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AMAZON IN CHINA Entry mode selection Contents: 1. Amazon. com: Background leading up to the decision. 2. China: Endless possibilities. 3. Amazon in China: Entry mode selection and strategy. 4. Partnership with Joyo and current status. 5. Appendix (NOTE: While background information is meant to be an appendix and not be considered in terms of required word count, the decision was made to place it at the beginning for a much better flow of the project. ) 1. Amazon. om: Background leading up to the decision. In the mid 1990’s, a time where the Internet was booming and it’s use as a channel for commerce was becoming prevalent in society; many companies and entrepreneurs turned to the World Wide Web to conduct their business. At this time, in 1994, Jeff Bezos, president of a Wall Street firm read a report that projected growth of the Internet by 2,300% and he quit his job to write a business plan that one year later would become Amazon. com.

Out of a list of items he believed could be easily sold online he ended up choosing books due to the great size of the market, vast amount of offering available and because of the low price that could be offered for them. Within one month of operation, Bezos had shipped books to the 50 states and over 47 other countries. This was proof to him of the possibilities his business had thanks to the scope of the market reach the internet provided and he proceeded to move out of his garage and into a Seattle office where all operations would be handled.

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Amazon’s operations were very innovative for the industry as unlike competing bookstore giants they only held about 2,000 titles in their warehouse. They passed orders received through the website directly to publishers and suppliers who sent them to Amazon’s office to be shipped to the client. Also, taking advantage of his role as a pioneer on the online business front Bezos hoped to make his company a benchmark to what e-commerce should be like and he strived to make his business as customer friendly as possible.

An example of this was the very successful recommendations feature based on previous purchases, which many businesses continue to imitate to this day and also the product review feature, which let customers provide and read other’s opinions about the book they were considering and at the time was revolutionary. A year later Amazon pioneered a marketing strategy that would once again be imitated by a vast number of e-platforms; the associates program, by which web owners could sell Amazon products on their sites and then get a commission for doing so. 997 was a very eventful year for the company; it went public and it opened a new distribution center in Delaware which not only put it closer to customers and publishers diminishing the time it took to get books into the center and to get books from the center to customers but also it expanded the capacity of the Seattle warehouse by 70% resulting in much faster processing. All of these features combined into a new goal that would serve as one of Amazon’s most important differentiating factors into the future; same day shipping of stocked items.

All the above mentioned strategies set the stage for the company Amazon was to become; in 1998, with a growth of 564% in new customer accounts over the previous year and a catalogue of over 2. 5million titles the company became the third largest bookseller in the states and begun it’s international expansion through the purchase of Bookpages, one of the largest online booksellers in the United Kingdom, Telebook, the largest online bookseller in Germany.

After this acquisitions the company continued to grow through a series of strategic moves that would take it into other product segments such as movies and music however as big as their presence was, the company had yet to make a profit. “After seven years and more than $1 billion in losses, Amazon is still a work in process. ” Read a 2002 Business Week article. However, by the end of that same year they were excited to finish with $3million above the red.

This profit was mostly coming from their Japanese site where they implemented their secret weapon which was already accounting for 23% of sales in North America, the first step into what would lead them to become one of the world’s biggest online sellers; The marketplace, where users and retailers could put items for sale thus immediately expanding their product categories to anything anyone could think of, all backed up by Amazon’s warranties. ? (The robot above is an example of how Amazon tailors it’s marketing and experience to each particular culture; the Japanese were the initiators of the toy robot movement) It is indeed a very very major strategic step in driving our mission to offer our customers the best shopping experience in convenience, in selection as well as in value” * Amazon Japan’s president Jasper Cheung. After this success they proceeded to look for greener pastures where they could apply all that they had built and actually start getting rewarded for it. China’s predictions for growth were too big to be ignored any longer and it looked like the natural next step for the company to take. 2. China: Endless possibilities.

China is a major global economic force and will grow dramatically in the foreseeable future, however, E-shopping was at first much slower to take on in China than in the places such as the Japan and the USA. This was mostly due to lower income levels, difficult access to debit and credit cards making online payment options complicated, outdated infrastructure making it hard to deliver goods on time and the fact that traditionally the Chinese was a culture where shopping involved bargaining and that proved a difficult act to play digitally and also, abrupt changes in regulations led by the government are great concerns.

