Red Dawn: The Chinese Assault on the U.S. Amazon Marketplace
It’s not unlike an invasion.
Over 1-million new sellers joined Amazon marketplaces around the world last year, according to Marketplace Pulse. That’s around two every minute! It’s estimated that one-third of these sellers are located in China – and they’re infiltrating the lucrative, free-spending U.S. market with steadily increasing success.
Is Amazon Giving Chinese Sellers Preferential Treatment?
Amazon is rolling out the red carpet for these Chinese sellers. For one thing, it’s holding regular conferences in China to promote its U.S. marketplace. It also offers exclusive perks to those who sign up:
- Amazon’s been offering end-to-end freight solutions to China-based FBA sellers, from China to a single fulfillment center in the US with no inventory placement fee since 2015 – a feature called Lock FC – so they don’t have to split their shipments
- Amazon has hosted conferences targeted at sellers in China for several years – they hosted the first conference in New York only this year
- Amazon industrial parks in China (over 10 in Shenzhen alone), partially funded by the Chinese government, offer lectures, consultations, and 3-12 month long co-working programs to oversee training for sellers
According to Sebastian Gunningham, Amazon’s Global Senior Vice President, the perks aren’t going to stop anytime soon. “Amazon has an edge to help Chinese companies expand out of China. We operate 109 fulfillment centers and serve 285 million active users all over the world. We plan to increase our ability to facilitate Chinese manufacturers creating their own brands for global consumers.”
USPS Subsidizing Shipping for Chinese Sellers
And Amazon isn’t the only one extending a rather large helping hand to sellers based in China.
The welcome mat from the United States Postal Service (yes – OUR postal service!) includes subsidized shipping by ePacket, volume savings, and free shipping software. The result is that it’s cheaper to ship something from China to the US, than it is to ship within China itself! As if that isn’t enough, it’s so expensive for consumers to send a product back if they don’t like it, that Chinese sellers are practically immune to returns.
Check out these numbers:
- It’s almost $6 to ship a one-pound package from South Carolina to New York. The cost from China to NYC is only $3.66! AND you’d have to spend around $50 if you wanted to send that package back to China!
- US sellers also get a raw deal when they ship outside the country. A nine ounce package from China to Toronto, Canada or London, England costs less than $4. From the US to Toronto, we pay $14.73 and to send it to London, it’s $21.28!
Other Competitive Advantages Chinese Sellers Have
What’s worse, sellers based in China also have a distinctive geographic advantage in being so close to their suppliers. While the rest of us can take up to four weeks to scope out a factory, a Chinese seller can take a cab there and settle things in a day. Talk about ‘speed to market’! Very few of us are close to our suppliers, who are probably scattered all over the country or world. There’s also the fact that China has cheap labor and Chinese sellers are hiring savvy Western marketers – combining the best of East and West advantages.
Putting all of these pieces together paints a rather startling picture.
Because China-based sellers’ overall shipping and product costs are lower … because they can ship their goods thousands of miles across the world for pennies on the dollar … because they have access to cheaper labor … because they’re so close to their suppliers … they can turn around and underprice – and outsell – their American competitors on the U.S. marketplace. For U.S. third-party sellers, in some cases, there’s no getting around it. The Chinese simply have the upper hand when it comes to cost. So, it’s no surprise that 34% of top Amazon sellers are based in China!
And it’s not going to stop anytime soon.
In fact, this trend is expected to not only continue but increase! The Chinese government is investing heavily in ecommerce infrastructure, funded by the billions of dollars they’re extracting from other countries through international ecommerce. This is the new reality.
Now we’re not saying that the situation is hopeless for U.S. third-party sellers, or that Chinese-based sellers will dominate every category they enter – just that competition is going to increase, and there will be instances where Chinese-based sellers will have the upper hand.
How to Beat Chinese Competitors At Their Own Game
However, there are things a U.S. third-party seller can do to hold their ground and fight back.
In order to survive and thrive, you need to achieve mass scale. You must be selling and buying higher quantities of products. To drive up your sales and purchasing volume, you must first drive down your costs – and then your prices.
The three costs that you, as a third-party seller, have a realistic chance of lowering are:
- Product Costs: Even if product costs are fixed initially, you might want to consider aggressively lowering your prices. The idea is to sacrifice short-term profitability for long-term survival and growth. While selling products for less profit or breakeven is less than ideal, the payoff in the form of higher sales and purchasing volume – which provides the leverage necessary to negotiate lower product costs with suppliers – is well worth it in the long run.
- Shipping Costs: If you can fulfill orders for less, you might be able to outsell your competitors if you pass the savings along to your customers in the form of lower prices. To do this, ‘catalog overlap’ is required. Catalog overlap is buying the same SKU from different suppliers in different locations. This lets you increase your gross profit margin after the sale by routing orders to the location closest to the end customer.
- Operating Costs: If you’re unwilling or unable to lower your product or shipping costs, you need to look at lowering operating costs – specifically payroll – usually the highest expense after buying product. Your ability to compete depends on your net margin, which factors in the operating costs of the business such as payroll, rent, utilities, etc. The best way – if not the only way – to generate higher net margins is to have a system performing tasks that employees now, or will, do. If you can drive the same total revenue with 1-2 fewer employees – OR – if you can increase revenue by 30-40% without adding staff or increasing your operating costs … your net margin will increase.
If you can successfully lower one or all of the costs above, and you’re willing to pass the savings onto your customers by lowering prices, you’ll increase your sales volume. Which is what you need to do to survive. But, this increase will also put more stress on your business to keep up and operate more efficiently.
Why Operational Efficiency is Now a Basic Competitive Requirement
Ask yourself: Can I realistically handle double or triple the sales volume without hiring employees and increasing my operating costs? If the answer is no, it’s time to take a good hard look at your operations and understand its role as a catalyst for long term survival and growth.
- On average, how many packages can you ship per hour? How would you handle it if that number doubled, tripled or even quadrupled?
- How much time do you spend processing sales and purchase orders? What if you had only half that time, or if you have to process twice that amount of orders with the same number of people you have now?
- How precise is your rate shopping process? Can you select the lowest cost fulfillment method for every line item of every order with 100% accuracy? Are you considering each suppliers’ location specific carriers, negotiated shipping cost savings, and available shipping services levels? If so, how much time does this take?
Each question leads back to the core concept of operational efficiency. How efficient are your systems and processes? Are they producing maximum results with minimum effort? Because the key to long term survival and growth in today’s constantly changing marketplace comes down to one thing: the efficiency of your operations.
Operational efficiency is the only way your business can stay relevant.
The third-party sellers who continue to rely on manual processes and disconnected systems are going to lose. Those who want to win need to make it their mission to eliminate or automate as many processes as possible.
Every area of your business – from purchasing to fulfillment – must be connected. True end-to-end integration will provide the data centralization and data integrity that process automation requires. This allows you to manage inventory, fulfill orders, rate shop, and do all the other jobs that need to be done each day for less than your competitors do … which means you have a better chance of outpricing – and outselling – them.
You need to do this now …
… before Chinese sellers leave you in the dust. Their lower shipping costs, supplier proximity, and cheaper labor give them a decided advantage in some cases. You need to focus on leveraging your advantages by cutting costs and streamlining operations.