Lessons of E-Commerce Explosion in China

Lessons of E-Commerce Explosion in China

The second World Internet Conference (WIC), also known as the Wuzhen Summit, will take place Dec 16 -18, in Wuzhen, Zhejiang. Chinese President Xi Jinping will attend the conference and address the opening ceremony. It takes place amid dramatic expansion of Chinese e-commerce, thanks to great market potential and government’s supportive policies.

In early spring, the State Council, China’s cabinet, announced it will boost e-commerce by cutting red tape and liberalizing investment regulation in the sector. Meanwhile, Premier Li Keqiang said that with the “Internet Plus” strategy China would back e-commerce development and guide the Chinese internet companies’ international expansion.

In the mainland, e-commerce and other internet-based industries are supporting and accelerating the rebalancing of the Chinese economy toward consumption and innovation. Only months ago, I predicted that “China’s e-commerce will shake the world.” The first act ensued only a few weeks ago.

Records in global e-commerce and domestic consumption

In early November, the sales on the Singles Day – the Chinese version of the U.S. Valentine’s Day – morphed into a huge shopping extravaganza as the mainland consumers’ buying spree caused sales to soar almost 60 percent from last year. Although Alibaba, the e-commerce giant, started the online festival only seven years ago, its total sales alone climbed to RMB 9.2 billion ($14.3 billion).

To put the figure into an international perspective, it is more than quadruple the U.S. earnings last year from its Black Friday and Cyber Monday sales events combined. Unsurprisingly, Alibaba’s founder Jack Ma believes that “Singles Day… will go global. In the next five years, I believe it may be in Tokyo, Paris or New York.”

Alibaba expects the number of middle-class to grow from 300 million to 500 million over the next 15 years. Dramatic market expansion is energizing intense rivalry in which even Alibaba must cope with growing competition – from its nemesis Tencent to alternative business models and specialized services, including JD.com, Vishop and Dang Dang.

As China’s growth is slowing, Chinese living standards continue to grow fast. The deceleration of growth supports social spending, which drives Chinese consumer welfare as per capita incomes are likely to double in 2010-20. Chinese e-commerce is driven by heavy online buyers, younger demographics, and consumers in the relatively wealthier first-tier cities – although relative growth is even faster in many lower-tier cities and rural areas.

These internet-based industries fuel the government’s 13th five-year plan that was officially outlined a month ago. Until recently, Chinese growth relied on investment and net exports, but that era ended with the global financial crisis. The new objective is to rebalance the Chinese economy toward consumption.

Short-term data suggests that the writing is already on the wall. According to the third-quarter data, fixed-asset investment expanded only 10 percent year-on-year and net exports barely 1.8 percent; the slowest since 2000. In contrast, consumption accounted for more than 58 percent of growth in GDP in the first three quarters.

The medium-term trend is even clearer. Last year, consumption was still 38 percent of the GDP; more than before but still lower in comparison to other emerging economies. Given the current transition, consumption has the potential to double by 2030, which could lift its relative role in the economy to 50 percent.

In this massive shift from net exports and investment to consumption and innovation, a central catalyst role belongs to e-commerce in particular and the information and communication technology (ICT) sector in general.

 Threat to brick-and-mortar retailers

Not everybody has benefited from Chinese e-commerce explosion, however. As the record sales on Single’s Day showed, online retailing poses an increasing threat to those brick-and-mortar retailers that continue to stay mainly offline.

According to industry estimates, online retailing still accounts for some 12 percent of total retail sales in China. While it has soared explosively from barely 1.1 percent in 2008, it is still a small part of the total.

Nevertheless, as online retailing is exploding but Chinese consumers remain highly cost-conscious, some entrenched brick-and-mortar retailers have not yet been able to capitalize on the current trends.

For the leading department store operators in China, online retailing remains limited and sales growth is weak. While Intime Retail may be best positioned to benefit from online retailing – not least because of its strategic cooperation with Alibaba – several other companies, including Golden Eagle Retail, Parkson Retail and Maoye International Holdings are only getting into the game.

In turn, Golden Eagle and Maoye have collaborated with Tencent through the WeChat social platform, whereas Parkson has introduced an online shopping site.

How international giants fell behind market explosion

The explosion of Chinese e-commerce has caught off guard not just domestic retail leaders but international industry giants. Initially, these Western giants attributed their losses to China’s growth slowdown and the pullback by shoppers, which presumably accounted for their shrinking profit margins.

However, the rapid explosion of e-commerce and the rising share of consumption in the Chinese economy cast doubt over such interpretations. Most importantly, a closer look at retailing trends in China suggests that it is not Chinese consumers or Chinese economy that accounts for the losses of these international industry giants – but competition.

The famed Unilever, for instance, saw its sales fall off the cliff because it failed to go online fast enough. Chinese consumers did not leave the market; rather, they embraced Unilever’s online competition. In June, Nestle SA, a leading Swiss food company, acknowledged it failed to understand how retail was changing in China. The failure to move quickly and broadly into online retailing proved costly: the Swiss company had to burn instant coffee it could not sell in stores. The same goes for Colgate-Palmolive and Germany’s Beiersdorf, which have been suffering from offline overstocking, even as new online retailers have reaped enormous earnings.

Intriguingly, some of these international giants have missed much of the Chinese e-commerce explosion, even though many have experienced two decades of e-commerce growth in the U.S., Europe and Japan. In these advanced economies, the e-commerce explosion took place differently, however.

In the prosperous West, the Internet revolution initially relied on fixed-line personal computers and notebooks. In the emerging and developing East, such technologies remain relatively expensive. In these nations, the initial penetration has been fueled by mobility, particularly smartphones. In China, the mobile drives retail sales growth and currently accounts for half of all e-commerce sales.

The lessons are clear. First, business models that succeed in advanced economies may not work in emerging and developing economies. Second, advanced-economy lessons are vital but they must be adjusted to the Chinese business environment. Third, simple imitation of Western strategies does not ensure success in China – innovation may do so.

Dr Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS). He also has affiliations with think-tanks focusing on the United States, Europe and India. For more, see http://www.differencegroup.net/

This commentary was originally released by China.org, China’s official government portal, on December 16, 2015. It is the first in a series of commentaries that will be based on Dr Steinbock’s research project on “China and the multipolar world economy” as Guest Fellow of Shanghai Institutes for International Studies (SIIS), the leading global think-tank.

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