Some people view Amazon’s move to open an online shop on Alibaba’s Tmall as a sign of defeat. In fact, while both companies could benefit, the significance of the move is likely to be small.
“The company is widely considered to have failed to achieve the type of success in that market that investors are accustomed to from Amazon,” Citigroup writes in a note to clients.
Amazon gets 60 percent of its revenue from outside the United States and is a market leader in many countries, except for China, where it only holds a market share of 1.3 percent, according to China Internet Watch.
By opening an online portal on Tmall (with a market share of 57.6 percent), Amazon will pay Alibaba commission to sell its products there.
For Amazon, doing business with competitors is nothing new. In every other market, however, the tables are reversed and smaller sellers list their products on Amazon, competing with similar and sometimes the same products on price, shipping, and service.
According to Citigroup, this effort by Amazon to be successful in China is serious. “While Amazon characterized its Tmall store to us as ‘a pilot program,’ it appears that Amazon is focused on making it successful,” it says in the note.
Amazon is also launching initiatives to give Chinese consumers access to products on Amazon sites outside China and is lowering the shipping time as well as prices.
However, despite the push, the impact on both companies is likely to be small. At this moment, Amazon’s only unique selling point is the 25 percent of its products which it sells exclusively in China. It doesn’t have the scope yet to compete with Alibaba channels on price, like it does elsewhere. Alibaba benefits from having Amazon sell legitimate luxury goods on its platform. On top, it is getting a commission.
Two Different Companies
The move by Amazon warrants a reminder that the two companies are fundamentally different. Amazon is a brick and mortar company as well as a technology company whereas Alibaba is just a technology company. Amazon owns massive warehouses all across the globe and employs legions of people. Alibaba doesn’t.
Unless Amazon manages to expand its warehouse system in China and can compete with Tmall offerings on price, chances of success are low.
Many Bloody Noses
While Amazon is still active in China, many other Western companies had to leave with a bloody nose and a blue eye.
Highly competitive and innovative in the West, many companies like eBay neglected the preferences of the Chinese consumer. eBay could not offer the right payment and communication systems and had to close down its operations in China.
Home Depot didn’t realize Chinese don’t like to DIY and Google had an infamous run-in with the Chinese regime’s censorship arm.
Successful companies like Starbucks and KFC modified their product lines to cater to the Chinese consumer. They also had it easier in terms of competition.
Many markets in China are tough to enter because they have one giant monopoly-like company guarding its gate. Despite the fact Alibaba is not state-owned, it used to have very good relationship with members of the politburo and it had the first mover advantage, as well as local expertise.
“Alibaba had the first mover advantage. This is the kind of business that once you get the scale, it’s hard to be dislodged,” said Linda Lim, a professor for business strategy at the University of Michigan.
Chinese search engine Baidu used to lure users by giving them access to pirated material, something that Google could never do.
Not a Single Fight
On the other hand, there is not one single success story of a Chinese company building its operations from the ground up in the Western hemisphere. In fact, there aren’t even many examples where they have tried.
Chinese companies have acquired Western companies, with the best example being Lenovo’s acquisition of IBM’s PC operations and Motorola Mobility.
However, Chinese companies chronically lack innovation, are entering competitive markets, and also don’t have the local knowledge they need to get their feet on the ground.
“There is very little evidence that Chinese companies are succeeding in building networks and success outside of China or Chinese communities. WeChat is used by overseas mainland Chinese. The ability to build up a Latin American or European community is still very limited,” says China expert Fraser Howie.
Alibaba is trying to scoop talent from Microsoft and Amazon in the United States to build its operations, which to this day are very limited with only 300 employees. Despite that, there is evidence they are actually trying to put up a fight in the near future.