Competing with dragons Amazon in China Case Study Notes PDF

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Competing with dragons: Amazon in China Overall situation Amazon arrived in China since 2004 with a big reputation. But twelve years later, in 2016, its new president Elaine Chang had a debate if should Amazon abandon China or stay and fight, and how had they end with a market share of no more than 1.6% of the world largest ecommerce business and how to regain it. Amazon is based in Seattle, Washington as one of the world’s largest and innovative firms. In 2016, it had 341.400 employees and net sales of $136 billion. In 1994 was founded by Jeffrey Bezos initially as an online bookstore and evolved into a giant online marketplace (ecommerce) that revolutionized the retail industry, but since 2007 has been involved in hardware business with the launch of its Kindle e-reader, Fire Tablet, Fire TV, and Echo handsfree speaker. Also, it has become a leader in the cloud-computing revolution with its Amazon Web Services (AWS) unit. In 2004, e-commerce was a phenomenon in China (competitors of Amazon were very small). So the first movement of Amazon was to buy one of the major local online bookseller (Joyo) and transferred the advanced technologies and business practices (already proven in U.S.) to the new subsidiary. Amazon introduced a system to automatically track product prices on other e-commerce platforms and established strict rules governing the behaviour of online sellers in its marketplace.

But, between 2008 and 2016, Amazon’ share of the Chinese market plummeted from 12.1% to just 1.3%. They decided to bring a fresh leadership, with new strategies (including cross-border e-commerce (in 2012) and the introduction of Amazon Web Services (in 2013)). But this didn’t stop their market share from shrinking. Amazon: from bookseller to customer-centred giant Four years later its founding, Jeffrey Bezos described his vision of the company’s future to shareholders. He makes a comparison of today’s meaning of e-commerce and future one, in which Amazon.com makes a promise of delivering real value for its customers. The result of that, it’s a enduring franchise, even in established and large markets.

Over the next two decades, Amazon had followed it vision, growing from an online bookseller to an internet giant offering a wide range of products (electronics, games, furniture, clothes, beauty) to individual and corporate customers. = Amazon had changed it model from a

vendor selling only its own products to a marketplace where third parties could market their products using Amazon’s warehousing and transaction services. While this transition, also expand it operations overseas to Europe, Asia, Latin America and Netherlands. Also, Amazon has invested heavily in smart technology to increase operational efficiency and reduce delivery times. By 2012, it acquired KIVA robotics and was the first e-commerce firm to massively deploy robotic warehouse management systems. By late 2016, Amazon was using 45.000 robots in some twenty fulfillment centres. An recently they trial its Prime Air drone delivery service. China: The world’s largest e-commerce market Facts about China ● GDP annual growth rate averaged 9,5%, between 2000 and 2015. ● Known as the “World’s Factory” because of its low cost production, since 90s. ○ Nowadays is a huge emerging market. ● By 2000, middle class was only 4% of population (annual income between $9.000 and $34.000). In 2012, it had increased to 68% and is expected to be 75% in 2022. ○ Because of this increasing, internet penetration also increased. ● Internet users grew from 1.8% to 52.2% (721 millions users, which is more than a double of U.S. population), between 2000 and 2016. ○ Resulting in the increase of domestic demand of computer internet technology generating a e-commerce industry boom. For example, in 2015 and 2015, Chinese customers spent $406 billion and $564 billion on online purchases respectively. ● Chinese consumers also started cross-border shipping. With $40 billion in 2015, which is 7% of China’s total e-commerce market. ○ It’s growing at a rate of 50% annually. Alibaba Founded in 1999 by Jack Ma, with $60.000, beginning with two B2B platforms (which are business-to-business models that exchange products, services or information [e-commerce], rather than B2C [between businesses and consumers]), one for domestic wholesale trade and other one

for international wholesale trade. At the beginning they used to relied on independent logistics firms to deliver the goods sold online (like U.S.). In 2013, they found Cainiao Network to process and optimize logistics information among delivery partners, warehouses, and merchants. Its growth has been supported by investors. In 2005, Yahoo! paid $1 billion for a 40% stake in

