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Volume 16
Issue 1
March 2018
HEC204

Competing with Dragons: Amazon in China

Case prepared by Pengfei LI 1

Yahoo! arrived in China in 1999, but departed in 2005

eBay entered China in 2003, but exited in 2012
Google tackled China in 2005, but retreated in 2010
Uber headed to China in 2013, but was driven out in 2016

In 2004, Amazon arrived in China as a behemoth, but twelve years later it was still just a small fry,
holding no more than 1.6% of the world’s largest e-commerce business in terms of market share.2
Should Amazon abandon China as its American high-tech peers had done, or should it stay and fight?
How had it lost this important battle, and how could it regain its market share? In April 2016, Elaine
Chang, Amazon China’s newly appointed president, needed to quickly find answers to these
questions.

Based in Seattle, Washington, Amazon was one of the world’s largest and most innovative firms. In
2016, it had 341,400 employees and net sales of $136 billion. (Exhibit 1 shows Amazon’s financials
from 2000 to 2016.) Founded in 1994 by Jeffrey Bezos as an online bookstore, the company quickly
grew into a giant online marketplace that revolutionized the retail industry. Since 2007, Amazon has
been actively involved in the hardware business with the launch of its Kindle e-reader, Fire tablet,
Fire TV, and Echo hands-free speaker. It has also become a leader in the cloud-computing revolution
with its Amazon Web Services (AWS) unit.

With its leading technologies and size advantage, Amazon dominates the e-commerce industry in
many countries, yet it has failed to do so in China. When it entered China in 2004, e-commerce was
an emerging phenomenon there, its local rivals, just small, young players. Amazon’s first move was
to acquire a major local online bookseller (Joyo), transferring the company’s advanced technologies
and the business practices that had proven successful in the U.S. to its new subsidiary. Amazon
introduced a system to automatically track product prices on other e-commerce platforms and
established strict rules governing the behaviour of online sellers in its marketplace. These measures
backfired, however. Between 2008 and 2016, Amazon’s share of the Chinese market plummeted
from 12.1% to just 1.3%. (See Exhibit 2 for changes in China’s e-commerce market). Feeling the
pressure, Amazon brought in fresh leadership and set new strategic business focuses, including cross-

1 Pengfei Li is an assistant professor in the Department of International Business at HEC Montréal. The author thanks Ying Fang
for his research assistance in preparing the first draft of the case and editor-in-chief Anne Mesny, head of editing Joanne Griffith,
two anonymous reviewers, and Yves Plourde for their constructive comments.
2 China E-commerce Research Center, “China e-commerce market research report – first half of 2016,” September 13, 2016
(accessed March 3, 2017, in Chinese)
© HEC Montréal 2018
All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited.
The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 00 2018 001 with the HEC Montréal Case Centre, 3000, chemin de
la Côte-Sainte-Catherine, Montréal (Québec) H3T 2A7 Canada.
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Competing with Dragons: Amazon in China

border e-commerce (in 2012) and the introduction of Amazon Web Services (AWS) in China (in
2013). This did nothing to stop Amazon’s share of the Chinese market from shrinking, however.
As new president of Amazon China, what should Chang do?

Amazon: From bookseller to customer-centred giant

In 1998, four years after founding Amazon, CEO Jeffrey Bezos described his vision of the
company’s future in a letter to shareholders:
Today, online commerce saves customers money and precious time. Tomorrow, through
personalization, online commerce will accelerate the very process of discovery. Amazon.com uses the
Internet to create real value for its customers and, by doing so, hopes to create an enduring franchise,
even in established and large markets. 1

Over the next two decades, Amazon pursued this vision, growing from an online bookseller to an
Internet giant offering a wide range of products, including electronics, games, furniture, clothes,
beauty, and more to individual and corporate customers. Along the way, it changed its business
model from a vendor selling only its own products to a marketplace where third parties could
market their products using Amazon’s warehousing and transaction services.

In 2007, Amazon began producing its own hardware devices to complement its books, games, and
videos. The Amazon Kindle e-reader was introduced in 2007, and five years later, e-books were
outselling print books on Amazon. 2 In 2011, Amazon launched the Kindle Fire tablet for just $199.
In 2014, it released Fire TV, a digital media player and networking device, and Amazon Echo smart
speakers.

At the same time, Kindle Store, Amazon Appstore, and Amazon Video went live. These new
services were supported by the Amazon Prime membership, created in the U.S. in 2005 to give
subscribers access to free shipping, video streaming, music streaming, audio series, and other
benefits for an annual fee of $99 ($79 before 2014).

In 2006, Amazon established a new core business: cloud computing. Drawing on its expertise in
IT infrastructure, it began offering virtual server hosting plans to companies. Amazon Web
Services (AWS) quickly expanded into a cloud services platform offering a full suite of services,
including web hosting, data backup and storage, content delivery, and database maintenance and
management.

While developing these new businesses, Amazon had also expanded its operations overseas. In
1998, Amazon entered Europe by acquiring local online book retailers in the UK and Germany.
By 2016, Amazon was active in thirteen countries, including England (since 1998), Germany (since
1998), France (since 2000), Japan (since 2000), Canada (since 2002), China (since 2004), Italy
(since 2010), Spain (since 2011), Brazil (since 2012), India (since 2013), Mexico (since 2013),
Australia (since 2013), and the Netherlands (since 2014).

