4/30/22: Chinese Sellers are Leaving Amazon. What's Their Story?
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Insider Digest 4/30/22: Chinese Sellers are Leaving Amazon. What's Their Story?
Housekeeping / Announcements / Fun:
Happy May 1st for those who get a long weekend! Stay safe and healthy!
What You Missed on the TBCI Discord
The big news was the Politburo meeting that talked about focusing on the economy and mentioned platform economies
The exact words were: “It is necessary to promote the healthy development of the platform economy, complete the special rectification of the platform economy, implement normalized supervision, and introduce specific measures to support the standardized and healthy development of the platform economy."
However, even though on the surface, these words are pretty much what the government has been saying since the beginning of the year, it was widely reported in English and Chinese as a signal that the “crackdown on tech is over”
As far as I can tell, this is because the prior versions haven’t really worked. Either on investors or really in preventing bureaucrats from being overzealous with their enforcement. So now we’re hearing from the highest offices of the land, the Politburo. Stocks are up, but let’s see how long that lasts.
PE Chief PAG Group Weijian Shan says China is in bad shape
As w048cxh immediately noted, Shan was just appointed to BABA board in March as an independent director, uh oh
The leaked video is here (I’ll leave it up through the weekend)
Xi says there is a role for private capital as long as it’s regulated
But investors should be “educated and guided” to practice China’s core socialist values and “walk the right way”, Xi said. More action would be taken against corruption and to promote fair competition in capital, particularly against corrupt behaviour driving disorderly expansion of capital and “a monopoly of platforms”
I think this is fairly consistent with what the govt’s stance has been thus far. Introducing international capital though is a different matter, as this project is still in its infancy, relatively speaking, so I don’t think this cautious note on private capital extends as much to the efforts to bring in international capital. Your thoughts?
Multiple articles in state-owned media about loosening Zero Covid continue to get censored
Machine translation of Epidemic Communication Summary from Beijing hospital deputy GM, somewhat helpful for understanding the bind China is in with its lack of resources and much of population’s extreme fear of COVID
Interesting interview with Stephen Roach ex MS Asia Economist
4/28/22 Chinese Sellers are Leaving Amazon
You might have seen the headlines — Chinese sellers are leaving Amazon. But I think the story is being covered very differently in English vs. Chinese (as is usually the case and probably why you’re here at Tech Buzz China in the first place). It’s also especially interesting to me personally in the context of the TBC Investment Syndicate, where cross-border commerce is a main thesis.
So, first here are the facts:
Chinese sellers used to make up 42% of the top brands on Amazon at their peak in 2020, but declined to 40% in the beginning of 2021 and further to 38% in September 2021. (I will note here that some sites cite an even higher percentage, up to 63% when you include Hong Kong, while others are saying US brands have retaken the majority of top-selling third party brands at 55% as of January 2022, so I’ll just leave both numbers here for you to ruminate over, but it’s undoubtedly a very high percentage.)
A lot of this can be attributed to the fact that Amazon aggressively banned Chinese sellers for violating its reviews & ratings rules. I’ve seen numbers as high as 50,000 merchants banned, although apparently Amazon itself has only confirmed 600 brand bans across 3,000 seller accounts.
The violations were typically around inflating reviews / ratings. Users may have been paid for positive reviews / ratings, or to remove a negative one.
It is estimated that the annual GMV of the banned Chinese sellers thus far is something like $15Bn USD
Pretty simple, right? Dishonest Chinese sellers gaming the system! Of course they should be punished! But then when you look at some of the brands who were banned — like Aukey for example, whose products (mainly chargers, earphones, and the like) I personally own and work great, and are even recommended by NYT’s Wirecutter ... then it made me consider, wait, why is even best-selling Aukey doing this, despite being “repeatedly warned” by Amazon not to? Could there be a deeper reason beyond just “being shady for shadiness’ sake”?
