This document provides a case study on why Western digital firms like Amazon and Google failed in China. It analyzes their entries into the Chinese market, business models, and competition faced. Amazon struggled with high operational costs from its inventory-based model, while Alibaba succeeded using a zero-inventory marketplace approach. Google faced censorship issues with the Chinese government blocking search results. The document argues their failures resulted from a lack of understanding of the complex Chinese market and not adapting strategies effectively, rather than single issues. It suggests experimental approaches and accumulating incremental benefits over time may be needed to succeed in China's fast-changing digital environment.

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INTERNATIONAL BUSINESS -ECON F434
WHY WESTERN DIGITAL FIRMS FAILED IN CHINA
CASE STUDY ON AMAZON, GOOGLE
By
Ashrith Grandi
Yeshwanth V

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CONTENTS
ABSTRACT 3
INTRODUCTION 4
DEATH BY THOUSAND CUTS 5
Inside view 5
Outside view 6
Amazon 7
Amazon’s Entry Into Chinese Market 7
Amazon’s Business Model 8
Amazon’s Competition 9
What Amazon did wrong? 10
Google 11
A Brief History 11
The Great Firewall of China 12
Google’s Problems 12
GETTING BACK IN THE GAME 13
Doing everything right isn't enough. 13
Accumulating progressive benefits within the “winner takes all” digital market. 14
Experimental approaches to strategy and innovation. 15
References 16
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ABSTRACT
As opposed to western firms from different areas, which have all made distinctive
dimensions of progress in China, no WIFs, from web indexes, web content suppliers, and
interpersonal organizations to online business and sharing economy stages, have had the
capacity to beat their Chinese rivals and make supportable operational progress in China.
Government oversight and control and social contrasts among China and the West are
frequently referred to as the principal purposes behind such disappointments. However,
comparative conditions existed in different nations, for example, Indonesia, Thailand, or
Saudi Arabia, which did not counteract ​WIFs​, for example, Google formed an overwhelming
90 percent of their inquiry markets. Existing global business hypothesis, the
Ownership-Location-Internalization (OLI) varied worldview, neglected to offer conceivable
clarifications.
The hypothetical and administrative ramifications are talked about in this article.
Research ought to analyze the key factors that prompted the efficient disappointment of
WIFs in China, especially by testing recommendations and growing new hypothetical
structures. The exercises from this examination will reveal insight into our comprehension
of globalization techniques in fast evolving enterprises, with potential ramifications for
general administration speculations in the computerized age.
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INTRODUCTION
Many leading American digital companies, together with Google, Amazon, eBay, and Uber,
have success dilated internationally by introducing their products, services, and platforms
in different countries. However, they have all been unsuccessful in China, the world’s
largest digital market.
The primary reason for the failure is cited as Chinese censorship and cultural difference
between emerging China and developed western countries. Of course, these factors played
a role in the failure of these firms but most of the reasons were oversimplified.
Google, for instance, has penetrated remote markets that have profoundly unique political
frameworks and societies (counting Indonesia, Thailand, and Saudi Arabia). Also
“censorship and cultural difference” have not ceased Western multinationals from
prevailing in China in vehicle producing, quick moving buyer merchandise, and even areas
where culture assumes a key job, for example, brew, coffeehouses, cheap food, and the
film industry. There are more profound explanations for the methodical disappointment of
Western advanced firms in China. (The expression "digital firms" alludes to those
organizations that from their commencement have concentrated on advanced
administrations empowered by the web and related advances, including versatile. It does
exclude conventional IT firms that depend on offers of equipment or programming as their
fundamental wellspring of income).
To figure out the reasons a detailed study of the firms, competition, and strategy becomes
a vital part of the research. What can firms do differently this time to succeed?
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DEATH BY THOUSAND CUTS
This statement can be understood by taking two views into consideration ​Inside
view​, ​Outside view​. These views help us to classify all the reasons why Western
digital firms failed in China. These terms are coined by Nobel laureate ​Daniel
Kahneman.