1 http://media.corporate-ir.net/media_files/irol/97/97664/reports/Shareholderletter97.pdf (accessed February 23, 2017)

2 Claire Cain Miller and Julie Bosman, “E-books outsell print books at Amazon,” New York Times, May 19, 2011 (accessed
February 23, 2017)

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Competing with Dragons: Amazon in China

Known as one of the world’s most innovative firms, 1 Amazon has invested heavily in smart
technology to increase operational efficiency and reduce delivery times. In 2012, it acquired KIVA
Robotics and was the first e-commerce firm to massively deploy robotic warehouse management
systems. By late 2016, Amazon was using 45,000 robots in some twenty fulfillment centres – a
50% increase over 2015. 2 The company’s technological ambitions were also illustrated by its
recent trial of its Prime Air drone delivery service. 3

In 2015, Amazon posted global net sales of $107 billion (Exhibit 1). Books and media services
accounted for $22 billion, electronics and other general merchandise, $76 billion, and AWS,
almost $9 billion. Excluding AWS, North America accounted for $63 billion and other regions
including China, $35 billion. In terms of operating income, Amazon had recently performed well
in North America but faced major challenges in other markets (Exhibit 1).

China: The world’s largest e-commerce market

Between 2000 and 2015, China’s GDP annual growth rate averaged 9.5%. Known as the “world’s
factory,” renowned for its low-cost production, since the 1990s, China is now a huge emerging
market. According to McKinsey, 4 just 4% of Chinese urban households were deemed to be middle
class (annual income between $9,000 and $34,000) in 2000, but that percentage had grown to 68%
by 2012 and is expected to be 75% by 2022. As its middle class exploded, China also witnessed a
substantial increase in Internet penetration. The share of Internet users in China jumped from 1.8%
in 2000 to 52.2% in 2016, totalling 721 million users, or more than double the U.S. population. 5
Not surprisingly, increased domestic demand along with the widespread adoption of computer
Internet technology generated a booming e-commerce industry. In 2014 and 2015, Chinese
customers spent $406 billion and $564 billion on online purchases respectively. 6

Not limiting themselves to buying domestic products on e-commerce platforms, Chinese

consumers also started cross-border shopping. McKinsey estimates that cross-border e-commerce
totalled $40 billion in 2015, or about 7% of China’s total e-commerce market, and is growing at a
rate of 50% annually. 7 As in other countries, China’s e-commerce market is dominated by a few
major players.

1 Noah Robischon, “Why Amazon is the world’s most innovative company of 2017,” Fast Company, February 13, 2017 (accessed
September 22, 2017).
2 Ángel González, “Amazon’s robot army grows by 50 percent,” Seattle Times, December 29, 2016 (accessed January 11, 2017).
3 Alex Hern, “Amazon claims first successful Prime Air drone delivery,” The Guardian, December 14, 2016 (accessed February
23, 2017).
4 Dominic Barton, Yougang Chen, and Amy Jin, “Mapping China’s middle class,” June 2013 (accessed February 10, 2017).
5 http://www.internetlivestats.com/internet-users-by-country/ (accessed February 10, 2017)
6 National Bureau of Statistics of China, “Statistical Communiqué of the People’s Republic of China on the 2014/5 National
Economic and Social Development,” http://www.stats.gov.cn/english/PressRelease/201502/t20150228_687439.html and
http://www.stats.gov.cn/english/PressRelease/201602/t20160229_1324019.html (accessed February 10, 2017)
7 Chenan Xia, “Cross-border e-commerce is luring Chinese shoppers,” McKinsey & Company (accessed February 10, 2017).

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Competing with Dragons: Amazon in China

Alibaba

In 1999, Jack Ma founded Alibaba Group in Hangzhou, Zhejiang Province, with $60,000,
beginning with two B2B platforms: www.1688.com for domestic wholesale trade and
www.alibaba.com for international wholesale trade. In October 1999, Alibaba received $5 million
from a consortium of investors. Three months later, it raised another $20 million from a group of
investors led by Softbank. In 2003, Alibaba launched Taobao Marketplace (www.taobao.com), a
comprehensive C2C retailing platform; in 2008, it further established Taobao Mall
(www.tmall.com), a B2C marketplace.

Alibaba took several steps to develop China’s e-commerce market. In 2004, it launched Alipay, an
online payment system, to facilitate online transactions. In 2006, it founded Taobao University to
educate online buyers and sellers. Like Amazon in the U.S., Alibaba originally relied on
independent logistics firms to deliver the goods sold online. But, in May 2013, an Alibaba-led
consortium founded Cainiao Network to create a platform to process and optimize logistics
information among delivery partners, warehouses, and merchants. In 2009, Alibaba launched the
Double 11 Shopping Festival to stimulate online shopping. (The festival’s name stands for 11/11,
or November 11). Twenty-seven online brands participated in the first event, racking up
$8.17 million in sales in a single day. 1 Other retailers soon joined this annual event and, in 2016,
Tmall alone generated $11.85 billion in gross merchandise volume. 2 In 2014, Alibaba launched
Tmall Global, a cross-border online marketplace for Chinese consumers.

