How Important Is Japan For Amazon?

+13.47%
Upside
180
Market
205
Trefis
AMZN: Amazon logo
AMZN
Amazon

Amazon‘s (NASDAQ:AMZN) offices in Japan were recently raided by the country’s antitrust regulator, the Fair Trade Commission, on suspicions of unfair practices followed by the e-retailer. It is alleged that Amazon forced retailers to set lower prices for their products, particularly e-books, on its website to fight increasing competition. The case focuses on the company’s practice of seeking assurances of the lowest prices from suppliers, termed as a “most-favored nation clause” in e-commerce. Although these lowest-cost assurances may not necessarily violate the letter of Japanese antitrust laws, the regulator is likely to focus on whether Amazon misused its dominant position in the Japanese e-book market to crowd out competition using these practices. This is the first case of its kind for the Japanese Fair Trade Commission. [1]

The outcome of the investigation will be extremely important for Amazon, as the company generates over $8 billion in sales from Japan, including e-commerce and Amazon Web Services. amzn-1Japan’s share in Amazon’s global sales has consistently declined over the last three years, and any dent in sales due to regulatory issues could further erode Japan’s prominence for the company. Japan’s e-commerce market is currently dominated by Rakuten, whose market share (around 25%) is equal to the combined share of Yahoo Japan Shopping and Amazon Japan. [2] [3]

Japan’s E-Commerce Potential

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Japan is the fourth largest e-commerce market in the world, with about $80 billion in online sales, after China ($563 billion), the U.S. ($349 billion) and the U.K. ($94 billion). The Japanese e-commerce market is interesting because about 80% of all users (97% of all online users totaling 109 million) shop online, and e-commerce sales are increasing at over 7% annually, despite a declining population and near-zero GDP growth rates.

Another factor that is encouraging Amazon to increase its focus on Japan is profitability. Amazon has so far struggled with profitability in its e-commerce business, with operating margins remaining negative in international markets in the last two years, while in North America the company maintained operating margins of just 3-4% in the last five years. On the other hand, Rakuten generated operating income of about $142 million on a margin of 12.3% in its e-commerce business in fiscal 2015, which is significantly better than Amazon’s. Owing to large-scale adoption of e-commerce and a level of customer maturity, e-commerce in Japan can generate significant profits for Amazon going forward if the regulatory issues are taken care of. ((Top 10 ecommerce markets in the world, Ecommerce Insights, May 20 2016)) [4] [5]

It is important for retailers like Amazon to adapt to the Japanese language and culture to attract and retain customers, as a significant majority of the country’s population of 125 million exclusively speak Japanese, and loyalty and customer service are highly regarded in the country. In fact, a recent report states that market leader Rakuten allows only those third-party sellers on its website whose customer service personnel speak Japanese. ((Ecommerce in Japan: Marketplaces Dominate, Practical Ecommerce, Feb 23 2016))

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AWS In Japan

Japan is ranked as the second-largest market for cloud computing and cloud services in the world. Gartner estimates the cloud services market to rise to $11.5 billion in the Asia-Pacific and Japan region by 2018. [6] Japan was the top cloud market in the Cloud Readiness Index compiled by the Asia Cloud Computing Association (ACCA) for two consecutive years before dropping to 5th place in 2016. This was better than the cloud readiness of the U.S. and only slightly behind the U.K. [7]

Amazon Web Services (AWS) is currently the second largest player in the Japanese website hosting market, with a share of 19%. This market is dominated by CentOS which has a share of 38%. AWS is also one of the largest players in the overall cloud services market in the country, dominated by U.S. companies – AWS, Google, IBM, Microsoft and Salesforce. One of the biggest drivers of the growing cloud services market in Japan in recent years has been the government’s “Kasumigaseki Cloud” project aimed at rolling out government services through the cloud, and encouraging public and private sector collaboration to improve government functions and accessibility.

Japanese government regulations provide a level playing field to foreign players, enabling the likes of Amazon to get a foothold in the growing cloud infrastructure market. Regulations are expected to become more beneficial to foreign players going forward with the implementation of the Trans-Pacific Partnership (TPP) and its condition of open data flows. As a result, we expect AWS Japan to report higher sales growth than Amazon’s e-commerce business in the country going forward.

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Notes:
  1. Amazon Japan’s pricing deals under investigation, Nikkei Asian Review, Aug 10 2016 []
  2. Ecommerce in Japan: Marketplaces Dominate, Practical Ecommerce, Feb 23 2016 []
  3. Amazon, Rakuten battle for Japan, Il Manifesto, Nov 21 2015 []
  4. INFOGRAPHIC: JAPAN ECOMMERCE MARKET, Digital River, May 22 2015 []
  5. Rakuten Financial Info 2015, rakuten Investor Relations []
  6. Cloud Computing Top Markets Report, Trade.gov []
  7. AsiaCloudComputing.org, 2016 []