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Will Alibaba overtake Amazon in the West?

Will Alibaba overtake Amazon in the West?

Alibaba had a great quarter, expanding our user base to 674 million annual active consumers, demonstrating our superior user experience,” said Daniel Zhang, Chief Executive Officer of Alibaba Group. “We will continue to expand our customer base, increase operating efficiency and deliver robust growth. With strong cash flow from our core commerce business, we will continue to invest in technology and bring digital transformation to millions of businesses globally.”

The quote above is from the latest report on Alibaba’s financial results. In the report, the company boasts about its many users, revenue growth, and technical innovation. Alibaba is the biggest in total revenue of all marketplaces globally, and there are no indications of it slowing down. This continues growth, in combination with the departure of Jack Ma – founder and charismatic leader of the company – it seems appropriate to take a closer look at the Chinese challenger of Amazon. In this article I want to provide a broader view at Alibaba’s success in China, and ask whether it will be able to replicate its success in Western markets. The goal is to provide a perspective in which the fast day-to-day developments of China’s biggest marketplace. I will do this by looking at the (dis)advantages the company has in regards to strategy and culture compared to Amazon. However, the topic of Alibaba is too big to discuss every relevant aspect of its successes and challenges. Therefore, I will provide some ‘recommended reading’ for those of you who want to know more. 

Section one

1.1 How Alibaba became successful in China:

Alibaba was first founded by Jack Ma and a group of investors right before the Dot-com crash in 1999. To be the successful e-commerce giant it is today,  the company needed to resolve two key problems: a lack financial resources, and a lack of trustworthy credit. The first problem resulted in a lack of Chinese e-commerce businesses until funding became more plentiful in the current decade. The second problem resulted in the failure of Western companies like eBay in China where the lack of trustworthy credit resulted in false product information and delivery statuses undermining eBay’s trust and business model.

The company resolved these two problems with the ‘Trustpass Membership’.This programme offers third party retailers on the platform an official certificate of trustworthiness in exchange for 2300 RMB (about 300$) deposit. As a result of this system, customers knew which retailers were to be trusted, creating a safe marketplace environment. In addition, Alibaba gained access to large amounts of cheap capital needed to fund its operations. With these problems solved, Ma’s company became dominant within China’s small and medium  Business-to-Business retail, revolutionising the way in which ordinary Chinese have access to national and global markets.

Once Alibaba had the capital and trust it needed to grow its operations it launched ‘Taobao’ in 2003, a free to use marketplace concentrated on the greater Chinese market, that is, also serving cultural Chinese living outside mainland China. Indeed, almost all Taobao merchants are culturally Chinese. The focus on the sino-ethnic world resulted in minimal service-costs and economies of scale, giving the platform a competitive edge. Taobao is not the only new service Alibaba started in the past 20 years. Alipay, a product that works similarly to PayPal, for instance, provides ordinary Chinese with all the benefits of a cashless society. In the figure below, all subsidiaries of Alibaba are depicted.

1.2 Why Amazon didn’t become successful in China

In ‘Why Amazon didn’t make the cut in China’, Mark Greeven and Howerd Yu give two important reasons for why Amazon, with its global reach and seemingly unlimited resources, didn’t succeed in China. Although the reasons for the lack of success of Amazon in China are surely more complex, these two reasons give an important foundation from which to look at the phenomenon.

The first reason is focus. Greeven and Yu state that: ‘There are always a million things a company could do to serve customers better, so it must prioritise. For Amazon, the US will always be the home market, the one to which its investors pay the most attention.’ (Greeven and Yu, 2019). Amazon has had similar problems in culturally similar places such as Latin America. There, they are playing catch-up with local rivals, having problems with cultural and bureaucratic differences. In Brazil, Amazon faces problems with building a network of logistical centres needed to deliver on the promises of the platform. Much like the rainforest from which it got its name, the company is in a constant struggle to remain prominent.

The second reason is more focused on China, Greeven and Yu state: ‘As for Amazon China, it just did not do enough to build a brand reputation and get close to the Chinese consumer. Shopping festivals, discount campaigns, nation-wide red envelope promotions and orchestrated efforts to integrate online entice the Chinese consumer have always stayed the domain of local retailers. Chinese retailers have become the synonym for the new retail movement that is satisfying the increasingly on-demand and location-based needs of Chinese consumers’ (Greeven and YU 2019).