Alibaba also diversified its business activities. Ten years after its founding, in 2009, Alibaba
launched Aliyun, a cloud computing business, and acquired a controlling interest in HiChina,
China’s leading Internet infrastructure service provider. In 2014, Alipay was regrouped as Ant
Financial Services Group and extended to provide credit rating and financial services to individuals
and small and medium-sized enterprises. In 2015, Alibaba announced the launch of its music
division running two music streaming apps it bought. 3 In 2016, it acquired the South China
Morning Post, an influential English-language newspaper in Hong Kong. 4

Alibaba’s growth has been supported by investors. In 2005, Yahoo! paid $1 billion for a 40% stake
in the company. When it went public on the New York Stock Exchange in 2014, its $25 billion 5
IPO set a world record.

Jingdong

JD.com, or Jingdong Mall (formerly 360buy), China’s second-largest e-tailer, was launched in
Beijing by Richard Liu in 1998. Building on his early experience as a vendor of electronics
products, Liu launched JD.com, expanding to Shanghai in 2006 and to Guangzhou in 2007. In

1 CIW Team, “Review of sales value on Double 11: 2009–2013,” China Internet Watch, November 6, 2014 (accessed
February 13, 2017).
2 CIW Team, “Tmall Double 11 Insights 2016,” China Internet Watch, November 11, 2016 (accessed February 13, 2017).
3 Patrick Frater, “China’s Alibaba expands further into music,” Variety, July 21, 2015 (accessed December 23, 2017).
4 Patrick Frater, “Alibaba completes South China Morning Post acquisition,” Variety, April 5, 2016 (accessed December 23, 2017).
5 Elzio Barreto, “Alibaba IPO ranks as the world’s biggest after additional shares sold,” Reuters, September 22, 2014 (accessed
February 13, 2017).

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Competing with Dragons: Amazon in China

2008, JD Mall began offering general merchandise, transforming the business from an electronics
retailer to a full-fledged e-commerce platform.

After 2007, JD received five rounds of investments totalling $1.9 billion, followed by a 2014 IPO
on NASDAQ, which raised another $1.8 billion. 1 JD then invested in building its own logistics
network in China. In September 2016, JD had 254 warehouses, 6,780 delivery or pickup stations
in China, and 115,811 full-time employees. 2 By running its own logistics network, JD was able to
ensure fast delivery, usually within twelve hours in major cities.

JD also set itself apart from Alibaba by selling many of its own products online. In December 2010,
to fully leverage its logistics network, JD opened its market platform to third-party sellers. In 2015,
JD had 155 million active customer accounts and fulfilled 1.2 billion orders. 3

In 2013, JD began expanding its business beyond online retailing. It first launched JD Finance,
offering credit services to individual and corporate customers. In 2014, in a bid to build a stronger
competitor to Alibaba, Chinese Internet giant Tencent transferred its e-commerce business to JD
and paid $215 million to buy a 15% stake in the company. 4 In 2015, JD introduced JD Worldwide,
offering cross-border online shopping to Chinese consumers.

Dangdang

In 1999, Dangdang – an online book retailer much like Amazon at the time – was founded in
Beijing by Peggy Yu and her husband, Guoqing Li. Dangdang went public on the New York Stock
Exchange in 2010, but went private again six years later through a management buyout.
Dangdang’s business model was somewhere between that of Alibaba, which outsourced logistics,
and JD, which handled logistics in house. Dangdang built distribution centres in several major
cities, but relied on third-party logistics firms to deliver goods from its warehouses to customers.
In 2008, Dangdang expanded its online product line from books to electronics, home decor, and
more. 5 In 2012, to compete with Amazon, Dangdang also introduced an e-reader. 6

Others

In addition to the three major players, China’s e-commerce market also included several small
firms such as Suning and GOME, electrical appliance retailers that extended their business online,
and Vancl, an Internet apparel seller.

1 Yishi Zhu, “Richard Liu keeps financial control of JD,” Caixin, February 11, 2014 (accessed February 13, 2017, in Chinese).
2 About JD.com (accessed February 13, 2017).
3 Ibid.
4 Lulu Yilun Chen, “Tencent to buy 15% stake in JD.com to boost e-commerce,” Bloomberg.com, March 10, 2014 (accessed
February 13, 2017).
5 Sherman So, “Dangdang heads for Nasdaq,” Asia Times, October 27, 2010 (accessed February 13, 2017).
6 Steven Millward, “Dangdang launches e-reader, sells it for under $100,” TechInAsia, July 26, 2012, (accessed February 23,
2017).

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Competing with Dragons: Amazon in China

Amazon’s entry (2004)

Acquisition

Amazon entered China in 2004, one year after eBay. At that time, China’s e-commerce industry,
including online book selling, was still in its infancy. Chinese consumers lacked confidence in e-
tailers and preferred to see what they were buying in person before paying. Logistics infrastructure
was another challenge facing early Chinese e-tailers since the state-owned carrier was inefficient
and private carriers were underdeveloped. In 2003, only 6 of China’s 50 million Internet users had
tried online shopping. 1 As for books, Dangdang, dubbed “China’s Amazon” by the Economist in
2003, had in fact cornered less than 0.1% of the Chinese book market. 2

Amazon initially offered to buy a 70% stake in Dangdang for $150 million, but Yu and her husband
wanted to keep control of their business and offered Amazon only a minor shareholder position.3
When negotiations broke down, Amazon turned to Joyo – one of Dangdang’s competitors – and
made a complete acquisition for $75 million.

