Alibaba and Amazon hit India

Source: https://www.economist.com/news/special-report/21730539-e-commerce-giants-are-trying-export-their-success-alibaba-and-amazon-look-go-global

IN SEPTEMBER 2014 Jeff Bezos announced his first big investment in India, hopping aboard a colourful bus in Bangalore. It was the start of a rapid $5bn investment in India, part of Mr Bezos’s plans to take Amazon global. Two months later Alibaba’s Jack Ma appeared in Delhi. “We will invest more in India,” he declared. The following year Alibaba put $500m into Paytm, an Indian digital-payments company. This year it led a fundraising round for Paytm’s e-commerce arm. The two giants seem set for an epic clash in India.

But in their home markets they have so far stayed out of each other’s way. Amazon has only a tiny business in China. Alibaba’s strategy in the United States has been to help American businesses sell in China and vice versa. “People always ask me, when will you go to the US?” says Alibaba’s CEO, Mr Zhang. “And I say, why the US? Amazon did a fantastic job.” The two firms have mostly invested in different foreign markets: Alibaba across South-East Asia and Amazon across Europe. But much of the rest of the world is still up for grabs.

The biggest tussles will probably be over growing economies and cross-border commerce. Alibaba aspires to serve 2bn customers around the world within 20 years—a benevolent empire that supports businesses. In some cases it has begun with digital payments, as in India with Paytm. In others it has invested in e-commerce sites, as with Lazada, in South-East Asia. But it intends to build a broad range of services within each market, including payments, e-commerce and travel services, and then link local platforms with Alibaba’s in China.

Mr Ma wants to enable small firms to operate just as nimbly as big ones on the global stage. Alibaba helps Chinese companies sell in places such as Brazil and Russia, and assists foreign firms with marketing, logistics and customs in China. Eventually it hopes to use its technology to link logistics networks around the world so that any product can reach any buyer anywhere within 72 hours. That is still a long way off, but it gives a glimpse of the company’s staggering ambition.

Amazon already earns more than one-third of its revenue from e-commerce outside North America. Germany is its second-biggest market, followed by Japan and Britain. This year it bought Souq, an e-commerce firm in the Middle East. Its criteria for expansion elsewhere include the size of the population and the economy and the density of internet use, says Russ Grandinetti, head of Amazon’s international business. India has been one of its main testing grounds.

Amazon, like Alibaba, also wants to help suppliers in any country to sell their products abroad. An Amazon shopper in Mexico, for instance, can buy goods from America. Mr Grandinetti sees such cross-border sales as an increasingly important component of Amazon’s value to consumers and sellers alike.

Yet both companies run the risk that strategies which did well in their home countries may not succeed elsewhere. In China, for instance, the popularity of e-commerce relied on a number of special factors. China’s manufacturers often found themselves with excess supplies of clothes and shoes; Alibaba provided a place to sell them. Alipay thrived because few consumers had credit cards. China has also benefited from having cheap labour and lots of big cities—more than 100 of them with over 1m people—creating a density of demand that made it worthwhile for logistics firms to build distribution networks.

As they expand, however, Amazon’s and Alibaba’s business models may shift and, in some markets, start to converge. So far the companies have differed in important ways. Amazon owns inventory and warehouses; Alibaba does not. But Alibaba has a broader reach than Amazon, particularly with Ant Financial’s giant payments business. As Amazon grows, it may become more like Alibaba. In India, for instance, regulations prevent it from owning inventory directly. And Amazon recently won a licence from the Reserve Bank of India for a digital wallet. Alibaba, for its part, may become more like Amazon. As the Chinese firm set its sights on South-East Asia, it invested in SingPost, Singapore’s state postal system. In September it became the majority owner in Cainiao, a Chinese logistics network, and said it plans to spend $15bn on logistics in the next five years.

Their advances may be slowed by other rivals. Smaller firms can flourish in niches. Flipkart, whose backers include Naspers and SoftBank, is competing fiercely with Amazon in India; the two companies routinely bicker over which has the bigger market share. Yoox Net-a-Porter, an online luxury-goods seller, is also expanding around the world.

Among the questions facing the two giants are whether other technology firms will pour more money into e-commerce, and what partnerships might emerge. Tencent’s WeChat Pay is already challenging Alipay in China. About one-third of WeChat’s users in China shop on that platform. Tencent is trying to recruit shops to accept its payment app in other countries, too, and recently took a stake in Flipkart. In deploying its services abroad, Tencent might get a helping hand from Naspers. The South African company owns about one-third of Tencent and has backed e-commerce firms around the world. Facebook is now muscling in on this business by making it easier for its users to buy goods through its messaging service as well as its other platforms, WhatsApp and Instagram.

The A-list still stands

For now, however, Amazon and Alibaba remain each other’s most formidable international rivals. Success in e-commerce requires scale, which needs lots of capital. Local e-commerce firms in India have come under pressure from investors to boost profitability. Amazon has no problems on that score. As Amit Agarwal, head of Amazon India, puts it: “We will invest whatever it takes to make sure we provide a great customer experience.”

Big firms also have a natural advantage as they expand, because technologies developed for one market can be introduced across many. “It’s like a Lego set,” says Lazada’s chief executive, Maximilian Bittner. He can use pieces of Alibaba’s model, such as algorithms for product recommendations, to improve Lazada’s operations. Amazon’s investments in machine learning have myriad applications anywhere in the world.

That does not mean that Amazon and Alibaba will dominate every country around the world, nor that they will crush every competitor. Bob Van Dijk, chief executive of Naspers, maintains there is room for many operators: “I don’t believe in absolute hegemony.” But given the two giants’ ambitions and the benefits of scale, they are bound to become more powerful and compete directly in more places. That has implications for all sorts of industries, but particularly the retail sector.

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