Business

10 March 2015

China's way or the highway 

Amazon has agreed to open a shop on the Tmall sales website of Alibaba in what appears to be a tacit acknowledgement that the retail giant cannot challenge the dominance of its Chinese archrival on its own turf. It also perhaps recognizes that for all China’s apparent potential, it is not an easy market for foreign companies to penetrate.

Alibaba’s online marketplaces, including Tmall and Taobao, account for more than 70% of China’s online sales, leaving rival JD.com another 20%. Amazon, then, faces a relatively small piece of the pie. Analysts at UBS recently concluded – apparently presciently – that the online retailer’s best strategy would be to forge a deal with one of the domestic firms.

Amazon is not the only Western company to encounter problems in China. Walmart acknowledged last year that performance there was its worst in any major country, leading to a management shake-up and job cuts. Britain’s Tesco has also struggled against strong domestic competition, while technology companies hurt by Beijing’s policies on cybersecurity have sought White House help.

China has rarely proven to be the treasure trove that companies expected, partly for structural reasons. The economy is not growing as fast as in the past; the official target for this year is 7%, but some economists believe the real figure may be far lower. Meanwhile, for ‘core’ products, Chinese companies may benefit from better knowledge of their domestic market.

Shareholders are unlikely to be impressed these days with mere talk of Chinese expansion; it must be well targeted and differentiated. China remains an exciting market, but slower growth and stronger incumbents means non-domestic companies must develop a clear and coherent strategy.