Chinese e-commerce biz to become world’s largest

chinese e-commerce

Chinese consumers like to pay by debit card and shop from work. Credit: anaken2012

China is the world’s second-largest economy and e-commerce market. But while it will likely be years before the most-populous nation becomes the biggest economic powerhouse, the country is likely to pass the United States to become the world’s largest e-commerce market before the end of 2013.

China’s market is on pace to reach $296 billion this year, compared to $252 billion for the United States, according to data from Forrester and iResearch.

Chinese e-commerce companies earned $210 billion in revenues in 2012, and the market has been growing at 120 percent annually since 2003, according to a March report from the management-consulting firm McKinsey & Company. E-commerce commands 5 to 6 percent of total retail sales in China, compared to 5 percent of U.S. sales conducted online.

Why the huge spike in growth? A lot of it is due to sheer numbers.

Buying luxury online

“China cannot help being the largest e-commerce market on the planet — with over 500 million Internet users and one out of almost five phones on the planet,” explained Hal Josephson, founder of MediaSense, an international business development firm.

Clocking in at some 242 million in 2012, China’s population of e-commerce shoppers will soon exceed the entire population of the United States. As buyers keep getting richer and more sophisticated, they increasingly purchase big-ticket items online. The luxury segment is booming, from Smart Cars to Lamborghinis, according to iResearch China.

The rise of mobile is also critical. The New York Times recently cited a report from consulting firm PwC that found that Chinese consumers shop online using gadgets like smartphones and tablets more frequently than their counterparts elsewhere. Some 58 percent of Chinese respondents shop online at least once a week — versus 42 percent of U.S. shoppers — and they’re twice as likely as the global average to shop using mobile devices.

Unique shopping habits

Despite the outsize importance of mobile, it would be easy to assume that the Chinese are merely following the U.S. e-commerce model. But McKinsey points out that the Chinese e-commerce market is structurally different:

Some 90 percent of Chinese electronic retailing occurs on virtual marketplaces—sprawling e-commerce platforms where manufacturers, large and small retailers, and individuals offer products and services to consumers through online storefronts on megasites analogous to eBay or Amazon Marketplace… A large and growing network of third-party service providers offer sellers marketing and site-design services, payment fulfillment, delivery and logistics, customer service and IT support.

The comparable figure for the U.S. is just 20 to 30 percent, partly because developed nations typically have well-developed networks of brick-and-mortar retailers that are also online players.

That means companies like Alibaba — which owns Taobao and Tmall, two of the larger marketplaces — wields enormous influence on Chinese e-commerce. The Economist says those two sites handled more sales than Amazon and eBay combined. Vendors must learn to work with these marketplaces to negotiate the market’s complex logistics especially in second– and third–tier cities.

Other differences include a much higher percentage of consumer-to-consumer sales — 77 percent to roughly 20 percent, per Sapient Nitro. Chinese e-commerce customers also communicate differently. According to Sapient, “most customers in China do their online shopping during working hours and most tend to use online chat” for customer support.

There’s one more critical difference: payment. Debit cards, not credit cards, are the dominant payment method in China, Sapient reports. Cash-on-delivery is still widely used and — in a reverse of U.S. best practices — online orders are generated before payment information is entered.

Evolving market

Most observers see the pace of Chinese e-commerce only increasing, along with the opportunity to find profits in the market.

“Understanding and exploiting Chinese e-purchasers will prove to be the most strategic market positioning any company can strive to achieve,” enthuses Josephson.

Possible challenges include competition-driven price drops that could erode the healthy profit margins currently enjoyed by many Chinese e-commerce vendors. (Chinese e-commerce customers are heavily motivated by deals.) China is also said to be drafting laws to more closely regulate the e-commerce sector.

But perhaps the biggest unknown is how long the large online marketplaces — such as those run by Alibaba — will continue to dominate the market. As the Chinese retail and payment infrastructure continues to improve — and brick-and-mortar retail chains expand nationally — there could be a move toward a more decentralized approach to e-commerce in the country. Such a transition could open up opportunities for new players, but bring additional uncertainty to vendors now working with the large marketplaces.

Fredric Paul
Fredric Paul is an award-winning writer, editor and content strategist who has held senior editorial positions at InformationWeek, CNET and PC World. He lives in San Francisco.
Fredric Paul
Tags: BYOD,Technology