Go online to reap the harvest

E-commerce helps Western companies gain a toehold in the huge hinterland

Although it is a relatively new kid on the block, in terms of size and spread e-commerce has no peers in China. But its real strength, as many foreign companies and brands are discovering now, is its ability to be a matchmaker in the vast and untapped Chinese domestic market.

With revenues in excess of $210 billion last year and a steadily growing customer base of more than 500 million, the e-commerce industry in China is fast catching the fancy of big names such as Louis Vuitton, Adidas AG, Samsung Group and The Walt Disney Co. Many others such as the UK-based retailer Marks & Spencer Plc and Mothercare Plc are in talks to be a part of the sunrise industry that deals with the buying and selling of products as diverse as mobiles, fresh vegetables, textiles, dresses, exotic food, machinery and personal care products.

Staff at a Taobao shop are busy packaging goods to be sent from Yiwu, Zhejiang province, to different parts of China. [LYU BIN / FOR CHINA DAILY]

"E-commerce has a key role in bolstering China's economic growth and also in increasing domestic consumption. It is a crucial tool for the government as it charts steps to rebalance the economy and ensure sustainable development," says Qi Xiaozhai, dean of the Shanghai Commercial Economic Research Center.

Pointing out the importance of the industry, analysts maintain that it is one of the few that has been recording consistently high growth rates over the past few years. The e-commerce industry has seen growth rates of more than 78 percent since 2006. Unlike the brick and mortar stores, where physical presence is the key driver, e-commerce relies more on faster, cheaper and better buying experiences and more shopping choices online.

E-commerce sales in the United States, the largest market, last year were around $225 billion, accounting for more than 5 percent of the total retail sales in that country, according to data published by the US Census Bureau. In contrast, online retail revenue in China was around $207 billion last year, representing just 6 percent of the total retail spending in the country. With the population of Internet users in China slated to grow further this year, and the fact that online shopping penetration still lags behind many developed countries, experts says they feel there are enough rich pickings for foreign companies, provided they are willing to weather the competition from domestic players.

Expanding presence

Currently only 41 percent of all the luxury brands present in China have an online presence and most of those present have not been that successful in reaching out to customers. Out of the 564 million people who had Internet access in China last year, only 242 million people placed an order online. This is something that should interest the Western companies searching for new markets to sustain growth, experts say.

While there are no doubts about the vast potential of e-commerce, it is its ability to reach out to customers in remote areas of China, where stores are few and the cost of building a physical retail presence is high. That is proving irresistible to Western companies.

According to a study conducted by Taobao.com, China's biggest customer-to-customer electronic trading website, online shopping has played a key role in unlocking the consumption potential of lower-tier urban residents in the nation. The research, which surveyed 2,006 Chinese counties last year, indicates that nearly 30 million people from these regions bought goods with a combined value of 179 billion yuan ($29.2 billion) on Taobao, up 87 percent year-on-year. That is a per capita average of 6,000 yuan, eclipsing the 4,700 yuan spent by shoppers in first- and second-tier cities. Small-town customers shopped on Taobao 54 times a year, compared with 39 made by big-city buyers.

Yiwu, a county-level city in East China's Zhejiang province, took the top spot in overall spending, with online transactions of around 3.4 billion yuan. People from Qingliu county in Fujian province were among the most enthusiastic digital shoppers, devoting 72.6 percent of their disposable income to online vendors on Taobao. In Beijing and Shanghai, the comparable figure was only 27 percent.

The keenness of county-level shoppers to buy global cosmetics and clothing brands online is also drawing more foreign competitors to China's e-commerce market. Buyers from smaller regions spent an average of 765 yuan for Estee Lauder skin care products last year on Tmall, Taobao's sister unit where business vendors sell to individual customers. In contrast, large city residents spent only 652 yuan on similar purchases.

The findings coincided with a study conducted by global consultancy firm McKinsey & Co in March that indicated online spending has played a key role in lifting total consumption, especially in less-developed areas of China.

"We found that although income in the urban areas is still low, online purchases still tend to be higher because customers have online access to products and brands previously not available, especially in locations where many retailers do not even have physical stores," says Richard Dobbs, director of McKinsey and lead author of the report.

Qi Xiaozhai from the Shanghai Commercial Economic Research Center reiterates that online shopping has been the main catalyst for economic growth, especially when it comes to uncorking the demand from lower-tier cities. "It is important for merchants and companies to build brands that resonate and inspire trust with customers online," he says.

Unlike first-tier citizens whose purchases are largely governed by exposure to products, Qi Xiaozhai says emerging customers are usually novices for whom buying a refrigerator, a pair of jeans or even a box of diapers may be a first-time experience.

Trusty ally

MaryAnn Richardson, founder of Makeup By MaryAnn, a UK company that sells makeup brushes and other fashion items, says that having a presence on Alibaba, China's largest e-commerce platform, has helped several Western companies engage, converse and participate in business negotiations with entrepreneurs from diverse backgrounds. "Having access to so many companies under one platform, especially those who are able to produce bespoke items at affordable margins, is great for start-up businesses," she says adding that it also gives companies good brand exposure.

