Online retailing giant Amazon.com Inc. (AMZN) has ample expansion opportunities in China, which posseses an e-commerce market growing at a double-digit percentage rate. The company's expansion into China started with the 2004 acquisition of Joyo.com, the country’s largest online retailer of books, music and videos, for $75 million.
China, one of the world’s fastest growing economies, is replete with resources and is on course to becoming a central player in the global e-commerce industry. The low-cost, widely available telecommunication infrastructure in China has made the Internet a very handy tool for online shopping.
According to the global management consulting firm Boston Consulting Group (“BCG”), China ranks second in terms of online shoppers, with 145 million buyers (versus 175 million in the United States). But given the Internet-savvy population in China, BCG thinks that there is much room for further growth.
Another impressive forecast is that the number of e-buyers will skyrocket through 2015, growing from145 million to 329 million. Overall, ecommerce will account for 7.4% of the country's total retail spend by 2015, up from 3.3% in 2011 indicating exceptionally high growth compared to the U.S. that took almost a decade to reach that level.
Naturally, established U.S.-based ecommerce players like Amazon will try to make China a future e-commerce hub.
Amazon’s Strengths
Amazon is well accustomed to local e-commerce standards in China and drives new technology advancements in the area of online payments. For instance, in order to effectively reach as many customers as possible, Amazon offers a cash-on-delivery (COD) option. Reception of this option has been enthusiastic, particularly since credit card usage is not very common in China.
Further, Chinese customers often find that online merchants fail to properly disclose, return or refund policies, and in some cases may not even have full faith that the merchandise being sold will be the same as that delivered. This is where Amazon beats the local players hands down because of its excellent customer service and credibility. As a result, the company has been rapidly growing its market share in China.
Moreover, e-commerce has attracted a large number of players in China. So companies looking to benefit from the surge in online shopping have got to be able to meet customers’ needs for better quality at competitive prices. Here again, Amazon is way ahead of the others with the best selection, pricing, deals and platforms.
Growth Opportunities
Last month, Amazon shipped its cheaply priced Kindle Fire, which has the potential to do very well in China. Not only did it make it before the Christmas selling season, but early next year China will also celebrate its new year, which should generate incremental revenue for Amazon.
Very recently, Amazon opened an online Chinese-language bookstore, jointly operated by Amazon and the China International Publishing Group (CIPG). The store gives readers from all over the world an opportunity to read Chinese books, as well as enhance cultural exchanges between China and other countries.
As Amazon expands, we can expect more fulfillment warehouses built to serve the major Chinese metropolitan areas (Guangzhou, Suzhou, Beijingand Chengdu), indicating future growth. In China, Amazon already has approximately 530,000 square feet of space, including the 180,000-square-foot distribution center in Beijing.
Conclusion
Amazon has been expanding its international operations in the last few years and currently, operates in six countries outside the US, including Canada, China, Japan, the U.K., Germany and France. Of all these markets, China has the strongest growth potential.
Amazon's retail market share is still relatively small in the emerging markets, but there is a good possibility of its capturing a significant share of the Chinese market within the next five years, in which case the company would see an additional several billion dollars a year in revenue. Success in Chinawould also ensure that the company’s strong growth rates continue, justifying its big earnings multiple.
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