As part of my interest in figuring out how Amazon’s pricing system works, I also wanted to try and get some perspective on Amazon’s lively list of third party resellers. As third-party retailers have exploded on the platform in recent years, investors have attempted to try and consolidate some of the action to create economies of scale. After all, it’s not drop-shipping that’s tough– it’s figuring out how to scale. Figuring out how to compete, as the little guy, with a global company that will stop at nothing to make as much profit as possible, whether by copying companies’ products on their platform, illegally suppressing union labor, or manipulating prices even to sell products at a huge loss. This led me, of course, to AliExpress. In the business realm, we often talk about “disintermediation”– a fancy word that just means “cutting out the middle man.” Is AliExpress the new Amazon? Let’s review the question from a firsthand consumer experiment of sorts!
Origins of the “Chinese Amazon”
AliExpress is the foreign office, if you will, of Alibaba (NYSE: BABA [ADR]), a Chinese upstart that has taken the world’s increasingly saturated retail markets by storm. While Alibaba was founded in 1999, just a few years before eBay busted into China’s market, most of the company’s growth has been in the past decade– concurrent with the explosion in growth-happy Silicon Valley investors venture capitalizing, well, every damn thing in search of them bucks. This has also been concurrent with the explosive growth of China’s mass consumer class amid the country’s meteoric arrival on the stage. Alibaba’s sales have grown more than 70-fold in the past decade. Much of this comes from AliExpress, which sells consumer goods (b2c) versus Alibaba’s bulk and industrial goods (b2b). The company– which, oddly, does not actually sell in China- is effectively the Amazon of Russia and Eastern Europe, and is gaining traction in western Europe and the US as well.
Competing With The Giant
1999 might feel like ancient history by now. Remember when Amazon only sold books and CD’s? (Also, remember CD’s?) But again, the most explosive growth of these eCommerce companies has really been in the past decade. Amazon itself only surpassed Wal-Mart in market capitalization in 2015. And now, Alibaba is on the trail. Of course, there are some hefty logistical challenges for the Chinese retailer that Amazon doesn’t face. Like, you know, shipping products across a giant ocean. Shipping by air freight versus gigantic, Suez Canal-clogging ocean freighter (too soon?), costs about three times as much. It’s thus generally reserved for small, high-value items, which means that Ali often cannot compete with Amazon for items that have a lower value-per-weight ratio– more on this in a minute.
Alibaba can sell you bulk consumer goods, but it can also sell you industrial products. Machine tools. Giant shrink wrap machines. Someone once created an account with my phone number and the fake name Chamd Fasnacht on Alibaba and for a few years I’d get call of these inquiries, like, “Hi Chamd, how are you dear? Would you like to buy some GRAIN SILOS?” This is a great microcosm of a platform based in a country with serious security issues and some struggles with cultural competencies in connecting to the US market. Be the Chamd you wish to see in the world.
High value in small objects
There’s a lot of “very-cheap-but-caveat-emptor” stuff on the platform. Of course, the emptor can’t really do their due diligence when the product is six thousand miles away. So the price is the major selling point. But what’s really wild about AliExpress’s business model is that there are a limited range of things you can buy that are, well, basically just the cost of shipping. We’re talking a total cost of $1 or $2 for something or other, typically a very small object.
We know that labor costs in China have been increasing for years. Prices have also been increasing, raising concerns about inflation globally. This makes it even harder to imagine how it’s profitable to ship something across the ocean, especially given the previously raised issue of global supply chain disasters like the Ever Given. So, this might make sense now, but it’s probably not going to be a thing in ten years.
Value density & value-to-weight
I mentioned the value-to-weight ratio. This might also be called the value-to-volume-slash-weight ratio, because it’s early still and I haven’t come up with a better name yet pre-coffee. Ordering a customized MacBook from the Apple website will often involve shipping via some international courier on a few planes and a few trucks directly from China to your doorstep in as little as a few days. A MacBook is also a very high-value item, and it’s very small. Some objects, however– like some polypropylene parts organizers I’ve been shopping for- are no cheaper on AliExpress.
This is because they have a very low value density per volume. A bin with a volume of 2000 cubic inches that only sells for $1? You could jam a whole plane full of these but it’d never pay for the high cost of shipping. This is why a lot of plastics end up being made in the US. This is also true for very heavy objects that aren’t very profitable to ship. Let’s take some extremes like a bag of compost that you can buy from Home Depot for $1.95. A large chunk of that cost involves shipping the bags in pallets on a very, very heavy truck. That’s not the kind of thing you can buy from Ali, obviously, but it’s a good illustration of what kinds of things aren’t going to be coming from across the ocean.
Fit is always a weird thing when buying online. It’s especially harrowing buying from Chinese retailers who don’t necessarily understand American sizing or fit. You’ll get listings like, “Asian XXXL = US L” that gets really, really tiresome. Yes, I know, we’re fat! You’ll also buy a pair of pants that fits your thighs comfortably but fits your calves like some sort of unholy, polyester shrink wrap.
Composition labeling is also weak to nonexistent. You’ll see a line that says, “Material: Polyester,” right above another line that says, “Material: Cotton Blend.” Sometimes, there will be some Chinese text that you can translate into something that is vaguely intelligible. Like, PROCESS RECYCLED CELLULOSE FIBER (viscose or rayon, one might assume). As someone who’s very picky about fiber and material composition, this is generally a hard “no” for me. There’s also warranty risk. If something goes wrong, will the company replace it? Will they refund you? Who knows? I’ve been banned from the Wish App for disputing a payment with my credit card over a warranty that a manufacturer didn’t honor.
Advice: unless the deal is really worth the risk, skip it.
What I’ll call “unspecialized” electronics have come a long way in recent years. Consider the high “convenience cost” of the $10 junk USB cable sold at the gas station down the block. You can get a ten-pack of these from AliExpress for about the same price. And they’ll probably hold up quite a bit better. The question is whether you can stand to wait a month to get them. A good example is a powered USB hub that I found for $12 including shipping– versus $20 for a similar one from Amazon. Why is Amazon so much more expensive? Well, returning to the value density question, Amazon has to store all of these things in its distribution centers. That’s not driving down the costs for them.
Advice: Go for it, as long as it’s for non-name-brand products and you don’t need it tomorrow.
Completely unsurprisingly, Ali has piss-poor product information. What are these sheets made out of? Well, there are three fields, count ’em, for this information. Often it’ll say something like, “Material: Cotton,” and then, “Material: Polyester,” and then, “Material: Rayon.” I haven’t bought any housewares on the platform, but I’ve looked at a lot of them. You’ll get something like a knife that says it’s “Damascus steel” but then it turns out it’s just laser-etched to look like it’s Damascus steel. Voluntary or mandatory material labeling systems could go a long way to build trust in retailers on platforms like Ali.
Advice: worth it for some products. Especially worth it if you don’t need information about material composition.
Copycat products 👯♀️
And copycat products? We know that this has been a sticking point in US-Chinese trade relations. If you can’t make something yourself, just copy it from someone else! AliExpress retailers don’t really shy away from this. This is, in my humble opinion, less dishonorable than Amazon pretending it doesn’t do this. Some are ostensibly the real deal. I don’t know whether they’re real or copies.
But brand name electronics are probably not worth the risk of buying from a foreign retailer given the shipping time and what I might call the “customer service risk.” This is especially a thing when you’re talking about products that my broke ass will never be able to afford. Like a $700 pair of headphones (what?). Amazon’s customer service response, given the company’s stratospheric sales volumes, is usually, “oh, something’s minorly wrong? How about we refund ALL OF YOUR MONEY?” Look, I didn’t ask for the refund, I just asked whether the thing was supposed to come with a power cord!
