Talks are underway to merge Amazon’s Chinese venture with NetEase-owned Kaola, according to business publication Caijing. Kaola is a Chinese e-commerce firm which specializes in selling imports.

The business publication added that an agreement had been inked late last year amidst difficult negotiations. NetEase is listed on the Nasdaq and boasts a market cap of slightly over $30 billion. Besides Kaola, the Chinese tech giant also develops internet content, including games for personal computers and mobile devices.

Amazon China Chooses to Compete in a Niche Rather than Target Alibaba Directly

Currently, Kaola is the biggest Chinese e-commerce firm that deals in imported goods, according to Reuters. Alibaba’s Tmall Global as well as JD Worldwide, follow closely behind. Kaola imports more than 5,000 brands from 80 countries. The imports are largely bought directly from overseas manufacturers.

The development comes at a time when Kaola is said to be requiring an infusion of investment. Yang Zhaoyu, the Chief Financial Officer of NetEase, recently stated in a conference call that the priority lay in expansion (loosely translated):

“At present, the company is still focused on increasing the scale of e-commerce business, expanding the market total, enhancing brand awareness and user reputation. The current goal at this stage is not to increase gross margin.”

In China, Amazon is Playing a Game it Hardly Knows – Catch Up

The merger talks could be seen as a last-ditch attempt by Amazon to catch up to local e-commerce operators. Unlike in its home country where Amazon is the undisputed e-commerce leader, the internet retailer is lagging behind in China. There, it is occupying the seventh position with a 0.7% market share, according to eMarketer.

This contrasts sharply with Alibaba, China’s biggest online retailer, which has an imposing 58.2% market share. China’s second-largest e-commerce firm, JD.com, has a market share of 16.3%.

With China being one of the world’s most promising retail markets, Amazon knows it cannot give up without a fight. According to eMarketer, China will – for the first time ever – topple the United States as the top retail market in the world this year.

“We expect China’s total retail sales will grow 7.5% to $5.636 trillion in 2019. In contrast, US retail sales will grow 3.3%, reaching $5.529 trillion. Growth rates are slowing for both countries, but China’s growth rate will exceed that of the US through 2022.”

China Dominates World’s E-Commerce Market

Notably, e-commerce sales in China will grow to nearly a third of all retail sales this year to exceed $1.9 trillion. This is not only the highest rate globally but 55.8% of the world’s online retail sales will be in China. In the United States, e-commerce will only comprise slightly under 11% of all retail sales.

The rising retail sales in China are attributed to increasing incomes as millions of its people join the middle class. For Amazon, this is not an opportunity to be missed.

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