Can Amazon succeed in China?

The recent announcement from The Internet Corporation for Assigned Names and Numbers (ICANN), the body responsible for managing internet domains made for interesting reading. In amidst news that it had released a host of colourful domain names ranging from .angel to .zoo were details that Amazon had acquired several Chinese and Japanese domains including .wanggou and .yun, two places in China and 11 that use Chinese or Japanese characters. This is a clear indication of the future direction that Amazon is looking to pursue; but can it succeed in China?

In theory selling in China makes good business sense for Amazon. At the end of last year there were 513 million internet users which is just 38% of the population and is expected to reach 701 million by 2015 – nearly three times the 245,203,319 internet users in the US (sources: Internet World Stats and Business Monitor International). In 2011 online retail generated $121 billion in sales in China last year, up 66% from 2010 and is expected to reach $420 billion by 2015 (source: McKinsey). Standing in Amazons way is Alibaba, a privately owned group of online businesses who completely dominates China’s online market.

The biggest threats to Amazon come from Alibaba’s Taobo.com website which completely dominates the Chinese online consumer market with 90% share of the online consumer to consumer market (which accounts for 85% of all online transactions) and its Tmall.com website, which has 50% of the B2C market, nearly triple its nearest competitor. According to Goldman Sachs last year Taobo generated $60 billion which is double its 2009 figure and well ahead of Amazons $48 billion. If that wasn’t enough of a challenge, Tmall.com has just announced it will start selling books at the end of the month and will launch with 1.3 million titles.

From my perspective despite the challenge offered by the Alibaba group of companies, it is possible for Amazon to succeed but it won’t be easy. Historically Amazon succeeded as an online retailer by being first to market and later by being big and it succeeded with its Kindle by offering by being cheap; neither or these approaches will work in China against the Alibaba group. Where it can prosper is by differentiating itself – through providing a high standard of service along with products not commonly available in China, like ebooks and others products not produced in China, Amazon can gain a significant slice of the Chinese online market. It is likely to be their biggest challenge to date but the rewards available make it worthwhile.