Joyo was founded by Lei Jun (the founder of Xiaomi) in 1999 and carved out a place for itself in
China’s e-commerce market by selling books, cosmetics, and DVD box sets. Before its acquisition
by Amazon in 2004, Joyo had revenues of $19 million. After acquiring Joyo, Amazon stated that
it was aware of the “unique challenges” of doing business in China and would adjust to local
customs and regulations. 4

After the acquisition, Amazon continued to operate Joyo’s website under its original name until
2007, when it was changed to Joyo-Amazon. In 2011, it was renamed Amazon.cn.

Amazon began by replacing Joyo’s management team, which doubted that Amazon’s business
model would work in China. Nian Chen, Joyo’s vice-president, stated that it was difficult to do any
planning based on his understanding of the Chinese market because “Americans do not listen to
you.” 5 In 2007, Chen left Joyo to found Vancl. In 2005, Amazon appointed Hanhua Wang, a
veteran of Motorola’s Asia Pacific business, as the new president of Joyo.com. Amazon spent
several years bringing its U.S. IT infrastructure, including an automatic system for managing
orders, inventory, and logistics and tracking competitor prices, to China. With this new technology,
Amazon China was able to analyze big transaction data and forecast product demand in certain
areas, facilitating inventory management and reducing delivery times. The system became
increasingly powerful as Amazon China increased its transaction volume.

1 “China’s Amazon: why read the little red book when you can buy ‘straight from the gut’?” The Economist, August 21, 2003
(accessed February 14, 2017).
2 Ibid.
3 “Why Dangdang rejected Amazon’s offer of 150 million,” http://www.people.com.cn, August 19, 2004 (accessed February 14,
2017, in Chinese).
4 Matt Hines, “Amazon buys into the Chinese market,” CNET, August 19, 2004 (accessed February 14, 2017).
5 Chunmei Xiu, “Joyo’s gloomy Amazonization,” China Daily, November 4, 2011 (accessed February 14, 2017, in Chinese).

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Competing with Dragons: Amazon in China

Challenges (2004–2012)
The logistics network

Amazon China inherited Joyo’s logistics system and initially handled deliveries themselves to first-
tier cities, including Beijing, Shanghai, and Guangzhou. Deliveries to second- and third-tier cities
were outsourced to third parties.

To benefit from economies of scale, Amazon China invested heavily in building a national logistics
network. 1 (Exhibit 3 shows Amazon’s fulfillment centres in China.) In 2004, it expanded its
fulfillment centre in Beijing, then entered the Yangtze River Delta and the Pearl River Delta by
establishing a 118,400-square-foot delivery centre in Suzhou in 2006 and another in Guangzhou in
2007. In 2009, Amazon expanded into southwest China by opening a fulfillment centre in Chengdu,
which was renovated in 2011. One year later, Amazon opened fulfillment centres in the northeast
(Shenyang), northwest (Xi’an), centre (Wuhan), and southeast (Xiamen). It then further expanded
its logistics network to cities such as Nanning and Harbin while also consolidating its presence in
the three major metropolitan areas (Beijing-Tianjin, the Yangtze River Delta, and the Pearl River
Delta) by establishing three huge distribution centres, each covering more than 1,200,000 square
feet, in Kunshan, Tianjin, and Guangzhou. By 2014, Amazon China’s logistics network counted
more than 9,000,000 square feet of warehouse space. Its distribution centres were clean and well
organized, equipped even with emergency first aid kits in case of heart attacks. 2

Humans or machines?

To leverage its national fulfillment network, Amazon China abandoned Joyo’s strategy of selling
only media products (books and DVDs), increasing its product categories from six in 2004 to
twenty in 2008, 3 twenty-four in 2010, 4 twenty-eight in 2012, 5 and thirty-three in 2017.

Amazon China also changed its business model from vendor to marketplace; it opened up to third-
party sellers in 2011, ten years after doing so in the U.S. Unlike Chinese e-tailers, which charged
sellers both an annual fee (ranging from $800 to $8,000) and a commission (0.5% to 30%
depending on the product category), Amazon China charged only a commission (4%–7%
depending on the product category). 6 In 2012, Amazon China changed its commission structure,
increasing its commission to 15% for some products. 7

1 “Amazon Global Fulfillment Centre Network,” MWPVL (accessed February 15, 2017).
2 “Amazon becomes realistic in China,” Sohu, May 17, 2015 (accessed January 9, 2018, in Chinese).
3 “Joyo-Amazon starts using its largest fulfillment center in China,” TechWeb, June 30, 2008 (accessed February 15, 2017, in
Chinese).
4 “Joyo-Amazon launches its 7th largest fulfillment center in Shenyang,” TechWeb, June 30, 2010 (accessed February 15, 2017,
in Chinese).
5 “Amazon China announces the official launch of its Tianjin fulfillment center,” TechWeb, February 2, 2012 (accessed
December 23, 2017, in Chinese).
6 Qingchun, Chen, Mingfei Hua, “After the peaceful evolution of Amazon China,” http://business.sohu.com, May 10, 2012
(accessed December 23, 2017, in Chinese)
7 Shengyuan Cao, “Online retailers increase prices,” NBD,com, February 15, 2012 (accessed February 15, 2017, in Chinese).