the company. According to NY Stock Exchange in 2014, its IPO is a world record with $25 billion. Jingdong JD.com oe Jindong Mall (formelry 360buy), it’s china second largest e-tailer, launched by Richard Liu in 1998. Building on his early experience as a vendor of electronics products, Liu launched JD.com, expanding to Shanghai in 2006 and to Guangzhou ini 2007. In 2008, JD mall began offering merchandise, transforming the business from and electronics retailer to a full fledged e-commerce platform. Dangdang In 1999, Dangdang was founded in Beijing by Peggy Yu and her husband as an online book retailer much like Amazon at the time. Dandang’s business model was somewhere between that of Alibaba, which outsourced logistics, and JD, which handled logistics in house. Dangdang built distribution centres in several major cities, but relied on third-party logistics firms to deliver goods from its warehouses to customers. Others In addition to the three major players, China’s e-commerce market also included several small firms such as Suning and GOME, electrical appliance retailers that extend their business online, and Vancl, and Internet apparel seller. Amazon’s entry (2004) Acquisition In 2004, China’s e-commerce industry, including online book selling, was still in its infancy. Chinese consumers lacked confidence in e-tailers and preferred to see what they were buying in person before paying. Logistics infrastructure was another challenge since the state-owned carrier was inefficient and private carriers were underdeveloped. Because of this, only 6 millions of China’s 50 million Internet users had tried online shopping. Because of Dangdang company as a competitor, Amazon initially offered to buy 70% stake in the company for $150 million, but Yu and her husband declined as they want to keep control of their business. Negotiations broke down and Amazon made a complete acquisition for $75 million of Joyo (a Dangdang competitor). Joyo was found by Xiaomi founder Lei Jun. Before the acquisition, Joyo had revenues of $19 million. Used to sell books, cosmetics and DVD box sets. After acquiring, Amazon stated that it was aware of the unique challenges of doing business in China and would adjust to local customs and regulations.

Amazon replaced Joyo’s management team, which doubted that Amazon’s model will work in China because Nian Chen (Joyo’s vice-president) stated that “Americans do not listen to you”. Chen finally left and founded Vancl in 2007. But in 2005, Amazon appointed Hanhua Wang, a veteran of Motorola’s Asia Pacific business, as new president. Amazon spent several years bringing its U.S IT infrastructure, including an automatic system for

managing orders, inventory, and logistics and tracking competitor prices, to China. With this, they were able to analyze big transaction data and forecast product demand in certain areas, facilitating inventory management and reducing delivery times. This system became increasingly powerful as Amazon China its transaction volume. Challenges (2004 -2012) The logistics network They inherited Joyo’s logistics system. Started with first-tier cities (Beijing, Shanghai and Guangzhou), then second and third-tier cities were outsourced to third parties. Yo benefit from economies of scale, Amazon China invested heavily in building national logistics network. Humans or machines? Amazon China abandoned Joyo’s strategy of selling only media products, by increasing its categories since 2004 to 2017 from six, to 20, 24, 28 and 33. Initially its business model was vendor, but it changed to marketplace; it opened up to third party sellers in 2011, charging an annual fee ($800 - $8000) and a commission (0.5% to 30%, depending on product category). But in China, the commission of 4% to 7%, depending on the product category. In 2012, it changed the commision structure increasing it max 15%. As pioneers of China’s e-commerce industry, local e-tailers such as Alibaba had to teach sellers how to market their products online and how to treat internet customers. But, as U.S. practices to China, Amazon relied on its IT infrastructure to deal with both sellers and suppliers. THIS RELIANCE ON TECHNOLOGY ESTABLISHED CLEAR GUIDELINES, BUT LEFT LITTLE ROOM FOR HUMAN INTERACTION. For example, Amazon China used and automatic seller rating system, allowing a maximum of 1% negative customer comments If a seller failed to meet this standard, it was automatically closed by Amazon China. Chinese customers sometimes worte negative comments for emotional reasons, regardless of the service they had received. Also, some of their rules were stricter than those required by Chinese Law Amazon’s seller rating system was appreciated by demanding customers since it created a reliable online shopping experience with qualified sellers. However, Amazon’s high-tech approach to dealing with sellers and suppliers discouraged their involvement; as a result, while Amazon China increased its catalogue of titles, it lagged far behind Alibaba and JD when it came to product choice.

