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Amazon's China connection

November 2, 2016 11:38 AM
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A search for “phone charger” on Amazon.com ranks a charger sold only by Chinese electronics manufacturer Anker Technology Co. Ltd. at the top of Amazon’s organic search results—ahead of chargers from Amazon.com Inc.’s own line of products, AmazonBasics, and 34 merchants selling a charger from global brand Samsung Electronics Ltd.

The $12.99 Anker charger has more than 23,000 reviews—mostly positive—and because Anker uses Fulfillment by Amazon, the product is eligible for fast and free shipping to Prime members, Amazon’s most lucrative customers.

Anker is just one of the growing number of Chinese merchants selling products made in Chinese factories directly to consumers around the world, many of them via Amazon’s online marketplaces. In fact, just in the city of Shenzhen, a manufacturing center in southeastern China, about 10,000 merchants sell online outside of China, according to Chinese cross-border e-commerce association Eagle and Bear Union. And a lot of that cross-border commerce involves selling to North American and European consumers via the online marketplaces operated by Amazon and eBay Inc.

The opportunity is apparent for Chinese manufacturers and merchants—there’s a clear gap between what it costs to make or source a product in China versus what a consumer in rich countries like the United States, Canada and United Kingdom will pay for it. And by using the internet and online marketplaces like Amazon’s, merchants at the source can reach these customers, often with a lower price tag than sellers who often go through middlemen to acquire goods to resell. Middlemen, such as importers and distributors, have their own fees and margin goals to meet, and that increases prices.

Steven Yang, a China native who earned a master’s degree at the University of Texas and then worked as a senior engineer for Google in Silicon Valley, recognized the opportunity. In 2011, he founded Ocean Wing E-commerce Co. Ltd. in Shenzhen and began developing the Anker line of technology products with the plan to sell them to consumers in the United States and Europe. Four years later, the manufacturer booked 1.302 billion yuan ($193.1 million) in worldwide revenue and Anker is a top brand on Amazon’s U.S. marketplace in some categories.

Smart business? Certainly. A competitive threat to existing online merchants? Absolutely.

Chinese sellers like Anker are multiplying, and Amazon is encouraging that growth. Amazon began in 2012 to recruit Chinese manufacturers and merchants that sold on Amazon.cn—its Chinese e-retail site—to sell to U.S. consumers on Amazon’s U.S. marketplace and on marketplaces it operates around the world. Last year sales by these merchants doubled compared with 2014, Amazon executives reported in December 2015 at an annual meeting Amazon hosts for Chinese sellers in Guangzhou, China. More startling is the sales growth for Chinese sellers on Amazon.com specifically: Amazon executives said these sales increased more than tenfold in 2015. Amazon did not provide dollar figures for those sales.

Amazon declined to say how many Chinese manufacturers and merchants currently sell on Amazon.com. But estimates from sources that help Chinese manufacturers sell on the online marketplace say the number has rapidly increased in the last two years. Noah Herschman, managing director of Southeast Asia for consulting firm Marketplace Ignition and the former chief operating officer of DHgate.com, a Chinese online marketplace that facilitates sales between Chinese manufacturers and wholesale buyers globally, says the figure bandied about is 200,000. That means Chinese sellers on Amazon.com may represent about one-tenth of the more than 2 million marketplace sellers Amazon reported it had in 2015.

The new competition is making it more challenging for veteran U.S. Amazon sellers to grow. These merchants, especially those that previously thrived on Amazon, are frustrated as they’ve seen sales growth slow over the last two years—coinciding with when Amazon began making a real push to recruit Chinese sellers. Some say they feel defeated because they think Amazon isn’t responding effectively to their concerns or policing the problems it created by encouraging Chinese sellers to join the online marketplace. Some argue that Chinese Amazon sellers use biased product reviews, copy listing pages and list items for sale that are—legally or illegally—too similar to products they sell themselves, and all of these contribute to U.S. sellers not growing as much on Amazon as before. But the real thorny issue is Chinese sellers are selling their products at lower prices than many existing sellers because they can afford to. And customers often choose the lower-priced products.

