The toughest nut to crack

Google’s CEO Eric Schmidt once said that a “Gang of Four” ruled global technology. He named them as Google, Apple, Amazon and Facebook (naturally putting his own company first on the list).

Microsoft was conspicuous by its absence, leading Steven Sinofsky, then head of Windows, to retort that “nothing called the Gang of Four ever ends well”.

The put-down was lost on the majority who heard it, but less so in China, where the original Gang of Four, led by Mao’s wife Jiang Qing, ended up in prison and disgrace.

Schmidt’s assessment was American-centric, ignoring the impact of China’s troika of technology titans: Baidu, Alibaba and Tencent (the BAT). Their exclusion was more forgivable when he made the comment almost a decade ago. But it would be harder to make the same claim today, not least as China’s homegrown giants are far more instrumental to the day-to-day lives of its 1.4 billion people.

Indeed, the domestic media sometimes delights in detailing the limited impact of Schmidt’s Gang of Four in China. Case in point was a long feature in Jiemian recently examining Amazon’s commercial footprint in a market where online shoppers spent $378 billion in 2016, according to iResearch figures.

Amazon has seen its market share fall in China from 15.4% in 2008 to just 0.8% in 2016, the report claimed, far behind Alibaba (57%), JD.com (25%), Suning (4.3%), Vipshop (3.5%), and Yihaodian (1.1%).

Internet-based newspaper Jiemian visited Amazon’s Seattle-based headquarters and met senior executives who all reaffirmed the company’s commitment to the Chinese market. But to local observers, its inability to get much more than a toehold in China was encapsulated in 2015 by its decision to open a storefront on Alibaba’s Tmall. A year later Amazon was forced to deny rumours that it planned to sell its entire Chinese operation to LeEco, leaving news website Quartz to damn it with the faint praise as “almost a non-player but a persistent one”.

Amazon executives told Jiemian that the company’s main focus is cross-border e-commerce (jargon for selling overseas goods to Chinese consumers), amounting to $14 billion in sales during the fourth quarter of 2016. It should be a strong area for Amazon, given its global logistics capabilities and the longstanding preferences of many Chinese consumers for international goods based on brand, safety and trust grounds. Here, Amazon still only ranked sixth in this segment at the end of 2016, but its market share was bigger at 6.6%, though still trailing Alibaba’s 19%.

While Amazon has operated in China since 2004, it has only ramped up its cross-border efforts since 2014, after the government established a free trade zone in Shanghai. This enabled it to provide more competitively priced products, thanks to the zone’s tax and customs advantages. Jiemian cites 2015 Shanghai customs data, showing that 90% of cross-border revenues on online platforms in the zone that year related to Amazon.

Earlier this year, the company established a similar arrangement with the Ningbo government, where another e-commerce pilot zone has been established. Further zones would clearly help it to establish a much bigger footprint across the country.

Chinese customers also have more international sites on which to buy goods via the company’s Chinese-language Amazon Global Store. This service originally linked to Amazon’s American and British sites, but a site for Japan is now included as well and the additions led to a five-fold increase in shoppers on Amazon’s Chinese platform last year.

In a bid to boost customer loyalty, Amazon also launched its Prime service in China last October. Greg Greeley, who runs Prime, tells Jiemian that the original cross-border delivery service was too slow and expensive, which the Prime offering hopes to remedy. “Our main focus lies in creating a very reliable cross-border solution,” he explains.

Amazon Prime is currently available in 82 cities and costs Rmb188 for the first year, rising to Rmb388 ($57) per annum (compared to $99 in the US). In return, customers get free shipping and guaranteed delivery times within five to nine days, compared to nine to 12 days for Amazon’s standard service.

Samir Kumar, Amazon’s international retail head, says that the Prime fees don’t cover the costs of the service in any of the countries that Amazon offers it.

But the company is persisting with Prime as part of its flywheel philosophy – that heavy investment generates long-term returns, because spending on any one component of the company’s business acts as an accelerator for all the others.

As Kumar explains, “We hope that if Chinese consumers find more lower-priced goods than they expect, and enjoy faster delivery times, they’ll subconsciously choose Amazon next time.”

Amazon faced another key test in China on Tuesday, the company’s third annual ‘Prime Day’ and the first of its kind to be offered to Chinese customers. As a number of commentators have pointed out, the online shopping carnival symbolises a growing trend of the West copying the East, as Alibaba set the precedent for events like these with its wildly popular Singles’ Day.

However, there are differences between the two. Amazon’s Prime Day is a lot more low-key and the main intention is to lock in customers over the longer term rather than rack up huge one-day sales figures. Analysts believe this year’s event is likely to have generated about $1 billion in global sales (although the top-selling items for the Chinese were an unlikely combination: a glow-in-the-dark seahorse doll and the bestselling book Sapiens: A Brief History of Humankind).

Still, takings were a long way short of Alibaba’s haul for its most recent Singles’ Day ($18 billion) or even JD.com’s equivalent 618 Day ($17.6 billion).

Where Amazon has been making more inroads is with its Kindle device. About 2.34 million e-readers were sold to Chinese consumers last year, according to the China Audio-Visual and Digital Publishing Association, and sales on Kindle were up 25% year-on-year to Rmb12 billion.

The association is forecasting 20% sales growth in 2017 and it estimates that China now accounts for 8% of the global e-reader market, second to the United States on 68%.

Amazon has tried to improve its position locally by forging a partnership with China Mobile subsidiary, Migu. In June, the two launched their first co-branded e-reader, which gives users access to 460,000 books via Kindle and 400,000 more through Migu, which has 160 million readers on a monthly basis.

After the summer break, investors appetite for e-readers will be tested when Tencent launches an estimated $600 million to $800 million Hong Kong IPO for its e-publishing arm, China Literature (formerly named China Reading). The company says it had accumulated over 600 million users across its nine platforms by March last year and a catalogue of about 10 million books.

While sales of the jointly-branded Kindle give Amazon hope, the company’s history in China seems to reinforce arguments that technology leadership is a bi-polar affair – with the BAT troika dominating in the Chinese market and the Gang of the Four across the rest of the world.

News organisations in the two countries tend to have a very different take on why this has happened. In a recent article Bloomberg once again argued that protectionism is the biggest barrier to global companies operating in China. But 21CN Business Herald dismisses such arguments, concluding that Amazon “could have built up better market share in China”. It believes the American retailer has struggled more because its platform has been designed primarily for American customers and not Chinese ones.

Outside China, Amazon’s seeming invincibility is the default narrative, particularly as it doubles down on its dominance of cloud-based services (China is again an exception, where its market share is small). Indeed, Amazon’s shares recently hit an all-time high of $1,000 and some analysts have argued that it will be the first company to achieve a $1 trillion market capitalisation and $1 trillion in sales. But as of now, its revenues in China are not going to be much help in reaching such heady targets. Indeed, of the Gang of Four, only Apple makes a meaningful share of its sales to Chinese customers, and even the Cupertino-based firm has faced headwinds over the past year (see WiC373) trying to counter the rise of Tencent and Alibaba.

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