With Less Than 1% of China's Market, Amazon Is Now a Niche Player. Will It Be the Next eBay? | Top 15 Annual Report

A global juggernaut everywhere else, Amazon is down to its last stand in China. If its new bet — Prime membership plus cross-border shopping — can't turn things around, it will be the next eBay.

The story Jeff Bezos has told investors for over a decade is getting hard to keep telling — because last year, Amazon accidentally made a little too much money.

For all of 2016, Amazon's net profit came to about $2.3 billion. That is roughly half a month of Apple's average profit over the same stretch, yet it more than doubles Amazon's previous best year.

Amazon's revenue has climbed a steep curve over the past decade. But the story the company keeps telling is that it pours every cent of profit into future bets, aiming to run as close to zero profit as it can. In practice, it has more or less done exactly that.

Amazon's e-commerce business in the United States has almost no rivals. Of every $100 Americans spend shopping online, $51 goes to Amazon. In July 2015, Amazon's market value passed Walmart's for the first time; eighteen months later it was nearly double Walmart's.

Beyond e-commerce, Amazon's cloud business — now a decade old — still grows more than 50% a year. Last quarter it brought in $861 million in net profit, leaving second-place Microsoft far behind.

Some unproven bets seem to be going well too. At the just-ended CES electronics show, Amazon's voice assistant Alexa had been built into more than 700 kinds of electronic products, and even cars. Google, by contrast, has only a dozen or so partner products so far.

Starting in the second half of last year, Amazon poured more into new ventures: a pledged $5 billion to build out e-commerce in India, a bigger AI team that already runs into the thousands, new brick-and-mortar supermarkets and bookstores, and $3 billion burned on video.

Which of these bets will pay off is anyone's guess. But set against Apple, Google, Microsoft, and Facebook — the other giants of American tech — Amazon has the rosiest growth outlook of them all.

Among Amazon's many businesses last year, though, one stands out as a glaring laggard: its international retail arm. The latest quarter's earnings show losses there doubling from a year earlier.

And the worst of the lot is China, where Amazon has been at it for twelve years.

In the World's Largest E-Commerce Market, Amazon Is Now a Niche Player with Less Than 1%

China is now the world's largest e-commerce market. In 2016, Chinese shoppers spent 5.16 trillion yuan online — a quarter more than the year before.

Yet Amazon's share of China's B2C e-commerce market has slipped from 2.1% in 2015 to less than 1%. Count in Taobao — really a vast crowd of small and mid-sized merchants — and Amazon's slice shrinks further still.

Unable to move its goods, Amazon China has been cutting product categories.

Search Amazon for big appliances — refrigerators, televisions, air conditioners — and you'll barely find any shipped by Amazon itself. Almost all come from third-party sellers, mostly Gome and Shundian.

Last April, Gome's official flagship store joined Amazon. A pop-up in a prominent spot on the Amazon China homepage steered shoppers to the new store — bringing more than 5,000 home-appliance and electronics products from Gome onto the platform.

Word that Amazon China was quietly dropping its own big-appliance business had been going around since 2014; the Gome deal was the result.

Small appliances tell the same story. Compare sales rankings on JD.com and Tmall, and apart from small appliances shipped from Amazon US or Amazon UK, most products come from third-party stores.

We also tallied 42 new phone models that the five biggest handset makers — OPPO, vivo, Huawei, Xiaomi, and Apple — put on sale in 2016. Across the three platforms, even counting third-party shipments, Amazon carried the fewest.

Apparel — the highest-grossing online category — looks worse still for Amazon. We searched forty mass-market brands across women's, men's, and children's clothing and footwear, most of them brands that e-commerce had brought back into fashion.

By brand coverage, Tmall is the most complete; JD.com carries roughly 70% of what Tmall does; Amazon, only 20–30% of that. ONLY, for instance — a brand with flagship stores on both JD.com and Tmall and shops on every street — sells on Amazon only goods shipped from the United States.

Apparel in China has long been Taobao and Tmall's turf. Now JD.com is barging in too, staging fashion shows, running livestreams, and launching curated channels co-created with designers. By Richard Liu's recent account, clothing and footwear is JD.com's fastest-growing business.

That's the picture across apparel, appliances, and phones — the hottest, most mainstream categories. In nichier ones, Amazon's selection is thinner yet.

Amazon China Is Caught in a Vicious Cycle

When it first came to China, Amazon tried to copy the formula that had worked at home.

It put most of its money into things shoppers rarely see — warehousing and logistics — and built the largest operating network Amazon has anywhere outside the United States.

