A Case Study on International Expansion: When Amazon went to China

Last time we learned about eBay’s attempt to expand into China in 2003. This time we will assess how Amazon faired, keeping in mind five key practices that US tech firms must adapt in order to make their Chinese operations a successful venture. These practices are:

1. Partnering with a local Chinese brand with a strong name as method of entry.

2. Adapting a meaningful, easily recognizable Chinese name.

3. Hiring local leadership.

4. Launching a separate service based locally in China.

5. Giving local Chinese operations autonomy to build their own business model and operate independent of US based headquarters.

A Case Study on International Expansion: Amazon

Amazon was founded in July 1994 by Jeff Bezos and is the largest Internet-based retailer in the world by total sales and market capitalization. However, despite its worldwide success, Amazon had yearly estimated losses of $600M in China up until 2015, when it opted to be Alibaba’s customer rather than competitor, opening up a store in Tmall (Alibaba’s platform that is a prized venue for Western brands trying to reach Chinese consumers.)

Amazon entered the China market by acquiring Joyo in 2004, the biggest online book seller in China. Joyo was rebranded as Amazon China in 2011. As Amazon grew from an online book store to e-commerce juggernaut in the United States, it failed to recreate such success in China.

Amazon made many of the same mistakes that eBay made in China. Amazon attempted to fit its working business model in the United States to China, but like eBay, the Chinese consumer market demanded something different. Like eBay, Amazon preferred globalization and was not willing to give much autonomy to its China operations. Even today, when there is a conflict of interests between the Chinese management team and Amazon headquarters in Seattle, Amazon headquarters in Seattle tends to override the Chinese management’s decision.

Price Sensitivity

The first consumer preference Amazon did not account for was how price sensitive the China market is. TaoBao’s model of having tens if not hundreds of thousands of merchants, coupled with effective mechanisms to curb fraud, created fierce competition between merchants, which pushed the prices of goods to be as low as possible. Amazon commonly had prices much higher than competitors in China. Fierce competition also forced merchants to communicate with and listen to customers, similar to how startups listen and adapt to customers while big companies do not. Because factories are plentiful and cheap in China, this allowed customers to make direct orders from merchants, and allowed merchants to innovate. Similar to eBay, Amazon has not been able to adapt to this ever changing market. As Scott Cendrowski, an American citizen living in China says, ‘I surf both Amazon’s Chinese site and Alibaba’s platforms. Whatever I can’t find on Alibaba’s sites, I look for on Amazon. But I never visit Amazon first because I know the prices will inevitably be higher.’

It should be noted, however, that Amazon’s model does work in China. JD, who holds 24.7% of the e-commerce market share in China (and who Walmart holds 12% of) uses the same business model as Amazon. But this only tells half the story. Within this model, Amazon is still making many of the same mistakes eBay made.

Payment System

First and foremost, Amazon is making the same mistake of failing to implement more convenient payment systems for local Chinese consumers as eBay. In 2016, China’s credit card transaction and debit card transaction rates were 13.8% and 17.3% (12), as a wide array of bank transfer options and other prepaid payment methods are more commonly used in China. Alipay continues to be the most popular online payment methods, and Amazon has not to date partnered with Alipay.

Furthermore, local e-commerce giants TaoBao and JD better understand how to market themselves to the China market. One of JD’s major investors is Tencent, the second biggest Internet company in China, who also owns QQ, WeChat and Tenpay. JD partially leverages on Tencent’s nationwide reach via WeChat. As of December 2016, there is an average of 768M WeChat daily active users, of which 83% purchase products online via WeChat. Because Chinese locals are much more mobile-savvy than they are computer-savvy, this opens up JD to an immense market that Amazon has little reach, as spending via mobile is accounted for 55.5% of e-commerce spending in 2016, and is expected to grow to 68% by 2020.

Market Entry by Acquisition

Finally, Amazon has also made the mistake of assuming their typical market entry strategy would work in China. The company’s typical path to success — buying market share (Amazon India, Amazon Brazil)– has been repeatedly blocked since it entered in 2004 with the acquisition of Joyo. Amazon’s latest attempt at this strategy, has also fallen flat.

In August 2014, Amazon purchased Twitch, the world’s leading platform for watching organized video-game competitions (known as e-sports) for $970M, its second-largest purchase ever. By leveraging the popularity of e-sports, with 134M viewers and a market worth $612M annually, Amazon hoped to find youthful new audiences for Amazon’s original, streaming entertainment programming. However, Wang Sicong, the son of China’s richest man, launched Panda TV, a China-based streaming e-sports platform that will compete directly with Twitch. Asia is home to the world’s largest population of gamers and e-sports fans where audiences watch tournaments that exceed those for the NBA finals. Perhaps best known for buying two gold Apple Watches for his dogs, Wang Sicong’s popularity in China is second to none. Wang Sicong is also a successful entrepreneur, avid gamer himself and owner and founder of Invictus Gaming, a popular e-sports team.

How the Story Ends

As Amazon’s latest expansion plans came to a grinding halt, Amazon has appeared to have given up its ambitions for the China market. In March 2015, Amazon opened up its store on Alibaba’s Tmall platform, where it now pays fees to Alibaba to run its store on Tmall’s site.

It should also be noted, however, that Amazon launched a limited version of Amazon Prime in China in October of 2016, showing that Amazon is continuing to innovate in China. Not enough information is of yet available as to the success of this limited release of Prime, and whether or not Amazon will work towards releasing a full version.

So far, we’ve covered eBay and Amazon’s story in China. Next month, for our last edition in this series, I will analyze Groupon. If you have any thoughts or questions, please comment. And if you are working on anything in the industrial or mobility space, send me a note at alex.lee@alliance-rnm.com — I’d love to connect.