The customer experience 📞
Perhaps the biggest struggle AliExpress will have is the fact that it lacks dedicated distribution infrastructure in the United States. Amazon’s major competitive advantage as a retail business is the fact that it’s very good at moving products. It can deliver virtually any product, anywhere in the United States, within two days. In many markets, they’re now offering same-day deliver. It’s a far cry from Kozmo.com. If anything goes wrong, Amazon usually will just throw money at the problem. A Customer Service-Democrat, if you will. Earth’s most customer-centric company! (Semantically, note the use of ‘Earth’ to appeal to customers interested in do-gooder, liberal, environmentalist causes. Plot twist: there’s nothing sustainable about mass consumption!)
In Ali’s case, customer service is limited. You can’t pick up the phone and call someone 24 hours a day, as is the case with Amazon. You’ll get messages that are all in Chinese, and you have to translate them. These are partially just growing pains with a company, but it leads us to the crux of this review, and that’s the question of cultural literacy. In my estimation, this, not the distribution issue, is the biggest hurdle facing the platform.
China’s struggle toward scale in US Markets
Ironic, I know. China’s already the most populous country in the world. How could they struggle with scale? Compare China with an emerging market in Eastern Europe. Ok, so the Iron Curtain limited trade– but after that, it was just a quick trip across the border! That doesn’t address the infrastructure challenges of growing a brand new industrial base. But it makes it easier to connect on a basis of language and culture. Think about East Germany vs. West Germany. The reunification of the two meant that East German markets were immediately open to West German companies. They both spoke the same language. This is a first key step.
The issues I’ve highlighted in these images are interesting because they show how really basic stuff– like succinct product information- doesn’t translate from Chinese into English, both in terms of literal or verbatim meaning and in terms of implication. Health is my duty? Bro, what does that even mean? Waste Band? Like. You could get literally any underwear consumer who has a vague command of the English language and figure this out. This, to me, highlights the biggest reason why Ali will struggle in the near-term. All else equal, American consumers will probably prefer what I’ll call culturally legible names– whether Hanes, New Balance, or a hypothetical brand, let’s say Johnson & Smith Brand Shoes, to Chinese branded products with no brand identity and names like GOODFUN or WISHALIFE or WOLFBSUH. (What? Why are they in all caps?)
An evolving, maturing e-retail landscape
Both Ali and Amazon are sticking around for the near future, if not way longer. But they will get some new competititors. In Korea, for example, competitor Coupang just went public. In the US, Walmart has been aggressively retooling its entire business model to compete with Amazon. And other companies have been busting into the spaces in which Amazon struggles to compete.
Backmarket, for example, is a retail platform for used electronics. Backmarket fills a niche that Amazon can’t: Amazon has a really hard time developing filters that allow users to sift through the balance of quality, credibility, and price. It’s possible to create filters to help the end user sort through this. Amazon has done this, for example, for car parts. If I’m shopping for a car part, it’ll say, “oh, is this for your 2009 Honda Fit that you haven’t driven in three months?” And I begrudgingly say, yes, Jeff, it is.
There’s also the increasing backlash against companies like Amazon for unionbusting. While China has been accused of literally using slave labor, American consumers want cheap stuff, and this seems to trounce human rights considerations for the average consumer, at least until a major regulatory intervention comes along.
Beyond eCommerce: Clouds and Logistics
And it’s not just retail itself. Just as Amazon’s distribution and cloud computing services are becoming as important if not more than the retail frontend itself, Alibaba’s cloud business is growing, as is its extraordinarily clever logistics subsidiary Cainiao. This is not to say that Ali is going to trounce Amazon– there are too many growing pains facing a Chinese company looking to overtake a US-based competitor, at least for the foreseeable future. There’s also enormous risk in this conversation as labor costs and inflation in China and globally start to dampen the prospects of, you know, trees growing to the moon, or whatever.
In the meantime? Check it out! And let us know what you think.