Inside view
To start with, interviews were led with 40 senior business administrators from six
driving Western computerized firms (Google, Yahoo, eBay, Amazon, Groupon, and
Uber) and their relating direct rivals in China (Baidu, Sohu, Taobao, JD.com,
Meituan, and Didi). This was expected to distinguish within perspective on the
wonder. The overall account rising up out of these meetings focuses on an absence
of vital assurance and tolerance by Western advanced firms as the fundamental
driver of their disappointment. This is reflected in seven elements:
● Absence of a profound (enough) comprehension of the Chinese market.
● Poor administration of relations with Chinese controllers and the legislature.
● Doomed endeavors to force worldwide plans of action unsuited to the
Chinese market
● Inability to adapt to the very wild challenge in China
● Inability to oversee relations viably with nearby colleagues
● Forcing innovative stages created for the U.S. showcase on China
● Excessively concentrated authoritative structure's prompting moderate basic
leadership
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Outside view
Second, 185 seasoned expert observers were interviewed in China to identify the
outside view ​on the phenomenon. This was portrayed in Chinese as Bujie diqi (不
接地气), which means these organizations neglected to "​keep their feet solidly on
the ground.​" It led to a series of competitive disadvantages, thereby allowing
Chinese digital firms to race ahead in the fight for market share.
● Failure to address a really sizable amount of native competitors
● Failure to address extraordinarily aggressive and determined native
competitors
● Underestimating the key variations between digital business and different
industries
● Failure to develop and communicate business methods effectively
● Ineffective innovation methods
● Failure to completely enter operations in China
Despite the variations between the inside view and also the outside view, these
factors have converged :
1. Poor understanding of the business surroundings.
2. Ineffective strategy creating and communication.
3. Underperformance operating and execution.
The Western firms’ failures in China weren't because of one specific issue, however
rather to the accumulative effects of multiple factors over time. ​“It’s death by
thousand cuts!”​ remarked a former senior government from eBay.
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Amazon
Amazon is an international e-commerce player selling a large number of products online.
The firm is a market leader within the US, UK, FRG, and Japan. it's a dominant player within
the West. However, has struggled in the Chinese market since the time of its entry into the
Chinese e-commerce business. China’s B2C e-commerce market size is similar to that of the
USA. Here is the latest market share of China’s e-commerce companies
Amazon’s Entry Into Chinese Market
Amazon entered the Chinese market by acquiring the largest Chinese online bookseller
Joyo in 2004 for $75 million. However, Amazon wasn't the first mover in the Chinese
e-commerce business. Alibaba and E-Commerce China Dangdang started their operations
five years before Amazon’s entry. Jingdong (JD.com), that presently holds the second largest
market share in China was started within the same year (2004). Amazon planned to copy its
growth strategy within the US through the acquisition of the local online book retailers and
expand its product portfolio. However, this strategy failed to generate yield for the
company as Joyo was suspected to have indulged in piracy and this made conditions worse
for Amazon. Its competitors were native companies that had in-depth information on the
domestic market. Amazon found it tough to draw in the price-sensitive Chinese shoppers.
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Amazon’s Business Model
Amazon used a similar operational model that it uses globally. Moreover, Amazon China
purchases the inventory from suppliers and stores in its fulfillment centers. Amazon China
and Jingdong have a small proportion of a marketplace model for suppliers to sell their
merchandise on to customers. Presently, Amazon China has seventeen fulfillment centers.
This model puts an extra burden on the Amazon as this increases operational expenses
and also will have a huge impact on working capital. The fulfillment expenses account for
roughly 10 percent of the operational expenses for Amazon and eight of its revenue.
Below is Amazon’s Net income for the past 3 years
Year ended Dec 31 (In Million Dollars)
Operating Income 2015 2016 2017
North America 1425 2361 2837
International (699) (1283) (3062)
AWS 1507 3108 4331
Consolidated 2233 4186 4106
As mentioned Amazon never made a profit from its International operations and scenario
in China is no different.