In this section, I’ve described how Alibaba became the dominant marketplace in China. When looking at the core of Alibaba’s success, it is the way in which the company understands the needs of the Chinese market better than its competition, and using Chinese business culture to inform its strategic choices. This is especially true if you compare the company with performance, or lack thereof, of Amazon within the Chinese market. In the remainder of this article, I will explain to what degree Alibaba has been successful within the global market, and if it is likely to takeover Amazon’s dominant position in the Western Markets.

Section 2:

International chances for Alibaba

  1. Small and Medium Business Expert Alibaba is the largest B2B marketplace in small and medium enterprises (SME). The expertise of the company is to connect these small players in a global network. This can be a first-movers advantages in a competitive global field. An advantage the company has over Amazon is, that its network is mostly based in China, the largest producer globally. Therefore the company has more opportunities to shorten the supply chain.
  2. International expansion From 2009 onward, Alibaba has already successfully expanded to Western markets like the USA, Japan, and Western Europe, in addition to developmental nations, such as India. Within these markets they are specialised in B2B.
  3. East – West Alliance Cross-border alliances have been a successful tool used by the company in the past. The most notable example of this was the cross-investment of Alibaba with Yahoo. Know-how on partnerships can be a useful tool for acquiring cultural knowledge and technology 
  4. Tactical acquisitions Since 2012, Alibaba has made investments and acquisitions in all kinds of companies that are beneficial to its long-term expansion. Anwar sums them up: ‘These include software companies, digital mapping, Singapore Post, e-commerce platform, robotics firm, mobile gaming and ticket booking and theater management service firms, Jet.com, Shanghai Media Group, SnapChat, South China Morning Post Group, Internet TV, a phone-maker, Didi Kuaidi, and an online retailer’ (Anwar 2017).  In Europe specifically, there is a trend of increased investment by Abibaba in European tech. 
  5. Aliexpress Through ‘Aliexpress’ the company utilises its SME network for B2C marketplaces sales. Within the West, the platform is a success within the lower end of the market.

Why it won’t overtake Amazon in the West

The advantages of Alibaba described in the previous section may give the impression that the Chinese marketplace is destined to dominate the globally. However, there are four key challenges that problemises its potential success within Western markets. 

  1. Priority of resources Similar to Amazon, Alibaba has a limited amount of resources to invest in broadening the scope of its operations. Within the competitive markets of Europe and the USA, it is unlikely that it will be able to meet the already existing infrastructure of Amazon, let alone local players like Otto, Cdiscount, and Zalando. With about 80% of its revenue based in China, Alibaba won’t be quick to prioritize foreign investment over maintaining its domestic dominance of its.
  2. Cultural apathy Again, this challenge is similar to what Amazon faced when it wanted to create a foothold in China, worsened by a bad reputation of Chinese goods within Western markets. If the company wants to be a key-player in higher segments of the consumer markets, Chinese products (both cultural and technical) need to gain more good will. Ask yourself: when, if ever, have you recommended a Chinese product or service for its quality, and do you think you will recommend a Chinese product in the future? 
  3. Trade war Recent trade tensions between the US and China could result in restricted access, increased import taxes, or even bans. Just look at how Huawei was restricted due to trade tensions. Recent rumours of the possible delisting of Chinese companies on American stock exchanges could further problemise Alibaba’s rise in the West.
  4. Chinese political/bureaucratic challenges China’s political landscape is notoriously versatile, bureaucratic, and corrupt. The country has a weak rule of law, and finance from state-owned banks is almost exclusively channels through state owned enterprises. Jack Ma, the charismatic CEO of Alibaba has always had the right connection with the government to create success for his company, however, he is stepping down and his successor might not be as popular with the regime in Beijing. Indeed, in September of this year the government announced it will place government agents at all big private companies, including Alibaba.

Conclusion

In this article I have asked the question whether Alibaba will become dominant within Western markets at the cost of Amazon. The development of marketplaces, both in the West and the East, has been to dynamic to give a definitive answer to predict the future. I can, however, make a broad statement on what I think is likely to happen based on the arguments made above. Surely Alibaba will maintain and increase its presence within Western markets, forcing Amazon to remain competitive and innovative within the region. However, based on cultural differences and current market dominance, Alibaba will likely not take Amazon’s spot in Europe and definitely not in the US. Chinese brand like Alibaba don’t have the goodwill, infrastructure, and capital to challenge dominant Western players like Amazon. In line with this argument, it is perhaps not unthinkable to see a European-native marketplace overtaking Amazon top position  in the future.

But, as always, I’m curious to know what you think. Do you agree with my analysis? Or, do you think that Chinese players will overtake the position of Amazon in Europe? Send your comments and questions to ivo@bandsom.nl, or in the relevant comment sections. 