However, even if just by the sheer size of the population and the speed at which they were adopting the Internet (see chart), these were just bumps along the way to an inevitable boom that no one wanted to miss out on. In fact, companies such as Google and Ebay had already made their entrance and Amazon knew they couldn’t stay behind. In 2003, the number of Internet users in China rose by 800,000 every week, partly promoted by the recent outbreak of the Sars virus which instigated any consumers to stay home to avoid contact and try ecommerce as an alternative to the suddenly out of reach brick and mortar tradition. Also, the e-commerce market was estimated to be worth over $500million and was expected to grow two-fold in the following year. “We have been in the fast lane in terms of number of Netizens and the rapid momentum will continue in subsequent years” * Director of China Internet Network Information Centre (CNNIC), Wang Enhai

Even though only about 0. 15% of the population held debit or credit cards a number of payment options had blossomed, such as local escrow services that credited specific online accounts, making payments easier. All of these factors combined into a pie that could no longer be resisted by Amazon: “People don’t want to miss the boat” * Duncan Clark, managing director of the consulting firm BDA China. And they would now have to decide how to best enter the market. 3.

Amazon in China: Entry mode selection and strategy. Entering a foreign market is a risky move corporations all around the world aim to take, however it can provide great benefits. Before the mode is made, decisions on all levels of the organization have to be taken: * On the corporate level, which involves the highest level of management, the decision on what international market should be targeted is made. * On the division level, decisions on how to allocate resources will be made. On the business unit level, the decision on which consumers segments should be targeted in each market will be made, and also how to go about it. * On the product level, a marketing plan will be developed to decide on specific product line, product or brand attribute. According to David Arnold and his article Strategies for entering and developing international markets, companies choose to proceed into international territories for many different reasons, and these different reasons should result in different strategies being applied at the time of entry.

The most common strategy tends to be referred to as ‘increasing commitment’ and it speaks of a pattern by which market entry starts with selling goods through an independent local distributor or partner and then the commitment to the market escalates until a directly controlled subsidiary is established. This strategy enables businesses to quickly establish themselves in a foreign market while at the same time minimizing risk and giving them time to learn the culture and the market, thus increasing their chances of future success.

The biggest trade-off companies face when entering a new market is between risk and control: Four of the most common ways to enter foreign markets are exporting, licensing, joint venture and direct investment. They all have benefits and disadvantages: Exporting: Partnering with a trading company, agent or local distributor, is beneficial because it requires very low involvement on the part of the exporter; there is no need for offices, employees, warehouses, etc… thus the financial risk, usually the major consideration at the point of market entry is very low.

This strategy is particularly well suited to company’s with minimal international experience as the partner will take care of all the details at the point of sale, however important drawbacks are also associated with it; the level of control is nominal in the case of trading companies and agents and only slightly higher is a done through a distributor. The danger is increased due to the fact that most agents’ aim is to partner up with as many companies as possible thus limiting the effort they will put into the image, promotion and sale of your product, especially if you’re not their biggest client.

Also, this strategy presents a cash flow risk due to the fact that distributors often act on commission and never take ownership of the product, thus not paying the seller until the product is sold, something that may happen weeks or months after they took possession of it. At the time when it considered entering into China, Amazon was already exporting to over 200 nations across the world using the direct exporting method. This strategy, greatly facilitated by the internet’s global reach, is very beneficial for Amazon as it enables it to reach a very broad pool of clients with no additional risk.

However, it also leaves a great deal of untapped potential to be exploited by local competitors taking advantage of your model and tailoring it to the local market by communicating to clients in their own language, from their own country and with a platform and product offering that satisfies their particular needs. Licensing: Licensing is a global expansion strategy beneficial for those with a legally protecting asset that is a key differentiator from their competitors.

It’s beneficial because it can provide access to markets with high entry barriers and also it involves low financial risk and at the same time it enables proprietors of the licensed product or media some degree of control over how it will be used. A company that takes advantage of this strategy is Disney who licenses the image of it’s famous characters for production of thousands of goods beyond it’s core capabilities and then it proceeds to reap the benefit from the sale of these concessions while it focuses on it’s core competencies; media and tourism.

