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THE BOTTOM LINE

Why Amazon didn't make the cut in China

WHEN Amazon announced last week that it was giving up the e-commerce business in China, it wasn't because of Chinese protectionism.

Retail, after all, is almost the only sector where Beijing doesn't favour the locals. LVMH, Prada, Gucci, Zara, H&M, Uniqlo all prosper. It's a rare, relatively level playing field for foreign companies, a sector in which local competition must fight long and hard. It's a place where mighty foreign Internet companies would have supposedly shown their innovative prowess and then achieved dominance in the world's largest e-commerce market. But it's a market where Amazon, the largest and most valuable retailer in the world, which has been heralded as the disruptor of many industries, decided to retreat. What happened?

If it's not government interference, then it's the cut-throat competition for online shoppers in China. Amazon China got caught between Chinese digital giants such as Alibaba, JD.com and Tencent, specialised e-commerce players such as Pinduoduo, Meilishuo and Mogujie, and cross-border ventures such as Xiaohongshu and Vipshop. Still, the market is far from being consolidated. New ventures keep popping up routinely. The most recent addition is Tiktok, an industry-leading, algorithm-based short video sharing application that decided to diversify into e-commerce, with native shops on its platform of 500 million users. In other words, China's e-commerce sector is enormous, far bigger than that of the US, and yet still developing, with new entrants succeeding based on new consumer preferences.

It's this extreme dynamism of the industry that didn't bode well for Amazon.

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LOGISTICS

Amazon understood early the importance of building up the e-commerce ecosystem in China. In the US, Amazon developed its logistics infrastructure, automated warehouses, and third-party marketplace, and actively participated as the core player in the ecosystem. But Amazon hesitated in China, even though the market is larger. The early acquisition of Joyo in 2004 and rumours of an acquisition of NetEase's Koala were as far as Amazon's efforts went. Even JD.com - often considered a copycat of Amazon in China - diversified into logistics and financial services, slowly grabbing market share from Alibaba's T-mall as it could, then leveraging its better service and delivery quality. Amazon's global position has not proven to be a sufficient substitute for truly localised operations.

But why?

There are always a million things a company could do to serve customers better, so it must prioritise. For Amazon, the US will always be the home market, the one to which its investors pay the most attention. Latin America could have been the company's fastest-growing market because of its cultural proximity and the similarities in its consumer preferences. But even there, Amazon has found itself playing catch-up with local rivals that know how to navigate local challenges, from a complicated tax structure to high import costs to moving goods across a continent-size country like Brazil. And because e-commerce is a service mixing digital information and consumer goods, the key area of differentiation lies in its delivery in the physical world. The idea of a platform through which Amazon can build one standard and then roll it out across the world no longer suffices.

As for Amazon China, it just did not do enough to build a brand reputation and get close to the Chinese consumer. Shopping festivals, discount campaigns, nation-wide red envelope promotions and orchestrated efforts to integrate online and offline retail to entice the Chinese consumer have always stayed the domain of local retailers. Chinese retailers have become the synonym for the new retail movement that is satisfying the increasingly on-demand and location-based needs of Chinese consumers.

So, what's Amazon's future in China? A full-scale retreat by Amazon from China may seem unthinkable, but Amazon's own growth script - building global infrastructure, leveraging data analytics, and entering different verticals, to infinity and beyond - cannot work everywhere. Investors on future IPOs of major startups that promise a global conquest - Pinterest, Zoom, and Uber - must take note of this lesson.

  • The writers are from the IMD Business School in Switzerland and Singapore. Mark J Greeven is a Chinese-speaking Dutch professor of innovation and strategy, and a former faculty member at China's leading innovation institute at Zhejiang University.
    Howard Yu is the LEGO professor of management and innovation, and director of IMD's signature Advanced Management Program (AMP). He is also the author of 'LEAP: How to thrive in a world where everything can be copied' (PublicAffairs; June 2018)