Conflicts The introduction of third-party sellers offering lower prices created problems for Amazon because it was a decline of its own sales. Because of this, Amazon China started

a competition with its own suppliers, re negotiating prices with them to remain competitive. Also, they intended to encourage independent sellers to use its inventory and delivery system. However, third-party sellers could choose not to use the Amazon’s logistics network exposing Amazon’s reputation by the poor service offered by some sellers. Culture Clash ● Because of its technology, Amazon didn’t invest in advertising. While most of the local competitors did it, Amazon China prefered it system of automatic price-tracking, which maintain it prices lower and “competitive”. ● Also, because of a poor website design (small photos, imites information and lots of blank space). Amazon China had several discussions with U.S. office until its page was adapted to local preferences (some reason were that more items shown would increase load time and affect shopping experience). Major restructuring (2012-2016) New Leadership Because of the low progress comparing them with their local rivals, Amazon China changed Hanhua Wang in 2012 and temporarily put Seve Frazier. And in 2014,the placed a new president Doug Gurr, an Amazon UK executive. A global store In 2014, they decided to target China’s cross border e-commerce market. They launched Amazon Global Store, which offers foreign products to chinese customers. In the beginning they used to buy from suppliers, but as transaction increased, they decided to integrate Amazon’s global network by offering the foreign websites to Chinese customers. They need speed in transfer information, translation of language, measurement units and prices (based on real-time currency conversion), careful communication and coordination of logistics and product delivery between Amazon China and Amazon’s global operation s.

In 2014, Amazon Global Store used to sell 80000 products mainly mother and baby items, and by 2015 they offered 4 million in 27 categories. In 2016, U.S and U.K integrated with China. By doing this, they adopted a mixed logistics strategy for delivering foreign products to Chinese buyers which consists of storing popular items in warehouses at China’s mainland ports or in Hong Kong. By this they will delivered in 3 days. They established a cooperation relationship with Shanghai Free Trade in november 2014 to facilitate the international logistics operation. Also, they launched a Black Friday online shopping festival.

In 2015, they opened a store in Alibaba’s Tmall marketplace to sell selected foreign products. And in 2016, they introduced a membership program to China for free crossborder shipping paying an annual fee of $57. Also, they received a marine freight forwarding license. Kindle Launched in December 2012, six months later introduced Kindle Device. But, for publishing and selling books companies need a license, that is not given to foreign firms. Amazon borrowed one of its vendor partners license and this opened a debate about the legality of doing this. Also the device has some modifications for China: because women read more than men, they change the color by white and also designed a gift box that include cupons. AWS Introduced in 2013, was operated by a different group of the e-commerce in China, in collaboration with governments of Beijing and Ningxia, in the last to build a data centre in one of its small cities. Because of the law, if they want to provide cloud computing services, they need to collaborate with local partners. Microsoft had done an agreement with 21vianet, a local internet service provider that owns customer data and offers cloud computing services using Microsoft technology. Because of this, Amazon chose to local partners and provided a front-end service, which in 2014 started offering to select chinese clients.

But, in 2015, China’s ministry of industry and information technology classified cloud computing as a value-added telecommunications service, which means that foreign companies could access to customer data and only chinese firms could operated them. Microsoft was already a supported company, but Amazon ended it relationship with Chinanetcenter because of the risk.

In 2016, Beijing government ordered Amazon to suspend its AWS business. But Amazon signed a new contract with Sinnet (the other local partner) that authorized its technology to clients in Beijing and surrounding area. But, in this market, its far behind from competitors and its smaller than Microsoft. The next step Its true that the strategies diversified Amazon in China, but the e-commerce sales kept falling, its market share falled from 2% to 1.3% in 2016. By this moment, Gurr was sent back home and Elaine Chang took his place. Meanwhile, the competition had become more aggressive nationally and internationally. ● Walmart buy 10% stake in JD and integrate the inventory and logistics systems to improve competitiveness in China ● Alibaba has been putting efforts to arrive to Europe and Australia, also launching a cloud computing research centre in Silicon Valley....