Why Amazon is persisting in China

We are at the tail end of the world’s two biggest retailing phenomena: Singles’ Day (11/11) and Black Friday/Cyber Monday (27/30 11); the former adopted and promoted by Alibaba in China since 2009; the latter heavily influenced by Amazon, and with its origins in the US.

At this time of year, it’s impossible not to compare these two major shopping fests; the figures from Singles Day were daunting to say the least:

• An estimated 100 million shoppers spending almost $13 billion in total
• More than $9 billion (£6 billion) spent in the first 12 hours, “eclipsing” last year’s final results in a little over half the time.
• More than 20 million transactions completed before 5pm claimed by leading online Chinese retailer, JD.com, who an hour and a half later added that one-day orders had passed the combined total of the five previous Singles’ Days.[1]

By way of comparison, desktop sales for the five days from Thanksgiving until Cyber Monday in the US in 2014 were around $6.56 billion, according to internet analytics firm comScore[2] – although, of course, this spending weekend now extends far beyond American shores.

This year’s Singles’ Day sales figures reinforce (if that is even needed!) the massive opportunity represented by cross-border e-commerce with China – and go a long way to explaining why, despite struggling initially to break into the market, Amazon is persisting in China and has latterly undergone a change of strategy to strengthen its business model there.

Surely this persistence – and the company’s new strategy in particular – will bring new opportunities for overseas SMEs hoping to get a foothold in China?

Size of potential market

 
At around 668 million, China’s online population is the world’s biggest[3] . It is wired into the world's largest and most dynamic e-commerce market, which has seen a surge in cross-border trade recently, driven by the Chinese consumer’s appetite for international brands.
 
Some $450 billion was spent online in China in 2014 – an increase of almost 50% over 2013.^[4] While some obstacles remain for overseas online purchases, the Chinese market is full of potential for cross-border e-commerce.

Indeed, according to a report released in June by Accenture and Alibaba's research division, AliResearch, "China will become the largest cross-border business-to-customer (B2C) market by 2020, with the transaction volume of imported goods purchased online reaching $245 billion."

With numbers like this being bandied around, it is hardly surprising that China's leading online marketplaces Alibaba and JD.com have quickly rolled out cross-border e-commerce services; or that Amazon has "refocused the business" in China as a cross-border e-commerce site.
 
Of course, as even the mighty Amazon has discovered, when you are an outsider it is not easy to get to understand China's consumers and businesses – or how best to reach them and meet their expectations.

What are online buyers in China looking for?

Chinese buyers like a bargain: 60% of Chinese online consumers list “better price” as the number one reason to make purchases online.[5] So if you are selling on a Chinese marketplace, you will need to price very competitively.
 
They like a brand too. Younger Chinese consumers in particular are attracted by well-known names; established brands offering authentic products as opposed to the counterfeit goods which have proliferated on some Chinese marketplaces.
 
They have ‘grown up’ with marketplaces and use them as first port of call for online shopping. It is estimated that around 90% of all Chinese-based e-commerce transactions are completed through marketplaces – that’s much higher than in most countries.[6]
 
They have different expectations of online stores: they want to see more detailed product pages, more images and more information on deals, for example.
 
And if getting to know your target audience is difficult, government restrictions are also a challenge for overseas retailers.

There have always been obstacles in the way of cross-border trade with China: complex duty, tax and translation requirements – not forgetting difficulties in protecting intellectual property rights.

The fact that Amazon eventually resorted to using Alibaba’s Tmall platform (thus paying its main competitor for the privilege of so doing!) is an indication of just how difficult it is to break into the Chinese market – even when you’re Amazon.
 

Amazon in China: a slow start – but a new cross-border strategy

Despite a presence in China since 2004, in Q1 2015 Amazon accounted for just 1.1 percent of China's B2C market in terms of revenue[7] .

The company was, however, several months into the implementation of a new strategy to expand its operation in China and "refocus the business" as a cross-border e-commerce site.

The new approach has two objectives: the first, to help customers in China gain access to the best products from around the world; the second, to help businesses in China become global brands through Amazon's platforms.
 
To help to achieve the first objective, in November 2014, the company launched the “Global Store” service, which enabled Chinese customers to buy goods from other countries (initially US-focused), directly from Amazon's online shopping platforms, and in Chinese. Customers had access to over a million Amazon products globally.[8]

This was followed in August 2015, by the introduction of “Cross-border 2.0"; Amazon China's updated cross-border online shopping service, which brought faster delivery, an enhanced experience for customers and, importantly for retailers trying to sell in China, a greater selection of overseas products.

Amazon introduced a ‘free-trade zone model’ as a way of achieving faster delivery. This service brings in the most popular imported products, fulfilling customers' orders directly from a free-trade zone. According to Amazon China, this means a localised shipping lead time of one to three days.

Given the size and market clout of Chinese competitors such as Alibaba and JD.com, Amazon needed to find strong differentiators to compete successfully. These were found in the existing relationships the company has with hundreds of thousands of vendors/brands all over the world – combined with Amazon’s global logistic capabilities. The company attracted 36,000 brands to China in just six months and now offers more than three million different overseas products on its site. Orders for high-quality foreign products apparently topped five million in the first nine months of 2015.[9] In addition, Amazon China has a strong infrastructure in place, with more than 5,000 staff in 13[10] centres around the country, dealing with quality control, shipping and delivery services.

The result? More overseas brands available for rapid delivery to Chinese consumers.

Why is Amazon’s persistence in China important for other online retailers?

It is not easy to break into the Chinese market, as we have already seen: distance, cultural and language differences, the need for alternative payment systems, different delivery options and communication strategies pose significant hurdles. 

Local marketplaces Alibaba’s Tmall and Taobao dominate the market, alongside JD.com.

Overseas online retailers have had the opportunity of using these marketplaces to enter China – and they are increasingly interested in helping them. For example, Alibaba launched Tmall Global to make it easier for overseas businesses without Chinese business licenses to sell there; and JD.com recently created a “French Mall”, focusing on products imported from France.  

However, headaches remain – for SMEs in particular. Some find the requirements of Alibaba’s site “constraining” – delivery must be made in 20 days and live chat must be available in Mandarin, for example. Other marketplaces are more accommodating however. JD.com, for example, offers to buy the stock directly and manage the marketing for overseas merchants.[11]

So is Amazon a viable alternative to the Chinese marketplaces?

With initiatives like “Global Store” and “Cross-border 2.0”, it must surely be worth investigating what is on offer.

An agreement recently signed by UK Trade and Investment and Amazon identifies China as a priority market and aims to help SMEs in the UK increase their exports and grow online sales there. As part of this agreement, Amazon will provide “dedicated resources to help UK companies to engage with them on a global basis, and will also create a full set of services to support UK companies selling in other countries, including China”.[12]

Using a marketplace to enter a new overseas market is a logical starting point, offering significant benefits:

• a ready-made audience
• a globally recognised brand that promotes trust among shoppers
• support services to help overseas retailers operate in the new market – particularly as regards order fulfilment.

In the case of China, using a marketplace really is the only way to go – particularly for SMEs.
The question is, in terms of getting your products in front of Chinese consumers will Amazon’s new cross-border ecommerce strategy literally deliver the goods as it is promising?