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Competing with Dragons: Amazon in China

Amazon China thus dealt with sellers differently than local e-tailers did. As pioneers of China’s e-
commerce industry, local e-tailers such as Alibaba had to teach sellers how to market their products
online and how to treat Internet customers. This was the reason for a fixed annual fee. Transferring
U.S. practices to China, Amazon relied on its IT infrastructure to deal with sellers and suppliers.
This reliance on technology established clear guidelines, but left little room for human interaction.
For example, Amazon China used an automatic seller rating system, allowing a maximum of 1%
negative customer comments. 1 If a seller failed to meet this standard, it was automatically closed
by Amazon China. Chinese customers sometimes wrote negative comments for emotional reasons,
regardless of the service they had received. Some negative comments were even written by
competitors. “Amazon didn’t consider the reason for negative comments and used machines to
calculate the rate and close stores. This decision was irrevocable. And if you complained, several
layers of management were needed to reverse it,” explained a seller who was closed down on
Amazon China. 2

Some of Amazon’s rules were stricter than those required by Chinese law. In China, it was common
practice for Internet vendors to sell products without direct authorization from the brand owner,
but with indirect authorization from a distributor or agent. This was prohibited by Amazon China
and led to automatic shop closure. 3

Amazon’s seller rating system was appreciated by demanding customers since it created a reliable
online shopping experience with qualified sellers. However, Amazon’s high-tech approach to
dealing with sellers and suppliers discouraged their involvement; as a result, while Amazon China
substantially increased its catalogues of titles, it lagged far behind Alibaba and JD when it came to
product choice. Many customers continued to see Amazon China as a bookseller. 4

Conflicts

The introduction of third-party sellers offering lower prices created problems for Amazon, which
saw its own sales decline as a result. 5 Competition from independent sellers thus pushed Amazon
China to be more aggressive with its own suppliers, renegotiating prices with them to remain
competitive. 6

To leverage its national logistics network and offer customers the best possible shopping
experience, Amazon China encouraged independent sellers to use its inventory and delivery
system. 7 However, third-party sellers could choose not to use Amazon’s logistics network,
exposing Amazon to the risk of its reputation being damaged by the poor service offered by some
sellers.

1 Fang Wang, Yang Yang, and Jinke Ma, “Stubborn Amazon,” The Economic Observer, December 3, 2012 (accessed
February 15, 2017, in Chinese).
2 Ibid.
3 Ibid.
4 Xuan Yang, op. cit.
5 Xiaoping Xie, “New challenge to Joyo-Amazon CEO Hanhua Wang: The late marketplace,” NBD.com, July 20, 2011 (accessed
February 16, 2017, in Chinese).
6 Ibid.
7 Ibid.

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Competing with Dragons: Amazon in China

Culture clash

As an American high-tech firm, Amazon China had an organizational culture focused on

technology rather than on marketing. For a long time, Amazon China and its president Hanhua
Wang kept a low profile in China. Unlike local rivals, who spent heavily on advertising, Amazon
China didn’t invest much in marketing. Amazon China established an automatic price-tracking
system allowing it to track competitors’ prices and lower its own as necessary. 1 With this price
tracking system, Amazon regarded advertising as unnecessary. 2

Amazon China also experienced a culture clash with its website design. To attract shoppers,
Chinese e-tailers plastered their homepages with colourful slideshow ads and photos of the items
they were promoting. Amazon China’s homepage was characterized by small photos, limited
information, and lots of blank space. (Exhibit 4 compares Amazon China’s homepage with JD’s
on July 22, 2013.) In 2013, Amazon China’s local team suggested to the U.S. head office that it
redesign its homepage, but this idea was rejected due to concerns that placing too many items on
the homepage would increase load time and negatively impact the shopping experience. 3 It took
several attempts before Amazon’s head office agreed to adapt Amazon China’s homepage to local
preferences. 4

Major restructuring (2012–2016)

New leadership

Although Amazon China had grown substantially since 2004, its progress was dwarfed by that of
its local rivals. (Exhibits 2, 5, and 6 compare Amazon’s market share, gross merchandise value,
and daily page views of Amazon with those of its local competitors.) In 2008, Amazon occupied
12.1% of China’s B2C e-commerce market, not far behind JD (16.1%) and Alibaba (20.2%).
However, three years later, Amazon’s market share had plummeted to just 2.9%, while Alibaba
and JD had grown to 51% and 18.5% respectively. 5 Amazon China clearly needed a major
restructuring.

This began in 2012, when Hanhua Wang stepped down as head of operations and was temporarily
replaced by Steve Frazier, Amazon’s global vice-president of retail operations. In 2014, Amazon
announced that Frazier would be transferred back to the Seattle headquarters and be replaced by
Doug Gurr, an Amazon UK executive, as the new president of Amazon China.