Recommended reading

A bit academic, but nonetheless a good overview of Alibaba’s global expansion:

Anwar, S. T. (2017). Alibaba: Entrepreneurial growth and global expansion in B2B/B2C markets. Journal of International Entrepreneurship, 15(4), 366-389.

Very readable book on the advantages of Amazon in the West:

Galloway, S. (2017). The four: the hidden DNA of Amazon, Apple, Facebook and Google. Random House.

I used an article, but it contains more interesting articles on the development of Chinese digital business development:

Kim, Y. C., & Chen, P. C. (Eds.). (2018). The digitization of business in China: Exploring the transformation from manufacturing to a digital service hub. Springer.

Bibliography

Articles and books:

  • Anwar, S. T. (2017). Alibaba: Entrepreneurial growth and global expansion in B2B/B2C markets. Journal of International Entrepreneurship, 15(4), 366-389.
  • Cui, Y., Mou, J., Cohen, J., & Liu, Y. (2019). Understanding information system success model and valence framework in sellers’ acceptance of cross-border e-commerce: a sequential multi-method approach. Electronic Commerce Research, 1-30. 
  • Galloway, S. (2017). The four: the hidden DNA of Amazon, Apple, Facebook and Google. Random House.
  • West, J. (2018). Getting Better Value Out of Global Value Chains. In Asian Century… on a Knife-edge (pp. 91-123). Palgrave Macmillan, Singapore.
  • Kim, Y. C. (2018). Alibaba: Jack Ma’s Unique Growth Strategy and the Future of Its Global Development in the Chinese Digital Business Industry. In The Digitization of Business in China (pp. 219-247). Palgrave Macmillan, Cham.

Websites:

Brandsom Long reads

Buying (Mr) Bags

Buying (Mr) Bags

For Whom: once a month Brandsom takes a closer look at developments within marketplaces. By placing these changes within a broader context we hope to help you understand how marketplaces are changing, and how your brand can benefit. You can find our articles on Brandsom.nl or on LinkedIn.  Comments, concerns, and suggestions can be sent to Ivo@Brandsom.nl

Summary: in this article, I explain two developments within e-commerce based on the example of Mr Bags. These developments are: how selling feelings and lifestyle has become central to consumption, and how social media has decentralised this process.

Introduction

In the video above we see an interview with the famous Chinese influencer/Key Opinion Leader Tao Liang, better known as ‘Mr Bags’. What makes him special is both the trajectory of his career as well as the way in which he sells his ‘goods’. If we take a broader perspective, Mr Bags is a representation of larger developments within (online) consumption. In this article I will discuss these developments based on the case of Mr Bags. I will consider two developments in particular: consumption as lifestyle and social media as marketplace. The first is a long term development beginning in the early 20th century, now more relevant than ever due to the rise of marketplaces. The second development is the way in which social media platforms are becoming marketplaces in themselves. 

The goal of this article is to give broader context to the changes within e-commerce. Often, we are only focused on the short-term innovation of our brands and the implementation of current online strategies. By taking a broader perspective, we can understand the chaotic and fast-paced changes inherent to our industry.

Some Basic Concepts

Before moving on, it is important to have a basic understanding of the following concepts:

  • Key Opinion Leaders (KOL): people who have authority on within a specific field. Within marketing, they can be used to give credibility to a product. For instance: dentists recommending a specific toothpaste. The difference between KOL’s and influencers is that the former have specific knowledge for a certain demographic, the latter is not necessarily an expert on a specific topic, but speaks to a broad audience. People can be both KOL and influencer, like Mr Bags. 
  • Marketplaces: Amazon, Alibaba, and Zalando are examples of marketplaces. These platforms are different from ‘normal’ e-commerce spaces in that they sell product from multiple suppliers on the same platform.

Consumption As Lifestyle

Consumption has become a part of expressing one’s lifestyle. This is not at all a new development, however. Indeed, those of you who have watched HBO’s Mad Men know that linking lifestyle to consumption is a development that started in the 60s with the Coca Cola commercial of 1971 as a prime example.  An earlier example of successfully selling ‘lifestyle’ as a product was the Disney theme park, opening up in the first half of the 20th century. Even now, the brand ‘Disney’ is synonymous with happiness. Sociologist Alan Bryman analysed Disney’s theme parks, and found four key elements in explaining their success: 

  1. Theming: this is the most explicit element of the – theme – park that has been copied by other brands. The advantage of theming is that it makes the ‘feeling’ sold to the consumer more explicit. This makes it easier for the consumer to know what to buy for what emotional need they have.
  2. Combining different forms of consumption: Disney parks were revolutionary in combining both the selling of entertainment in the form of rides and shows, as well as have shopping and eating areas.
  3. Merchandising: this is in line with number two. By merchandising your brand you create a feeling of attachment to the product you’re selling. In the case of Disney, the success of this strategy is easily seen: people are willing to spend extra for a Mickey-item than for a regular one. 
  4. Emotional labour: this last point is crucial for the credibility of the lifestyle the brand wants to sell. If the workers at the parks break the experience, you’re not buying a fairytale – only a day at a cheaply made concrete jungle.  