So here is the Chinese merchant’s side of the story, which is, of course, not covered really at all in English. Here's a timeline of Amazon’s third party Marketplace service in case you don’t remember:
2000: Marketplace is launched
2005: Prime is launched
2007: Fulfillment by Amazon (FBA) logistics service is launched
2012: This is when Amazon began to officially recruit Chinese merchants, a strategy that contributed greatly to the years of explosive Marketplace growth afterwards
According to Chinese sellers, in the early days, there was almost no barrier to entry. Mostly they would use international packaging services to ship products. The main profits came from the markup when you switched from selling domestically to selling abroad:
Products that cost 5-6 yuan on Taobao could be sold for $20 (about 140 yuan) on Amazon, a markup of 20-30x! Not %, but times. Because of this crazy high profit margin, the number of Chinese sellers on Amazon began to climb sharply.
In 2015 alone, the total sales from Chinese sellers on Amazon tripled from the previous year, and on Amazon US, sales from Chinese sellers increased nearly 10 times. In 2017, one-third of all international sellers on Amazon were from China, and Marketplace's sales officially surpassed products sold by Amazon itself. Bezos himself and Amazon were (are!) greatly admired in China, and many cross-border sellers considered the company their role model. They strongly believed in and supported Amazon’s “customer first” + “creating long-term value” principles, even though Amazon clearly stated that it would choose customers over the interests of third-party sellers.
Costs Rise for Chinese Sellers
Recall that Amazon charges both commissions and advertising fees from third-party sellers. The commission costs — which it calls referral fees — are 15% typically, and 17% for some select categories. It’s an amazing business ... because despite all the PR around AWS, I’m sure all of you know that Marketplace is Amazon’s cash cow, not AWS. In addition, it also charges logistics and warehousing costs. Consider this:
Before 2011, Chinese sellers typically used international shipping, because it was more cost effective, and only a very small minority joined FBA, because it was still quite economical to ship internationally. But after 2011, when Amazon began to heavily push its Prime memberships, it became a necessity to use FBA in order to have one’s product be Prime eligible.
There are so many problems that have been exposed with Amazon’s practices re: Prime / FBA, that I can’t possibly understand from the consumer perspective (because it’s a good experience for me!), but surely you remember this piece of news when Amazon “unintentionally” hid faster but non-Prime goods at the beginning of the pandemic.
That’s not to say FBA is bad! It is mostly good from a customer experience perspective, especially for Chinese sellers. It shortened delivery times from a few weeks to a few days.
Warehousing costs went up 69% from 2013 to 2016 and another 41% from 2016 to 2020. And it continues to grow, a nice 11% bump just this February.
Advertising costs have been increasing as well, and surged 50% during the pandemic.
But the real killer is ... sellers really have no choice. If you don’t pay up for all of these costs, you really can’t play on the Amazon platform at all.
And that’s just on the Amazon platform. Don’t forget that there has been increasing logistics costs outside of the Amazon ecosystem. What used to be maybe a 2-3% ocean shipping cost is now something like 15%. Add to it forex pressures, inflation in raw materials, changes in tax policies, and Chinese sellers are feeling super squeezed compared to a few years ago.
Is There Another Way to Work with Amazon?
Well, yes. You can become an Amazon supplier. This doesn’t mean it’s Amazon branded, by the way, it will just say on the listing that the product “ships from and is sold by Amazon.com.” It was pretty easy for Amazon to identify who they should approach, by the way, because it knew which products were selling best, and which brands were growing fastest from its own internal data. And there were many advantages to becoming an Amazon supplier:
Significantly increased sales: Amazon could direct traffic to its own brand over that of third party sellers, a practice which it denies by the way, but nonetheless is hugely controversial with sellers, such as in these examples here and here
Manipulated results: Chinese sellers claim that Amazon can sell any product on the platform and edit the product details page (listing) arbitrarily, whether or not the product is self-operated
Better rankings: Negative reviews wouldn't affect the rankings of the seller that much;
But in the long run, it doesn’t sound like such a great deal:
There will be a longer payment period for Amazon's suppliers than third party sellers, which will be a greater challenge to inventory turnover and cash flow;
Amazon retains the right to acquire the brand from the third-party seller.
