Caixin
Apr 24, 2019 10:00 AM
TECH TALK

Amazon Driven From China by Culture of Internet Money-Losers

Much has been written these past few days about Amazon’s decision to sort-of leave China, and why the world’s biggest e-commerce company couldn’t crack the world’s biggest internet market. A frequently-cited reason is its failure to make a uniquely Chinese product for the nation’s huge pool of more than 800 million internet users — an often-cited reason why earlier names like Google and eBay also failed in China.

From my perspective that particular analysis is true, though not in the way many people think. Sure, Chinese people have their own particular shopping and buying habits that are different from those in the West. What’s more, China’s retail landscape is a very different creature from most other countries, with e-commerce playing a much bigger role than in more mature markets like the U.S.

But those elements seem somewhat secondary to me, even though they are still important and deserve mention later. Instead, my list is topped by one element that is truly unique to China, namely the huge tolerance by investors and entrepreneurs for backing companies that lose massive money for years and often die without ever earning a profit.

The Chinese internet realm is littered with such companies that have collectively cost investors billions of dollars in cash without ever producing the hoped-for profits. Of course a handful of standouts such as e-commerce juggernaut Alibaba and online travel titan Ctrip stand out as exceptions, which is what keeps the money taps flowing.

Two of the latest money-losers made headlines this week when each filed for U.S. initial public offerings despite their profitless status. At the head of the line was live broadcasting game specialist DouYu International Holdings Ltd., which asked Wall Street for $500 million in fresh funds. Never mind that the company lost nearly 900 million yuan ($134 million) last year, it told investors, with the implication that perhaps it would become profitable somewhere down the road.

Then there was the even more problematic Starbucks challenger Luckin Coffee Inc., an app-only coffee shop that also filed for a New York listing asking investors for $100 million. I found that particular request even more audacious, as Luckin is just two years old and has an operating history of just a little more than a year. In all my years of covering such tech startups, I’ve never seen one go public that quickly.

A look at Luckin’s prospectus shows why it may be turning to Wall Street for more funds. It burned through about a third of its cash in the last quarter alone, spending about 500 million yuan in the first three months of this year, as it opened stores at a breakneck pace and offered nonstop discounts to keep people like me coming through the doors. The bottom line was that it posted a massive loss of about 1.6 billion yuan last year, its prospectus showed.

How now, Amazon?

With that kind of competition, it’s a bit easier to understand perhaps why Amazon.com Inc. was never able to make it in China — at least not the part of its business that sells domestically-sourced goods to Chinese consumers that’s now being closed. The company’s share in that part of the market stood at less than 1% at the time of its decision, despite its status as one of the market’s earliest arrivals.

Some will point to Alibaba to show how profitable the market can be for the company that gets it right. But less talked about, at least among investors and operators, are the big losses being posted by many of the other major e-commerce firms. No. 2 player JD.com has never made consistent profits, and last year posted a 2.5 billion yuan net loss. Another high-flyer, discount e-commerce specialist Pinduoduo, posted an even larger 10.3 billion yuan net loss for the year.

One doesn’t need to look too far for other similar high-powered cash-burning machines in China’s high-tech realm, including the likes of shared bike operators Ofo and Mobike, as well as the Uber-like Didi Chuxing. I’m guessing that Amazon’s domestic e-commerce business never made money in China either, and that the company probably threw in the towel when it finally realized that investors would continue funding similar massively money-losing rivals for the foreseeable future.

That said, we do have to look at a few other factors that perhaps led to Amazon’s failure to crack the domestic e-commerce business, even as it affirmed continued commitment to its healthier cross-border e-commerce, Kindle reader and cloud services in China. Since I’m not a regular e-commerce user, I turned to some of my friends and students to get more on-the-ground opinions from real-life users.

One of the biggest complaints I discovered was price. I remember smiling many years ago when an acquaintance from the traditional brick-and-mortar retailing world told me the three most important factors for success were “location, location and location.”

You can tweak that formula for China to say the three most important considerations for retailers here are “price, price and price.” The reality is that China is far more price-sensitive than more mature markets, where service and other factors also weigh heavily in determining consumer preferences. A number of people said they could always find cheaper goods on Amazon’s rivals, especially in Alibaba’s popular Taobao marketplace that was famous for years for its huge volume of cheap knockoffs.

Others also criticized Amazon for not enough hand-holding with things like contacting third-party merchants, and offering other assistance. The result was that it provided a “tasteless offering” comparable to eating a chicken rib, as one friend colorfully put it. Perhaps that’s true and Amazon could have done more to make its domestic China e-commerce service a tad tastier. But even if it did, I doubt that Amazon or any other major Western internet firm will ever truly develop a taste for the years of major losses, with no guarantee of eventual profits, now required to play ball on China’s internet.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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