At its peak, Amazon China could keep a full range of products in stock while still roughly honoring its promise of the lowest prices online.

But over twelve years, Amazon never cracked one basic problem: getting Chinese users to know it exists.

Before 2016, Amazon China had advertised exactly once. In a market as cut-throat as China's, that was plainly not enough. Amazon's page design, payment options, and checkout flow also ran against Chinese users' habits.

Amazon China's market share fell from 15.4% in 2008 to less than 1% today.

Now, to stem losses, Amazon has trimmed its categories, dropping more and more slow sellers and low-margin items. As a 1% channel, it also has little leverage to win low prices from mainstream brands — big names won't antagonize Tmall or JD.com for Amazon's sake.

But the huge logistics network Amazon built in its early years is still there, second in scale in China only to JD.com's. So is a large team for courting brands. With few buyers, the losses keep mounting.

And so the vicious cycle takes hold: fewer customers → falling sales → thinner selection and no good prices → fewer customers still.

Over the past two years, 695 million Chinese internet users have shopped on their phones. The phone is overtaking the PC as the main device for buying online.

And phone shopping usually means installing an app or buying inside a high-traffic place like WeChat. Most people won't install a pile of apps, so in e-commerce the big get bigger and the small get smaller.

Alibaba's latest earnings show that in the fourth quarter of 2016, 493 million people shopped through the Taobao and Tmall apps — 43 million more than the quarter before.

Alibaba's investment in content has paid off too. The redesigned Taobao app traded detailed category listings for a feed full of recommended content; sellers large and small now produce livestreams and articles, each operating as its own "account." After the change, users do spend longer on Taobao, and spending per user rose from 181 yuan a year earlier to 241 yuan.

Amazon China Is Pinning Its Hopes on Cross-Border Shopping — and Has Played Its American Trump Card, Prime

In Amazon China's 2016 cross-border trends report, clothing and footwear ranked as the two most popular categories — but both were bought through Amazon China's Chinese-language overseas-shopping service, sourced from Amazon US and Amazon UK.

Beauty Amazon has handed over entirely to its overseas-purchasing arm. In October, Amazon China launched a Global Beauty section; search Amazon for brands Chinese shoppers love — La Prairie, SK-II, Shiseido, Sulwhasoo, Hada Labo, Estée Lauder, Lancôme, Kiehl's — and the goods almost always ship from an overseas-purchasing store.

Cross-border shopping fixes the gaps in Amazon's domestic first-party catalog and sets its brands apart. Amazon announced that Amazon UK, too, had finished linking up with its overseas-purchasing store, and the range of foreign goods open to Chinese Amazon users jumped by several million more items at a stroke.

When Amazon launched its "Overseas Shopping" channel in 2014, cross-border buying was just heating up in China. Over the next two years Amazon kept refining the experience, plugging in every category from Amazon US one after another and merging the account systems of the Chinese and US sites. Users can now buy straight from Amazon US without leaving Amazon China's site, and pay with a UnionPay card.

Amazon even opened a flagship store on its rival Tmall, selling goods bought in bulk from overseas.

Amazon's sales teams can't negotiate good prices from brands inside China. But in the US, UK, Japan, and Germany, Amazon is the largest e-commerce player in each market and can get low prices. Where big platforms like Tmall International and JD.com must line up suppliers region by region, Amazon China can reach more than a million products right away.

Thanks to suppliers' existing ties with Amazon's home teams, the whole procurement process is down to a single step: a supplier ticks a box on its US Amazon contract agreeing to sell outside the United States, and the product goes straight live on "Overseas Shopping."

To raise its profile and fix its traffic problem, Amazon went back to advertising in 2016.

For the first time in six years, Prime ads turned up in office- and apartment-building elevators and before shows on video sites. Ahead of Black Friday, Amazon opened a pop-up store in the heart of Beijing's Sanlitun. Wrapped in kraft-paper brown with black "Prime" tape, it was built to look like a giant shipping box — the kind Amazon Overseas Shopping sends from the US or UK to a shopper's door.

There is also a Discovery channel with its own slot inside the Amazon app, where Amazon set up a small standalone team to drive extra purchases through curated recommendations.

But the centerpiece is Prime.

On October 18, Russ Grandinetti, Amazon's senior vice president for international consumer business, introduced the Chinese version of Prime to more than 100 media outlets in Beijing. Grandinetti runs Amazon's e-commerce in every market outside the United States; the head of Amazon China reports to him.

In the US, Prime members pay Amazon $99 a year for priority free shipping, free music and video, and the occasional new pilot program. They also spend far more with Amazon than ordinary members do. Over the past month, Amazon's 50 million Prime members accounted for 57% of its sales.

