon entered China’s B2C e-commerce market in 2004 by buying Joyo.com, however, the company rebranded it as Amazon.cn in 2011. It observed an immense decrease in sales from 2004 – 2016. (Wang and Ren 2012) Amazon currently owns 0.8% of the e-commerce websites market share, it also brought in Amazon Prime, hoping to bump up sales in China, however it remained far behind Chinese e-commerce websites. (Jeff Dunn 2017)

The company introduced Amazon Prime to China in 2016 but appeared to still not go any further, that is because Alibaba’s domination of the e-commerce market was controlled by Tao Bao where cheap brands were available and T-Mall where big western brands would launch their digital shops. (Jason Del Rey 2016)Amazon profoundly keeps investing in China, Dawson (2015) mentioned that given the strong competition in China and regulations, its very questionable for Amazon.cn to witness a lasting success. On the other hand, Amazon China’s president Doug Gurr (2015) adds that cross-border e-commerce is the company’s strategy in China. In 2015, the cross-border buying power by Chinese consumers has revealed growth, sales records from Amazon show that the primary users of Amazon China are people with high disposable incomes, educated, and young. (Meng Jing 2015) In my point of view, this can reveal a matter of trust, Amazon’s general image around the world is known to be very positive and constructive, it’s main competitors in China such as Tao Bao, T-mall and JD sometimes offer unoriginal and no-brand named goods, but Amazon China seems to be positioning itself as a premium platform offering only genuine and western products. In 2015, the president of Amazon China stated that they will continue to tremendously invest in the following year of 2016 to make shipping cheaper for customers when purchasing items from abroad, and this strategy will eat up more market share. (Jing 2015) By that time, Amazon China was acquiring 1.1% of the market share (see Figure 3), as of now (2017) the strategy does not seem to be working as they own 0.8% of the share.  The e-commerce market in China is colossal, so how small is a share of 0.8% in such market?

The E-Revolution in China

Over the past 10 years, China has become a cyber-market, e-commerce has been emerging and third-party payment systems have made it comfortable for Chinese consumers to purchase items online. (Cristiano Rizzi 2013) Distribution channels in China are becoming exclusively attractive for foreign companies because the population is thriving and Chinese people have shown a preference to consume on online platforms. Rizzi (2013) in his book E-commerce Law in China suggests that foreign companies that want to expand to China or enter the Chinese market must consider adopting traditional methods of approach and eventually launch an online presence. (Rizzi 2013) Porter Erisman (2012) narrated in his documentary “Crocodile in the Yangtze”, “Imposing a Western model in China doesn’t work.”  EBay’s failure in China can be one of the cases where a Western company missed its chance to recognize and adapt to Chinese e-commerce models.

Big data gradually drives e-commerce in China, more companies in China use data and analysis for future outlooks and to understand consumer behaviors. (Helen H. Wang 2016) Tencent, Alibaba, and Baidu maintain the most treasured data sources. Not only it can help them manage and segment their own target markets but also help other multinational companies in China to do so. (Wang 2016)

The e-commerce market in China is growing at an incredible rate, doubling in numbers whilst economic performance advances. Due to progressive e-commerce, it has brought more than 700 million people to join the middle-class. China is estimated to overtake the US in becoming the largest retail market in the world with a population of 1.3 billion people and a blossoming number of smartphone and internet users. (Tsendyam Enkhchimeg 2016)

Amazon China’s 0.8% current market share may seem very small but lets not forget that it’s a piece of the world’s largest and fastest growing e-commerce market. According to the National Bureau of Statistics in China, 2016, online retail sales reached around $752B. (Frank Tong 2016) However, as China’s e-world continues to grow, Amazon China has not shown to grow in terms of market share, instead it has exposed a loss.      

SWOT Analysis and Michael Porter’s Five Forces

Strengths: Amazon is generally a very profitable company, known as the largest online retailer in the world. Information Technology and Customer Relationship Management also abbreviated as CRM maintain Amazon China’s strategies in business. As mentioned earlier, the company aims at understanding its Chinese customers by recording data on consumer behaviors and preferences, it empowers the company to offer certain needs at the right time of year by tracking purchases and clicks (visited items), a concept also known as “re-targeting.”  As the above are the overall strategies of e-business companies, Amazon China’s current situation is urging them to absorb as much information as possible to deliver more needs to its current customers and understand the potential ones. Financial stability and market orientation can also be additional strengths; the mother company grossed more than $90B just in sales last year (company 2017), this success is driven from a low-cost structure and wide range of products and items. Third party sellers, (a model for sellers within the platform) also push new customers to Amazon China’s website. All of Amazon’s marketplaces upkeep each other by creating benefits, that is one of the reasons it is continuing to survive and hasn’t yet latched out of China’s e-commerce market. 

Another strength acknowledged is the brand image of the company overall, it has long been a trusted and a dependable platform, Amazon China uses this advantage to offer Chinese consumers quality goods from abroad, a resilient strategy used by Amazon.cn called cross-border e-commerce.  

