In 2002, China had an estimated 27 million online consumers,53 rising to over 80 million in 2004.54 By 2014, the country was expected to reach 650 million online consumers.55 In 2002, China’s e-commerce market was valued at an estimated $1.3 billion, growing to over $16 billion by 2005-2006.56 At the start of 2014, China’s e-commerce market was valued at over $300 billion, expected to reach $540 billion by 2015. Growing at a compound annual rate of nearly 70%, China’s e-commerce market was scheduled to surpass the
U.S. as the largest e-commerce market in the world.57 According to World Bank data, China recorded 621.7 million Internet users in 2013, approximately 46% of China’s 1.4 billion population and more than double the amount of Internet users in the U.S. at 266.2 million.
At an investor conference in 2013, Jack Ma, founder and chairman of Chinese e-commerce giant Alibaba Group, remarked, “In other countries, e-commerce is a way to shop, in China it is a lifestyle.”58 Chinese consumers were known to use social media extensively. According to McKinsey & Co., China’s 300 million users of social media spent more than 40% of their time on the Internet browsing blogs and social networking sites.59 Using popular social media sites such as WeChat and Weibo, Chinese users often accessed and posted product reviews, got buy/don’t buy product advice from “key opinion leaders” and friends, and
saw advertisements of featured products from retailers.60
Chinese consumers were also becoming very active shoppers on mobile devices. With the largest volume of mobile e-commerce transactions in the world, China expected purchases via mobile device to reach $41.4 billion by 2015 from only $7.8 billion in 2012. This volume of mobile transactions attested to the Chinese consumer’s craving for fast shopping at any time of the day.61
China, however, did not represent a consistent market from region to region. KPMG International highlighted that customers in “tier-1” cities such as Beijing and Shanghai varied drastically in their shopping preferences and purchasing decisions from other consumers in smaller markets, such as Xi’an and Fuzhou. Sales volume for higher-end goods, such as cars, jewelry, and handbags, was much greater in Shanghai than in smaller coastal and inland cities. This trend was also true for brand loyalty, as consumers in China’s smaller markets favored differed products and tended to stress current fashion styles less than those in larger cities.62
By operating in a communist-led country, Amazon faced limitations on its operations that it had not encountered in its prior international experience. Chinese law regulated and restricted Amazon’s Internet content, as well as its sale of any media-related products or services. In addition, Chinese law demanded that Amazon’s website, www.amazon.cn, be operated by a Chinese-owned corporation in order to comply with local ownership laws.63
While the Chinese online commerce market had consolidated significantly by 2014, the competitive landscape in the nascent market of 2004 was far more fragmented. All the players started with somewhat different business models that would continue to evolve. Central competitors in the early battle for Chinese market share included EachNet, Alibaba, Joyo.com, and Jingdong.
EachNet was founded in Shanghai in 1999 by two Chinese entrepreneurs who had studied in the U.S.: Bo Shao and Haiyin Tan.64 As of 2002, EachNet had 3.5 million registered users and was the leading person- to-person online trading site in the nascent Chinese e-commerce market when eBay announced its intent to acquire a 33% stake of the company for $30 million.65 Under CEO Meg Whitman, eBay completed the transaction in 2003 and brought in a German country manager and a technology executive from the U.S. Neither understood the language or the local market. EBay invested an additional $100 million into the entity which was soon renamed eBay EachNet.66
Founded in 1999 by Chinese entrepreneur Jack Ma, Alibaba.com was launched in Hangzhou as an online forum for Chinese manufacturers to sell their products to domestic and overseas buyers. In 2002, Alibaba made its first profit, only $1. It “badly trailed” EachNet, according to the Wall Street Journal.67 By 2014, Alibaba Group with Jack Ma as chairman operated several web services including two of China’s largest e-commerce sites, Taobao.com and Tmall.com. However, faced by competition from eBay EachNet, little- known Alibaba’s quest for market share in the early 2000s was not easy.
In response to the eBay-Eachnet acquisition, Alibaba launched Taobao.com in 2003 as a way of preventing eBay from taking away its customer base.68 Taobao.com began as a marketplace and auction site that would later serve as a pure marketplace which connected merchants of all sizes to a network of millions of consumers. According to Helen Wang, author of The Chinese Dream, given that Chinese users at the time
were unfamiliar with Internet auctions, only 10% of Taobao’s product listings were available for auction, as opposed to 40% for eBay EachNet. Alibaba also offered longer and more flexible listing periods for its auction products. Furthermore, to cater to China’s three hundred million cell phone users (compared with only 90 million Internet users at the time), Taobao offered its buyers and sellers the option of communicating via instant messaging and voice mail.69
The marketing strategies of the two companies also reflected their different knowledge and experience. EBay purchased exclusive rights to Internet ads on major Chinese portals Sina, Sohu, and Netease whereas Ma blitzed the major TV channels with Taobao ads. At the time, many more Chinese were in front of their TVs than on the Internet. Most importantly, Taobao charged no commission fees to its sellers. Signing-up was very easy – even five minutes was enough to register on the site.70 Many of these differences appealed to the Chinese and helped Taobao to quickly overtake eBay Eachnet. In 2013, Taobao recorded 7 million sellers and over 800 million product offerings.71
Tmall, was Alibaba’s next offering. It was a business-to-consumer marketplace designed for bigger merchants and major labels, such as Nike and Gap. Each business selling products on Tmall was required to pay a deposit to set up its business, and was then charged a fee on each transaction. Created in 2008 as part of Taobao.com, Tmall.com officially became its own website in June 2011.72 By the end of 2012, Tmall had attained a 51.5% share of the Chinese business-to-consumer marketplace (see Appendices I1 and I2 for Alibaba’s Tmall and Taobao web pages and for Alibaba Group’s executive leadership).73
In 2013, combined transaction volume for the two sites equaled $240 billion, more than the transactions for Amazon and eBay combined (approximately $100 billion and $75 billion, respectively); (see Appendices J1 and J2 to compare Alibaba with major western Internet companies). According to The Wall Street Journal, Alibaba controlled nearly 80% of all Chinese e-commerce in 2013.74
Alibaba Group filed for an initial public offering in the U.S. on May 6, 2014, with analysts valuing the company at over $150 billion. Alibaba sought to be listed on the New York Stock Exchange (NYSE) with the ticker, BABA. As of the time of the case, Alibaba had since filed various amendments throughout the summer in response to requests for additional information from SEC approval. The expected IPO date had been pushed back to September 2014.