“The Chinese sellers absolutely have a lot of advantages. Most of the world’s production is in China, so if a factory is going to sell on Amazon directly, they’re going to have lower costs,” Marshall Taplits says. He is the founder of Amichai LLC and an Amazon seller who sources products from China to sell on Amazon.com. “If you’re an American retailer and the only thing you have going for your business is that you have the cheapest price, your days are numbered.”

Wilmington, Del.-based online retailer Do It Wiser learned that simply lowering prices won’t foster growth on Amazon, given the competition today. The company has sold ink and toner cartridges on Amazon for nearly a decade and last year generated more than half of its $20 million in gross sales through the online marketplace. The increase in Chinese marketplace sellers over the last two years selling ink and toner direct on Amazon has hampered Do It Wiser’s growth, particularly in the United States and Europe, says CEO Alejandro Velez. The main crux of the problem: The Chinese companies charge far less than Do It Wiser does.

“First we tried to follow them on prices…lowering and lowering the prices of our products. At the time we thought to ourselves, ‘We’re not going to sell anymore’ and we were really scared,” Velez says. But selling products at lower prices wasn’t helping Do It Wiser increase the number of units sold because many of its competitors too were lowering prices to respond to the new competition. Do It Wiser shifted its focus to keeping product ratings high, which is another element in addition to price that Amazon factors into rankings in search results.

“Our Chinese competitors get a lot of sales, but many have low ratings and crappy feedback,” Velez says. He says Do It Wiser has been able to compete with Chinese sellers because it maintains positive ratings. Still the e-retailer has had to lower prices on some products. Overall, Do It Wiser lowered its prices on Amazon by about 50% in Europe and about 20-30% in the United States.

Amazon sellers worldwide face this dilemma because Amazon is the top marketplace choice for many Chinese sellers looking to sell internationally. 62% of Chinese e-retailers that sell outside of China said they sell goods on Amazon, the most popular choice among international shopping portals. That’s according to a study released in August by Payoneer Inc., a payment services company. Survey results were based on the responses of 900 online sellers in China and Hong Kong.

Of the 62% of respondents selling on Amazon, 91% sell on Amazon.com in the United States. Among the Chinese merchants that don’t currently sell through Amazon, many plan to join. 26% said they want to sell on Amazon.com, the site for U.S. consumers; 23% wish to join Amazon’s European sites and 12% want to sell through Amazon.co.uk, Amazon’s U.K. site.

Chinese sellers prefer Amazon’s marketplace for its “high-quality products” and “simple and fair rules,” the report says. That’s likely because the process to begin selling on Amazon is simpler than some other online marketplaces. Sellers can upload their product listings and within a day begin selling on Amazon. Chinese sellers also cite high traffic, local customer support and access to multiple markets for choosing Amazon.

Amazon is making it easier in other ways for Chinese manufacturers and retailers to sell on its online marketplaces. For instance, Amazon in 2015 rolled out a Chinese-language version of its management system, Seller Central, for merchants selling on its U.S. and U.K. sites. Amazon also has a Chinese-speaking seller support staff, and has held seller conferences in China highlighting the cross-border opportunity. Chinese merchants can sell on Amazon sites in 10 of the 14 countries where Amazon operates country-specific sites: the United States, Canada, France, United Kingdom, Spain, Italy, Germany, Japan, China and Mexico.

“To globalize the marketplace and expand the opportunities available to sellers, we have built selling tools that empowered entrepreneurs in 172 countries to reach customers in 189 countries last year,” an Amazon spokesman says in response to why the marketplace is recruiting sellers in China.

That said, Amazon’s actions align with the mission statement it has used since 1999: “To be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online. We strive to offer our customers the lowest possible prices, the best available selection and the utmost convenience.”

But others say there’s more to the story. Taplits, the Amazon marketplace seller, thinks Amazon is recruiting Chinese sellers in part to defend its turf against the possible entry into North America and other Western markets by Chinese e-commerce giant Alibaba Group Holding Ltd.

“While Amazon is an amazing company and at the forefront right now, it’s also afraid that these Chinese marketplaces are coming to the U.S.,” Taplits says. “It knows if it can get Chinese sellers hooked on American marketplaces and sell products with really low prices, Alibaba won’t have an advantage when it [brings its operations] to the U.S.”