For Amazon China's Prime members, any overseas-shopping order over 200 yuan ships free across the border, and domestic orders ship free without limit all year. The first-year promotional rate is 188 yuan (with an extra 30-day free trial); after that the regular rate is 388 yuan a year.

If Prime Falls Short Too, There's No Telling What Amazon China Becomes

When Prime first launched in China, prompts to start a 30-day free trial were everywhere — all over the website and the app.

Open Amazon China's app or site today and the center of the homepage is given over to Kindle, Overseas Shopping, and Prime; in the listings, the most prominent mark is the blue "Prime" badge.

Amazon China calls Prime a success; a spokesperson said its growth rate has far outrun the company's own expectations. On Black Friday 2016, Amazon China's sales were six times its Singles' Day figure — and that Black Friday number was twice the 2015 Black Friday figure.

But Amazon has released no hard numbers, and on Black Friday itself — November 25 — Amazon's app showed no clear bump in China's iOS store download rankings. Prime may well be a big step up from Amazon China's past form, but it has yet to close the gap with the major Chinese platforms.

At its launch event, Amazon China said it would next plug in Amazon Germany and Amazon Japan. Germany has plenty of cheap electronics and home appliances that need no voltage converter, and Japan is the destination Chinese shoppers buy from most.

But Prime's real tests have only just begun.

In April 2016, the Ministry of Finance, the General Administration of Customs, and the State Administration of Taxation jointly announced new tax rates on overseas purchases. The hardest-hit categories were mother-and-baby goods, daily necessities, and cosmetics priced under 100 yuan, with the added tax ranging from 11.9% to 32.9%.

In May 2017, the new rates are set to take full effect. That will cool consumers' appetite for cross-border shopping.

Meanwhile, all Prime can offer in China is free cross-border shipping on orders over 200 yuan and free domestic shipping — none of which cuts the tax that cross-border buying now incurs. And cross-border shipping is already cheap unless the item is bulky like a suitcase or heavy like a printer; the base fee can be as little as 12 yuan.

As for free domestic shipping — plenty of Taobao items already ship free and arrive in two or three days. Used to free shipping for years on end, the Yangtze Delta and nearby provinces have even earned the nickname "the Great Free-Shipping Zone." Using free shipping to set Prime apart and lure users from rivals doesn't have much pull.

Then there's cross-border shopping itself: slow delivery, uncertain waits. At the same time, more and more products are coming onto Alibaba and JD.com through brand flagship stores. For a product to be worth a month's wait, a lower price alone probably isn't enough.

Even with the whole of Amazon's global empire behind it, Amazon China still has to win users away from Tmall and JD.com — and fast. Tracking by Xingtu Data found that during the Double 11 festival, Amazon's share of total online sales was just 1%, while Tmall's topped 65%.

Tmall and JD.com face the same puzzle — squeezing more revenue from each user — and over the past year they rolled out tool after tool to grab attention: Taobao Headlines, Tmall Livestream, JD ID, JD Livestream, and more. However many products Overseas Shopping brings in, the traffic problem is one Amazon China cannot get around.

Through "Discovery," Amazon has plugged in content from shopping-guide channels like Bansure, Liwushuo, and Guoku, and uses their sites and apps to recommend Amazon products.

Yet every channel that works with Amazon is also pushing JD.com and Taobao content. And most of the content channels JD.com and Taobao plug into, Amazon doesn't reach at all. When it comes to content-driven e-commerce, Amazon still can't match the scale or speed of two rivals who have poured in vast sums.

Prime membership, products from Amazon's US, UK, Japan, and Germany sites — all the support Amazon's global network can give China — arrives in 2017.

If Amazon China can't use these resources to solve its traffic problem, the best it can hope to become is a localized front end for overseas Amazon sites.

At worst, it ends up like eBay in China today: an outfit that helps merchants sell goods abroad.

About the Top 15 Annual Report

2016 was a turbulent year worldwide. Judged by corporate performance, the market leaders had a harder time of it than their challengers.

The Top 15 companies QDaily tracks — the ones shaping how people live — had a rough year, and they all shared a single trouble: the ceiling.

Whether building new products (Apple's watch and car) or chasing new users and channels (IKEA moving into e-commerce), these industry leaders are searching urgently — and perhaps blindly — for their "next" growth engine.

Breaking through that ceiling is harder than it looks. QDaily's Top 15 year-end report for 2016 is not all good news.

In-text graphics / Feng Xiuxia

Cover image via Huffington Post