Bottom line: Amazon's withdrawal from selling domestic goods to local buyers in China was inevitable due to its lack of a standout service and cut-throat competition from Alibaba and the money-losing JD.com.

The e-commerce headlines have been buzzing these last few days with word that global giant Amazon (Nasdaq: AMZN) is abandoning China, representing the latest setback for a western Internet company in the large market. Amazon has come out with some statements clarifying the matter, in a move somewhat akin to what happened when Internet peer Google (Nasdaq: GOOG) made a similar withdrawal nearly a decade ago.

As Google did then and Amazon is doing now, both companies are being quick to point out that they aren't completely withdrawing from China, but rather are just exiting what's arguably their most important business. In Google's case it shuttered its core China search engine. Now with Amazon, the company says it's shuttering the part of its business that sells domestically-sourced Chinese products to customers in China. (English article)

To be more exact, Amazon is shuttering its platform that allows domestic Chinese merchants to sell to Chinese consumers. It's also halting its own direct sales of China-sourced goods to Chinese consumers. At the same time, it will continue to operate its cross-border e-commerce platform selling foreign goods to Chinese consumers. It will also continue to sell Chinese Kindle e-readers, and support a China Kindle store. Lastly, it will continue to offer its popular cloud services to Chinese consumers.

In a nutshell, the company is effectively surrendering the most lucrative part of the China market to incumbent behemoths Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD). Some might call that a no-brainer, since Amazon had less than 1 percent of that market, despite being in China for years. By comparison it seems to be doing better in cross-border e-commerce, which caters to a growing number of Chinese who prefer to buy imports over locally-sourced goods that often have spottier reputations.

So how did we get to this place, and what does it mean for Amazon? Many are pointing out that this withdrawal represents the latest such move by a major global Internet company that couldn't compete in China. Besides Google, others that have made similar attempts that ended in failure include former search giant Yahoo, as well as B2C specialist eBay (Nasdaq: EBAY) and the likes of smaller names like recruitment specialist Monster.com.

Latest Failure

People inside China like to jump on these failures and point out how such big western companies didn't understand the market and tried to simply use their global business models rather than create country-specific products. I agree with that explanation to some extent. In such a huge market like China, the western companies that perform the best are most often those that truly "go local" and effectively start from scratch rather than just trying to tweak their global products here and there.

But I also like to point out that part of the China "business model" is one that most western companies rarely accept for long, namely the focus on sales and market share at any cost, even when it means losing money for years. Former eBay chief Meg Whitman was famous for saying that "free is not a business model" back when her company first entered China in the first decade of the 2000s, responding to the challenge of an Alibaba Taobao that was just starting out at the time.

Fast forward to the present, when the free or heavily subsidized business model is still widely accepted and practiced by Chinese Internet companies. Sure, in rare cases such a model will work, and people point to Alibaba itself as one such case that has paid handsome dividends for those who stuck out the free route for so long. But in the lion's share of such cases investors inevitably get tired of funding constant money-losers, with the result that such shops end up closing when the investment taps turn off.

The Chinese tech scene is currently littered with such cases, including shared bike operators Mobike and Ofo, as well as the Uber-like Didi Chuxing. JD.com, which is one of the companies that drove Amazon to withdraw, is itself losing money hand-over-fist, and trying desperately to find a road to profitability. (English article) At the end of the day, China really doesn't look like a good fit for any profit-minded western Internet company, though undoubtedly many will continue to try their luck in the cut-throat market.