Amazon is shutting down its China marketplace business. Here’s why it has struggled

Queenie Liao, an office worker in Guangzhou, China, shops online several times a week. Alibaba’s Taobao and JD.com are her go-to platforms, but it wasn’t always that way.

“I used to use Amazon a few years ago. Amazon was one of the first online shops in China and a lot of friends told me that the things from Amazon were much more trustable. That’s why I used it,” Liao told CNBC. “Taobao and JD have more items now.”

Her shift in attitude underscores one of the major reasons why Amazon is thought to be struggling in China. The U.S. e-commerce giant now plans to close its domestic marketplace business in China.

“We are notifying sellers we will no longer operate a marketplace on Amazon.cn and we will no longer be providing seller services on Amazon.cn effective July 18,” the company said in a statement, referring to its Chinese-language site, according to the Financial Times.

“Over the past few years, we have been evolving our China online retail business to increasingly emphasize cross-border sales, and in return we’ve seen very strong response from Chinese customers. Their demand for high-quality, authentic goods from around the world continues to grow rapidly, and given our global presence, Amazon is well-positioned to serve them,” the company added.

Customers in China will still be able to buy items from the U.S., Germany, Japan and the U.K. through Amazon’s global site as it focused more on cross-border sales into the world’s second-largest economy, according to an earlier Reuters report. Amazon’s cloud business will reportedly continue to operate in China.

Cross-border market

Amazon entered the Chinese market in 2004 through the acquisition of Joyo, a domestic online shopping market. Joyo was rebranded to Amazon China in 2011. It enjoyed success in the early days with market share of over 15 percent in 2011 to 2012, according to China-based analyst Choi Chun of iResearch. That has now plummeted to less than 1 percent, according to another China-based market research firm, Analysys.

As Liao mentioned, Amazon had a reputation in the early days of its China operation for being a site that would have legitimate products and so was trusted by Chinese consumers. Chinese players like Alibaba struggled with policing fake items on their sites. Chinese e-commerce players, however, have been taking proactive measures to fight counterfeit goods.

Not only is Amazon trying to compete with e-commerce giants like JD and Alibaba, who are often able to deliver goods to Chinese customers faster, but smaller domestic like Pinduoduo and VIP.com are also offering a challenge.

The U.S. giant has also not been as aggressive on the marketing front as some of its rivals. Alibaba and JD both do huge sales promotions and big advertising campaigns on Nov.11 each year, known in China as Singles Day.

Amazon said in its statement that it is emphasizing cross-border trade. While that may have been a unique part of the business in the past, China’s domestic players have put a big focus on that in recent years. In November, Alibaba announced plans to help global businesses sell $200 billion in goods to China in the next five years. However, analysts said Amazon can still compete for now.

“JD and Alibaba are better positioned because they have larger traffic and consumers trust these two platforms (relatively to other platforms). But one thing I need to point out is that cross-border e-commerce in China is not as consolidated as regular domestic e-commerce, online shoppers go to different platforms for different overseas merchandises,” Chun told CNBC. “Therefore, Amazon’s cross border e-commerce is still very competitive.”

Chun said Amazon’s cross-border business is “not insignificant,” but the U.S. firm “doesn’t realize their problem in the Chinese operation and doesn’t want to catch up.”

“I don’t rule out the possibility that Amazon’s cross-border business will follow the same path of Amazon’s China domestic e-commerce business,” Chun said.

In its statement Amazon said its “commitment to China remains strong.”