Weaknesses: Amazon China has been adding new categories in their selection, Chinese produces and items, may be useful in diversifying the customer base, however, it risks damaging the only positive brand advantage they currently have, cross-border buying power. Moreover, the delivery model has not been clear for both impending Chinese customers and current customers, Amazon China has changed from free-shipping to charging customers for shipping because it projected financial losses. A further weakness is the infrastructure and model used are not genuinely suitable for the Chinese e-commerce market though over the years it has slowly started adapting to it. As discussed earlier, the use of smartphones is much more common than the internet, the company has not yet set up an Amazon China app where Chinese people can purchase items on their phones, it also lacks the social ecosystem where buyers and third party members can communicate.    

Opportunities: E-commerce opportunities in China are vast, not only for Amazon but for many other foreign companies as well. As the e-commerce market continues to develop, shipping costs are decreasing, technology is advancing and the economy is thriving while Chinese household incomes are mounting. At some point, China may observe an entire developed economy and country, whereas Amazon’s stable infrastructures built for developed countries can come in handy. Foreign brands in China represent prestige and premium quality, they also have shown quite a demand, the company is opening its doors to third party sellers from abroad who can bring these needs to the fullest.   

Threats: Chinese demand and interest in foreign goods, typically US branded or EU branded has caught the attention of many American and European companies, an e-commerce movement that seems will cause more competition for Amazon China. For instance, the big American retail brands such as Macy’s announced that it will launch its e-commerce website in China by the end of 2018. Macy’s already has a good reputation and image in China due to its digital shop on T-mall, this could be a major threat for Amazon. Joint ventures and mergers in the market may also be of great threat to China’s Amazon.

Porter’s Five Forces

 PESTLE Analysis

Political/Legal influences affecting and supporting Amazon’s e-commerce business in China:

China’s political and legal stability is unclear: (opportunity and threat)

Amazon has faced and continues to face many challenges within the Chinese e-commerce landscape. It is a foreign company facing Chinese born competitors such as Alibaba, the government has shown to ease regulations by supporting the Chinese e-commerce companies. It continues to threaten Amazon because it may cause more Chinese e-commerce websites to launch. In addition, the Chinese government is restricting new regulations on cross-border e-commerce activities to secure trade safety and this only limits third-party sellers to join Amazon’s Chinese platform. Third-party sellers who sell foreign items are also objected to go through payments and electronic contracts. On the other hand, the government has shown great support for e-commerce websites in China, both foreign and domestic, by cultivating business conditions in enhancing cyber security, the buyer, seller and logistic services can rely on the e-commerce platforms.

Economic Factors:

China’s economy has been enjoying e-commerce advantages. As it is still a developing economy, disposable income is on the rise, this opportunity for Amazon is valued especially for the long-run as it will surge the company’s revenue. However, an economic recession in China is very likely, a threat that would unravel Amazon’s efforts in trying to penetrate the world’s most developing e-commerce market.

Social and sociocultural Influences:

The social factors are all opportunities the company must take advantage of.

China is witnessing a culture of online consumption, this degree of consumerism on all of the county’s e-commerce platforms must drive Amazon to create social activities with the program to enhance the social experience. As social media continues to be a dominant distribution channel, consumers also use these medias to make buying decisions on platforms such as WeChat.  

Technological Factors:

Technological advancements within China have directly hit Amazon, new technologies are rapidly altering and developing which pressures Amazon to progress its technological systems. However, it is also viewed as an opportunity by the company because it adjusts the business accordingly. Amazon’s investments on IT may increase a competitive advantage and defend itself from new entering competitors in the same e-commerce market. The opportunity to further enhance performance by increasing the efficiency of information technology must be considered by China’s Amazon in order to exploit productivity and decrease operational costs. Furthermore, stressing continuous developments in technologies within the Chinese e-commerce market may lead the company to stay a step ahead of competition or assist it by not staying behind.

Environmental (ecological) Elements:

Environmental awareness is beginning to be become more popular in China. Ecological threats such as global warming is driving companies to launch environmental programs, Alibaba for instance is continuously promoting and raising awareness on environmental protection of the country. Due to the growing interest in environmental programs, Amazon has sought the opportunity to reduce the amount of paper-made books in the selection and offer e-book alternatives both on Kindle and desktop. 

 Business Models and Technologies

China’s e-commerce business models

Business-to-Business (B2B)

The B2B model is designed for businesses to sell their products or services to other businesses within an online platform.

The B2B segment basically launched the development of e-commerce in China. Such model was first aimed at enhancing the trading channel between Chinese suppliers and US/EU buyers. Nevertheless, now it is used by millions of buyers and suppliers from around the world. China is the worlds leader in the B2B e-commerce sector, due to Alibaba’s dominance.  

Business-to-Consumer (B2C)

The B2C model generally applies to when a transaction occurs between the company (seller) and the consumer.

China’s B2C e-commerce market is conquered by the domestic online retail companies such as T-mall. The penetration of online shopping and internet usage deliver a strong basis for the growth of the online retail industry in China.  