Although these four elements were distilled from Disney’s theme parks, these elements are incorporated by most, if not all successful brands. Just think about how M&M, Nike, Lego, Apple, Starbucks, etc. sell their brand, and compare that experience to the four criteria mentioned above. 

When we compare the four elements to the example of Mr Bags, we get a clear view of how he sells his brand. To begin with theming: the name says it all. Tao Liang (the birth name of Mr Bags) differentiates himself from others on social media by explicitly theming what he does. Combining forms of consumption is a less prominent aspect of the Mr.Bags brand. However, we do see a clear broadening of products. The influencer began as entertainer journalist writing about bags, slowly added advertised content and moved towards selling his own brand. Merchandising fits better with Mr.Bags’ brand. The bags sold in the video at the beginning of this article are by Italian fashion brand TOD, in effect making it merchandise. Lastly, emotional labour is at the core of Mr Bags’ success. A large part of the success of the brand is that his audience wants to be associated with the image of the personality. Especially within Chinese culture, it is important to have a certain ‘face’ and to create trust with your potential customers.

How Social Marketplaces Make A Difference

When comparing how established (Western) brands sell their lifestyle to new social media Key Opinion Leaders (KOL) like Mr Bags there are two substantial differences. First of all, the lifestyle name is based on the person, not on the the brand. Sure, established lifestyle brands use high profile media personalities to sell their brand, and KOL like Mr Bags can use brands in order to strengthen their own credibility. The key difference is the goal of the collaboration. It seems that personal branding is more successful within social media marketplaces: it is easier for the potential customer to identify with a person than with a brand. Especially in China, where personal connections are at the center of (business) interactions, it is important to know the (perceived) personality of the seller. Therefore, it is not surprising that the East is further with this trend.

The second difference is the way in which social media is used. For a traditional brand, social media is primarily an outlet for marketing. Fundamentally, the way in which a brand like M&M uses Facebook is not different than how it uses ads on more traditional media like TV and magazines. Mr Bags uses social media as a marketplace, in addition to it being a marketing platform. In the video at the top, you can see that he uses WeChat (China’s Facebook, WhatsApp, and more) to communicate to his followers, and to sell them bags.

The way in which social media are becoming more and more like marketplaces is reinforcing the rise of personal brands like Mr Bags. It is no surprise that the Chinese WeChat is forward-thinking in this regard. For the Chinese, the prominence of individual reputation is part of centuries old traditions relating to social convention. I will explore Chinese perspectives on marketplaces in more detail in a later article. In the West, social media platforms like Instagram and YouTube are playing catch-up, only recently starting to incorporate marketplace mechanics into their services. With these developments it’s a save bet to assume that social marketplaces will only became more important in the future.

Conclusion

In this article I have given a perspective on the phenomenon of KOL on marketplaces. Using Mr Bags as an example, I have shown that his method of selling is part of a continuing trend of selling products as lifestyles in part developed by Disney. Furthermore, I explained how the rise of marketplace elements within social media facilitates the marketisation of KOL. 

In the future, it is likely that these figures will only became more important. It is therefore important for brands to take advantage of the new opportunities these developments bring, and to adjust your strategies accordingly. In the meantime, I’m curious to know how you see the future of social media marketplaces. Please send your thoughts on the subject to ivo@brandsom.nl.

About Brandsom

Brandsom is a consultancy firm specialised in brands on marketplaces. We help brands with the creation, implementation, and maintenance of their presence on marketplaces.

About the author

Ivo Verhoef is Assistant Marketplaces at Brandsom and has a Masters Degree in Politics, Society and Economy of Asia from Leiden University. He is interested in the rapidly changing marketplaces of China, in particularly how we can learn from their innovation. 

Bibliography

Academic Sources:

  • Bocock, Robert, Consumption (1993).
  • Bryman, Alan. “The Disneyization of society.” The Sociological Review 47.1 (1999): 25-47.

Websites:

YouTube Videos: