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THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE DEPARTMENT OF ECONOMICS Amazon China and Alibaba's Chinese B2B eCommerce Competition: Does the Distribution Network becomes a Determinant Factor? WANXUAN XU SPRING 2021 A thesis submitted in partial fulfillment of the requirements for baccalaureate degrees in Economics and Statistics with honors in Economics Reviewed and approved* by the following: Karl Schurter Assistant Professor of Economics Thesis Supervisor Russell Chuderewicz Teaching Professor of Economics Honors Adviser * Electronic approvals are on file. i ABSTRACT Amazon China (referred to as "Amazon cn") and Alibaba are two major companies in China's eCommerce market. Nowadays, online shopping has become a more convenient way with multiple choices. There is also a growing demand for cross-border products, from product quality, delivery time, and services to different platforms' price comparison. Chinese eCommerce market was valued tremendously in the past 20 years. However, Amazon left the Chinese eCommerce market in 2019 and remained its cross-border market open. It is questionable why Amazon's business model and operating system are booming in North America and countries like Japan, Singapore, and European countries. Is there any significant factor that caused its "failure" or the change of strategies in the Chinese eCommerce market? What caused Amazon cn to experience the recession in the past decade? In this paper, we will argue that the distribution network or delivery sector is the main reason why Amazon cn stopped gaining profit in the Chinese eCommerce market. From my analysis, we hope readers can have a general knowledge about the market competition. Moreover, we hope the paper can bring some ideas about choosing the eCommerce company for business owners interested in entering the Chinese cross-border eCommerce market. ii TABLE OF CONTENTS LIST OF FIGURES ..................................................................................................... iii LIST OF TABLES ....................................................................................................... iv ACKNOWLEDGEMENTS ......................................................................................... v Chapter 1 Introduction ................................................................................................. 1 Chapter 2 Literature Review ........................................................................................ 4 Two-Sided Market ........................................................................................................... 4 Monopsony Power in the Chinese eCommerce Market .................................................. 6 Thesis Goals ..................................................................................................................... 8 Chapter 3 Distribution Network................................................................................... 9 Alibaba and Cainiao Network .......................................................................................... 9 Potential Collusion in Cainiao Network .......................................................................... 12 Potential Monopsony Power in Cainiao Network ........................................................... 14 Fulfillment by Amazon in the Chinese Market................................................................ 16 JD.com and JD Logistics ................................................................................................. 18 Conclusion ....................................................................................................................... 18 Chapter 4 Vertical Comparison in the Chinese B2B eCommerce Market .................. 19 Alibaba vs. JD.com .......................................................................................................... 19 Amazon cn vs. JD.com .................................................................................................... 20 Alibaba vs. Amazon cn .................................................................................................... 21 Pros and Cons .................................................................................................................. 22 Chapter 5 Model and Analysis ..................................................................................... 25 Competitive Bottlenecks Model ...................................................................................... 25 Implication ....................................................................................................................... 26 Analysis............................................................................................................................ 29 Chapter 6 Limitations and Conclusion ........................................................................ 33 Limitations ....................................................................................................................... 33 Conclusion and Suggestions ............................................................................................ 34 BIBLIOGRAPHY ........................................................................................................ 36 iii LIST OF FIGURES Figure 1. Major Players in the Chinese eCommerce Market................................................... 2 Figure 2 Cainiao Network's Intelligent System ....................................................................... 10 iv LIST OF TABLES Table 1. Delivery Companies' Market Share from 2016 to 2020 ............................................ 15 Table 2. Alibaba, Amazon cn, and JD.com's Pros and Cons ................................................... 22 Table 3. Amazon cn, Alibaba, and JD.com's Warehouses and Warehouse Sizes in 2014 ...... 30 Table 4. Amazon cn, Alibaba, and JD.com's Warehouses and Warehouse Sizes in 2017 ...... 31 Table 5. Amazon cn, Alibaba, and JD.com’s Warehouses and Warehouse Sizes in 2021 ..... 31 v ACKNOWLEDGEMENTS I would like to thank Dr. Karl Schurter for always listening to my ideas and being patient in guiding me toward the correct direction of the thesis. I would also like to thank Dr. James Tybout for providing thoughtful comments and suggestions on the thesis. Writing the thesis throughout the year provided me with extraordinary academic experience in Economics and connected in-class knowledge to my interest. I would like to thank Schreyer Honors College for providing honor courses and events to help me determinant my academic career goal. 1 Chapter 1 Introduction Chinese's eCommerce market has a market size of 1.8 trillion dollars by 2020 with 150.8 billion dollars of profits, creating over 1 million jobs and 12.1 billion dollars of wages (IBIS World, 2020). The increasing popularity of internet users and rapid growth of eCommerce companies' comprehensive services and popularity among young generations. More people turned to online shopping for no location restrictions, instant service, and fast delivery. Meanwhile, rising disposable incomes also stimulate eCommerce buyers' population. According to the China Internet Network Information Center and the National Bureau of Statistics, China had over 904 million internet users in 2019, representing approximately 64.5% of the population. Also, China had 710 million online shopping users in 2019, accounting for 78.5% of total internet users. With industry services being improved by government policies and public acceptance, the industry revenue is forecast to grow at an annualized 17.1% over the five years through 2025, to $3.9 trillion (IBIS World, 2020). There are three major players in the Chinese e-commerce market: Alibaba, Amazon, and JD.com. In particular, JD.com and Amazon operate similar distribution strategy-managing their delivery network. Chapter 4 will compare their similarities and differences in distribution networks among these three companies, demonstrating the influence of the delivery sector in this Chinese eCommerce market. We may use market shares to demonstrate whether each company is growing or not. Figure 1 is the change of market share in the Chinese eCommerce market for the past 13 years. 2 From 2014 to 2015, there is an increase in Alibaba’s market share from 56.7% to 72.5% and a decrease in Amazon cn’s market share from 7.8% to 1.4%. The trend corresponded to Alibaba’s operation on its established distribution network-Cainiao Network in 2014. Figure 1. Major Players in the Chinese eCommerce Market Source: IBIS World and Data Mining Online Articles The eCommerce market in China was thriving and expanding in the past 20 years. One of the most decisive reasons is the government's support from all perspectives. In the Notice on Strengthening the Security of Internet Domain Name System promulgated by the Ministry of Industry and Information in 2010, the government's goal is to ensure safety environment by establishing a security monitoring system and prevent domain names from being hijacked (IBIS World, 2020). Later in October 2013, the Consumers' Interest Protection Law of China was issued, which regulates that buyers have the right to return goods within seven days since 3 receiving products as for the products purchased online and through TV, telephone, and mail- order (IBIS World, 2020). Also, the Law strictly protects personal information during online shopping. By constructing a comprehensive law system that safeguards legitimate rights and regulations for eCommerce companies, sellers, and buyers, the