Amazon announced late last Wednesday (April 17, 2019) that it was closing its domestic e-commerce operations in the world’s second-largest economy, China. The announcement is tantamount to calling it quits in a lucrative market, but it wasn’t a surprise for industry analysts who have been keeping track of the online retail giant’s presence in China.
The Jeff Bezos-founded online retail giant has struggled in the Chinese market despite its presence there for more than a decade and its enviable international status.
But Amazon isn’t completely closing its China operations. The Amazon.cn shoppers can still buy some products on the online retailer’s website but these are imported by the company’s sites in the United States, the United Kingdom, and Japan. Before it closed its domestic operations in China, Amazon.cn sold products supplied by local Chinese suppliers.
Amazon’s sales in China are relatively small that the company doesn’t even provide a sales breakdown in its financial reports for them. The company’s sales in Japan, a smaller country compared with China, are higher – and the Japanese market is the smallest market that Amazon provides a sales breakdown in its financial reports, to boot.
In 2018, Amazon’s Japanese sales reached $13.8 billion. This represented about 6% of the company’s global sales.
While Amazon has cut back on its China operations, its competitors are thriving. Walmart, Amazon’s chief rival in the United States, has been aggressively expanding its China business through local partnerships, as well as operates hundreds of physical stores across the country. With its smart supermarket, Walmart can also deliver orders to customers’ homes in less than an hour so it caters to the Chinese consumers’ need for quick delivery.
According to an official Amazon statement, the company has been evolving its online retail business in China and emphasizing its cross-border sales. It has “seen a very strong response from Chinese customers” who have an increasing appetite for quality, genuine products from around the world. It is “well-positioned to serve them” given its international presence.
Amazon’s presence in China started when it acquired Joyo.com for about $75 million in 2004; Joyo.com was at the time a popular online seller of books, the same line of business Amazon was in when it first started. At the time, Jess Bezos, Amazon’s Chairman, President and Chief Executive Officer, said that, “We are happy to be part of one of the world’s most dynamic markets.”
By 2011, Amazon.com rebranded Joyo.com as Amazon China.
At time of its acquisition of Joyo.com, Amazon had several advantages that foreign online companies today don’t have including fewer legal restrictions. Despite these advantages, however, the company struggled to get a good traction on the local market for many reasons.
First, there were several competitors who were as cutthroat as they came, and the successful business model used by Alibaba in the Chinese market certainly didn’t help matters. Alibaba is king in the Chinese online retail market just as Amazon is the dominant player in the American online shopping market.
Second, Amazon was unable to adapt well to the Chinese consumers and their unique demands. The Chinese market is known for being price-sensitive for many products and Chinese customers prefer near-instant delivery and genuine foreign products.
Third, the Amazon business model just wasn’t the right fit for China and it eventually took its toll. In contrast, Alibaba’s business model revealed a deep understanding of its Chinese customers’ needs and wants.
Amazon constructed its own delivery infrastructure and controlled most of its inventory in China. It wasn’t a cost-efficient and results-effective model – the costs kept piling up apparently.
Alibaba’s business model allowed for lower prices and faster delivery. The Chinese e-commerce retailer used local delivery companies and hosted smaller suppliers and vendors. Over time, it was able to beat Amazon in the online retail market, a blow that would have sunk other lesser companies.
Smaller local companies even bested the American behemoth. These online retailers poured more investments into better logistics systems and focused on the local markets, something that Amazon didn’t do. Amazon, some argue, wasn’t as focused on the Chinese market due to its wide range of international pursuits, from online retail to streaming services, even satellites.
Amazon has also veered away from its core e-commerce operations in China – online retail – and focused more on its Kindle devices and cloud services. But these products haven’t been as well-received in China as the company expected, not to mention that these struggled under Beijing’s heavy-handed control.
The combination of a strict regulatory environment, especially for foreign companies, and an existing strong competitor did Amazon in, so to speak.
The drastic move is seen as a significant setback for Amazon and for Jeff Bezos, a man willing to accept short-term losses to attain long-term gains.
But it isn’t just Amazon that’s scaling down on its China operations or focusing less on the China market. The likes of Facebook, Netflix, and Alphabet’s Google are reportedly on the same path as Amazon.
