Making It Big in China
On April 18, Amazon announced it is shutting down most of its China-based business. Much like its counterpart in the United States, Amazon’s Chinese website, amazon.cn, is a marketplace where Chinese consumers can buy goods from domestic sellers. Amazon has been in China since 2004, when it bought local seller Joyo.com for $75 million. The Seattle-based company has struggled in China recently, where it has been forced to compete with domestic tech giants like Alibaba. Amazon’s poor performance has been attributed to its high prices and shipping costs, which cause Chinese consumers to opt for domestic services, which are often quicker and cheaper. As a result, Amazon managed to capture just 6% of the e-commerce market in the country. It is worthy to note, however, that Amazon plans to remain in the country, at least partially, through its cloud hosting division—Amazon Cloud.
Amazon’s fate is familiar for anyone who follows Chinese business news. Numerous internet companies have failed to dent what is, at 668 million users, the world’s largest internet market. Google and Facebook are famous examples of firms which have been unable to operate in China, but this has been due to internet censorship and government intervention. Up until public outcry last year, Google had been working on an alternative, China-tailored search engine to be launched in the country. The service would comply with China’s internet censorship laws, and some reports claim that Google continues to work secretly on the project.
Other companies have been forced out due to competition. In 2006, eBay sold its operations in China after investments of hundreds of millions of dollars. This was after a several-year fight with Alibaba’s Taobao for being the leading marketplace in China. Both eBay and Taobao’s models were customer-focused, where users could sell personal items for money. However, Alibaba purposefully launched Taobao in order to compete with eBay, and offered services at low prices and customized to the domestic market. Further, it emphasized direct selling rather than an eBay-style auction system, which was foreign to Chinese consumers. Overall, eBay’s inability to tailor its services to the domestic market was the root cause of its demise, and the emergence of Alibaba as China’s primary e-commerce retailer.
Another famous company that had to quit the Chinese market relatively recently was Uber. When Uber first began its operations, it did so through a highly autonomous subsidiary—Uber China. It invested billions of dollars in the country but competed directly with DiDi, an established ride-sharing app that was already widespread in China. The advantage that made consumers pick Didi over Uber were lower prices and less restrictions for riders; for example, drivers could pick up passengers with vans or buses, and its services were widely available in both urban and countryside locations. Eventually, Uber sold its business to Didi in exchange for a 20% stake and left China in 2016.
Overall, problems seem to be three-fold. Firstly, the tight relationship between business and government in China not only means that some foreign firms like Facebook are outright denied access to the market, but also that China helps homegrown firms turn into successful enterprises through both offering them preferential treatment, and by prevented foreign competitors from conquering the domestic market. Further, a rising sense of nationalism, led by President Xi Jinping, has caused Chinese consumers to often favour using domestic services rather than American ones. The main problem, however, seems to be that American firms are entering a market fundamentally different to the one in the United States woefully unprepared. They are unable to tailor their services to what Chinese consumers desire. eBay lost out to Taobao because its auction-system was unfamiliar to the Chinese; Uber lost out to Didi because the latter offered more modes of transport that were better-suited for its domestic consumer base; and most recently, Amazon lost to the likes of Alibaba because it offered uncompetitive prices and long delivery times to rural regions.
In order for American tech firms in particular to succeed, they must better tailor their services to their future consumers. The first step would be to learn from the myriad of Western firms that have actually found monumental success in China—these include Starbucks, Ikea, H&M, and BMW. What distinguishes these companies from the failed American tech giants is that rather than simply providing a product or a service, they are selling an experience and a lifestyle. If US tech firms can do that, they could very well be on their way to success in China.
Image Courtesy of: https://www.great.gov.uk/selling-online-overseas/markets/details/amazon-china/