A big risk that companies using this strategy face is the fact that it may lead to the creation of future competitors since trade secrets are being revealed to the licensee and it’s very difficult to keep them contained once they leave the company. This is particularly true in the case of technological ventures and therefore it is only suited to companies with a steady stream of innovation which will constantly leave the imitators behind.

This is the current strategic move of automakers in China for example, who initially begun only producing only older models in the country to keep hold of their new technologies but due to consumer demands ended up giving up and producing the new models there also and now heavily rely on constant update and innovation. This is actually quite beneficial for the consumer as it adds constant pressure to manufacturers to find better ways of satisfying them.

Joint venture: International joint ventures (IJV) are the preferred expansion method of the governments of emerging countries as they enable the enable the transfer of knowledge and technology building local expertise and also they positively effect the balance of trade is goods produced in their countries go on to be exported back to the company’s motherland or anywhere else in the world. Joint ventures can be beneficial for both parties as they provide one with knowledge of skills, production or technology that it would’ve taken them years to obtain and the other with an insider’s expertise into the local market and culture.

However, 70% of IJVs break up within 3. 5 years and this ofen results in the local partners taking advantage of the knowledge acquired to turn into direct competitors. Expansion into the Chinese market is unlike anything Amazon had experienced before as not only was it culturally very different in many ways but regulation wise the government had rules in place that demanded companies engaged in partnerships with local companies rather than set up their own independent subsidiaries.

While this wouldn’t be a problem for Amazon as they had shown preference for this type of strategy in their entry into Great Britain and Germany, the underlying reason for which these regulations existed: So that your technology and knowledge base could be leaked to Chinese manufacturers. This constitutes a big threat for Amazon who relies of it’s various technological features to differentiate themselves from the many other e-commerce platforms around the world. “If China requires that you joint-venture, get a majority stake, control the board and install your own CEO, CFO and HR director.

If you don’t trust your CFO like your mother, give your mother the job. Never joint venture with government entities unless you have no choice. Then understand that this partnership is about China obtaining your technology, know-how and capital while maintaining control. ” * James McGregor’s author of “One Billion Customers” a detailed account of doing business in China. McGregor offers business people from around the world hoping to penetrate the Chinese market the following words of wisdom: * Fatigue, food and drink are negotiating tools.

If your Chinese counterpart wants to finalize a deal after Mao-tai-soaked banquet, it is better to throw up on the contract than sign it. * Foreign business people who come to China often have too much goodwill, too much trust and too little patience. * Don’t mistake language ability with business or management competence. The savviest and smartest Chinese managers often don’t speak English or have a Western university degree. * China is all checks and no balances. Chinese government anti-corruption drives are not cynical exercises. But the effect is minimal because the overall system is almost incompatible with honesty. China has returned to its traditional symbiotic relationship between the merchants and mandarins. Officials clear the way for business. The business people pave the way for officials to accumulate assets. * If you decide to sell your soul and succumb to China’s corruption, get a good price and focus on charity work in your old age. * China’s modernization is aiming at “rule by law” not the “rule of law,” so relationships and personal power reign supreme. * Don’t rely exclusively on the law in China. You will lose. Use laws and regulations to enhance political and business arguments in favor of your position. Avoid the “slobbering CEO syndrome. ” Don’t fall for China’s brilliant use of its huge size and 2,000-year tradition of manipulative political pageantry to intimidate foreigners into accepting unwise deals. * Education is China’s greatest strength and greatest weakness. The Chinese are great memorizers, mathematicians and scientists who run tedious routines. But the rote education system leaves many weak on powers of analysis and leadership. * China’s rush to get rich is accompanied by deep distrust of the system and anyone outside one’s immediate family or circle of close friends.

This has created a business environment that is steeped in dishonesty and in dire need of transparency and fair dispute resolution systems. * China’s greatest management challenges are to create organizations that are not dictatorships, to treat others as equals, to accept responsibility and to share information– all behaviors that have been almost absent. * China is modernizing, not Westernizing. The country’s goal is to modernize but retain the Chinese “essence,” which it is still struggling to define. 4. Partnership with Joyo.