Reason for losses given in Amazon’s annual report
The increase in International operating loss in absolute dollars in 2016 and 2017, compared
to the comparable prior year periods, is primarily due to increased levels of operating
expenses to expand our fulfillment network
Clearly, Amazon is investing a lot of capital to improve its fulfillment network but still not
able to compete in China because of the very different competitors strategy
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Amazon’s Competition
Alibaba is Amazon’s biggest rival and market leader in China’s e-commerce space. Alibaba’s
business model is very different from that of Amazon’s and is the primary reason why
Amazon is not able to compete with it.
Zero Inventory Model
Alibaba uses Zero Inventory Model where it doesn’t store any inventory rather it just acts as
a middleman between buyer and seller. Alibaba offers a fee-free marketplace for sellers to
list their products. It charges no extra fee from either the seller or the buyers. As this is
open marketplace sellers offer competitive prices for the customers which Amazon is not
able to achieve
Alibaba’s Ecosystem
Alibaba uses technology extensively and has built the whole ecosystem of service with its
technological innovation. It provides integrated payment system, logistic optimization to
reduce delivery times, data and other tools for sellers to improve and get insights from it
Payment System
The payment system is at the core of any e-commerce business and Alibaba’s payment
system allows customers to make transactions at almost free of cost. Alipay, A digital
payments solution by Alibaba has a market share of approximately 50 percent
How Alibaba makes money?
● Advertising
○ It allows advertising on its main page, on related search queries
● It charges an extra fee to the sellers who wish to have their products appear high on
search rankings
● Other services like Alipay, Alibaba cloud, etc.,
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What Amazon did wrong?
● Price Sensitivity
○ Amazon was not able to compete with fierce competition between local
merchants which brought prices to very low levels on Alibaba sites
● Friction between Local Leaders and Headquarters
○ Not allowing local Chinese business leaders autonomously who better
understand the local market
○ Even today there is a conflict of interest between Chinese leaders and
headquarters
● Not offering any services tailor-made for the Chinese market
○ China has problems which are not faced in a country like the US. E.g,
Payments using debit and credit cards is not economical and very high
transaction charges around 10-15 percent. Alipay, JD.com solves this problem
by offering digital payment solutions at very less or no extra charges
● Not creating an image of a local Chinese company
○ Amazon never launched a service locally in China
○ People in China have a tendency of preferring a Chinese company over other
foreign competitors
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Google
A Brief History
Google entered China with an aspiration of capturing the global market in 2000. Google
created a Chinese version of google.com
Reasons for Google entering China
● Rapid growth in the population who has access to the Internet
○ China has 103 million internet users in 2005 which constitutes to 11 percent
of the world’s online population
○ Most of the users used the internet to seek information mostly with the help
of search engines
● Emerging search engine market
○ As the number of people using the internet is predicted to grow
exponentially google saw an opportunity as there are no better search
engines than google in the market
● A need for fast and local search engine
○ Surveys have shown that China users are interested in obtaining news from
western sources, Google news would have helped the company attract the
users
Today’s China search engine Market
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The Great Firewall of China
China monitors all the internet traffic that tries to access sites which are hosted outside
China. Being a communist, China’s government tries to control the information that the
public has access to. For instance, the Chinese government denied the Tiananmen Square
massacre and doesn’t want the information to be available to the public. Since Google
doesn’t have any office set up in China, the Chinese government has no legal authority to
demand Google to filter its search results. This posed a problem to the government as
search results included banned sites and people started to know the censorship of the
government. Eventually, In 2002 the Chinese government decided to ban Google. Google’s
executives suspected the ban was instigated by one of its rival Baidu. Some American
executives believe that Baidu has benefited from the Chinese government covert
operations. Google shut its operations temporarily in 2010
Google’s Problems
Google wants to provide information to all users transparently and without any bias. From
Google’s point of view, there are two main reasons for shutting down its operations
● Lack of transparency in the Chinese government
● Censorship by the Chinese government
Even though Google is behind Baidu 95 percent of people use Google services and other
products
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GETTING BACK IN THE GAME
Are Western digital companies forever doomed to fail within the Chinese market? The
solution, of course, is ​No​. The issues don't seem to be insurmountable, however, the scale
and dynamism of the Chinese digital market recommend that any solutions that focus
solely on those issues are unlikely to be adequate. The competitive benefits that have
served Western digital corporations well in different countries ought to be recalibrated for
the Chinese market.