1 Anqi Yang, “Bezos’s messenger in China,” Global Entrepreneur, 20, 54–65, 2014,
http://yanganqi.baijia.baidu.com/article/50667 (accessed February 16, 2017, in Chinese)
2 “Amazon China: Price war is misleading,” Financial Network, August 20, 2012 (accessed December 23, 2017, in Chinese)
3 Anqi Yang, op. cit.
4 Ibid.
5 China E-commerce Research Center, China E-commerce 2011 Market Research Report, May 2012 (accessed February 16,
2017, in Chinese).

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Competing with Dragons: Amazon in China

A global store

A new strategy for Amazon China was to target China’s surging cross-border e-commerce market.
In 2014, under Doug Gurr’s leadership, Amazon China launched the Amazon Global Store,
offering foreign products to Chinese customers. In the beginning, Amazon China bought directly
from overseas suppliers, 1 but as cross-border transactions increased, it found it more efficient to
integrate Amazon’s global network by offering the items on Amazon’s foreign websites to Chinese
customers. 2 This integration required the speedy transfer of information about items sold by foreign
suppliers to Amazon China’s website: this included translation of the language, measurement units,
and prices based on real-time currency conversion. It also required careful communication and
coordination of logistics and product delivery choices between Amazon China and Amazon’s
global operations. By the end of 2016, Amazon China was integrated with Amazon U.S. and
Amazon UK. 3 The number of items available from Amazon Global Store jumped from 80,000
(mainly mother and baby items) in 2014 4 to 4 million in 27 categories in 2015. 5

Amazon China adopted a mixed logistics strategy for delivering foreign products to Chinese
buyers. In addition to order-by-order delivery, Amazon China also stored popular items in customs
bonded warehouses at China’s mainland ports or in Hong Kong. By maintaining an easily
accessible supply of these popular items, Amazon China was able to deliver them in about three
days. 6 In November 2014, Amazon.com signed a memorandum of cooperation with Shanghai’s
free-trade zone, established in 2013, to facilitate international logistics for cross-border e-
commerce. 7

When Amazon China launched Amazon Global Store in 2014, it also launched an annual Black
Friday online shopping festival from November 18 to December 5.

Interestingly, in 2015, it was Amazon (not Amazon China) that opened a store in Alibaba’s Tmall
marketplace to sell selected foreign products. 8 Amazon China provided logistics services for this
store. 9

In October 2016, Amazon China introduced a version of Amazon’s Prime membership program to
China, offering free cross-border shipping from the Amazon Global Store for an annual fee of $57.
Unlike the U.S. version, the Chinese Prime membership did not include free video and music
streaming. Russ Grandinetti, Amazon’s senior vice-president, remarked that “launching a unique

1 Honglin Lv, “Why does Amazon survive after Yahoo and Google’s retreat from China?” Chinese Entrepreneurs, December 26,
2016 (accessed February 22, 2017, in Chinese).
2 Ibid.
3 Ibid.
4 Ibid.
5 Shulong He, “How is Amazon China doing,” sootoo.com, November 25, 2015 (accessed February 22, 2017, in Chinese).
6 Xue Chen, “Amazon China announces entry into its second age,” August 13, 2015 (accessed February 22, 2017, in Chinese).
7 “Amazon enters Shanghai free trade zone to boost offering in China,” Reuters, August 20, 2014 (accessed February 22, 2017).
8 Hongchao Sun, “Amazon’s entry into Tmall, Amazon China’s awkwardness,” Tencent, March 6, 2015 (accessed February 23,
2017, in Chinese)
9 Ibid.

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Competing with Dragons: Amazon in China

program designed for our Chinese customers shows our obsession with Chinese customer needs
and demonstrates our long-term commitment to growing our business in China.” 1

Early in 2016, Amazon China’s logistics subsidiary, Beijing Century Joyo Courier Service
Company, received a U.S. maritime freight forwarding licence, confirmation of the company’s
ambitions with respect to cross-border e-commerce. 2

Kindle

Amazon China launched Kindle Store in December 2012, six months before it introduced the
Kindle device to China. 3 In China, a government licence is required to publish and sell electronic
books and is not open to foreign firms. 4 Amazon borrowed the operating licence from one of its
vendor partners, Chineseall.com, 5 which led to a debate in China over the legality of this practice. 6

When Amazon introduced the Kindle device to China in June 2013, 7 several adjustments were
made to the product by Amazon China’s Kindle team led by Elaine Chang. For example, Amazon
China designed a gift box for the Kindle, including book coupons, which turned out to be very
popular. 8 The original Kindle device was produced only in black, which Chang believed would not
go down well with women, who tend to read more than men. She therefore suggested that a white
version, Kindle Paperwhite, be marketed in China. This also was popular and was later introduced
to other countries. 9

AWS

A global leader in the cloud computing business since 2006, Amazon introduced its AWS business
to China in 2013; it was run by a different team than that heading the e-commerce group in China. 10
Amazon began by collaborating with the governments of Beijing and Ningxia (an autonomous
region in northwest China) to build a data centre in Zhongwei, a small city in Ningxia. 11 According
to Chinese law at that time, foreign firms wishing to provide cloud computing services were
required to collaborate with local partners. Since 2014, Microsoft has worked with 21vianet, a local
Internet service provider, to offer its Azure service in China. Under their agreement, 21vianet owns

