Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN) generally aren't considered competitors. Alibaba is the top e-commerce and cloud player in China, but Amazon dominates those two growing markets across many other countries.

However, Alibaba considers Europe to be a priority for its expansion beyond China. That expansion, which includes the launch of its AliExpress marketplace and Alibaba Cloud services across Europe, could set it up for a showdown with Amazon's online marketplace and AWS (Amazon Web Services) in the near future.

A view of Europe from space.

Image source: Getty Images.

How Alibaba could hurt Amazon in Europe

Alibaba launched AliExpress as a cross-border e-commerce platform in 2010. It started out with a business-to-business focus that let Chinese companies sell products to international buyers, but the platform gradually expanded to include business-to-consumer and consumer-to-consumer transactions.

AliExpress became the top e-commerce marketplace in Russia and one of the top websites in Brazil. Alibaba maintained that momentum by launching AliExpress in Europe last year with an initial focus on Spain, Italy, and Turkey. It also opened its first brick-and-mortar store in Madrid last August to showcase about 1,000 products from 60 brands.

To attract sellers, AliExpress aggressively undercut Amazon's seller fees. That push convinced the department store chain El Corte Ingles to open stores on AliExpress, but major apparel brands like Mango and Benetton rejected Alibaba's advances. Yet that strategy will likely continue, since the company believes that securing overseas shoppers will help it top a billion annual active shoppers worldwide by the end of fiscal 2024, then double to two billion shoppers by 2036.

Alibaba is adopting a similar strategy for its cloud platform business, which ranked third in the world after AWS and Microsoft's Azure in 2018, according to Gartner. To challenge those rivals in Europe, Alibaba is offering free trials and double-digit discounts on annual subscriptions.

The company currently operates just two data centers in Europe (in Frankfurt and London), compared to nine data centers in China. However, the overseas expansion of Alibaba Cloud -- which already includes two data centers in the U.S., one in the Middle East, one in Japan, one in Australia, and four others across Southeast Asia -- indicates that number will rise.

Racks of servers in a data center.

Image source: Getty Images.

Should Amazon be worried?

Amazon doesn't disclose its exact revenue from Europe. Instead, it only lists Germany, the United Kingdom, and Japan as its largest markets outside of the United States.

Germany and the U.K., which aren't directly in AliExpress' blast zone yet, generated $34.4 billion in revenue, or 15% of Amazon's top line, in fiscal 2018. Its "rest of world" region, which include big AliExpress markets like Russia and Brazil, generated less than 11% of its sales.

Amazon is the top e-commerce platform across most European countries, but it faces tougher competition from smaller competitors than in the U.S. Leaked internal data revealed that Amazon controlled approximately 27% of Germany's e-commerce market last year, while research firm Edge by Ascential estimates that it controls over 30% of the U.K. market.

Those are solid market share figures, but they don't guarantee Amazon's long-term safety from aggressive challengers like AliExpress, which is clearly willing to sacrifice its margins to grow its presence. Furthermore, the massive crowds at AliExpress' store opening in Madrid indicate that European shoppers are drawn toward cheaper products from Chinese manufacturers.

AWS accounted for 11% of Amazon's revenue in 2018, as well as 13% of its sales in the first nine months of 2019. That segment also generated 62% of the company's operating profits during those three quarters, which offset the weaker profitability of its online marketplaces.

Alibaba, by comparison, subsidizes the growth of its unprofitable cloud business with its profitable commerce businesses. The difference in business models makes Alibaba a dangerous rival, since it's willing to take bigger losses to hurt Amazon's core profit engine.

Last but not least, Amazon's market dominance could backfire. It already faces an antitrust probe in Europe, and brick-and-mortar retailers that feel threatened by Amazon could store their data on Alibaba Cloud instead of AWS -- just as some U.S. retailers chose Azure over AWS.

The key takeaways

Alibaba's expansion into Europe likely won't affect Amazon over the next few quarters. However, long-term investors should be mindful of Alibaba's overseas moves, since they could impact Amazon's growth over the next few years or decades.