In 2016, China overtook the United States in becoming the world’s Ecommerce leader. With 450 million online shoppers, Ecommerce in China was generating $750 billion of online transactions for that year. But Ecommerce in China did not go as smooth as in the US. Many challenges had to overcome.
17 years ago
In 1949 the People’s Republic of China was proclaimed by Mao and the Chinese economy and retail infrastructure was called to a halt. The prices for food and fuel were set by the state and rations were distributed equally among the people. But 30 years later a new ruler, Deng Xiaoping, returned China to a market economy. But the reforming of retail was slow as the communistic mind desired to preserve the stability in the prices and supplies of basic goods. From 1978 to 1991, they forbade foreign investments in retail and wholesale. In 1992 foreign investments were allowed, but with the restriction that Chinese partners had to own 51 percent.
The turning point came in 2001 when China became a member of the World Trade Organisation. China lifted most restrictions on foreign investment in retail. Foreign retailers, like Walmart and Carrefour, started to build stores in the major cities in China.
If you want to read more about Walmart and its transition from retail to Ecommerce, read my article History of Ecommerce in the United States.
But Alibaba is different
While many Amazon clones were focused on making it possible for consumers to buy items online, Alibaba was focused purely on building a business-to-business (B2B) marketplace. By charging an annual subscription fee, sellers received an online booth to sell their products. The sellers can then buy additional services, such as sponsored keyword listings, prominent display in their product category, and certification as a “Gold Supplier” if they met certain standards.
Only later Alibaba entered the B2C market with the introduction of Taobao.com. Taking the competition to eBay. Since the Chinese merchant didn’t yet believe in the power of Ecommerce, Taobao announced that its services would be free to buyers and sellers for the first three years.
To understand how Ecommerce works in China, it’s worth taking a closer look at what made Taobao so different from eBay:
- Merchant Focus – The primary focus was the third-party merchant who was selling on Alibaba. Retail in China began with trust between the buyer and seller and by making the merchants happy, over time they would make their customers happy.
- Customizable Storefronts – Alibaba allowed sellers to build their own website where they could express themselves and differentiate their shops from others. Many used their Taobao URL on their business cards.
- A Look and Feel That Fit China – Chinese consumer expect more visual stimulation than their Western counterparts.
- Extensive Ratings – In a low-trust society like China’s, buyers need more ratings variables to better evaluate the merchants. And sellers need to evaluate the buyers as well after a successful transaction.
- Communication – By introducing an online chat function, the shoppers could ask questions to the seller get to know him and judge his professionalism. Sellers could better understand the needs of shoppers and make recommendations. And maybe reduce the price to the buyer to persuade him, because he is a friend of a friend.
The main challenges of Ecommerce in China
The Amazon business model didn’t work
In 1994 the internet hit China’s shores. Many Amazon clones entered China introducing the Amazon B2C business model. Amazon’s approach in the United States was essentially to create a large online retailer based on a high-volume, low-cost model that relied on massive scale and technology to create cost savings.
But until 2008 not enough citizens had internet access to justify this high-volume, low-margin business model. The online infrastructure had to be build from scratch, the use of credit card was rare and logistic was costly.
The eBay marketplace model was no good either
The eBay business model in the United States is assuming that “people are basically good”. And that in the US, if you place a bid, it’s a contract, and by law you need to fulfill that bid if you win the auction. That’s very clear. People would be afraid of getting sued if they did not abide by that contract.
In China people don’t care. The customers think as “I place a bid, I don’t want it anymore, tough luck.”. To solve this issue an eBay clone Eachnet, limited its auctions to Shanghai only and set up trading posts where customers could meet sellers in person after connecting online. At the trading posts customers would inspect the goods to their satisfaction and then pay cash.
It became apparent that eBay’s auction model was not suitable for the China market. eBay’s auction model had succeeded in the United States because it provided a marketplace where one-of-a-kind items could find a price. Whether it was a collectible, or a used item, the only way to determine the market price was to put it online and allow people to bid on it. eBay created a nationwide yard sale where sellers had a better chance of finding the specific item they were looking for.
Chinese, on the other hand, did not have basements or garages full of consumer goods that had accumulated for years. They had relatively few possessions and an aversion to buying used goods.
Mobile phones handle more then 51% of the online purchases
China has been on the internet since May 1989, but on a permanent basis since 20 April 1994. In 2008 China became the country with the largest population on the Internet and has remained so. As of July 2016, 53.2% of the country’s total population were internet users.
Mobile phones are already the primary means by which China’s online shoppers make their purchases; by 2015 Chinese made 51 percent of their online purchases with their cell phone. Data download speeds have increased while prices have come down. Mobile data in China are less expensive than in many other developing markets.
Logistics by 1.18 million couriers
Compared with other emerging markets, China’s logistics were good enough to get Ecommerce off the ground. It wasn’t a great logistics infrastructure, but buyers were willing to wait a few days to get a bargain online or a product they could not find in their hometown. Also the wages for man labor are low, resulting into 1.18 million delivery couriers in China.
The big Ecommerce players like Alibaba and Jingdong have setup their own logistics company for delivery of the products. Alibaba has a goal to ensure twenty-four-hour delivery to virtually anywhere in China.
Online Payment was not common
The use of digital money was not common in China until 2001. Although Credit Cards were allowed, only a few Chinese citizens had them. Next to that a Chinese merchant is hesitant to send the product before receiving payment. And a buyer is hesitant to send money before receiving the product.
Alipay, was launched in 2004, as an escrow-based payment system. It would release a buyer’s funds to the seller only after the buyer gave notice that he’d received the goods and they met his expectations. This was a big success, because buyers and sellers were assured that Alipay would assume the risk if one side of the transaction did not live up to its obligations.
Low Trust between buyers and sellers
Buyers still were filled with uncertainty about the quality and origin of goods offered by online vendors. Although seller ratings helped, shoppers still had nagging questions. Will this really be an authentic Nike shoe? Were these L’Oréal cosmetics properly stored in transit? Is this really a new iPhone?
Alibaba opened Taobao Mall or Tmall, which allowed larger and more qualified sellers to set up branded storefronts inside a premium channel within the Alibaba B2C marketplace. Sure, the prices were slightly higher. But the shopping experience was better. And it came with the guarantee that Tmall had certified the sellers to guarantee transactions if the seller attempted to cheat the buyer.
Although Tmall is a separate website from Alibaba`s Taobao, its listings were integrated in Taobao search results.
China’s evolving ecommerce landscape is dynamic and complex. But China’s online retail has already leapfrogged past the West. Ecommerce in China is more creative than disruptive and dominated by marketplaces. “Online to Offline” will be more important to China than in the West. Traditional retail stores in China will be designed around online retail, not vice versa.
Even the West can learn from the challenges and opportunities of Ecommerce in China. It is creative and resilient and thinking of new business models to be profitable. And even during a crisis, like SARS, the Ecommerce market has grown.
Most of the knowledge of Ecommerce in China I gained by reading the book Six Billion Shoppers.