As Amazon and Alibaba Face Off, Who Will Come Out On Top?

My money is on Alibaba, the massive Chinese company that will soon conduct a New York IPO.* Here’s why.

Amazon and Alibaba, the world’s largest e-commerce companies, are gearing up for the next big competition: cross-border e-commerce. Both companies have unique advantages in the market, and both are rushing to lock in an advantage in shipping goods from abroad into China, now the world’s largest e-commerce market.

In the last few weeks, Amazon.com Inc announcedthat it would set up a new hub for cross-border operations in the free trade zone outside of Shanghai. Amazon will use these facilities to connect Chinese consumers to its global platform, allowing imports into China of products that are normally only available to Amazon shoppers in other countries. The facilities will also serve as a logistics warehouse for exporting goods from China to abroad, and a center for organizing cross-border payments.

A little back-story: Amazon has operated in China for about a decade under the Amazon.cn brand. It has built a solid reputation for customer service and product quality, but its market share remains tiny: Amazon.cn had just 2.7% of the business-to-consumer market in 2013, according to Observer Solutions, behind Alibaba’s Tmall.com, JD.com, and Suning’s and Tencent’s B2C sites.

Source: Observer Solutions, 2014. http://www.slideshare.net/projectmanagement_bbp/julia-q-zhu

Till now, Amazon’s China platform, Amazon.cn, has not been connected with its international site, Amazon.com. Chinese people do occasionally use Amazon.com directly, but they have to create new accounts and navigate foreign payment and delivery systems to do so. Amazon’s bid to connect these sites more closely is a strong and logical move. Chinese customers are aware of the company’s extensive supplier network in the US, and many will undoubtedly be excited to access its foreign products.

This new development will help Amazon to tap into a huge and growing demand for Western productsin China. A 2013 report by PayPal and The Nielsen Company estimated that China’s cross-border shopping market will grow from 18 million customers spending $35 billion in 2013 to 36 million shopping spending up to $163 billion a year by 2018. For the Chinese respondents surveyed in this report, the US was by far the most preferred shopping destination.

Source: PayPal and The Nielsen Company, 2013. https://www.paypal-media.com/assets/pdf/fact_sheet/PayPal_ModernSpiceRoutes_Report_Final.pdf

This business could be a big source of growth for Amazon, but the company still faces challenges in its execution. Julia Q. Zhu, the founder of Observer Solutions, an e-commerce research and advisory firm, says Amazon’s success in this venture will depend on how it integrates its international merchants with sales in China, as well as how it solves the problem of time-consuming international delivery. An additional challenge for the China unit could be its lack of independent decision-making ability; some Chinese media reports have intimated that Amazon.cn lacks autonomy, and that important decisions must be referred back to U.S. headquarters.

In addition to these factors, Alibaba retains an even more important advantage: its extensive market share in China. Alibaba is the largest and most profitable e-commerce company in China by every measure, controlling roughly 80% of China’s e-commerce market. Amazon will undoubtedly benefit from integrating its Chinese and foreign business, but it would have to do something remarkable to win the attention of the Alibaba’s dedicated shoppers.

Alibaba entered the cross-border e-commercemarket in February with the launch of Tmall Global (www.tmall.hk), which sells foreign brands such as GNC, Lancome, and Coach directly to Chinese shoppers. (Foreign brands can also set up shop on Taobao and Tmall, but they must have a legal entity in China). The site has channels for formula and other baby products, nutritional supplements, clothing, and cosmetics. With its huge user base advantage over competitors like JD.com, Suning, and Amazon, Tmall is the force to watch in the cross-border shopping market.

Alibaba has a far more limited reach among foreign brands than Amazon does, but the noisy parade of media coverage leading up to Alibaba’s massive IPO is helping it to attract the attention of retailers throughout the world. Earlier this week, Alibaba made a splash by reporting $1.1 billion in operating income for the second quarter, 42% more than Amazon and Ebay combined. Analysts also noted that Alibaba’s sales on mobile devices, considered key to capturing e-commerce sales over the next decade, more than doubled from the previous quarter.

With big names like Burberry and Apple recently joining the Tmall Global platform, brand reach may not be a problem for Tmall Global for much longer. “Alibaba is being very proactive to recruit as many brands as possible. If Tmall can get these products soon, it will have an advantage over Amazon, because Tmall has a huge market,” says Zhu. “Things can change very quickly.”