The e-commerce war of attrition

Online retailer is resolute as the bullets fly

When China's biggest online electronics retailer 360buy.com claimed it had booked sales of 350 million yuan ($55 million, 44 million euros) in a day in a price war of home appliances on Aug 15, Mike Chou, president of Newegg.com.cn, the Chinese arm of the US online electronics retailer Newegg Inc, did not seem fazed.

The company, based in City of Industry, California, has been criticized for its slow progress in China and in localization, but Chou says he thinks Newegg should focus on its own core competency, rather than taking part in an eye-catching, but expensive, game of price cuts.

After being in China for 11 years, Newegg China wants to act as a bridge between Chinese producers and US consumers, something that its major rivals in the United States, Amazon.com Inc and eBay Inc, are doing in China too.

Chou, who took his post in March, says Newegg China can survive in the highly competitive market if it succeeds in its new initiative.

Newegg, which claims to be the largest online retailer of electronics in the US, is preparing for a platform called Cross Country Online Shopping and Selling, to be introduced in November.

It aims to put more made-in-China products onto overseas markets and make it easier for Chinese to buy overseas products. All data, including product information, inventory and feedback from consumers can be synchronized to Newegg's different branches.

"Newegg is a company with a mature network across countries that enables us to operate a transnational online business efficiently," Chou says.

"We can benefit from bridging the demand and supply gap between China and the rest of the world."

Newegg has three markets on this platform: the US, the Chinese mainland and Canada. Mexico, Europe and Taiwan are expected to join the platform soon.

"If consumers want to buy something overseas they usually turn to global shopping service providers and have it delivered to them," Chou says. "However, this service raises many questions: whether the goods are authentic, when consumers will receive them and whether service providers will overcharge them."

Chou says that by shopping on Newegg's platform for overseas products, consumers will have the same experience of shopping in their own country, because authentic products from where the products are made will be put into local warehouses, so prices will be kept down.

Newegg now has five main warehouses in China, and is building a sixth in Kunming, Yunnan province.

The company, founded in January 2001, had turnover of about $2.7 billion (2.16 billion euros) last year, with registered customers of 18 million, but its Chinese operation is losing money.

According to EnfoDesk, a think tank that researches new media economics in China, the business scale of the online business-to-consumer market in China reached 98.84 billion yuan in the second quarter of this year, an increase of 82 percent on the corresponding quarter last year.

Newegg's market share is less than 1 percent, while its major competitor Tmall, the business-to-consumer branch of e-commerce giant Alibaba Group, has 41.5 percent and 360buy.com has 15.5 percent. Amazon China has 2.3 percent.

The idea of transnational shopping came from a program called First From Asia. In the US, Newegg invited more than 300 Asian vendors to sell their products to the US market a year ago. The products included 3C (computer, communications and consumer electronics) products and jewelry.

"The trade volume every month was beyond vendors' expectations," Chou says. "FFA helped American consumers buy products unavailable in the US. Then we thought: why not do this the other way round?"

The transnational trading platform, still under trial, is by invitation only, the aim being to keep unqualified vendors from Newegg's platform.

Despite Newegg's loss in China, Chou says the company is still confident about the market. "This trading platform is not a sign that the head office wants to limit our power. It means that we (the Chinese branch) can contribute more to the group's development and better use the group's resources."

Newegg is not the only company chancing its arm in this market. Amazon has a similar platform, called Global Selling. EBay also has a transnational service, which accounted for nearly 18 percent of eBay Global's business in the first quarter of this year.

Chee-wee Gan, a principal in A. T. Kearney Management Consulting practice in Shanghai, says the volume of international e-commerce shipments of parcels will grow 32 percent annually between now and 2015.

"That's the big trend; the market is very attractive."

Lu Zhenwang, an e-commerce observer, says one trend in transnational e-commerce is to sell Chinese products overseas instead of selling overseas products in China.

"In this business (selling Chinese products overseas), eBay has been well-established," Lu says.

"It will take time to see whether this will help Newegg to turn around its business in China."

Chou says that notwithstanding Newegg's efforts to localize its services for China, it needs to emulate its counterpart in the US, whose key strength is 3C products.

One of the localization efforts is to expand product categories. Newegg in China is more like a shopping mall, selling products from flat screen TV sets and smartphones to even apples and vitamins.

"3C products are a very competitive market as Suning and Gome (two large Chinese offline retailers) are aggressive in their e-commerce drive," Gan says.

"It would be an interesting market for Newegg given their experience in selling products in other countries and regions; but they need to do it quickly."

Lu echoes this opinion. "The gross profit of 3C products in China is very low, only about 3 percent ... in the US the rate can be as high as 10 percent. The market is very competitive. So Newegg can make a profit in the US, but its Chinese operation is losing money.

"Now in China, most players in the B2C field are following this path: raise capital, burn the cash, gain market share, raise capital again, burn more cash, and gain bigger market share."

Chou acknowledges that Newegg has made mistakes in China but says he believes it is on the right path now.

"Chinese consumers are quite price sensitive; as long as one company offers free delivery and low prices, consumers shop on that website. When the bargains stop, customers will leave, just like that. A company cannot afford to stay in a price war forever, not making a profit."

However, Chou foresees a war of attrition lasting up to five years. And when the way that everybody operates finally changes and Chinese companies begin to focus on profit, Chou thinks Newegg will be one of the winners.

Contact the writers at suzhou@chinadaily.com.cn and linjingcd@chinadaily.com.cn

(China Daily 08/31/2012 page21)