1 Sarah Pere, “Amazon Prime launches in China,” techcrunch.com, October 28, 2016, (accessed February 23, 2017).
2 David Morris, “Amazon China earns its ocean shipping license,” Fortune, January 14, 2016 (accessed February 23, 2017).
3 Wenting Qi, “Amazon tries electronic reading in China,” www.nbd.com.cn, December 21, 2012 (accessed February 23, 2017,
in Chinese).
4 Ministry of Commerce People’s Republic of China, Catalogue for the Guidance of Foreign Investment Industries, February 21,
2012 (accessed December 23, 2017)
5 Wenting Qi, op. cit.
6 Ibid.
7 “Amazon launches Kindle this afternoon,” http://digi.tech.qq.com, June 7, 2013 (accessed January 4, 2018, in Chinese).
8 Honglin Lv, op. cit.
9 Ibid.
10 Xudong Zhu, “Amazon China speeds up AWS’s entry,” http://tech.qq.com, December 19, 2013 (accessed December 23, 2017, in
Chinese).
11 Jun Zhang and Wei Song, “The 4-year game between Amazon AWS and China,” Caijing, September 18, 2016 (accessed
February 23, 2017, in Chinese).

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Competing with Dragons: Amazon in China

the customer data and offers cloud computing services using Microsoft technology. 1 Amazon
chose two local partners, Sinnet in Beijing and Chinanetcenter in Shanghai. Unlike the business
model adopted by Microsoft and 21vianet, Amazon provided front-end services together with its
local partners. 2 In 2014, Amazon began to offer limited cloud services to select Chinese clients as
a test. 3

A major policy change occurred in December 2015 when China’s Ministry of Industry and
Information Technology classified cloud computing as a value-added telecommunications service,
meaning that foreign firms could not access customer data, and the cloud computing infrastructure
had to be operated by a Chinese firm. Foreign firms had to remain in the background as technology
supporters, just as Microsoft was already doing. When this new policy was implemented,
Chinanetcenter, Amazon’s Shanghai partner, ended its partnership with Amazon because of policy
risk concerns.

In May 2016, the Beijing government ordered Amazon to suspend its AWS business until the
necessary changes were made. 4 Three months later, Amazon signed a new contract with Sinnet, its
Beijing partner, authorizing it to use Amazon AWS technology to provide cloud computing
services to clients in Beijing and the surrounding area. 5 Amazon AWS thus officially entered China
in 2016, ten years after its U.S. launch.

In China’s cloud computing market, Amazon AWS is not only far behind local rivals such as
Alibaba but also smaller than Microsoft, its U.S. counterpart.

The next step

Although these new strategies diversified Amazon’s businesses in China, Amazon China’s e-
commerce sales kept falling, its market share shrinking from 2% in 2014 to just 1.3% in 2016.
That’s when Doug Gurr, Amazon China’s president, was sent back to the UK and Elaine Chang,
general manager of Kindle China, was appointed to lead Amazon China.

Meanwhile, the company’s local rivals were becoming more aggressive both domestically and
internationally. In 2016, Walmart acquired a 10% stake in JD and decided to integrate their
inventory and logistics systems to improve their competitiveness in China. 6 Since 2014, Alibaba
had also made big strides in its internationalization efforts by setting up shop in Europe 7 and

1 Nan Shu, “After two years, Amazon AWS has finally found the right way into China,” huxiu.com, August 8, 2016 (accessed
February 23, 2017, in Chinese).
2 Jun Zhang and Wei Song, op. cit.
3 Ibid.
4 Ibid.
5 Ibid.
6 “JD values cooperation with Walmart much more than its Chinese e-commerce business,” money.163.com, June 23, 2016
(accessed February 22, 2017).
7 “Alibaba group expands European presence,” AlibabaGroup press release, October 20, 2015 (accessed February 22, 2017).

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Competing with Dragons: Amazon in China

Australia 1 and launching a cloud computing research centre in Silicon Valley. 2 These Chinese
firms were no longer Amazon’s local rivals but increasingly its global competitors.

How can Chang compete with these dragons to boost Amazon’s share of the world’s largest e-
commerce market? Will Amazon be forced to retreat from China?

2018-03-07

1 Nyshka Chandran, “Alibaba ventures down under to help local businesses go global,” CNBC, February 5, 2017 (accessed
February 22, 2017).
2 John Ruwitch and Paul Carsten, “Alibaba just made a ‘very strategic move’ in the US,” Business Insider, March 3, 2015
(accessed February 22, 2017).