The Seattle-based retail giant spent moths searching for the perfect partner to conquer a market expected to be worth $16billion by 2005 when it finally settled on Joyo. com, which they bought for about $75million in August 2004. “In a relatively short time, Joyo. com has established itself as the leading online destination for books, music and videos in China. We’re happy to be part of one of the world’s most dynamic markets. ” * Jeff Bezos, Amazon’s chief executive Executives at the rival Chinese online shopping firm Dangdang. om took offense by the above comment as many measures such as Reuters placed them as the number one e-commerce platform for the sale of books based on factors such as name recognition and website traffic. Also, they were quoted as saying they rejected an earlier offer from Amazon to take a majority stake in the firm for as much as $150m to which Amazon refused to comment on. The failed first bid attempt into the Chinese market was due to the fact that Amazon refused to own anything less than a majority stake, which as evidenced by the information above, is a necessary measure to avoid future complications.

Amazon decided to seek other options and it moved on to make a bid for the purchase of Joyo. After six draining months of failed negotiations with Dangdang they had raised their stakes and a majority share was now longer enough; now they wanted it all. For about $75million they successfully purchased four year old company Joyo from it’s two major investors Lenovo and Kingsoft . With several hundred employees, a distribution system and three fulfillment centers that fed small, local delivery centers the company had managed sales of over 300million CYN for the year.

As things would turn out, Joyo was a much better match for them than Dangdang was; built on the spirit of providing customers with the best possible prices, and having recently decided that it’s goal was to be an online Wal-Mart, it had built a strong reputation around itself that fit perfectly into Amazon’s values. This low cost reputation was especially beneficial to Amazon as an American company entering the Chinese market, as often times, foreign companies were perceived to have higher prices than local ones by the very price-conscious Chinese consumer.

Also, this reputation was the perfect stepping stone for Amazon to add to it it’s technological expertise in providing the best shopping experience. With two of it’s core values covered, low cost and excellent shopping experience the final one to consider was product offering, and Amazon’s deep pockets aided by Joyo’s local know-how would certainly enable to them to build a product selection comparable or even greater than the one they had in their home market.

The success of Amazon in the Chinese market would greatly depend on how well they managed to implement the above-mentioned additions, and this would greatly depend on how well they handled their relationships with the local company. Cultural differences pose a big threat for all companies aiming to establish themselves in foreign lands and many have failed because they didn’t lever them correctly. Amazon would have to strive to keep the balance of power in order to profitably combine Joyo’s local expertise and reputation with their own technological advantages and deep pockets.

They attempted this for example by giving preference to the Joyo logo and brand name over their own. Joyo Logo 2006: Joyo Logo 2007: They implemented changes internally and in their website but they kept the brand Chinese consumers were loyal to in place. It wasn’t until 3 years later when they decided to add the Amazon logo to Joyo’s, and even then they kept Joyo’s as they kept Joyo’s as the most visible one (see above). This is a smart move because it that many companies ignore as many Chinese consumers are not as trusting with foreign brands as they are with local ones and keeping the local brand shows respect for the culture.

In 2007, Joyo Amazon was still not profitable. However, this was also the case for years preceding Amazon’s USA’s great current success and president Jeff Bezos declared to be happy with the performance and the potential of Joyo and said he had no intention of backing down: “ With something growing this fast and doing this well, as far as investment goes, we would like to double down, double down is a term used in backgammon, which means when you like the odds, you want to increase the investment. In 2008, Bezos made his promise a reality in a bold move very similar to Amazon USA’s initial expansion into the West Coast, one of the fundamental keys to their success; Joyo opened a 18,000 square meter operating center in Chengdu. This makes Joyo Amazon one of the B2C companies with the biggest warehouse space in China and it will enable them to reduce shipping time by one to three days and increase their capacity to nearly one million pieces. The fact that it’s creating hundred’s of jobs and countless business opportunities around the area doesn’t hurt either as the Chinese love to engage with companies who give back to the community.

This recent investment, added to all the technological enhancements to customer experience they have in place, puts them a great deal closer to their hopes for great financial reward in the country of endless potential. References & Sources: Class lecture slides Strategies for entering and developing international markets, David Arnold, Oct 17, 2003 Amazon buys into Chinese market, Matt Hines, August 2004 Amazon targets China with Joyo purchase, Juliana Liu, August 2004 Tips for Entering the Chinese Market, Elizabeth Lloyd, April 13, 2006 Joyo Amazon

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