Why many major American companies have struggled in China: Amazon
Why many major American companies have struggled in China: Amazon
This article is part of a series about the importance of cross-cultural design, other installments of which have been published over the last month.
Before mentioning anything about Amazon, the scale of its problem must be described. In 2014, after disappointing results for their business in China, Wolfe Research Analyst Aram Rubinson estimated that Amazon was operating at a $ 600 million USD a year loss in China. Wow.
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Like Walmart (which is discussed in the fourth installment of this series), Amazon has a long history in China, beginning with its $ 75 million acquisition of the Chinese online book retailer Joyo.com in 2004. Yet even with the purchase of a profitable company, The firm couldn’t seem to grow its site to the scale and profitability experienced in the West. It has only an estimated 1-3% market share in China. This small percentage of the market indicates a problem as its sites receive lots of visitors who must be simply browsing without making a purchase. The American, British, and Japanese versions of Amazon’s websites are all in the top 50 most-visited websites in China according to Alexa (most often times the versions from other countries will reroute the user to amazon.cn, the Amazon website specifically for China).
A possible reason users are simply browsing instead of purchasing could be that there are two markets in China for people purchasing goods, and Amazon doesn’t really target either of these. The two markets are white label items which are extremely inexpensive and verified branded items sold at a higher cost directly from the brand. Alibaba has directly attacked both of these market segments. As discussed earlier in connection with eBay (see the third installment of this series), Taobao allows the sale of extremely cheap items from consumer to consumer. Alibaba’s more recent Tmall allows, for a fee, brands to verify their products as legitimate while selling directly to consumers.
Amazon needs to speak more clearly to Chinese consumers
While it is somewhat understandable that Amazon has tried to simply repeat a model that has had great success in a number of international markets, if the company it wants its brand and businesses to have more than low-level success in China, it must do a better job of speaking to Chinese consumers. It could develop a strategy that creates companies or divisions which compete with Taobao and Tmall directly in the two market segments. However, since it is late in doing so and has allowed them to dominate those markets, the firm is in a tricky spot. Perhaps it could figure out and uniquely solve some problem for the Chinese consumer.
Here is an example of another Amazon misstep: Amazon Prime is a service widely loved in America. It provides free two-day shipping, as well as access to streamable audio and video, among other things. In October 2016, it was announced that Amazon Prime would be rolled out to China for a lower cost and with fewer features. The focus of China’s Amazon Prime is free shipping on items costing more than $ 29 regardless of their nation of origin. While this may be a desired feature, Amazon Prime in China could have been used to provide services specifically desired by the Chinese. For example, there is a very large market for pay-to-win games in China and Amazon has a digital currency for in-game purchases. It could have given a yearly allowance of digital currency with Amazon Prime to drive interest. Instead, they simply copied and pasted its American approach.
It seems Amazon never truly tried to problem solve by tweaking its products or services to relate to China-specific issues. As CEO Jeff Bezos said himself in regard to their China strategy, “We mostly tried to roll out what worked well for us in Japan, Germany, the U.K., Spain, France, Italy, the U.S., etc., and it needed more local market customization. If you want me to give one meta-lesson, it’s that one.”
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Amazon is a prime example of a company which thought it could succeed in an entirely different market just by continuing to do business as usual without good market and customer analysis. This method of going about globalizing a product will almost never result in good success and analysts are actually calling for Amazon to pull out of China. It seems that Amazon’s executives are not willing to do the type of market research that will allow it to better speak to the Chinese consumer.
One would hope that a company as large and advanced as Amazon would learn its lesson from massive financial losses in China, but it seems unfortunately that it is prone to making the same mistake again. Bezos has announced that Amazon plans to invest around $ 5 billion USD in the next three years in India to try to establish itself there. India is another complicated market which, like China, greatly differs from the West, but Amazon has implied it will again copy and paste its business model there without changes.
The author is Clayton “CJ” Jacobs, who is currently an Entrepreneur-in-Residence with, and the Head of Cross-Cultural Design at, ReadWrite. An area of focus for him is helping American companies understand and enter the Chinese market through taking a modern user-centric product design approach. You can contact him directly at clayton.michael.jacobs(at)gmail.com or find him on Twitter & LinkedIn.
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