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MAIN issues and global analysis. When you write the paper you must support it with facts. show me numbers. Case discussion question: 1. Did Amazon succeed in China? What did it learn? Amazon in Emerging Markets Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan. ©2014 Amy Nguyen-Chyung and Elliot Faulk. This case was written by Elliot Faulk and Amy Nguyen-Chyung (Assistant Professor of Strategy) of the Ross School of Business at the University of Michigan. It was created as a basis for class discussion, not to illustrate either the effective or ineffective handling of a business situation. Secondary research was performed to accurately portray information about the featured organization and to extrapolate the decision points presented in the case; however, company representatives were not involved in the creation of this case. In the spring of 2014, Amazon.com, Inc. (“Amazon”), saw its chief competitor in China, Alibaba Group, file documents with the SEC for an initial public offering (IPO) that could be one of the largest in history. Meanwhile, its main competitor in Brazil, MercadoLibre, sustained an approximate 40\% loss in stock price despite several years of profitability. On top of this, its two chief competitors in India, Flipkart and Snapdeal, formed separate mergers with other related firms. The intense battle for control of a country’s e-wallet was nothing new to Diego Piacentini, senior vice president of International Consumer Business, and Jeff Bezos, founder and CEO. In 2013, their decision to launch Amazon.in marked Amazon’s eleventh country-specific portal after nineteen years of operation. China was Amazon’s first emerging market website, and India only its third. Compared to its experience in China and Brazil, Amazon followed a different business model and strategy in India. What led to the differing approaches and which, if any, of Amazon’s emerging markets’ strategies and investments would succeed? The case starts by examining Amazon’s entry into India and then turns to Amazon’s experience in China and Brazil. Amazon’s International Expansion Incorporated in 1994, Amazon had evolved from a small online vendor of books and other information- based products in 1997, into a global “customer-centric” company serving consumers, sellers, and developers with operations in twenty-two countries. Amazon’s international expansion started in 1998 when it acquired Bookseller, Ltd. (bookseller.co.uk) in the United Kingdom and Telebook, Inc. (telebuch.de) in Germany. These two sites gave rise to what became Amazon.co.uk and Amazon.de, respectively. It was early in 2000, during this initial European expansion, that Amazon hired Piacentini, who had been Apple’s general manager for Europe. Since his hiring, Amazon launched nine other country-specific websites in Italy, France, Spain, Japan, China, Mexico, Brazil, Canada, and Australia. (See Appendix A for Amazon’s country-specific web pages.) In several other countries, from Costa Rica to South Africa to Australia, Amazon located customer service, software development, fulfillment, data centers, or back office operations. In 2013, Amazon’s Germany, UK, and Japan sites accounted for 85\% of total international revenues of $30.0 billion. Overall, Amazon’s international markets (excluding its Canadian site) made up 40\% of case W94C01 August 1, 2014 Revised November 7, 2019 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 2 Amazon in Emerging Markets Amazon’s total revenues of $74.4 billion (see Appendix B1 for consolidated financial results). However, despite a growth of 14\% in net sales between 2012 and 2013, Amazon’s international business had seen a period of declining rate of growth since 2011 (see Appendices B2 and B3 for a geographic breakout). Would this declining growth rate foreshadow what was to come for Amazon’s international markets, or be merely water under the bridge according to Bezos and Amazon’s “marathon” mind-set of emphasizing customer service and long-term gains in sacrifice of short-term profits? The Indian E-Commerce Market On June 5, 2013, Amazon officially entered the Indian market with the launch of Amazon.in. Although the Indian government had liberalized its strict foreign direct investment (FDI) laws in September 2012, the resulting regulations still forbid foreign multi-brand retailers from having over 51\% ownership.1 As a result, Amazon could not replicate its US business of selling its own products in addition to serving as a selling platform for third-party vendors. In India, Amazon would only be able to function as a pure marketplace that would connect domestic sellers to buyers in the market. For Amazon, these FDI considerations would be only the first hurdle encountered in the nascent but fast-growing Indian e-commerce market. According to World Bank data, as of 2013 India had approximately 189.1 million internet users (15.1\% of the 1.25 billion population) compared with only 60.7 million (5\% of the population) just four years earlier (see Appendix C for a list of Internet users per 100 population for select countries; see Appendix D for mobile cellular subscriptions). The Associated Chambers of Commerce and Industry of India estimated the Indian e-commerce industry at $16 billion in 2013, a large increase from estimates of $8.5 billion in 2012 and $2.5 billion in 2009.2 On the other hand, Forrester Research reported that Indian e-commerce was worth only $1.6 billion in 2012 after online travel sales were factored out of the estimates.3 Fast growth was less debated; analysts from the Indian retail consultancy Technopak believed that the country’s e-commerce industry could grow 61 times over the next decade.4 Overall, mom-and-pop stores dominated India’s half-trillion-dollar retail market. According to Deloitte’s India group, organized retail in India comprised only 17\% of the market versus over 85\% of the market in the US.5 Moreover, in addition to stringent laws on FDI, India still had considerable import duties on certain foreign products. According to the International Chamber of Commerce, India ranked 64th out of 75 countries for overall trade and FDI openness in 2013.6 In terms of transportation infrastructure, many of India’s roads were in poor condition and overly congested. Even on the better roads, such as between New Delhi in the north and Mumbai on the western coast, driving took almost twice the amount of time it took to drive the same distance in the US, according to Google Maps. In addition, nearly 70\% of India’s population lived in remote rural areas, which in some cases had limited access to major highways. Thirty-three percent of villages in India, primarily in the northern states, lacked all-weather roads, making them almost inaccessible during the monsoon season.7 Furthermore, addresses in India were notoriously difficult to find due to non-sequential numberings, lack of street signs, and narrow, winding streets. It was instead commonplace in India to describe locations with directions via landmarks.8 Retailers had tended to prefer commercial airfreight for delivery, but this option had led to increased delivery costs and a high risk of merchandise being offloaded to accommodate passengers.9 Over the past few years, India had experienced a series of major power failures allegedly due to a shoddily constructed electricity infrastructure. For example, in soaring temperatures in New Delhi on June 10, 2014, 16 million people were subject to power blackouts due to unmanageable demand.10 This power failure came only two years after a record-breaking electricity crisis in 2012 in which 600 million people W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 3 Amazon in Emerging Markets were left without power for two days.11 India also still had a highly impoverished population. In 2013, Organisation for Economic Cooperation and Development (OECD) researchers estimated that 42\% of India’s 1.24 billion people lived on less than $1.25 a day, reflective of its $4,000 GDP per capita.12,13 Much of India’s growth in computing and consumer spending, however, came from a growing middle class of over 160 million people.14 The Brookings Institution predicted that India’s middle class consumption would surpass that of the US by the year 2030.15 However, despite a growing population heavily involved in spending, cash payments remained dominant over credit or debit card payments in day-to-day commerce in India. Business Today cited that people in India averaged only six non-cash payments each year. As a result, a “cash on delivery” system had become widely accepted in the e-tailing space and accounted for roughly 50\% to 80\% of all e-commerce payments.16 Competition in India The Indian e-commerce market’s promise of rapid growth had already attracted several players, domestic and international, to the Indian e-tailing scene. Some of the largest in terms of revenue and market share included Flipkart, Snapdeal, and eBay. Flipkart In 2007, two ex-Amazon employees, Sachin Bansal and Binny Bansal (no relation), launched Flipkart, which became the leading domestic e-tailing company in India (see Appendix E). Having copied some of Amazon’s business model throughout the country, Flipkart’s founders had been able to capture 4.9\% of the very fragmented Indian e-commerce market by 2013 (Amazon held 1.6\% and eBay 1.2\%).17 Flipkart found quick success by developing its own logistics network and by adopting the “cash on delivery” payment option in 2010 in order to adjust to the cash-centric payment habits of Indian consumers. Since its launch in 2007, Flipkart had been dependent primarily on funding from venture capital (VC) firms. Flipkart used the VC investments to expand its product offerings through a string of acquisitions in the Indian online retail space. Its acquisitions included weRead (2010), a book review and recommendation site; Mime360 (2011), an Indian site for digital music, e-books, and online games; Chakpak.com’s catalogue of movies and film ratings (2011); and Letsbuy.com (2012), an Indian online electronics retailer.18 At the end of 2013, Flipkart was valued at approximately $1.6 billion and was selling 100,000 products daily to its 13.22 million unique visitors.19 In May 2014, Flipkart acquired a 100\% stake in online fashion retailer Myntra.com for an estimated $370 million, its largest acquisition. Following the acquisition, Flipkart raised $210 million from Russian venture capitalist Yuri Milner and his firm DST Global.20 This investment added to the nearly $550 million it had previously received from groups such as Dragoneer Investment Group, Accel Partners, Vulcan, Morgan Stanley, Tiger Global, Iconiq Capital, Naspers, and Sofina Capital.21,22 Similar to Flipkart, Myntra heavily relied on funding from private investors including Accel Partners, Tiger Global, Sofina Capital, and Premji Invest. With the acquisition, Flipkart became the largest online fashion retailer in India.23 Snapdeal Although they founded Snapdeal.com as an e-coupon website in 2010 (similar to Groupon in the US), Kunal Bahl and Rohit Bansal decided to revamp their site after a trip to China in 2011 during which they witnessed the dynamic growth of the Chinese e-tailing giant Alibaba. Using Alibaba for inspiration, Bahl and Bansal re-created Snapdeal.com in 2011 as an e-commerce marketplace (see Appendix F). Valued at $1 billion in June 2014, Snapdeal had relied heavily on funding from its investors.24 The largest of these W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 4 Amazon in Emerging Markets was American e-commerce firm eBay, which invested $50 million in 2013 and was the largest investor in Snapdeal’s approximately $134 million round of funding in the first quarter of 2014.25 Other investors in this round included Intel Capital, Saama Capital, Nexus Venture Partners, Bessemer Venture Partners, and Kalaari Capital.26 Attempting to replicate Alibaba’s business model in India, Snapdeal offered 5 million products from over 30,000 sellers—much more than Flipkart’s network of 3,000 sellers as of May 2014. Similar to Alibaba’s logistics strategy, Snapdeal opened 40 fulfillment centers in 15 cities across India where it stored and shipped sellers’ products for a fee.27 Snapdeal planned to open 35 more within the next year.28 Snapdeal had also expanded its reach through several acquisitions. In 2012 it acquired Esportbuy.com, an online sporting goods retailer, and in 2013 it bought Shopo.in, an online handicraft marketplace. In order to stake its position in the high-margin online fashion retailing space, Snapdeal acquired Doozton.com in May 2014, a site that helped users discover popular fashion trends and lifestyle products.29 eBay The American e-commerce giant entered the Indian market in 2005 after it acquired Baazee.com, India’s largest online marketplace at the time, for $50 million plus acquisition costs.30 Initially, eBay took a cautious approach in India while other e-commerce startups were aggressively investing to grab market share early on. In its infancy, eBay.in concentrated only on selling gift items such as chocolates and flowers from third- party traders.31 However, eBay since invested heavily to ensure its place as a leader in the Indian e-commerce market. By 2014, eBay India listed over 2,000 specific product categories from 45,000 traders.32,33 Similar to its model in the US, eBay was functioning solely as a marketplace in India, and offered products for auction as well as for a set price. Much of its investment had gone into logistics options for its traders as well as into other companies. In 2012, eBay.in launched its PowerShip program option, in which eBay coordinated shipping for its member traders among its logistics partners in India—FedEx, BlueDart, DTDC, and Aramex. For set PowerShip rates, eBay’s logistics partners would pick up products packaged in eBay packing material directly from sellers and ship them to the buyers. With PowerShip, sellers could offer prepayment or cash-on-delivery options to be handled by their eBay Paisapay account, an escrow account that transfered money from buyer to seller after receipt of the purchased goods. As mentioned previously, eBay’s investments included funding Indian e-commerce retailer Snapdeal. In return for its investment, eBay acquired permission to access Snapdeal’s 20-million-person user database as well as its logistics network.34 Moving forward, eBay looked to more partnerships with Indian sellers and incorporating them into its global trading network. In April 2014, eBay partnered with the Confederation of All Indian Traders (CAIT) to be the recommended platform for small Indian sellers looking to market their products on the national and international stages. eBay planned to add more traders to its membership list and offer them the option of international export for their products.35 By partnering with eBay, member traders could sell their merchandise through any of eBay’s 39 global sites to over 145 million active eBay users worldwide.36 Amazon’s India Approach Prior to Amazon.in, Amazon already had thousands of employees in India performing customer service, software development and back office functions.37 In addition, in February 2012, Diego Piacentini and Amazon’s VP for International Expansion, Amit Agarwal, led Amazon’s investment in Junglee.com, an online W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 5 Amazon in Emerging Markets product review site that listed over 10 million products, toward the Indian market in 2012. Through the site, customers could compare reviews, pricing, and shipping details for each product listed.38 Piacentini and Agarwal were determined to formulate a strategy that would best leverage their learnings from nearly a decade of operations in China. Rather than making piecemeal investments over their first few years of operation, Piacentini and Agarwal decided to invest big from the start. They recognized that their competitors had a head start of five to nine years to adapt their businesses to the Indian market, and so Amazon needed to develop a competitive strategy. Agarwal brought local knowledge and deep company experience to this endeavor. The Mumbai-born new vice president and country manager for Amazon India had joined Amazon in 1999 after earning his computer science degrees at the Indian Institute of Technology-Kanpur and Stanford University. He rose through the ranks from software development at Amazon headquarters to managing director of Amazon’s Development Center in Bangalore and then “Shadow and Technical Advisor” to Bezos.39 After the launch of Amazon.in in June 2013, much of Amazon’s initial Indian investments went to its core strength in logistics, as the company learned to adjust to the difficulties of distribution in India. Just prior to the launch, Amazon had completed the construction of a 150,000-square-foot fulfillment center just outside Mumbai. It later built one of similar size in Bangalore to serve southern India. With so much of India’s retail space dominated by local mom and pop shops, Agarwal and Piacentini decided to offer a “Fulfillment by Amazon” program in which Amazon enabled sellers to store their products at Amazon distribution centers and have Amazon handle the delivery for a fee. Eventually three out of every four orders on Amazon.in were fulfilled by Amazon.40 Agarwal and Piacentini decided to further differentiate Amazon from its Indian competitors by being the first e-tailer to offer next-day shipping for the orders it fulfilled. In order to compensate for the difficulty of locating addresses and to ensure timely delivery of its sellers’ products, Agarwal also added PIN codes (postal codes similar to ZIP codes in the US) and landmark fields on the delivery information page, reaching 21,000 PIN codes versus other retailers’ 12,000.41 Since Amazon would function solely as a marketplace in India, seller acquisition was a major priority for establishing market share. To attract domestic sellers across India, Piacentini and Agarwal offered sellers a promotion for a two-year membership agreement with the first year free of cost. After the first year, members were only required to pay Rs 499 ($8.27) per month in addition to Amazon’s commission charge of 4\%-8\% (4\% for most electronics, 8\% for watches and jewelry) and a Rs 10 ($0.17) “closing fee” for each transaction. Piacentini and Agarwal also stressed educating Indian sellers on Amazon’s platform and services. For small retailers with little to no online selling experience, Amazon offered a pilot service called “Mainstreaming Sellers/SMEs” to teach them how to transact