In 2004, when Unfortunately, we could not get stock quote AMZN this time. entered China by acquiring the businesses of Joyo.com, it was riding on its huge success in the US, Western Europe and Japan. It rebranded the company 亚马逊, with a catchy URL z.cn, and hoped things would fall into place. From the onset, it faced fierce competition from the local players, particularly from Alibaba and its subsidiaries such as Tmall.com and Taobao.com.
Things have not been any better for the company lately. According to Statista, in 2016, Amazon had 0.8% of the total e-commerce market in China (#7). Contrast that with Tmall.com’s 56.6% and JD.com’s 24.7%. This number is worse than even their 2012 market share, which stood at 3.5%.
This begs the obvious question. As the seventh largest player with a market share that is negligible and with no clear strategy to catch up with the market leaders, does it make sense for Amazon to stay in the country and devote more resources?
Characteristics of the Chinese market
From our China trek, some key insights came through, which were not very apparent to me before. Foremost, it is a mistake to consider China a single market. Instead, it is composed of small, but many markets, that are distinct from each other. Also, though not difficult to enter the Chinese market, it is extremely difficult to be successful. This is owing to not only intense competition but also unique political and social structure. The only way to be successful is to make a long-term commitment to the country. A clear but flexible strategy would certainly help. The joint venture route that many companies take to enter the market might be the easiest. However, often they present more problems than benefits.
Being able to execute locally with lower cost structure, targeted products and localised management is vital to sustainable success. At the same time, being wary of regulatory issues is extremely important, along with the capability to react quickly to adverse regulations. But, everything can go to waste if the domestic competitors are not understood well. Local competitors can be extremely nimble, fierce and not afraid to experiment. So, sticking to rigid norms might prove fatal. The financial rationale is not always the dominant factor in a company’s decisions. As a result, studying the strategies, organisational setup, leadership and culture of the domestic companies is an important step. In a nutshell, in addition to the 3 C’s of business strategy – customer, competitors and company, the fourth C of Context becomes doubly important in China.
The “benefits” of exiting for Amazon
We can safely argue that for Amazon, all the four C’s are in red. They don’t have the customers, competitors are pulling away, the company is not local and executives have little context. One quick way to fix the problem of bleeding cash is to end the misery and do a Google or an Uber i.e. exit the market altogether.
Amazon is currently focusing on four key strategies for its Chinese market. 1. Be the go-to marketplace for authentic foreign goods, 2. Build the Kindle and book business, 3. Shore up its logistical operations and 4. Build cloud services for the Chinese market. It is important that they realise that all the four strategies could be very easily replicated by the Chinese players. With the new data security law, it would be virtually impossible for Amazon to grow its cloud and data driven business.
Exiting the market would allow them to stop the drain on resources immediately. It would also allow them to focus on other markets such as India, where they have recently invested billions of dollars to fend off competition from local players. China is a lost cause for Amazon and the only operation they should do is to cut their losses. Also, they will not be the only ones doing this. They will join a growing list of companies who found the Chinese dream just a mirage. Some notable exits have been those of Google, Uber, Bank of America, Seagate, Panasonic, Metro, Home Depot, Revlon and Sharp.
The perils of leaving the Middle Kingdom for Amazon
However, there is no denying the fact that China is and will remain one of the biggest markets for retailers. Exiting the market is a definitely a risky proposition. Given the politics and the business environment, when executed in a proper manner, a company’s China strategy can provide significant benefits as shown by the likes of Coca Cola, Toyota and GM.
Given the relatively low value of the Chinese renminbi, it is only going to get stronger as time progresses. There is no better time to invest and build in China. The current cash bleed could just be the tuition fee to learn to do business in China, which in the long term can open doors to huge sales. In the next 5-10 years time, when China is already a developed market, there could be more consumers that Amazon can cater to. This could make its offerings more suitable to the affluent middle-class of China.
Finally, China (along with India) will make Asia the source of 50% of the global GDP by 2030. The net profits for Chinese top 500 companies have already surpassed those of the top 500 American ones. Moreover, the consumer taste is changing and the Middle Kingdom is definitely seeing changes in the political, social and economic system. Tier 3 and below cities are growing in prominence as the vast country gradually prospers. Is it sound to miss of this, just because in the short term, Amazon is bleeding cash?
In my opinion, Amazon should stick it out in China. If not for the reasons highlighted above, it should remain there simply because Alibaba is there. Amazon should rightly be afraid of Alibaba making a move into Amazon’s home territories. It is just a matter of time. By remaining in China, Amazon can observe Alibaba’s strategies and learn how to fend its advances internationally.
Moreover, Amazon might need to make some drastic changes to how it works in China. The Chinese team must have more flexibility to innovate locally. Given how fast the local competitors move, it is important that Amazon.cn keeps up with them. Insisting on a one-size fits all strategy (eg. Globally consistent UI design) might make the company slow to respond to local needs. Hiring local Chinese leaders and fostering close relationships with the Government is essential to be successful in China.
As Shen Danyang from China’s Ministry of Commerce told CNBC, for those who have “insight and courage” and are not after “quick money”, China is still a good place to invest. And we all know, Mr Bezos is not short on being insightful and courageous.
 Recode: Amazon is bringing Prime to China, where it has struggled for market share  Business Insider UK: Amazon is still getting dominated in China  MIT Sloan Review: How to Compete in China’s E-Commerce Market  INSEAD Euro Asia Centre: How can foreign companies enter China successfully?  BBC UK: China data protection tightened in new laws  Recode: Jeff Bezos just promised to pour $3 billion more into Amazon India  Business Insider UK: How Western companies can succeed in China CNBC: Why foreign companies are shutting shop in China  Harvard Business Review: The Globe: Is It Too Late to Enter China?  Amazon China company visit, Shanghai  Critical comments from INSEAD trek members Y.Eftychiou and E.Xie