On 18 April 2019, Amazon announced that, “We are notifying sellers we will no longer operate a marketplace on Amazon.cn [Amazon’s Chinese Site] and we will no longer be providing seller service on Amazon.cn effective July 18”. By closing its online store in China that allows the country’s consumers to buy from Chinese merchants, after being comprehensively defeated by domestic e-commerce champions Alibaba and JD.com, Amazon has finally followed in the footsteps of a list of Western digital behemoths — from Yahoo and eBay to Google and Uber — to admit defeat in the largest digital market in the world by user numbers. This is in sharp contrast to the overwhelming success Amazon (and other Western digital firms) managed to achieve in numerous other international markets across the world.
Over the last forty years, Western multinational firms have achieved significant success in China in different sectors, from car manufacturing, home electronics, fast-moving consumer goods, to beer, coffee shops, fast food, movies and professional services. However, no Western digital firm has been able to achieve notable operational success in China despite their perceived capabilities and competitive advantages, rich resources and technological knowhow. The words “digital firms” refer to those firms that from inception focus on digital services enabled by the Internet and related technologies, including mobile. These firms were born digital, particularly the so-called dot.com and e-commerce firms, such as search engines, online content providers, and retail and sharing economy platforms. Typical examples include Google, eBay, Amazon and Uber. They do not include traditional IT firms, such as Microsoft, Intel, IBM or SAP, which rely primarily on sales of hardware and software as their main sources of revenue.
Commonly cited reasons for the systematic failure of Western digital firms in China include strict government censorship and control, poor understanding of Chinese culture and market, and insufficient local autonomy. However, these factors did not prevent Western digital firms from succeeding in other heavily regulated and culturally different markets in Asia, the Middle East, or Africa; or stop Western multinational firms from other sectors succeeding in China. It has also been argued that the digital market is a culture market with strong network effect; and countries such as Saudi Arabia and Thailand are perhaps too small to sustain their own native digital firms, even though they are culturally and politically different from the West. However, Google’s success in India (94.53 per cent), Brazil (95.07 per cent), Japan (65.43 per cent), and Russia (42.9 per cent), compared with 1.55 per cent in China, suggests that although these factors have played a role, they could not explain why all Western digital firms have failed in China. So what other factors have contributed to this peculiar phenomenon?
My research has shown that the causes for this phenomenon are complex, and a long list of factors has been identified. However, two prevailing narratives have emerged from interviews with the so-called insiders and outsiders. On the one hand, interviews with 40 senior executives from six Western digital firms (Yahoo, eBay, Google, Amazon, Groupon and Uber) and six of their direct competitors in China (Sohu, Taobao, Baidu, JD.Com, Meituan and DiDi Chuxing) — the insiders’ view — pointed to the lack of strategic determination and patience by Western digital firms in China as the main cause for their systematic failures. On the other hand, interviews with 185 business, professional and governmental elites in China — the outsiders’ view — attributed the phenomenon to the failure by Western digital firms to acclimatise to China’s unique business environment.
The reality is, obviously, more complex than these narratives. In many ways, the digital market is fundamentally different from other industries. Western digital firms only had a short history to build up any inimitable advantages. The low technological barriers allowed a very large number of Chinese digital firms to be set up in China. As a culture market, it favours native firms in understanding users and the business environment, and in developing and communicating strategies. The network effect means “winner takes all.” When faced with more determined and locally embedded Chinese competitors, who are fully attuned to the Chinese business environment, Western digital firms have few competitive advantages but many disadvantages. It is the “perfect storm” that led to the systematic failure of all Western digital firms in China.
The managerial implications are profound, and have been highlighted in a recent article. Some Western digital firms such as Google and eBay are seeking to re-enter the Chinese market after their failures during the first round of competition. As Chinese digital firms grow bigger and more confident, they are actively pursuing new opportunities in other international markets — from India, Southeast Asia, and Africa to the United States and Europe — so the clashes between Western and Chinese digital firms are likely to escalate both in China and internationally. Further, the phenomenon is not limited to digital firms, because similar patterns have been observed in cloud services, mobile communications, fintech, and even some non-digital sectors (e.g., solar energy, electric cars, and high-speed trains). In addition, new battle lines have been drawn between Chinese and Western firms in machine learning and artificial intelligence, driverless cars, and in some industries where Western firms traditionally held major technological and other advantages. Insights from this study can shed light on these and a range of other emerging phenomena.
This is only the first of a multipart longitudinal study, and I am in the process of developing a series of new theory-oriented research papers from the rich data. I welcome collaborations from academics and business leaders who are interested in this and a range of other emerging phenomena in the digital economy.
- This blog post is based on the author’s paper Why have all western internet firms (WIFs) failed in china? A phenomenon-based study, Academy of Management Discoveries, 5 (1): 13–37, doi.
- This post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Featured image by Jens Schott Knudsen, under a CC-BY-NC-2.0 licence
- When you leave a comment, you’re agreeing to our Comment Policy.
Feng Li is chair of information management at Cass Business School, City, University of London. His research investigates how digital technologies facilitate strategic innovation and organisational transformation in the digital economy. He advises senior business leaders and policymakers on how to manage the transition to new technologies, new business models, and new organisational forms. His research has attracted the financial support amounting to over £40 million of external research funding. He is a fellow of the British Academy of Management (FBAM) and the Academy of Social Sciences (FAcSS). E-mail: (firstname.lastname@example.org