online, catalogue their products, and accept online payments. In addition, sellers could utilize the “Fulfillment by Amazon” option to give responsibility for delivery to Amazon.42 In order to attract buyers from India’s growing number of Internet users, Piacentini and Agarwal offered multiple incentives for those who referred customers to or bought products from Amazon.in. In the beginning stages of operation in India, Amazon offered free shipping for the orders it fulfilled. It also offered permanent free shipping on all orders fulfilled by Amazon over Rs 499.43 Piacentini and Agarwal also introduced the Amazon Associates Program, which offered a commission to all online publishers (e.g. bloggers, businesses, authors, nonprofits, and personal websites) who directed their viewers to Amazon.in via a link to a “contextually relevant product.” If a purchase was made, the commission for referrals would range between 5\% for consumer electronics and 10\% for most other product categories, such as books and movies, and would cover all purchases made by the referred customer.44 Piacentini and Agarwal also W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 6 Amazon in Emerging Markets attracted buyers by replicating the cash-on-delivery option it had offered in China. In addition to online payment options such as credit cards, debit cards, and bank transfers, cash-on-delivery would allow Amazon customers to pay for their merchandise at the time of delivery. However, this option had tended to delay payments to Amazon up to one week.45 E-retailers in India appeared to be fighting to offer the largest selection of products at the lowest cost and with the fastest delivery times. Just after Amazon introduced next day delivery, Flipkart announced that it would be offering “In-a-Day Guarantee” delivery. Soon after, both companies began to offer same day delivery in a number of cities if ordered before a certain time.46 Amazon and its competitors had further attempted to differentiate themselves through unique mobile features and by entering exclusive distribution agreements with producers. For example, in February 2014, Flipkart signed an agreement with Motorola to sell its new phone, Moto G, only online through Flipkart’s site. In addition, Snapdeal agreed to be the sole Indian seller of Oplus Technology’s (Taiwanese) newest tablet in January 2014. Snapdeal co-founder and CEO Bahl stated that 90\% of its product offerings were unique to Snapdeal, concentrating the most on the “unorganized segment in categories like apparel.”47 Snapdeal further differentiated itself by being the first to launch its site in both Hindi and Tamil.48 Amazon was also competing for market share among mobile users. According to Avendus Capital, India had 67 million smartphone users in 2013, a figure that could reach 382 million by 2016.49 As of 2014, Snapdeal claimed that 30\% of its business came from smartphone users; eBay claimed 31\%.50,51 To cater to this demand, most e-tailers had developed comprehensive mobile apps for their sites, even offering exclusive deals to those who made purchases on their phone. Moving into India’s fiscal year 2015 (April 1-March 31), some of Amazon’s competitors had expressed interest in acquiring a mobile technology enterprise in order to exploit this market opportunity.52 While Amazon waited for its rivals to take the lead on the e-tailing side for many years in India, the firm had entered China a decade earlier in 2004. The World’s Largest Market: China In 2002, China had an estimated 27 million online consumers,53 rising to over 80 million in 2004.54 By 2014, the country was expected to reach 650 million online consumers.55 In 2002, China’s e-commerce market was valued at an estimated $1.3 billion, growing to over $16 billion by 2005-2006.56 At the start of 2014, China’s e-commerce market was valued at over $300 billion, expected to reach $540 billion by 2015. Growing at a compound annual rate of nearly 70\%, China’s e-commerce market was scheduled to surpass the US as the largest e-commerce market in the world.57 According to World Bank data, China recorded 621.7 million internet users in 2013, approximately 46\% of China’s 1.4 billion population and more than double the amount of internet users in the US at 266.2 million. At an investor conference in 2013, Jack Ma, founder and chairman of Chinese e-commerce giant Alibaba Group, remarked, “In other countries, e-commerce is a way to shop, in China it is a lifestyle.”58 Chinese consumers were known to use social media extensively. According to McKinsey & Co., China’s 300 million users of social media spent more than 40\% of their time on the Internet browsing blogs