Government Interventions (Amazon Out of China)
Government intervention is a practice followed mostly in mixed and planned economies. It basically means that market decisions regarding output, prices and other production-related factors are made by the government instead of the private owners. It often makes it difficult for businesses to aim at maximizing their profits and if situations get worse, the business might even be forced out of the market.
Amazon entered China in 2004 with high hopes of dominating the market. The entry strategies implemented by Amazon were well planned out and for quite some while, amazon enjoyed high market shares and good revenues in the Chinese market. Overtime however, the competition faced by Amazon increased and it was evident that the Chinese customer base was more relevant to the rival firms such as Alibaba and JD.com. In July 2018 Amazon announced that it will be leaving the market of China and customers will have to order stuff from other international sites of Amazon. “We are notifying sellers we will no longer operate a marketplace on Amazon.cn and we will no longer be providing seller services on Amazon.cn effective July 18,” the company gave the statement to financial times. (Kharpal, 2019)
Besides tough competition, Amazon was also facing issues due to extreme government intervention in the Chinese Market. China practices a socialist approach for its businesses and some of the government interventions that drove Amazon out are as follows:
Chinese government places high taxes on imports from international markets, especially USA. (Gallagher, 2019) mentions that in 2019, China placed a total tax of $75 billion on US goods. This increased the risks for Amazon’s goods and the total sales turnover of the company was affected. Due to the taxes imposed on the goods by the Chinese government, the competition faced by Amazon increased significantly. Alibaba and other rivals such as JD.com were providing cheaper goods to the customers and therefore were attracting more customers, decreasing Amazon’s total customer base. Amazon could not enter into a set tax agreement with the Chinese government due to the socialism. According to (Lori, 2014) import prices of similar product when shipped from USA cost around $15, while when exporting a similar product to USA, it was only $1.5.. Overtime, the competition increased to an extent that it became impossible for Amazon to fight back and gain market domination. It even made an even lower sales turnover in China compared to that in Japan, which was the smallest market for Amazon. This compelled the company to exit the Chinese market in 2018 as reported by (Gallagher, 2019). (Kirby, 2016) states that Uber was also forced to leave the Chinese market due to extreme competition from the rival local company DiDi, which eventually took over Uber China.
State Capitalism (Subsidies)
(Kirby, 2016) states that Chinese government favours local businesses and provides huge subsidies to help them grow and establish dominance in the market. Uber China also entered the market through a huge autonomous subsidy but then faced huge competition by the local business DiDi and was forced to exit the market; this was reported by (Kirby, 2016). Industrial subsidies in key Chinese manufacturing industries exceed thirty percent of industrial output (Haley, 2013).This helps the local businesses in China to grow and gain maximum market share. Amazon was facing problems with customer preference and adjusting to the different policies of the Chinese Market; such as ban on certain products, advertisement rules, taxes and so on. Furthermore, with the added pressure of cost based competition, Amazon lost the market share and its Chinese market share dropped from 15.4 percent in 2008 to 0.6 percent (Beijing Review, 2019). According to (Hadjiyski, 2019) local competition was attracting most of the customer base and in order to compete with them, amazon had no other choice but to decrease prices. This however was not a successful strategy as the burden was falling back on the profits of the company. High costs and low profits drove amazon out of china.
REFERENCES (Harvard Referencing, Australia)
Beijing Review, 2019. The Truth About Amazon China. [Online] Available at: http://www.bjreview.com/Opinion/201904/t20190427_800166339.html.
Gallagher, K., 2019. CHINA AND AMAZON.
Hadjiyski, L., 2019. Making It Big in China. Business Today Online Journal.
Haley, G.T., 2013. Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy.
Kharpal, A., 2019. Amazon is shutting down its China marketplace business. Here’s why it has struggled.
Kirby, W.C., 2016. The Real Reason Uber Is Giving Up in China. Harvard Business Review Home.
Lori, K., 2014. Chinese Sellers Pay NO Taxes – Why? [Online] Available at: https://sellercentral.amazon.com/forums/t/chinese-sellers-pay-no-taxes-why/231221.