1. Doing everything right isn't enough.
China has vast geographical disparities and socioeconomic variations across its regions. Its
institutional surroundings and market preferences evolve speedily and typically even
unpredictably. Dominating and maintaining dominance in China poses distinctive
challenges. in contrast to different digital markets, doing everything right in China is
commonly not enough to ensure success, because of robust competition.
Take ​Uber​, Before getting into China, Uber senior leaders did their preparation rigorously
to avoid the mistakes that had derailed several different (digital and other industries)
international corporations. Uber started a extremely autonomous Chinese subsidiary;
partnered with China’s largest computer programme, Baidu; committed vital capital and
paid out ​$2 billion​ in subsidies to win market share, and offered services specially tailored
to the Chinese market. Uber’s founder and CEO at the time, Travis Kalanick took a active
role and spent over ​20 percent​ of his time in China.
Despite all this, Uber finally retreated from the Chinese market. What went wrong? It's hard
to pinpoint anyone failure on Uber’s half. One notable challenge, however, is that for the
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first time, Uber met a real competitor: ​Didi Chuxing​, that was a lot more determined, had a
bigger money reserve, and centered solely on China at that point. Uber sold its operation
to Didi Chuxing. This case suggests that merely addressing every of the noted mistakes
created by different multinationals within the past is usually not enough to ensure success
within the future. A additional holistic approach is required.
2. Accumulating progressive benefits within the “winner
takes all” digital market.
Whereas radical innovations in product, business models, and technologies capture the
foremost headlines, because of their importance to the long-run aggressiveness of digital
corporations, what’s typically unnoticed is that accumulating incremental benefits across
totally different areas of competition over time is at most essential for survival.
The digital market is considerably completely different from alternative market sectors.
Western digital corporations had solely very little history to determine any large noticable
benefits. The main focus of digital corporations is on product and business model
innovations, and taking into case of the comparatively low technological entry barriers,
allowed a really sizable amount of Chinese competitors to start and one more reason is a
very low sunk cost. As a culture market, China favors localised corporations, as they're
usually well versed at understanding users and therefore the business surroundings. Local
based corporations also are better at managing relationships with regulatory bodies and
thereby influencing and anticipating restrictive changes. The technologies and intellectual
property are also easily imitated due to the different laws regarding patents and very low
sunk cost compared to different industries like automobile.
In the “​winner takes all​” digital market, wherever sometimes only 1 or 2 players survive in
every market niche, incremental benefits would snowball and have increasing returns to
scale. The additive result from any such advantage will become what separates winners
from losers.
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3. Experimental approaches to strategy and innovation.
The large uncertainties within the speedily evolving digital markets involve experimental
approaches to each strategy and innovation. New ideas and concepts would become
obsolete before they're totally enforced, requiring frequent recalibration of the course and
destination of business strategy. Innovation through experimentation and improvisation is
important for fulfillment . However such experimental approaches are solely possible with
robust autonomy by local management, local product and technical groups, and, in several
cases, business models customised for the Chinese market.
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References
● Harvard Business Review
● Televisory Research
● Google's China Problem (and China's Google Problem) - Newyork times
● A Case Study on International Expansion: When Amazon went to China
● www.marketchina.com
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