Amazon’s E-Commerce Defeat in China Offers Lesson for US Businesses

By Fan Yu, Epoch Times
April 22, 2019 Updated: April 22, 2019

Commentary

A few months ago, I attended an event in the SoHo district of New York City held to attract U.S. startups to expand their operations to China. It was held by a few Chinese marketing firms that would assist the startups with their transition into marketing, social media, and operational support.

Despite the polished presentation and an engaged audience, it didn’t take long for most of the entrepreneurs there to recognize that expanding to China’s domestic market would be tough sledding.

Amazon’s announcement last week that it’s quitting China’s domestic e-commerce business is further proof of that reality.

Despite entering China more than a decade ago, Amazon—which dominates online consumer retail in the United States and many other foreign markets—has struggled to gain traction there.

The Seattle-based e-commerce giant’s Chinese website, Amazon.cn, will shut its platform selling domestic third-party goods by July 18. In a statement, Amazon said it would continue to sell certain imported products to Chinese consumers. The head of its China business, Elaine Chang, will remain with the company in a different role.

In 2018, Alibaba and its subsidiaries were No. 1 in Chinese e-commerce sales, with a 58.2 percent market share, according to data from eMarketer. JD.com placed second with 16.3 percent share, while Amazon China was a distant seventh place, with a paltry 0.7 percent share.

Amazon’s market position in China has slowly deteriorated in the past several years. According to Chinese business publication Caixin magazine, 10 years ago, Amazon China held a 15.4 percent market share.

State-Mandated Handicaps

Most media reports regarding Amazon’s retreat in China cite the fierce competition from domestic rivals such as Alibaba and JD.com. That’s a sound observation on the surface, but the underlying reasons behind Amazon’s China decline are more complicated.

Amazon originally entered China 15 years ago, by way of acquiring Joyo.com, a Chinese e-commerce website focused on books. China was a different market then and had placed far fewer restrictions on foreign companies.

Joyo.com was rebranded to Amazon.cn in 2011. The company was never a market leader in China for e-commerce, although it thrived as Chinese consumers craved foreign products and the reputational cachet of a foreign-branded website selling Chinese products.

But during the past five years, Amazon had shifted its strategic focus away from Chinese domestic e-commerce to Kindle and web hosting and cloud computing (Amazon Web Services, or AWS).

The focus on consumer hardware and business services mirrors Amazon’s strategy in the United States; it’s a sound strategy in most markets, but not in China. The company failed to foresee a shift in the Chinese regulatory environment.

Amazon’s strategic pivot to high tech in China thrust itself into the jaws of the Chinese Communist Party (CCP) regime. China’s cybersecurity laws enacted in 2017 presented a huge challenge to technology firms, including Amazon. The laws gave the CCP unprecedented access to user data, requiring technology companies to censor their Chinese websites, store customer data locally, and grant Beijing authorities access to their secured data.

Late last year, Amazon sold its physical server business in China. The official reason given by the company was that the CCP prohibited foreign companies from owning or operating certain underlying technologies.

An Oct. 4, 2018, Bloomberg report found that servers manufactured in China for Elemental Technologies, a company acquired by Amazon in 2015, had microchips planted into them that could let hackers enter any network that these machines were part of. “The chips had been inserted during the manufacturing process, two officials say, by operatives from a unit of the People’s Liberation Army,” according to the Bloomberg report. Amazon has since denied the allegations in the story.

Despite the challenges, Amazon continues to operate AWS in China today.

Nevertheless, the technological, operational, and regulatory challenges have diverted significant resources away from Amazon’s Chinese e-commerce business during this time. Despite a sizable market share several years ago, in recent periods Amazon’s domestic e-commerce business has ceded market share to Alibaba and more recent entrants such as JD.com and VIP.com, which sold cheaper products. Amazon’s earlier advantages were further eroded after domestic rivals have increased their policing of counterfeit products.

Increased Chinese nationalism also played a part in Amazon’s decline.

In 2011, 85 percent of Chinese consumers said they preferred foreign brands over domestic brands, according to an April 18 Wall Street Journal report, citing data from the China Market Research Group. Merely two years later by 2016, 60 percent of respondents said they preferred domestic brands over foreign ones.

One reason for this is Chinese domestic products have seen their quality improve over the last ten years due to increased competition both locally and internationally.

Another reason is state mandated. “Buy Chinese” is a tangible policy encouraged by the CCP regime through online and newspaper editorials. On Chinese social media, there are videos of Chinese consumers smashing their Apple iPhones and criticizing those who frequent KFC.

In a tough market backdrop even for well-heeled multinational corporations, U.S. startups likely won’t stand a chance.

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