Is China Like Amazon (But On Steroids)?

China is melting down, will Amazon be next?china_amazon_600

The Chinese government subsidises massive parts of its domestic industries making it possible for Chinese companies to sell products which can cost less than the raw material costs of a similar product elsewhere in the world.

Here are some examples of how the Chinese government props up its economy

Fishing –

Transport costs for producers (technically subsidised by the rest of the world but you get the idea) –

Auto Parts –

Transport costs again –

Car Manufacturers –

Solar Panels –

Glass Industry –

You get the picture and it is not sustainable.

In the same way Amazon uses its profits to subsidise the selling cost of its products, China does the same for its domestic industries.

And just like Amazon it could end very badly.

There is only one way Amazon’s strategy of not making money makes any sense.

Amazon must be subsidising R&D and infrastructure so that it can maintain the same selling price relative to its competitors in the future while making more profit than it does today.

Let me repeat that point because it is key to understanding of the future of Amazon, China and the future of the debt connected to both.

Amazon must be reinvesting its income today to allow it to sell at the same relative price in the future but with a larger profit margin.

It is impossible to overemphasize this point.

China must be doing the exact same thing. The massive government investments and subsidies must be paving the way for China to be able to maintain a cost advantage over the rest of the world but with a bigger profit margin in the future.

Both for Amazon and China, if the subsidies and infrastructure investment do not allow them to maintain their cost advantage and have a bigger profit margin in the future, they are both doomed to fail

The only reason China is so attractive to manufacturers is that the production costs are so much lower than anywhere else. As soon as the lower costs go away, so will the manufacturing.

And the same goes for Amazon. The main driver for purchasing from Amazon is price. As soon as the price goes away, so will the business.

Ordering from Amazon is convenient but it is not just the cost of the product that is subsidised but also the cost of the transport and the cost of the returns.

Something will have to give unless Amazon’s infrastructure spending, as I stated above, allows Amazon to sell at the same relative price, with the same relative shipping costs with the same level of customer service but with a bigger profit margin in the future.

Is this the way Amazon and China are heading?

Is China’s and Amazon’s infrastructure spending allowing them to SLASH over heads?

Is there any evidence of this happening?

You will need to speak to an analyst to get an answer to that question, I simply do not know the figures but if you want me to take a guess, I would say it is impossible.

I do not think it is possible for Amazon to cut its overheads enough so that it’s valuation makes sense.

And likewise with China. And perhaps worse. China has no inherent advantages over other countries.

China does not have access to technology that is not accessible to others.

China does not posses knowledge that other countries do not.

China does not posses and advantage in the area of raw materials.

China does not posses and advantage in terms of Geography.

China’s advantage comes from subsidies and flexible labour laws, both of which can disappear in the case of the first, and by reforms in competitor countries for the second.

And now the media is giving darker and darker outlooks for the Chinese economy on what seems like a daily basis.

As soon as the Chinese government runs out of money to subsidise its domestic industries and assuming the government spending of the last decades has not put the ground work in to allow Chinese companies to work with lower costs sans subsidises, the only way for the Chinese economy is down, at least on the export front.


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