OK, so profits are squeezed and working as Amazon’s supplier seems to be a bad deal. What did Chinese merchants do?
Chinese Sellers Seek Workarounds But Fail
Well, first, let’s acknowledge that many of these sellers did outright break the rules on incentivized / fake ratings & reviews. According to them, they had no choice because of the high costs of operating on Amazon discussed above and the way the system worked.
Different from Chinese eCommerce platforms such as Alibaba, the recommendation mechanism of the Amazon platform tends to weaken "shops" and emphasize "products". Different shops that sell the same product share a product details page (listing), but only the one with the highest sales can edit the listing, and other merchants are merely listed underneath as “other sellers.”
Accordingly, many Chinese sellers realized they could either open multiple stores to sell the same product in order to be ranked higher and increase sales; or they could win by ubiquity, by launching many SKUs and dominating the category that way. While neither directly violated the rules of the platform, it did weaken Amazon’s power over the sellers. Many Chinese sellers believe that the bans were in retaliation for them trying to go against Amazon. Their evidence? The bans, primarily levied against larger accounts, were simultaneously accompanied by a surge to recruit more, newer and smaller Chinese sellers. I don’t think that this proves anything except that Chinese exports are still very important to Amazon, but sellers are becoming increasingly bitter.
They also have nowhere else to go. Amazon also does not allow sellers to advertise that they also sell elsewhere. When the bans happened, many Chinese sellers made small cards with the information of their self-operated websites and put them into the packages sold on Amazon, often giving 5-10% discount on purchases at their own sites for incentive. Amazon found out and banned them.
The Aftermath of the Bans
I had been remarking to friends that even though there is supposedly massive inflation in the US, many of the “made in China” products I buy on Amazon are in fact selling at a discount. Well, that is actually true, because unbeknownst to most of us regular consumers, the banned accounts still have their inventory locked in the US in Amazon’s FBA system, and Amazon has not offered them a solution. The result is that to alleviate cash flow pressures, many of them recruit new, unbanned Chinese Amazon sellers, and these are often selling at a discount under the banned seller’s direction. The logic, I suppose, being that it’s better to recoup some money quickly than none at all.
But the urgency, as you can imagine, is really to just become less reliant on Amazon. I’ve already talked about this in various posts before on cross-border ecommerce
First, you can choose to become more like Anker, the global consumer electronics brand that started off on Amazon, but aggressively chased other channels. Offline, for example, now accounts for 40% of its overall sales, and Amazon is an increasingly smaller %. This would require Chinese sellers to actually think like a brand though, and not just a seller. That I think is unfortunately significantly harder than it sounds.
Secondly, you can now sell on a group of rapidly growing global Chinese platforms. Shein is certainly one such breakout (it doesn’t just sell self-operated goods anymore, but third-party brands as well), and JD / Alibaba are also aggressively expanding its international operations, and JD, true to its DNA, is focusing a lot on infrastructure and logistics. There’s also TikTok, whose momentum looks significant, and of course the many Shopify-clones like Shoplazza, which I’ve written about before. No monopolies here yet and way harder for them to form, given the amount of competition involved, so expect a lot more of these and attendant solutions going forward.
Thirdly, it is true that many Chinese brands are simply rebranding as American ones, by moving their headquarters to the US, at least on paper. Which is also a reason why some believe the true count of Chinese brands amongst Amazon’s top sellers to be higher than 38% this year. But I don’t see how this changes their economics in any way, and no doubt they are still going to have to use some combination of the two solutions above in order to become truly resilient.
Amazon still has a significant advantage in luring Chinese sellers, especially with Prime. But the bans last year may have been the final straw that broke the camel’s back after years of ... well, placing the customer before the seller, as they always said they would. As for me, I’m in fact eager to see more bans, so that there is even more urgency to diversify into other cross-border channels. What do you think?
Reply here on the Circle forum
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