Consumer-to-Consumer (C2C)

This business model enables customers to trade between each other.  

The C2C e-commerce model dominated the online retail Chinese market, Alibaba’s e-store Tao Bao is the primary participant controlling around 95% of the entire C2C sector. (CBBC 2012)

Summary:

All these models represent effective channels in which a company can associate with customers or clients at low costs both in China and abroad. However, a foreign company must understand and evaluate the Chinese e-commerce landscape to the maximum before it enters the market. For example, Amazon did not fully recognize the obstacles and opportunities before entering which caused it to perform poorly. EBay’s presence in China was a failure because its C2C business model did not suit the market and did not adapt to the environment, therefore missed the opportunity to control the worlds largest C2C e-commerce market. If EBay and Amazon had analyzed the Chinese environment and demographics more precisely before entering, they would possibly be leading the Chinese e-commerce market. The figure below demonstrates the Chinese E-commerce market growth comparison of B2C and C2C.

Amazon in China operates within a B2C business model, it sells products directly to consumers on the site and allows third-party sellers to join the platform at no charge. Amazon does not help the third-part sellers succeed, instead the company discovers the most sold items by the sellers and then places them at lower prices, however, it also lets sellers sell the same products as Amazon at lower prices. (Wang 2015) 

Future Outlooks

China has been changing the future of e-commerce. Online spending has been rapidly increasing since 2004, the convenience of online shopping continues to expand around rural areas and small cities which helps e-commerce companies reach new customers.  Shopping on mobiles is also increasing at an incredible rate, the convenience of shopping at the tip of your fingers, looking at reviewed items, rating products and so on is only seeming to become more and more popular in China. The top e-commerce giants of China are dominating the m-commerce market by continuing to improve their apps and customer services.

It is reasonably predictable that if China’s Amazon does not partake in the m-commerce market it will remain far behind and its market share will continue to drop. It is clear that Chinese people prefer to shop more on mobile rather than the internet.      

Moreover, Amazon.cn is simply absent to Chinese people, issues such as adapting to the Chinese infrastructures and lack of mobile presence are creating barriers to obtaining more market share and profit rather than being a strategy of differentiation. Being cost effective and selling cheaper items is not a cost leadership strategy because the competition already masters at that. Amazon.cn is left with one leading strategy to face, to only focus on branded imported goods.

Recommendations

Amazon may consider the following strategies to win in China’s e-commerce market.

The first strategy Amazon China can act upon is building a mobile app that can function as a corresponding tool to the website. An easy-use app where the the shopping experience is enjoyable and payment methods are easy and secure. Enhance customer service on the app through a feedback system, a network where the company and customer can communicate. 

The second strategy is social networking, Amazon must merge with Weibo and Wechat or create its own in-app social system where consumers can react on products by reviewing the quality of the item, delivery method and quality of customer service.

A third strategy would be advancing data assembling techniques, it will not only help the company gather enough information on their customers but it will also keep the company updated about market trends and developments. Furthermore, big data collection will customize the experience for the targeted consumers.    

The fourth strategy Amazon can stress on is cross-border e-commerce, it is the most powerful tool it currently has against its competitors in China. A lot of Chinese people admire western products, however, Amazon’s competitors such as Tao-Bao and T-Mall have those products at similar costs but the quality of the good is unreliable. Therefore, Amazon China can offer the western premium goods at lower costs by opening warehouses in tax free regions around China.

Amazon should customize its model and infrastructure based on Chinese sociocultural environment. Marketing strategies such as participating in Singles-Day sales, Chinese new year promotions and so on will bring the company a step closer to compete with the e-commerce giants of China. However, Amazon must stop investing and focusing too much on China, the simple strategies above could benefit the company in numerous aspects within the e-commerce market. Like Amazon India, the entire company must continue to expand to developing countries before Alibaba dominates them.  

Conclusions

To sum up, Amazon’s entry to China led the company to build new infrastructure and model for developing countries, its experience has helped it understand how to adapt a model in a country where change and growth are boundless. Amazon entered China at the wrong time in the wrong way, the company underestimated the obstacles and opportunities. The company failed to balance between customization and standardization that could shape a new business model. Amazon is still struggling in China left with very few strategies to consider, Amazon has even opened up its own store on T-Mall in-order to increase more publicity. 

Alibaba has dominated great power of the e-commerce industry, this e-revolution in China has served the economy in so many ways, creating jobs and an income for people in rural areas as well. A country of 1.3 billion people where 90% are online shoppers and a growing middle class drives Amazon China’s ambition to continue to remain in China. Chinese people have shown a demand in oversees premium products especially from the US and Europe, although a rapidly growing market and yet a decreasing market share for Amazon, the company believes that the long run will have so much to offer.  The company must implement new strategies and base itself according to Chinese culture, gain a mobile presence, engage in social networking, understand Chinese online consumers to the maximum, and most importantly remain as a premium online service that offers only items and products from abroad.

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