Amazon's Amazing Failure in China
Why was the world's best e-tailer unable to establish a domestic presence in a market that seemed made for it? Because it couldn't exploit labor enough.
Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology
How did Amazon lose its way in China?
After more than 15 years of trying, Amazon has secured less than 1% of the e-commerce market in a country of some 1.4 billion people. No wonder the company just announced that it's throwing in the towel and shutting down its online marketplace there. If we were talking about Facebook or Google, whose businesses were shut out and busted by the Chinese government, this kind of failure would be a little easier to understand. But Amazon basically had none of those regulatory impediments and even acquired its main local competitor in 2004.
While there have been some snide asides that the Amazon website design was too clean and simple to appeal to the complex sensibilities of the Chinese customers, these feel like people piling on with a bunch of after-the-fact "I told ya so" slams. As embarrassing as it sounds, my view is that they dropped the ball and were beaten in logistics, specifically the blocking-and-tackling ground game where we all thought Bezos & Co. were pretty much invincible.
This is an encouraging lesson in some ways for all the little guys like us trying to compete with 800-pound gorillas. But in other respects, this is one of those things that could only happen in China. Because what Amazon failed to appreciate-- or declined to exploit-- is the fact that in China there are still millions of people willing to work for a pittance. And they are going to be available for at least the next decade. These highly exploitable workers will always be the cheapest available resource. Amazon needed to change the way it organized basic delivery and just couldn't bring itself to effectively adapt to the economic realities of the local marketplace. (Yes, that's more than ironic given the criticism the company has taken for its warehouse labor practices here.)
In the constantly growing and accelerating mobile world, access, convenience, and especially speed, trump just about everything else including price. We're seeing this phenomenon globally and no place is more "mobile-first" than China, where new challenges continue to arise for many of the largest global players. They aren't responding, reacting and upping their games as quickly and aggressively as they should.
Starbucks is another business that's losing the race in China. The Seattle firm didn't see the local Chinese competition and the changes coming. Nor did Starbucks move soon enough to shrink its store footprint in favor having more locations to reach the growing numbers of "get-and-go" customers who don't want to wait for anything. Adapting this Dunkin' Donuts approach, the local Chinese firm Luckin, a startup founded in 2017, will have more locations in China than Starbucks has managed to open in 20 years. But I digress.
Considering that Amazon is the absolute leader in speedy delivery in the U.S. and a constant innovator in that space as well, it's remarkable that the company was bested in China, in large part because it refused to match the offerings of local competitors: free shipping and overnight delivery. Amazon couldn't make the free delivery math work without requiring a minimum order size (a competitive disadvantage) because of its costly and substantial in-market structure and locked-in labor costs. In addition, Amazon didn't localize: its website and warehouses were organized in the same fashion as those elsewhere; so was the delivery system. Remember that mantra: think global, act local?
The most interesting question is why the company was unable to do in China what it has done here, and keeps doing, with a vengeance. Amazon continues to up the stakes at home and just announced last week that it will be spending more than $800 million to enable its systems to support virtually universal one-day delivery to Prime customers--and two-hour delivery for Prime Now. Not surprisingly, the stock prices of Walmart, Costco and the other suspects took an immediate hit. More importantly, because Amazon never stops learning, the minimum order size requirement has been eliminated.
But I think that's only half the story.
The most important reason for the China debacle was that the local competitors built a better and far cheaper mousetrap. They took advantage of the massive and readily-available "gig" labor pool in a much more effective way than Amazon, which let rivals cost-effectively use excess local labor and thereby dramatically reduce their delivery costs. The front ends of the competitors' warehouses were similar - accepting and quickly sorting inbound orders. The middle portion of their delivery depots were also similar - albeit using somewhat-accelerated "pick, pack and ship" lines, where orders were consistently assembled and ready for delivery within 10 minutes of receipt.
But the ends of the local players' supply chains were radically different.
Imagine a sweaty, swarming and polluted marketplace of thousands of anxious and under-employed drivers waiting on a 24/7 basis at the back doors of these depots to be the next in line to grab a delivery and race off and you'll have some idea of how a cheap, quick and low-tech solution can sometimes beat the best guys in the business. Now you might ask a couple of questions. Do they even know who the drivers are? Nope. Do they pay these folks a reasonable wage? Nope - they tell them to make it up in the volume. Are there serious questions of quality control and disappearing orders? Yep. But no one seems to care as long as most of the time the stuff gets there as quickly and cheaply as possible.
Honestly, Amazon's problem is in part a product of political/economic correctness and a little cultural blindness. Given the criticism that companies such as Nike have experienced about labor practices in their Asian contract facilities, it's unlikely any major U.S. company could establish and defend any system that's this unstructured, undocumented and fully free form. Amazon is belatedly responding (at least in the U.S.), but in a typically U.S.-centric way. The company announced a new program called Delivery Service Partners to encourage and sign up independent entrepreneurs who want to start their own delivery businesses to ship Amazon packages. Your guess is as good as mine as to whether this will work for the little guys any better than any other part of the gig economy, but it's certainly an interesting departure from all the talk about how quickly Amazon would be taking over or competing directly with FedEx or UPS.
Bottom line: Maybe bigger isn't always better - especially when you're talking about the last mile - in delivery or really any form of transportation. There's a whole lot more and sometimes a lot less to successful localization than you might imagine.