As I write this article, Amazon (AMZN) is a small fish in a giant ocean when it comes to online retail market share in China. Even though it has the fifth largest business to consumer site in the country, this adds up to a market share of about 2.8%. There is a lot of room to grow.
Even at 2.8%, in a country like China this miniscule market share translates into big bucks! A 3% market share of the Chinese e-commerce market is worth about $27 billion a year. If Amazon never increased its market share, the growth potential in the country is still strong. Not only does China have more Internet users than any other country in the world, it doubles the second-place user, which is the United States. By 2015, usage in the country is expected to grow by a mind-boggling 53% to 800 million users, so Amazon has a pretty good motivation to invest in the country.
Getting the Kindle device into as many hands as possible is Amazon's plan since it is tailored to buy more items from Amazon.
The company is focused on using the Kindle Fire HD and Kindle Paperwhite as its main form of marketing and both are already on sale in China through the company's website. Kindle software and Kindle e-readers were already introduced in the country prior to release of the Fire HD. Local consumers are purchasing the e-readers from overseas markets before it was even introduced into the country.
One challenge that Amazon faces is a culture that hasn't fully embraced e-books yet. Publishers are still reluctant to embrace digital formats because they perceive that the change will hurt the sales of their printed books. Amazon has also had problems getting publishing rights and therefore the content for e-books will be limited.
People in China are not used to paying for books. Chinese competitors in the e-book reader market are less expensive and fill their readers with "rights free" Chinese classics. This may be one reason that Amazon will be selling e-books for about $1.50 compared to $9.99 here in the United States. Pirating is always a problem with consumers being able to choose a wide variety of downloadable e-book versions of varying quality.
The second challenge it faces is taking market share away from more established competitors. Two Chinese companies lead the e-reader market in the country: Hanvon Technology and Shand. In terms of the e-commerce market in general, Tmall.com, owned by Alibaba Group Holding commands a 40% market leading piece of the pie. Ironically, enough Alibaba is partially owned by Yahoo (YHOO). Established company names that we know here in the United States, Apple (AAPL) and Lenovo (OTCPK:LNVGY) are well-entrenched in the tablet market. These are hurdles that Amazon's Kindle has to rustle for market share
Even though I believe the Chinese market has an incredible potential for growth without even gaining market share, I think Amazon is making a major targeted push with the Kindle in order to increase that share. China is a hard market to make money in and Amazon has been there for eight years. From Amazon's standards, a 2.8% market share isn't good enough.
The closest "look-alike competitor" that Amazon has in China is a company called Dangdang that is headquartered in Beijing but also trades in the US market under the symbol (DANG). It is called "China's Amazon." Dangdang's main product categories include household merchandise, cosmetics, digital, home appliances, books, audio, and dozens of clothing and maternal and child categories.
As Amazon grows in China, it will be interesting to see what its cost of revenue will look like as a percentage of total revenue. In 2012, its cost of revenue was about 32.5%. Dangdang's is a blistering 86.1% and the company has been operating at a huge loss over the last couple of years. One company's misfortune could easily become another company's opportunity. So it is very important for Amazon to get those Kindles in the hands of the Chinese consumer. That is the bottom line.