Building trust in China's marketplace has been the biggest contribution of Chinese e-commerce companies such as Alibaba Group and Tencent Holdings Ltd.

Online shopping in China is no longer just clicking the "buy" button and has more to do with interactions, discussions on the latest trends and rating of products and services. Such interactions and communications create trust and more importantly empower the buyers, rather than sellers, experts say.

Scotland-based Sumayyah Nasaruddin, founder of Love to Dress, a fashion company, says that the Chinese e-commerce platforms have been of great help to her fledgling business. "I design long sleeve Western maxi dresses for Muslim women and manufacture my products in China using suppliers identified through the Alibaba platform," she says.

"The products and services on platforms such as Alibaba are not only easy to use but also help us check the authenticity of the other party in China. E-commerce has made it possible for us to cross borders without wasting time and money."

Chinese companies are also equally vocal in their praise for such platforms.

"I initially started using Alibaba as an additional platform to sell my products to overseas clients. But that has changed. It is now my primary source of overseas business and accounts for more than 50 percent of my total profits and orders," says Zhou Mingwang, owner of Yiwu Mingwang Co Ltd, a small export-oriented company in Yiwu, Zhejiang province. In the past five years, Zhou has received more than 200 requests every year from foreign buyers through Alibaba, with nearly 50 of these customers becoming full-time and regular clients.

"Alibaba has provided a regulated platform for companies to expand abroad and is also a hallmark of trust for foreign buyers," Zhou says.

He, however, feels that Alibaba should lift the threshold for merchants to sell online. "I think they can set even higher standards for future entrants to ensure a fair playing field as well as a good reputation for the marketplace," he says.

Business push

To understand the power of e-commerce in China, one does not need to look further than the success of Jack Ma and his Alibaba Group. Alibaba currently accounts for more than 5 percent of the total retail market in China. According to Ma's estimates, more than 30 percent of all the retail trade in China will be conducted online over the next five years.

Taobao, the group's eBay-like marketplace, controls more than 90 percent of online transactions in China by transaction value, while TMall, the group's online mall, accounts for 51 percent of the business-to-consumer segment, according to industry estimates. The turnover of these two companies outstripped the combined sales of their foreign counterparts, Amazon and eBay, last year. Other key Chinese e-commerce players such as Tencent, led by Pony Ma, are banking on customized e-commerce solutions and applications to drive growth and attract more customers.

Despite the lackluster export and import situation, Alibaba is looking to take a bigger bite of the e-commerce pie by renovating its systems for better matchmaking between merchants and buyers. Alibaba will leverage the data it collects from overseas buyers to precisely locate relevant Chinese suppliers, something that will enhance transaction efficiency by 28 percent, says Wu Minzhi, president of the company's international business.

"Today we are seeing a changed export environment in which producing bulky orders is no longer a common practice. Instead what we are seeing is more smaller-cap foreign buyers who are seeking diversified products and want to find the appropriate suppliers in China as quickly as possible," she says.

It is this changing reality that is forcing companies such as Alibaba to move beyond playing a mere intermediary role, says Qi Junsheng, business director of the international department of the company's B2B unit. Alibaba is planning to launch a "direct procurement platform" by sharing key commercial information such as emerging business trends soon, he says.

Explaining the changes, Qi Junsheng says that earlier the companies would launch their products on the online Alibaba trading platform and wait for suitable buyers to browse through the thousands of shops before deciding whether or not to make a purchase. That also required a business transaction spread over three weeks, he says, adding that the whole process might be a drag on the business efficiency of small businesses struggling to offset the global economic slowdown.

"The model also fails to help buyers precisely locate the vendors. For instance, a customer can never be sure whether his specific requirements would be catered to. It may take at least one week for both sides to negotiate back and forth, only to find out that the deal cannot be clinched because of, for instance, lack of raw materials," he says.

Payment solutions

One of the biggest hurdles for foreign companies, who are keen to be a part of the Chinese e-commerce market, is the absence of uniform payment solutions. That looks set to change now as companies such as Tencent are now coming up with solutions that offer safety and ease in transactions.

Tencent has enabled online transactions for select merchants by linking payment services to its popular WeChat smartphone application that has more than 300 million users globally. The application lets users send voice messages, photos and other media the way they might send text messages, without charging any extra fees. Since early June, WeChat has empowered a select few of its registered corporate accounts with online shopping facilities. WeChat does all back-end technical integration and support for these vendors, including page design and payment linkups. Online transactions are made available through credit cards, online banking or TenPay, the company's third-party payment platform.

The application has already attracted foreign retailers such as fast-food chain McDonald's Corp. The retailer has opened an online channel on WeChat and offers several discounts to customers who complete transactions using the WeChat framework.

Yu Ran, Qiu Bo and Cecily Liu contributed to this story.