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Amazon Curtailing Business Operations in China

April 22, 2019

Amazon says it is curtailing business operations in China, the world's biggest retail market, after struggling against better entrenched local players for more than a decade.

The company announced recently that as of July 18, it will no longer provide services through its Chinese website, Amazon.cn. The decision means Amazon will stop selling goods from China-based vendors to domestic consumers on the portal. Although it is moving out of the e-retail business in China, Amazon will continue with its cross-border business, bringing foreign brands and goods to China, the company said.

"Their demand for high-quality, authentic goods from around the world continues to grow rapidly, and given our global presence, Amazon is well-positioned to serve them," the company said.

The announcement has raised questions about the extremely thin presence of foreign companies in internet-related businesses in China, while Chinese companies like Alibaba create market space for themselves across the world.

Amazon's market share in China has fallen from about 15 percent a decade ago to about 6 percent. Alibaba and another local company, jd.com, account for nearly 75 percent of the Chinese market. Online shopping site eBay earlier moved out of China as it could not make a profit.

China is considered by many as a difficult market for foreign players even without taking into account hindrances caused by government policy. In the case of Amazon, however, analysts said the reasons for its poor performance lie in its not being able to localize to meet the requirements of the market.

Shaun Rein, managing director of Shanghai-based China Market Research Group (CMR), said Amazon's Chinese platform could not survive because it did not have a strong and stable management team. He does not think Amazon was hampered by government policy.

"I don't think it is a problem of government protectionism," he said, adding, "They (Amazon executives) didn't have the necessary relationship in China and were unable to build the right ecosystem for people to sell on Amazon."

Getting a large number of local sellers is crucial for an e-commerce platform to provide goods at competitive prices and in sufficient variety to customers.

Jacob Cooke, chief executive officer of consulting firm Web Presence in China, explained that Amazon could not compete with a gigantic local player like Alibaba.

"Alibaba has in-country experience, low costs that are passed on to consumers and unique knowledge of counterfeits / fake items. Additionally, they have market data in China that is superior to Amazon's," he said.

Cross-border

Analysts said Amazon has been concentrating on cross-border commerce since realizing that it cannot effectively compete in the "local to local" business of selling Chinese goods to Chinese customers, which accounts for the bulk of e-commerce activity.

"Our belief is that the cross-border business suits Amazon much better, as the "local to local" model is filled by large companies who operate on very low (virtually non-existent) margins," said Cooke. "We feel that cross-border is exactly where Amazon should focus their efforts in China, based on their strengths."

Fallout

Foreign internet-based businesses have very little presence in China, which has the biggest number of web users in the world. This is partly because a large number of U.S.-based sites including Google, YouTube and Twitter are banned, while e-commerce companies have walked away. Amazon's departure will likely only make it harder for other foreign retail companies to succeed there.

"I think it would be very hard for large e-commerce players from foreign countries to build in China. It is still possible for niche players like there are opportunities in luxury space and cross-border trade," Rein said.

American and European brands will have to depend heavily on local e-commerce companies like Alibaba and jd.com to see their products, analysts said. Although Amazon will continue to sell foreign-made goods, its reach is limited in China because local companies dominate the cross-border trade as well.

"Unfortunately, Alibaba is almost a monopoly in some ways and they have way too much power because they control the eyeballs," said Rein, adding, "They (Alibaba executives) control traffic so they are able to force Western brands to discount even if Western brands do not want to,"Rein said. "Alibaba controls the relationship with the customer rather than the brand controlling the relationship with the customer."

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