Outpaced by local rivals, Amazon struggles to remain relevant in China

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(Image credit: Amazon)

Amazon is shrinking its e-commerce offerings in China, where market share for the US mega e-tailer is barely negligible amid fierce competition from countless rivals including giants such as Alibaba and JD.

“We will cease support for third-party merchants on Amazon China’s website starting Jul. 18, 2019,” (our translation) the company said in a statement to TechNode on Thursday. Amazon provides its merchants with tools to boost selling, including fulfillment and advertising services, according to its website.

Its withdrawal from the domestic marketplace will allow the company to sharpen focus on its cross-border e-commerce business, which mainly sells overseas products to Chinese customers, and its cloud computing service, it said in the statement.

The global e-commerce giant had struggled to gain share since it strode into China’s booming e-commerce industry in August 2004 through the acquisition of online book seller Joyo for $75 million from Xiaomi founder Lei Jun, the largest shareholder of the company at the time.

Yet according to market research institute eMarketer, Amazon China held less than 1% share of the total e-commerce market as of June 2018, eclipsed by Alibaba, which holds a share of more than half the market, and JD.com with less than a fifth. Social e-commerce platform Pinduoduo, local retailer Suning, and Tencent-backed Vip.com round out the top five.

Long time coming

To some, the news is just a formal acknowledgement of Amazon’s reality in China.

“Honestly, I didn’t even know they still had a domestic business left,” Ker Zheng, marketing specialist at a Shenzhen-based e-commerce solution provider Azoya, told TechNode.

“They should have done away with the domestic business a long time ago. There’s no point to compete with Alibaba, JD, and JD isn’t even that profitable,” he added.

Netizens on social media appear to agree. “Amazon shut their in-house inventory business several years ago. Third-party merchants business is also not doing well. For me, Amazon has quit the game for a long time,” (our translation) one  Weibo user using the handle Summer wrote in a post dated Thursday.

The company’s strategic decision to retain key segments is a reflection of its platform’s polarity in China. “Not a big deal for me as long as Kindle and the cross-border operation is around. Amazon offers smaller discounts than Taobao and JD,” a Weibo user going by Shanika said.

China’s e-commerce market requires deep commitment that not all companies are prepared for.

“Basically all platforms provide a commodity service, since everyone sells the same products. To differentiate you have to either provide a lower price or a better customer experience, which means wider product selection, faster shipping. All of that requires a ton of investment and not making money for a long time. JD is willing to do it but not Amazon,” Zheng said.

Commitment can also mean evolving with consumers. Cao Lei, director of the China E-Commerce Research Center, attributes the company’s failure to gain a solid foothold to its lack of innovation. “The e-commerce platforms in China, both old and new, have developed lots of localized business models, such as Pinduoduo’s “group purchase” model and multi-echelon distribution model, to acclimatize themselves to the local market. But Amazon has missed many chances to make innovations, and lost a large number of users,” said Cao.

Regardless of its missteps, Amazon maintains that the move is not a complete pull-back from the China market, but is “a transitional period” (our translation).

However, the US giant also lags the competition in the cross-border e-commerce segment.

China’s leading e-commerce platforms, including Alibaba and JD, announced commitments to assist with importing a combined $250 billion worth of foreign goods at the first-ever China Import Expo held in Shanghai in November.

Rivals Tmall Global, NetEase Kaola, JD Worldwide, and Xiaohongshu lead the market, leaving Amazon China with a 6% share of the vertical as of the fourth quarter of 2018, according to data from research institute Analysys.

“[It] makes much more sense to focus on cross border imports since they have an advantage in sourcing foreign goods,” Zheng of Azoya told TechNode.

Cloudy Skies

The company’s other remaining business in China faces hurdles of its own. Amazon Web Services (AWS), the empire’s cloud computing platform, is a slow mover in the burgeoning cloud computing market.

Figures from Synergy Research Group showed that it held the leading share of the Asia-Pacific region with 24.1% share in revenue in the fourth quarter of 2018. However, in China, domestic tech giants hold the lion’s share with AliCloud comprising 40.5%, Tencent coming in a distant second with 16.5%, and AWS with around 9.7% share.

AWS made its China debut in August 2016, when it licensed the rights to Chinese telecommunication and data service provider Sinnet to offer local cloud services. China’s cyberspace watchdog requires foreign enterprises partner with local companies in order to run cloud infrastructure services in China for data security reasons.

Stay or go?

Early reports about the company’s shrinking China business were fractured, signaling internal confusion about the move.

Reuters reported on Wednesday that Amazon was preparing to close its China marketplace by withdrawing support for third-party merchants over the next 90 days. Chinese media also reported the closure of its main domestic retail business in China, citing a source as saying some employees are now hunting for new jobs.

However, according to China Business Journal, Amazon China announced the decision to close its e-commerce business including the proprietary retail segment in an internal meeting that took place Thursday morning.

Amazon China’s president, Zhang Wenyi, who took the post in April 2016, will reportedly leave, according to an unnamed executive. Around 2,000 people work for the company in China, and will learn more about the company’s layoff plans next week, said the source.

Amazon is not the first international retailer to fail in China.  The platform’s refusal to adapt to Chinese consumer preferences may have also taken a toll.

“If Amazon continues its cross-border e-commerce into China, it is highly suggested that they adapt and provide Chinese consumers the entertaining shopping experience that Chinese consumers like, instead of a global interface and rigid structure pushed to the consumer,” said Ron Wardle, CEO of e-commerce solutions firm, Export Now (Shanghai) Inc.

Cao of the E-Commerce Research Center agreed that Amazon China’s special “foreign-company style” corporate culture led to its weak execution of innovative ideas. “Decisions such as changing festival logos and launching new projects have to be approved by the company’s US headquarters, which results in its inefficiency and lack of indigenization,” he said.

JD.com founder and CEO Richard Liu—a leading figure in China’s e-commerce landscape whose own company and management has recently come under close scrutiny—uses a battle metaphor to describe the dynamic in a March 2018 video interview.

“It’s like soldiers who are told that they only have 10,000 bullets and before shooting each of the bullets, they have to check with the general whether more ammunition is coming. How can you expect the soldiers to win a war like this?” Liu said.

Additional reporting by Emma Lee and Wei Sheng. With contributions from Colum Murphy.