Chinese online retailer Globalegrow E-commerce Co. Ltd. saw the opportunity the price gap between Chinese sellers and international buyers represented, and how the internet could connect it to high-spending consumers. The Shenzhen-based company sells roughly 250,000 product SKUs, including apparel, consumer electronics and toys, to overseas consumers in 200 countries. Its 2015 annual report says its sales increased 165% to 3.64 billion yuan ($550 million) last year, with 80% of those sales coming through English-language e-commerce sites it operates, including apparel sites SammyDress.com and DressLily.com, and electronics site GearBest.com. Some sales—Globalegrow says less than 10%—come from Amazon. It declined to say how its Amazon sales are growing.

More Chinese sellers on Amazon means more competition for existing marketplace sellers—and that’s cutting into their sales. Same-store sales for ChannelAdvisor Corp.’s clients through Amazon.com increased 11.6% in June year over year, 12.3% in May and 12.9% in April. These monthly figures are far below the 33.8% growth in general merchandise sales Amazon reported in the second quarter. One reason for the discrepancy between ChannelAdvisor’s data and Amazon’s reported figures is that ChannelAdvisor’s same-store sales reports take into account only sales made by its clients selling on the online marketplace for at least one year. Therefore, it doesn’t include sales from the newest marketplace sellers or that don’t work with ChannelAdvisor, a company that helps retailers sell on online marketplaces.

Scot Wingo, ChannelAdvisor’s executive chairman, in July pointed to the “dramatic increase” in competition on Amazon’s marketplace in the prior six months, saying new entrants are taking share from longer-tenured sellers. At least some of those new entrants are based in China. ChannelAdvisor declined to disclose how many customers it has in China.

For Do It Wiser, the increased competition has impacted sales on a percentage basis more on eBay than on Amazon, Velez says. He believes that’s because Amazon has reviews and ratings on many product listings, whereas on eBay there are few product reviews. (EBay didn’t have product reviews until late 2015, though shoppers could rate eBay sellers.) He says this has made it easier for competitors with lower-priced products to sell on eBay because previous buyers could not share product reviews that might influence other consumers’ purchase decisions. “We are selling around 20% less than we should because of the presence on the marketplace of low-quality, low-price sellers, mostly imports from China,” Velez says.

Chinese merchants began selling internationally via eBay’s online marketplaces in 2007, and 32% of the top 1,000 eBay sellers are Chinese merchants selling in the United States, Europe and Australia, according to data released in July by Web Retailer, a community site for merchants selling on online marketplaces. This is up from 30% in 2015 and 25% in 2014. Web Retailer’s figures are based on sellers that have the most positive feedback in the last 12 months. Web Retailer says feedback volume correlates well with selling volume.

At a recent conference, an Amazon China executive said that about 30% of apparel sellers on Amazon.com are Chinese merchants.

Competition is stiff on Amazon as-is, but some U.S. marketplace sellers say it’s becoming even stiffer because some merchants, allegedly from China, are engaging in practices they deem unethical. Amazon sellers interviewed for this article say Amazon thus far hasn’t been able to control the volume of these practices, such as counterfeiting, that may be breaking laws. Some U.S. sellers say the procedures Amazon has in place to handle these types of issues do not effectively handle their concerns. Many Amazon sellers interviewed were reluctant to be quoted on this issue in fear of Amazon suspending their accounts.

Whether imitation products sold through Amazon by foreign sellers violates U.S. intellectual property laws is a gray area and varies case by case, says Ryan Vacca, a professor at the University of Akron School of Law who previously worked as an intellectual property attorney. Federally registering a trademark or product design goes a long way toward combatting infringing and counterfeit products, but that’s not the only way retailers and brands are protected against imitation products. “If you don’t formally register a trademark, that doesn’t mean you don’t have rights,” Vacca says. He says that what courts look for in these cases is if the imitation products or their packaging confuses consumers. If a consumer purchases a product believing it originates from the original supplier when it, in fact, comes from another supplier, that’s when companies typically have a legal case.

Merchants interviewed for this story aren’t trying to pursue infringements in court. Instead, they say they expect Amazon to police the issue. E-retailer Spreadshirt Inc., a German company that sells T-shirts on Amazon featuring designs supplied by independent designers, says it has encountered Chinese manufacturers selling similar—if not identical—T-shirt designs on Amazon. Spreadshirt CEO Philip Rooke says the rights to featured designs stay with the designer who created them and that Spreadshirt pays designers a portion of each sale of their designs.

For example, Spreadshirt marketed a $22 tee with the words “Notorious RBG” and a photo of U.S. Supreme Court Justice Ruth Bader Ginsburg. Rooke says Chinese manufacturers copied the design and product listing page information into their own product pages, and sold the shirt for $10. Beyond losing sales, this further affected Spreadshirt’s business when a consumer—unsatisfied with the low-quality fabric, incorrect sizing and the two months he waited to receive the $10 shirt he ordered—wrote a negative review and posted it to Spreadshirt’s product page, not the page of the seller he bought it from.

Some marketplace sellers say Amazon’s policing and response to such issues has been inadequate, and the process for challenging such copying is laborious. When sellers see listings they believe to be questionable imitations of their products sold by unauthorized sellers, they must file a complaint with Amazon, purchase the product to obtain evidence and then explain to Amazon why the product is a knockoff, says James Thomson, partner with Buy Box Experts, a marketing firm that helps brands and manufacturers sell on online marketplaces. For instance, the original seller may point out that it is the only manufacturer or authorized seller of the product in question and therefore the other seller’s product is illegitimate; or they can point to product attributes that show it’s not the brand’s product, such as incorrect labeling or the seams or colors being different than they should be. This process can take a while, sometimes weeks, especially if the products are shipped from overseas. If a merchant can make its case, Amazon may remove the listing.

Amazon’s anti-counterfeiting policy says it “may immediately suspend or terminate selling privileges” if a merchant sells counterfeit goods. It is unclear how often this happens. Thomson says Amazon, depending on the complaint, may reach out to the seller and make it prove the products are legitimate. But in some instances by the time Amazon removes one challenged listing, others have been added, some marketplace sellers say.

Spreadshirt contends with this frequently. Rooke says at one point there were up to 300 copycat listings on Amazon offering designs owned by Spreadshirt designers. But Rooke says he’s worked with Amazon to improve the situation and Amazon has gotten rid of many of these listings. Spreadshirt still sees knockoffs on Amazon but, having established with Amazon that copycats of Spreadshirt’s products are routine, Amazon removes them when Spreadshirt points them out to its account manager. “Amazon is now very cooperative,” Rooke says.

Spreadshirt has also taken to alerting consumers to the danger of knockoffs. On the “Notorious RBG” product page, Spreadshirt added the following: “ATTENTION: Ensure you choose ‘Spreadshirt USA’ as the seller to guarantee you receive an authentic, high-quality Spreadshirt product, made in the USA, as well as the great Spreadshirt customer service you expect. If another seller name is displayed, offering a lower price, the product is not associated with Spreadshirt at all, and may be of lower quality, shipped from China, and will have no Spreadshirt customer service.”

Amazon, which declined to provide an executive to speak on the issue, provided a statement through a spokesman: “We are constantly innovating on behalf of customers and working with manufacturers, content owners, vendors and sellers to improve the ways we detect and prevent intellectual property rights violations and counterfeit products from reaching our marketplaces. We work hard on these issues every day because we know that our customers trust that they are buying authentic products when they shop on Amazon.”

The problem of knockoffs is not a new one and does not apply only to Chinese sellers, Thomson says. Thomson worked at Amazon from 2007-2013, and his last job there was as head of Amazon Services, the division that manages marketplace sellers. One of his responsibilities was to remove listings that sellers complained were of products sold by unauthorized sellers. He says this is tough for Amazon because it wants to operate as an open marketplace—as it has for years—but that’s difficult when there are more than 2 million sellers and more than 300 million products listed for sale.

“It’s a mess that they have to clean up, but it’s a really hard problem to solve as an open marketplace,” he says. Thomson says that Amazon wants legitimate competition and to give sellers the opportunity to sell at lower prices. But at the same time, it wants to protect brands and shoppers. “It’s a cat-and-mouse game that Amazon continues to try to solve. But it doesn’t know yet how to close all the loopholes. When it closes one loophole, these sellers find another loophole.”

Amazon in August made a move intended to help manage and lower the number of counterfeit products. As of Aug. 22, new Amazon marketplace sellers who list products from select brands must pay a one-time fee of up to $1,500. In addition, sellers must provide three purchase invoices from the manufacturer or distributor and a letter from the manufacturer authorizing the marketplace seller to sell its products. The rules are intended to keep merchants from selling so-called “gray market” goods, such as merchandise bought in Asia and then sold on Amazon.com in North America where another company may have exclusive distribution rights.

Amazon has not released a list of brands covered by this new rule, however, marketplace sellers on Amazon’s Community Seller Forum say they include Nike, Lego, FunKo, Hasbro, Hewlett-Packard and Samsung. The rule also applies to existing sellers that are new to selling those brands.

Some U.S. sellers also complain of sellers launching new products with illegitimate reviews. These reviews are often obtained from sites that enable manufacturers and retailers to offer discounted or free products to buyers in exchange for reviews, and it’s generally assumed these reviewers tend to say nice things about the products to keep them coming. Amazon banned this practice in September, except for manufacturers using the online marketplace’s own review program, Amazon Vine. Vine is not available to Amazon’s marketplace sellers. (Amazon has always forbidden the direct purchase of reviews and has filed multiple lawsuits over the last three years against firms that broker such reviews, seeking to find out which manufacturers or sellers purchased them.)

For David Rifkin, president and CEO of MPO Global, Amazon’s new rule is good news. While his company, which manufactures its own products, has never offered discounted products in exchange for reviews, he says competitors have. And that has hurt his company’s rankings, margins and sales on Amazon because Amazon factors reviews into how it ranks and displays products on Amazon.

“We noticed that the competition has come with artificial reviews and lower prices. We didn’t want to have those reviews, so we’ve had to lower our prices,” he says. Rifkin says much of the competition with these reviews are from China, which he can tell because some of these sellers have Chinese seller names or listing pages will say “shipped from China” when merchants aren’t using Fulfillment by Amazon.

One mop MPO Global sells, for instance, has dropped in ranking in Amazon’s search results in the past year and a half, and the retailer has lowered the price to $12.95 from $18.95. “The product used to be one of the top five ranked mops, but now it has been bumped down to the second page because it doesn’t have as many reviews,” Rifkin says. He projects MPO’s revenue on Amazon will grow 30% this year, but estimates it would have grown 50% without competition from Chinese manufacturers selling in his product categories.

Faux taxidermy online retailer Near and Deer is sticking with its prices, in spite of the increased competition selling at lower prices. Competitors from China are selling similar products for at least $30 less on a product that Near and Deer typically sells for $80-$100, founder Lindsay Baublitz says. The retailer sells through its own site and 12 online marketplaces, including Amazon and eBay.

Baublitz says it competes with better service and a broader selection of colors and designs than competitors offer. Near and Deer also offers product customization, which has been a value-add for customers willing to pay more, Baublitz says.

That’s an example of how the influx of sellers onto Amazon and other marketplaces has forced U.S. sellers to compete harder and sharper than before. “If you understand the market and the segmentation of the market and what the needs are, and you can source your products to target the market, then you can optimize your photos, listing pages, et cetera, to get an advantage,” Taplits says. “The Chinese are coming because they see that the business opportunity here through Amazon is so great. The opportunity is still there for American retailers too.”

But the fact remains that Chinese sellers, like Anker and Globalegrow, are multiplying on Amazon and are getting better at selling to U.S. consumers, often at lower prices.

“Amazon is such an open market that anyone can do it,” Taplits says. “The downside is that anyone can do it and that makes it easier for people to eat your lunch.”

fareeha@verticalwebmedia.com
@fareehaali

Frank Tong contributed to this report.

 

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