Founded in 2000, Joyo.com was the largest online retailers of books, music and videos in China as of 2004, according to Amazon.75 Joyo also sold software, toys and gifts, among other products.
Jingdong Mall / JD.com
Other major competition came from Jingdong Mall (JD.com), formerly known as 360buy.com. Reportedly founded in 1998, its marketplace went online in 2004. In 2012, Jingdong Mall had a market share of 22.7%, making it China’s third largest Internet retailer.76 Total merchandise sales reached $16.39 billion in 2013.77,i In March 2014, TenCent Holdings, a leader in online games and mobile messaging (through WeChat) agreed to acquire at 15% stake in JD.com for $215 million, in a move to enter the rapidly growing mobile commerce market.78
Amazon first entered China in 2004 by acquiring Joyo.com for $75 million. Amazon’s entry came at
i Gross merchandise volume for retailers is different from net sales. Based on Jingdong’s 2014 20-f filing with the SEC, the firm reported approximately 6.6 billion USD in net sales based on the 6.31 official average annual exchange rate of RMB per USD.
a time when China’s GDP was growing at a rate near 10% each year, accompanied by a small but growing Internet user base of 94.6 million people (7.3% of the 1.3 billion person population) and an e-commerce market estimated to be worth $8.6 billion. In 2004, Joyo.com had 5.2 million registered users as well as projected revenues of $15 million.79 Within six months of the acquisition, a little earlier than expected from the time of due diligence, the management team had departed.80
For its first year in China, Amazon operated under Joyo.com’s domain name, mainly offering books, DVDs, and CDs to its customers in China’s largest cities of Beijing, Shanghai, and Guangzhou. Despite the departure of Joyo’s management team, the transition was seamless to the Chinese consumer.81 By 2007, Amazon had increased its product offerings thirty-two fold, offering electronics, baby products, beauty care products, and watches. With $26.1 million in sales in the last quarter of 2006, Joyo.com’s market share had reached 12%.82 In 2007 Amazon changed the domain name from joyo.com to amazon.cn, with Joyo Amazon as its name in Chinese. Amazon was renamed Amazon China in 2011, pronounced in Mandarin as “Yamashi.”83 Amazon finally launched its Kindle e-reader in China in June 2013.
Amazon strived to replicate the acclaimed customer experience it delivered to consumers in developed markets. For instance, Piacentini liked to tell an anecdote about the delivery of a new Harry Potter book in Chinese on its publication date in 2005. Amazon China delivered 5,000 books on schedule. However, when a competitor undercut Amazon’s price by 5 RNB (less than $1), Amazon issued a refund for the difference to the customers, who were not expecting a refund. This gained Amazon much positive publicity, and Piancentini hailed it to be the firm’s best public relations and marketing move in China for the year84.
Amazon had to drastically adjust its logistics operation in China. To start, Amazon used Joyo.com’s three existing fulfillment centers located in Beijing, Shanghai, and Guangzhou. From there, Amazon distributed orders to its other thirty delivery centers across the country.85 Piacentini and his team eventually expanded Amazon’s distribution network by creating fifteen fulfillment centers across China, its largest logistics operation outside the U.S. Differently from its U.S. model at the time, Amazon played a large role in the last leg of the delivery process. Amazon started to handle deliveries in-house by hiring employees to transport the merchandise the “last mile” to the customer. Instead of vans or trucks, however, intra-city deliveries in China were commonly carried out on bicycles or scooters due to China’s tendency for traffic-filled roads.86 When Amazon entered China in 2004, overnight deliveries had only recently been made possible due to new developments in truck, rail, and aerial transport.87
Amazon initially faced payment challenges similar to those it encountered later on in India. In the early 2000s, many Chinese customers were reluctant to pay in advance for their purchases with credit card. As a result, Amazon’s China team adopted Joyo.com’s cash on delivery option. Furthermore, Amazon began to offer free shipping on all purchases through its site. Joyo.com also offered product recommendations to customers based on their past purchase history, something that had proved successful in other Amazon markets.88
Despite its early investment and efforts, Amazon’s share of the Chinese business-to-consumer e-commerce market stood at a mere 3.5% at the end of 2012.89 However, as noted by Piacentini, Amazon had at least made its way into the top five e-commerce websites by January 2014.90 On the one hand, Piacentini knew there had been mistakes in China, but on the other hand, the glass was half full.