Extinction: Amazon and the End of the American Entrepreneur

Amazon is big. Like really big. It accounts for over 50% of every single product that’s sold online. And because it’s online, it doesn’t really feel as big as it actually is.

It’s bigger than American Airlines, Walmart, Nordstrom, Walgreens, Mcdonald’s, Costco, Kroger, Nike, The Gap, Best Buy, Macy’s, and Target… combined. On a single day last year Amazon’s valuation grew by the entire valuation of Fedex. In the 5 minutes it takes you to read this article, Amazon will have conducted 90,000 new sales. It’s a trillion dollar company, and its growing.

One of Amazon’s hundreds of fulfilment centers
One of Amazon’s hundreds of fulfilment centers

Amazon has used several brilliant strategies to consolidate power. It largely avoid paying taxes by reinvesting profits into its own growth, and use less-visible arms of its business, like the hugely profitable Amazon Web Services, to subsidize the consumer-facing store, with its fast shipping at highly discounted rates. Smaller businesses can’t beat this machine, so all that’s left for them to do is join it — as a third-party seller within the system.

But Amazon isn’t just conquering the American economy, it’s fundamentally altering the way it works. In optimizing its global practices for profits at a massive scale, Amazon is becoming a major force in shifting US retail power to China — a change that will come to define the 21st century.

How Amazon Sells

The majority of products for sale on Amazon are actually sold by small business owners listed as third-party sellers. This is how Amazon is able to offer such a massive product selection — third-party sellers can list any item for sale on Amazon at the cost of a 15% commission.

One main difference between Amazon and other marketplaces, like eBay, is that each product only has one unique listing, with many different sellers. Customer reviews reference the product, not the seller. And so any new seller claiming the same product at a lower price can effectively take over an existing product listing and all the reviews attached to it.

Another distinctive difference is Amazon’s wide array of options for any given product search. This is because anyone can become a supplier, a feature which, while offering variety and discounts, has earned Amazon a scary reputation for sometimes dangerous knockoffs.

Amazon is known for democratizing the selling process, but in doing so it’s optimized its platform for transient sellers racing to the lowest price.

How Amazon is Shifting Power Away from American Entrepreneurs

Amazon is laser-focused on offering the widest selection at the lowest price. By this strategy, and because most manufacturing happens in China, US brands appear as extraneous middlemen.

Chinese manufacturer → US Brand → Amazon → Consumer.

Chinese manufacturer → Amazon → Consumer.

Amazon is motivated to cut out the US brands, and take over their profit share, by shifting their business to Chinese sellers with lower costs and thinner profit margins. The fate of Toys ‘R’ Us is instructive — within years of signing an exclusive contract with Amazon, the retailing giant was headed towards bankruptcy, undersold by a swarm of Amazon-enabled sellers, about a third of which are estimated to be Chinese.

Amazon’s interests shape its business practices. Amazon has expanded its overseas shipping infrastructure for the express purpose of allowing it to transport goods directly from China to consumers. It’s also launched programs to train Chinese entrepreneurs to launch brands that will better resonate with US customers, so that they won’t need to export to US brands.

Amazon itself will sometimes even collaborate with Chinese factories to create clones of popular products originally manufactured elsewhere. Take the case of Allbirds, valued at 1B+ for their sustainable, eco-friendly, wool shoes. They chose not to sell on Amazon, but Amazon users were searching for their product on the system. Amazon cloned the shoes — without the sustainable practices — and mass-marketed them as Amazon’s Choice.

Amazon doesn’t protect US entrepreneurs. A common strategy used by Chinese sellers is to research existing best-selling products, clone them to the best of their ability, and then takeover the listing with lower margins. There are many accounts of entrepreneurs who have launched a successful product only to have it copied and sold at a lower quality and price. Even having a patent doesn’t help — Amazon’s resolution process can’t keep up with the volume of clones, causing the original seller to lose critical ranking momentum in the meantime.

How Chinese Sellers are Advantaged

Chinese sellers achieve lower prices in other ways besides proximity to manufacturing centers.

  1. Subsidization by E-Packet Trade Agreement

E-packet is an agreement between USPS and Hong Kong Post with the goal of increasing international ecommerce sales from China. Postage rates are heavily subsidized by the US government to allow US consumers to purchase goods from China with a lower shipping cost. The irony, however, is that costs ends up being significantly cheaper when sending from China than from within the US.

2. Access to Data Leaks

The illicit sale of private seller data by Amazon employees is a particularly pronounced problem in China. This access makes it easy for a Chinese competitor to obtain and use information to takeover listings of their US counterparts. Amazon insisted publicly that it would crack down on this problem, but a year later and there are still many third parties offering these services.

3. Tolerance for Multiple Accounts

One of Amazon’s strongest rules is that each seller can only have one account. In the US, this rule is easily enforced because each seller account is attached to a distinct Taxpayer Identification Number (TIN). This rule puts a lot of pressure on US sellers to stay well within Amazon’s other rules, as a suspension for whatever reason would be game over for their business. In China, TINs are much more easily duped. This allows the average Chinese seller to have, by some estimates, 20 accounts or more. They can risk gaming the system because if one account gets banned, they can simply use another.

According to one expert, who previously worked for a large Chinese Amazon seller, “In our company, we literally needed a diagram detailing all of our selling accounts so our staff could keep track of these accounts”.

4. Prevalence of Review Scamming

Clusters of Chinese accounts are often used to either rank listings quickly or to review bomb competing sellers’ accounts, causing Amazon’s algorithm to issue a ban. By the time the competitor’s account has been reinstated, the damage has been done.

The consequence of these factors is that, while US entrepreneurs are highly motivated to sell through Amazon because of its sheer scale, their business will have its growth capped at a certain point, at which other sellers — sometimes in collaboration with Amazon itself — will copy their product and undercut its price. The original seller can always leave, but their intellectual property will have already been digested by Amazon and a variety of mostly Chinese sellers.

Why You Should Care

When you’re buying from Amazon, you’re most likely buying from a Chinese seller, able to offer the lowest price through a combination of cheaper manufacturing costs and sometimes dubious advantages or misrepresentations.

In the short term, most of us, as consumers, will continue to enjoy Amazon’s convenience, selection, and prices, even as we become increasingly used to wading through junky listings made to resemble, just enough, what we had in mind. There’s an illusion that we’re in an entrepreneurial era because tech icons and startups are idolized in the media. In reality, we’re starting half as many companies as we were 30 years ago, and far fewer than that in the retail sector.

Over time — as monopolies have shown us again and again — there will be costs to stamping out entrepreneurs and competition. Prices will normalize, quality will decline, innovation will decrease, variety will narrow, and working conditions will worsen. Amazon’s recent purchase of Whole Foods has resulted in criticisms along exactly these lines.

More broadly, Amazon’s shaping of the world according to its interests is causing a sea change of cultural influence — from the West, and its practices, to China, and theirs. Those in the West will increasingly need to adapt themselves to a world in which being competitive entails longer work weeks, lowered labour standards, and dwindled incentives to make something good and new.

Foxconn, Chinese manufacturer of Amazon’s Alexa

Co-authored by Jackson and Jeff Cunningham



Making beautiful cat furniture @ tuftandpaw.com. Twitter: https://twitter.com/jacksonc

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