Alibaba (BABA) is launching a Chinese competitor to the Amazon (AMZN) Echo three years after Amazon first introduced its pioneering product, but it's still likely to win in the China market because of its home field advantage in a strictly regulated country.
The $73 "Genie X1" device launching on August 8 will also compete with the Google Home from Alphabet's (GOOGL) Google, as well as four other devices from competing companies. But these well-established players will have little effect on the success of Alibaba's Genie XI in China, CFRA Research analyst Scott Kessler said.
"Alphabet and Amazon are really not market leaders in China so this solidifies Alibaba's efforts as a multi-faceted tech player that is largely focused on the Chinese market," Kessler said. Alibaba's stock was trading up 2.8% to $144.93 by Wednesday's close after the company announced the Genie X1 at a press conference in Beijing earlier in the day.
Alibaba and other big Chinese tech players have developed a strategy where they copy what U.S. tech leaders are doing because those U.S. tech players are often excluded from the Chinese market, he explained. "They may introduce the product after the U.S. player, but they're still getting to introduce the product to the Chinese market," he added.
The search engine market in China is a good example of this. Beijing-based Baidu (BIDU) was launched about a year after Google in 2000, but it's the number-one search engine in China, helped out by the difficult time Google has had entering and staying in the Chinese market. Google offered a Chinese-language version of its search engine in 2000 but it was made unavailable in China the next year. Since then, Google has been blocked several times by China. Most recently, Google was forced to pull its services out of China in 2010 due to a disagreement with Beijing over censorship rules.
This strategy also played out in favor of Chinese-based ride-hailing app Didi Chuxing, which took over Uber's business in China in August after a bruising competition. It also worked in favor of Alibaba once again in 2005 when Yahoo! (YHOO) sold its China businesses to the company because the tough regulatory environment made the fight to break into the market a costly and time-consuming battle.
Kessler said he's tempted to "scoff" at the idea of Amazon or Google eventually having an impact on Alibaba's Genie X1 sales because they can't provide the same range of services and products in China that Alibaba can simply because of regulations. If consumers can't connect their smart home device to ones that are already available in China, then they won't want it.
Baidu is the number one search engine in China as Google continues a more than decade-long battle with Chinese regulators.
Amazon launched its Prime membership service in China in late 2016 for $57.23 per year, compared to the $99 per year price tag in the U.S. Despite this, Amazon's market share was around 1.5% in China in 2015 and has actually dropped to less than 1% in 2017, according to market research firm iResearch China. The company even decided to launch a store in 2015 on rival Alibaba's Tmall Global website, a platform for overseas branded merchants to sell goods in the Chinese online retail market.
In spite of the high wall surrounding the Chinese market, tech companies still pursue it because of the country's huge population -- close to 1.4 billion and growing. Gartner analyst Werner Goertz said he expects Amazon to significantly increase its international rollout of the Amazon Echo this year after previously launching in the U.K. and Germany in late 2016. "China is so sizable, it's appealing," he said. He expects Amazon to launch the Echo in other countries where it already has an e-commerce presence, such as in China.
While Amazon will be competing on its competitor's home turf, Amazon is also on its second generation of the product and could offer a better product to consumers, Goertz noted. In China, remote healthcare and remote eldercare are very popular and are enabled by devices with cameras that allow doctors to check in on patients. These services could be done through the recently launched $199.99 Amazon Look, which has a built-in camera, Goertz said. "This will be a big part of China's future," he said.
The Chinese market will always be isolated and the "made in China" aspect means Alibaba can offer its device at just $73, compared to the Amazon Echo's $179.99 price tag, but Goertz argued that the highest quality speaker will still win out in China. Amazon said this week that its Echo device now has 15,000 skills, up from 10,000 skills in February. "That more than anything is the driver," he said. "People want to know what it can do and how many home products it can connect to."