Publisher: International Trade Center
China’s e-commerce market: Big, growing, and full of opportunities for firms from outside China
China’s e-commerce market is big, growing fast, and increasingly open to goods from abroad. Thanks to the combination of overseas travel, increased Internet usage, exposure to foreign brands as well as surging demand for foreign products from Chinese consumers, China is projected to become the world’s largest cross-border e-commerce market by 2020, according to China Internet Watch.
There are various reasons for this rapid growth. Rural communities in China have found a source for cheaper and better quality goods: e-tailing has cut consumer prices. Depending on the category, goods cost an average 6% to 16% less online than in stores. According to Nielsen, Chinese consumers are increasingly demanding, and seek the quality and reputation of foreign goods.2 Nearly one fifth of those who shop online increasingly buy goods from vendors outside China. According to McKinsey, the country’s cross-border shoppers prefer items that are either too expensive or too scarce at domestic stores. For example, shoppers in cities use overseas sellers most often for premium healthcare products (for example, dietary supplements, medicines and medical instruments). Consumers in smaller cities primarily shop for luxury goods from foreign vendors.
The major actor in the Chinese e-commerce market is Alibaba. The reasons for China‘s extraordinary e-commerce growth are China’s size and booming economy; the relatively poor standing of its retail sector when the Internet first reached the country; and government policies on investment, infrastructure and taxation that favoured the development of e-commerce and related logistics and services.
The size and growth of the market is leading to significant investments in infrastructure. To keep up with increasing demand from smaller urban and rural areas, online retailers are seeking to expand logistics infrastructure and services. For example, Alibaba’s logistics arm, Cainiao, owns 180,000 express delivery stations for product shipment and has recently expanded its fresh food distribution centres across China. The firm recently completed its first external funding round and is expected to spend $16 billion over the next five to eight years to expand its network.
The Government of China has promoted the investments and establishment of special e-commerce zones, such as the China Hangzhou Cross-border E-commerce Comprehensive Pilot Area (Hangzhou is widely considered to be the e-commerce capital of China). One key area where the government would like to see increased involvement by foreign companies is the availability of international payment gateways; the Ministry of Commerce estimates that cross-border payments originating in China will top $1 trillion in 2016. The sheer size of the market is expected to prompt payment gateways around the world to seek partnerships with Chinese counterparts,5 and international payments should exceed 30% by the end of 2016.
How lessons of inclusive growth can be applied outside China
E-commerce has had a significant impact on inclusive economic growth in China. Specialized manufacturing centres have emerged in formerly rural locations based on the production and distribution of goods driven by demand from e-commerce markets. One example is the development of the wooden furniture industry in the town of Shaji. By the end of 2015, after only eight years of development, Shaji had over 4,000 e-commerce traders, 3,000 online stores, 302 furniture manufacturers, and 38 express logistics deliverers, with monthly outputs of nearly 40,000 pieces and 15,300 employees.
The case of Shaji’s wooden furniture industry is not an isolated one: by the end of 2015, there were over 780 ‘Taobao Villages’, villages that have more than 100 active online shops marketed through Taobao or where the total number of active online shops exceeds 10% of the village’s households, with a village’s total annual e-commerce turnover reaching $15 million.
The example of these Taobao Villages proves that considerable potential exists for increasing the participation of rural communities in e-commerce. According to government statistics, by December 2014 there were 649 million netizens (people actively using the Internet) in the country, 178 million (28%) of them in rural locations.
Other countries are studying China’s success, perhaps none more so than India. According to economists Pranjul Bhandari and Prithviraj Srinivas at HSBC, the promotion of online shopping in India inspired by the Chinese model could generate 12 million new jobs by 2025.6 The economists suggest that if India were to replicate the formula that led to rural China's embrace of e-commerce on Taobao, as many as 5 million villagers could set up online shops by 2025.
Getting into Chinese e-commerce: challenges for enterprises from developing countries
For enterprises from outside China there are many challenges to overcome in accessing Chinese e-commerce platforms and selling to local customers. The first of these is to understand the particularities of the Chinese market and how its e-commerce activities are structured.
This applies particularly to the Asian least developed countries (LDCs) that border China and that hope to emulate its success and exploit the opportunities presented by its growing demand for foreign goods. These countries – Afghanistan, Bhutan, Lao People’s Democratic Republic, Myanmar and Nepal – have high-quality produce and unique goods for which viable market niches could be developed in China, accessible through e-commerce marketplaces.
Another key challenge for developing countries and LDCs is to offer platforms for improved efficiency in production and logistics, without relying on significant public subsidies or support from home-grown e-commerce giants. The answer lies in facilitating collectively-owned solutions: access to technologies, supporting services and commercial promotion that can enhance the potential for small firms to work together and share the costs and benefits of better access to international marketplaces and payment solutions.
Entering new markets always raises the challenge of the unknown, but identifying the most appropriate markets and local partners can be facilitated by improving access to market knowledge and information. China indeed harbours particular language and cultural barriers that can be significant for firms from the United States of America and Europe; the Asian nations at least have the advantage of relative linguistic and cultural proximity. Local knowledge is especially vital to identify niches of demand for specific products available in the subregion, and most importantly to advertise in a manner that appeals to the market. Information needs to be gathered and regularly updated on import requirements, taxes and duties so that goods can be presented for import at a known door-to-door price, including transport costs and any other charges.
The marketplaces and payment solutions used so successfully by merchants in China are not as open to enterprises from neighbouring countries as it might first appear, however. Small enterprises from other Asian countries are unlikely to have the trading history and business credentials required to register in Chinese marketplaces, nor to have access to merchant payment solutions and international banking arrangements. To overcome this hurdle, firms that have grouped together can register a mutually owned business entity or contract with a third party to represent them in China, registering them in marketplaces and signing agreements on their behalf with payment solution vendors.
Managing customer relationships in China, including implementing a returned goods process and managing enquiries and claims, is yet another critical and potentially costly requirement that is best structured and managed by third parties in China on behalf of small foreign enterprises.
Finally and perhaps most important, partners, especially those with a presence in China, should be included in the collective solution developed for facilitating e-commerce.
Illustration Photo: Thailand's senior government officials, led by Deputy Prime Minister Somkid Jatusripitak, and Alibaba Group's management team, led by Executive Chairman Jack Ma, attending the signing ceremony of an agreement to help Thai SMEs succeed in e-commerce (credit: Alibaba Group)