and social networking sites.59 Using popular social media sites such as WeChat and Weibo, Chinese users often accessed and posted product reviews, got buy/don’t buy product advice from “key opinion leaders” and friends, and saw advertisements of featured products from retailers.60 W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 7 Amazon in Emerging Markets Chinese consumers were also becoming very active shoppers on mobile devices. With the largest volume of mobile e-commerce transactions in the world, China expected purchases via mobile device to reach $41.4 billion by 2015 from only $7.8 billion in 2012. This volume of mobile transactions attested to the Chinese consumer’s craving for fast shopping at any time of the day.61 China, however, did not represent a consistent market from region to region. KPMG International highlighted that customers in “tier-1” cities such as Beijing and Shanghai varied drastically in their shopping preferences and purchasing decisions from other consumers in smaller markets, such as Xi’an and Fuzhou. Sales volume for higher-end goods, such as cars, jewelry, and handbags, was much greater in Shanghai than in smaller coastal and inland cities. This trend was also true for brand loyalty, as consumers in China’s smaller markets favored differed products and tended to stress current fashion styles less than those in larger cities.62 By operating in a communist-led country, Amazon faced limitations on its operations that it had not encountered in its prior international experience. Chinese law regulated and restricted Amazon’s internet content, as well as its sale of any media-related products or services. In addition, Chinese law demanded that Amazon’s website, www.amazon.cn, be operated by a Chinese-owned corporation in order to comply with local ownership laws.63 Competition in China, 2004-2014 While the Chinese online commerce market had consolidated significantly by 2014, the competitive landscape in the nascent market of 2004 was far more fragmented. All the players started with somewhat different business models that would continue to evolve. Central competitors in the early battle for Chinese market share included EachNet, Alibaba, Joyo.com, and Jingdong. EachNet EachNet was founded in Shanghai in 1999 by two Chinese entrepreneurs who had studied in the US: Bo Shao and Haiyin Tan.64 As of 2002, EachNet had 3.5 million registered users and was the leading person- to-person online trading site in the growing Chinese e-commerce market when eBay announced its intent to acquire a 33\% stake of the company for $30 million.65 Under CEO Meg Whitman, eBay completed the transaction in 2003 and brought in a German country manager and a technology executive from the US. Neither understood the language or the local market. eBay invested an additional $100 million into the entity which was soon renamed eBay EachNet.66 Alibaba Founded in 1999 by Chinese entrepreneur Jack Ma, Alibaba.com was launched in Hangzhou as an online forum for Chinese manufacturers to sell their products to domestic and overseas buyers. In 2002, Alibaba made its first profit, only $1. It “badly trailed” EachNet, according to the Wall Street Journal.67 By 2014, Alibaba Group with Jack Ma as chairman operated several web services including two of China’s largest e-commerce sites, Taobao.com and Tmall.com. However, faced by competition from eBay EachNet, little- known Alibaba’s quest for market share in the early 2000s was not easy. In response to the eBay-Eachnet acquisition, Alibaba launched Taobao.com in 2003 as a way of preventing eBay from taking away its customer base.68 Taobao.com began as a marketplace and auction site that would later serve as a pure marketplace which connected merchants of all sizes to a network of millions of consumers. According to Helen Wang, author of The Chinese Dream, given that Chinese users at the time were unfamiliar with internet auctions, only 10\% of Taobao’s product listings were available for auction, as opposed to 40\% for eBay EachNet. Alibaba also offered longer and more flexible listing periods W94C01 For the exclusive use of h. alkubra, 2021. This document is authorized for use only by hamad alkubra in MKTG 357 Global MKTG Summer 21 taught by LAWRENCE DUKE, Drexel University from Jun 2021 to Dec 2021. 8 Amazon in Emerging Markets for its auction products. Furthermore, to cater to China’s 300 million cell phone users (compared with only 90 million internet users at the time), Taobao offered its buyers and sellers the option of communicating via instant messaging and voice mail.69 The marketing strategies of the two companies also reflected their different knowledge …