The Strategist

Amazon makes landfall in China to take on Alibaba

03/09/2015 - 08:38

Going by the proverbial ‘When you cant beat them, join them’ strategy, Amazon has taken the plunge and has partnered with Alibaba’s Tmall marketplace. And through this deal Amazon wants to capture the niche market of the quality-conscious Chinese buyer.

The strategy of co-operating with a rival need not necessarily be perceived as a sign of weakness. Although this move by Amazon has surprised many but by doing so, Amazon is essentially taking the bull by its proverbial horns. Although Amazon will be paying a commission on all of its sale to Alibaba, in exchange, it is however getting a strong foothold in one of the largest markets in the world.

Alibaba is the largest e-commerce company in China. Its US IPO, last year, was history in the making: it raised $25 billion in a market dominated by e-commerce giants such as Amazon and eBay. On the other hand, Amazon has been trying to make its presence felt in the Chinese market for a while now, and it has managed to capture only a miniscule market share.

Alibaba’s Tmall has played a key role in ensuring its success in China.  Through this storefront, Alibaba has opened its digital shopping complex to tap the ever-growing Chinese middle class. Although several other US companies, such as Nike and Apple, have tapped Tmall’s storefront, Amazon is the only one which has opted to open a separate portal of its own, from which consumers can access products from a varied range of companies.

Although Amazon has taken Robert Frost’s “the road less travelled by” and is having to pay a commission on its sale to its rival, the decision only goes to reflect how difficult it is to establish yourself and gain a strong following in the Chinese market.  This degree of difficulty is largely by design: historically, regulations have been put in place to safe guard the interest of Chinese companies. Foreign companies are forced to partner with a local company in order to establish themselves.

Just as Amazon wants a pie out of the Chinese markets, Alibaba too wants to make its presence felt in the US market. In order to achieve this objective, in January, it announced the creation of Alipay ePass – a service which allows a Chinese customer to shop and pay for goods and services from based out of the US.

Alipay is a middleware: it takes the customer’s Chinese currency and converts it to its dollar equivalent and passes it on to the US merchant. Having got the money, the retailer, the dispatches the goods to an Alipay location in the US, which handless the details of getting it shipped from the US to its customer in China.

Although, Amazon and Alibaba are direct competitors, Alibaba’s CEO Jack Ma, says “We are coming here not to compete” but “to help a lot of small businesses, which I think a lot of things may need to be done. It's not a competition [with Amazon]”

Amazon, on the other hand is not targeting small business concerns, their target group is the upper middle class who prefer foreign brands for their quality and do not mind paying a little more for it. They don’t trust local products and businesses not just because of poor quality assurance issues but also because they deal in counterfeit goods. As an American company, Amazon has been selling itself as one having quality assurance. The upper middle, who class who are quality conscious, is Amazon’s niche market.