- After years of trying, Amazon has struggled to make a mark in China.
- Amazon now plans to double-down on India by investing an additional $3B on top of the $2B it invested in 2014.
- Can Amazon make its investment in India count?.
For many years, Amazon (NASDAQ:AMZN) has tried unsuccessfully to break into the Chinese market. Amazon might be a household name in its U.S. home turf, but has struggled mightily to make a mark in the Middle Kingdom. This has mainly been caused by a strong Chinese ecommerce space, dominated by behemoths like Alibaba (NYSE:BABA),with a market share north of 70%, and JD.com (NASDAQ:JD), whose business of selling goods directly to consumers closely mirrors Amazon's. Strong support for local companies by the Beijing government has not been helping Amazon's foray into the country either.
Amazon can only boast a mere 1.3% market share in China's business-to-consumer, or B2C ecommerce market, with Amazon China bringing in less than 3% of Amazon's gross merchandise volume. Amazon conceded defeat in the middle Kingdom by opening up a flagship store on Alibaba's online marketplace early last year. Amazon is now a Tmall seller, effectively making it an Alibaba customer.
But Amazon's struggles in China are not an isolated case since the likes of Walmart (NYSE:WMT) and Best Buy (NYSE:BBY) have fared even worse there. Amazon has generally had a slog trying to expand its international operations. While sales in North America rose 25% in 2015 to hit $63.7B, international revenue increased an anemic 5.7% to $35.4B. The reason why this is the case can be chalked up to the difficulty of scaling out infrastructure around the world, and a lack of sufficient local services such as postal companies to handle services such as same-day deliveries. Many of Amazon's newer services and features tend to be exclusive to the U.S. and other highly developed economies.
The result is that North America, U.K, Germany, and Japan contribute almost 95% to the company's top line.
Gunning for India
After failing in China, Amazon is now gunning for India. The e-commerce giant has announced that it will invest an additional $3B in India to bring its total investments in the country to $5B.
It's not hard to see why Amazon is pumping such sums of money into a single country. India happens to be a low-hanging fruit in the Asia-Pacific region since it not only has the second-largest potential market after China, but has a much less competitive e-commerce industry. Local Indian e-commerce players such as Flipkart and Snapdeal are neither as dominant as Alibaba and JD.com nor do they enjoy the same level of government support as the two do in China. The two Indian online commerce leaders have also not been very successful at raising funds to expand their operations, though in the case of Flipkart it's been hampered by being too persnickety about valuation.
This kind of backdrop presents a great opportunity for Amazon to try and capture market share aggressively in the country. And, Indian ecommerce has good potential to grow to $60B in 2020, as per estimates by UBS AG. Amazon plans to become the market leader in this segment.
Secondly, Amazon sees a big supply-chain opportunity in the country. The company plans to source goods directly from both India and China and sell them in other parts of the world including the U.S. and Europe where it has a well-developed network of fulfillment centers.
Ultimately, Amazon's new strategy of identifying a few key markets and investing heavily in them is likely to be more rewarding than using a scattershot approach and spreading itself thinly. By doubling down on India, Amazon will be able to open up a new growth avenue that will help sustain its impressive growth clip.