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Competing with Dragons: Amazon in China

Exhibit 1
Amazon financials, 2003–2016 ($million)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Net sales 5,263 6,921 8,490 10,711 14,834 19,166 24,509 34,204 48,077 61,093 74,452 88,988 107,006 135,987
Cost of sales 4,006 5,319 6,451 8,255 11,482 14,896 18,978 26,561 37,288 45,971 54,181 62,754 71,651 88,265
Fulfillment 477 590 745 937 1,292 1,658 2,052 2,898 4,576 6,419 8,585 10,776 13,410 17,619
Marketing 122 158 198 263 344 482 680 1,029 1,630 2,408 3,133 4,332 5,254 7,233
Technology and content 208 251 451 662 818 1,033 1,240 1,734 2,909 4,564 6,565 9,275 12,540 16,085
General & administrative 88 112 166 195 235 279 328 470 658 896 1,129 1,552 1,747 2,432
Other operating expenses 3 (8) 47 10 9 (24) 102 106 154 159 114 133 171 167
Total operating expenses 986 1,161 1,607 2,067 2,698 18,324 23,380 32,798 47,215 60,417 73,707 88,810 104,773 131,801
Operating income 270 440 432 389 655 842 1,129 1,406 862 676 745 178 2,233 4,186
Performance by region
North America
Net sales 3,258 3,847 4,711 5,869 8,095 10,228 12,828 18,707 26,705 34,813 44,517 50,834 63,708 79,785
Operating expenses 2,975 3,527 4,415 5,639 7,695 9,783 12,119 17,752 25,772 33,221 42,631 50,474 62,283 77,424
Operating income 283 320 296 230 400 445 709 955 933 1,592 1,886 360 1,425 2,361
Other regions
Net sales 2,005 3,073 3,779 4,842 6,740 8,938 11,681 15,497 21,372 26,280 29,935 33,510 35,418 43,983
Operating expenses 1,927 2,904 3,509 4,572 6,291 8,290 10,818 14,516 20,732 26,204 29,828 34,150 36,117 45,266
Operating income 78 169 270 270 449 648 863 981 640 76 107 (640) (699) (1,283)
Source: Amazon’s annual reports (2003–2016)

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Competing with Dragons: Amazon in China

Exhibit 2
Market share of major online retailers in China’s B2C e-commerce market

2008 1 2011 2 2012 3 2014 4 2016 5

Alibaba 20.2% 51% 56.7% 57% 57.7%
JD 16.1% 18.5% 19.6% 21% 25.4%
Amazon 12.1% 2.9% 2.7% 2% 1.3%
Dangdang 11.3% 2.2% 1.9% 2% 1.4%
Suning — 3.3% 5.5% 4% 3.3%
GOME — — 1.4% 2% 1.8%
Vancl 4.3% 2.3% 1.2% — —

1 iResearch, “Key data of Chinese Internet firms,” November 2011, (accessed September 24, 2017, in Chinese).
2 China E-commerce Research Center, “China E-commerce Market Research Report in 2011,” May 2012, (accessed February 16,
2017, in Chinese).
3 China E-commerce Research Center, “China E-commerce Market Research Report in 2012,” August 2013, (accessed
September 24, 2017, in Chinese).
4 China E-commerce Research Center, “China B2C E-commerce Market Analysis,” September 2014, (accessed September 24,
2017, in Chinese).
5 China E-commerce Research Center, “China B2C E-commerce Market Research Report in 2016,” May 2017, (accessed
September 24, 2017, in Chinese).

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Competing with Dragons: Amazon in China

Exhibit 3
Amazon China’s fulfillment centres (total square feet in thousands: 9,146)

Harbin
HRB1 (2013): 86 sq

Shenyang
Beijing SHE1 (2010): 625 sq
PEK3 (2004): 538 sq Tianjin
PEK5 (2010): 323 sq TSN2 (2012): 1,764 sq

Xi’an Suzhou
XIY1 (2010): 626 sq SHA1(2006): 118 sq
SHA2(2011): 1,291 sq

Chengdu Wuhan Shanghai

CTU1 (2009): 194 sq WUH1 (2010): 300 sq SHA3 (2014):—
CTU2(2013): 538 sq

Xiamen
XMN1/2(2010): 170 sq
Nanning Guangzhou
NNG1 (2012): 538 sq CAN1(2007): 118 sq
CAN2(2013): 1,829 sq

Source: http://www.mwpvl.com/html/amazon_com.html (accessed February 15, 2017)

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Competing with Dragons: Amazon in China

Exhibit 4
Homepages of Amazon China and JD (July 22, 2013)

Amazon.cn homepage

Advertisements

Items

JD homepage

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Competing with Dragons: Amazon in China

Exhibit 5
Gross Merchandise Value (GMV) of major online retailers in China
(100 million RMB)

2009 2010 2011 2012 2013

Alibaba Taobao 2,420 3,980 5,860 9,170 12,010
Alibaba Tmall 0 200 900 2,220 4,100
JD 50 120 320 730 1,260
Amazon 22 35 60 90 100
Dangdang 17 27 47 73 110
Suning 2 5 55 170 310
GOME 1 3 20 44 60
Vancl 3 15 40 45 68

Source: China E-commerce Research Center, “China B2C e-commerce market analysis,” December 2014 (accessed
September 24, 2017, in Chinese)

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Competing with Dragons: Amazon in China

Exhibit 6
Daily page views of major online websites in China in 2014

Daily page views Website

Tmall 120,939,000 www.tmall.com
JD 31,298,400 www.jd.com
Amazon 12,087,000 www.amazon.cn
Dangdang 2,818,800 www.dangdang.com
Suning 13,744,080 www.suning.com
GOME 13,612,320 www.gome.com.cn
Vancl 406,020 www.vancl.com

Source: China E-commerce Research Center, “China B2C e-commerce market analysis,” September 2014 (accessed
September 24, 2017, in Chinese)

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