INTERNET: Amazon Retreating In China? Not Exactly…
Bottom line: Amazon’s opening of a shop on Alibaba’s popular Tmall looks like a shrewd move to boost its struggling China business, but is unlikely to raise its market share significantly.
Word that Amazon (Nasdaq: AMZN) will open a China store on Alibaba’s (NYSE BABA) popular Tmall marketplace has the online world buzzing that the US e-commerce giant is admitting defeat and failure of its China strategy. Some are even saying the move could mark an eventual closure of Amazon’s own China site, which has failed to attract a major audience despite huge investments by the company. But anyone reaching those conclusion should think again, as this particular move looks quite shrewd and could actually help Amazon to boost its struggling China business.
To understand why this move looks good, it’s important to understand that Alibaba and Amazon use 2 very different business models. Alibaba is the equivalent of an online landlord, operating its popular Tmall platform that’s the equivalent of a huge web-based shopping mall. By comparison, Amazon is an actual online store operator, purchasing a wide range of goods from suppliers and then selling them directly to customers online.
Thus Amazon was doing most of its China business out of its own China store at Amazon.cn, but has now decided to open a second store in Tmall as well. That looks like a good strategy, as it will give Amazon far more exposure in China via the huge volume of shoppers that currently use Tmall.
Before we go any further, let’s backtrack and recap the actual news, which says Amazon will soon open a flagship store on Tmall following nearly 2 years of negotiations. (English article; Chinese article) The Tmall-based store won’t sell all of Amazon’s products, but instead will focus on imported goods including food, women’s shoes, toys, maternity goods and kitchenware, which are currently available on Amazon’s China site.
Amazon certainly isn’t the first online store operator to open an outlet on Tmall to complement its own website. Others who have followed a similar strategy include Dangdang (NYSE: DANG), one of China’s oldest e-commerce companies, and Gome (HKEx: 493), a leading home appliance and consumer electronics seller that also has its own website.
From a strategic point of view, there’s very little downside to such a diversified approach. Operating a shop on Tmall obviously brings some added costs such as rent and commissions, much like renting a space in a real shopping mall. But Tmall has the potential to bring huge new traffic to Amazon China, since more than half of all B2C e-commerce transactions in the country now take place over the platform.
Amazon has spent millions of dollars over the last few years in China to build up a series of warehouses and set up other infrastructure to tap the market, which is one of the world’s largest but also extremely competitive. But despite that effort, the company is still a relatively small player with less than 2 percent of the market.
I do find it a bit strange that Amazon is offering such a limited array of products on its new Tmall store, which will open later this month or in early April. From Alibaba’s perspective there’s really no reason to impose such limitations, since the more goods that Amazon sells the more money Alibaba will earn. Instead, I suspect that Amazon is taking a slow approach and could broaden its offerings if the site proves popular. Amazon is also probably hoping to direct some Tmall visitors back to its own China site, thereby avoiding commissions it might otherwise have to pay to Alibaba.
In an interesting footnote, one report points out that Amazon founder Jeff Bezos was personally involved in this particular negotiation, underscoring the importance of the new relationship. That’s a bit unusual, as I have yet to see any reports of official visits by Bezos to China, unlike other tech company leaders like Apple (Nasdaq: AAPL) CEO Tim Cook and Facebook (Nasdaq: FB) founder Mark Zuckerberg, whose visits are relatively frequent and highly publicized.
I do suspect that Bezos has probably traveled to China at some point on one or more lower-profile, unpublicized trips, and this move onto Tmall indicates he’s paying closer attention to the market than many might believe. As to whether this latest move will work, I do expect that Amazon will sell significantly more goods in China with this new opening.
But it’s also important to remember that Tmall is a very crowded place, with thousands of merchants that include some of the world’s biggest retailers and brand names. Thus Amazon may struggle to gain attention on the platform, and even if it can double its China presence with this move will still only have about 3 percent of Chinese B2C e-commerce market.
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