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.
