E-Commerce in China – Shopping for one, shopping for millions

A Keyboard with an Icon of a Shopping Cart

For the past two years on November 11th (also known as “Single’s Day” in China), China’s online shopping networks have witnessed a complete 24-hour blow out. During the day, Chinese people have been able to take advantage of the annual one-day online shopping extravaganza started by China’s E-commerce giant Alibaba group, with most products listed on China’s biggest online sales platforms (such as Taobao.com and TMall.com) being 50% off or more. The 11/11 online sales event induced unprecedented success. To give you an idea of its scale: more people in China logged onto Taobao on Single’s Day in 2012 than the entire population of Brazil. Total sales consummated at 3 billion USD, with an average of 173 orders placed every second.

The zealous reaction of Chinese consumers to the high-profile and extremely popular digital sale event serves as a great example of the tremendous growth of the e-commerce sector in China within the past decade. In fact, in 2012, China had already become the second largest digital retail market with an online sales revenue of 214 billion USD, as well as an annual growth rate of 70% since 2009. With more than 500 million internet users in China and almost 200 million online shoppers, this growth trajectory is bound to continue. Experts predict that China will surpass the U.S in 2013 as the biggest online retail market. Many overseas companies have recognised the huge potential of China’s online retail market and are beginning to capitalise on this potential. However, understanding the drastic differences between the Chinese online market and its Western counterpart is the first step towards one’s successful venture into the Chinese digital retail market.

The perks of Chinese online shopping

Generally, Chinese consumers shop online for three main reasons: the price, the convenience, and the wide range of products available online. Just like people anywhere else, Chinese people love a good bargain. They greatly enjoy the lower prices that online vendors offer than traditional brick-and-mortar stores, which is the main reason for the success of Single’s Day online sale. In addition, online shops also provide Chinese consumers with a great platform to compare prices listed online to what is seen in physical stores. They may also compare prices across different online vendors. According to a recent survey, almost 70% of online shoppers across income levels undergo such a comparison process before they place their order.

Needless to say, e-commerce provides the universal advantage of not needing to physically commute anywhere to purchase goods. In China, this convenience is enhanced because the standard delivery time in China is 1-2 days, much shorter than the Western counterpart of 5-7 days. In many cases, consumers are even expecting same-day delivery.

More importantly, online shopping bridges the gap between Chinese consumers’ desire to purchase a range of products from a variety of brands and the retail market’s limited offering. Online shopping centers offer Chinese consumers a world of designer products, niche digital gadgets, and exotic food from across the world that are not available in traditional retail stores. This is especially true in the less developed third and fourth tier cities in China, where physical retailing’s limited range of products does not even cover the most popular domestic brands, let alone foreign brands. For example, people from tier 4 cities have significantly lower income than the bigger cities, but they spend 27% of their disposable income on online shopping as opposed to 18% among 1st tier city residents.

Not only has online shopping boosted consumption, it has also served Chinese people’s well-known obsession for foreign products, especially in fields such as baby formulas (health concern) and cosmetics (authenticity concern). In fact, the amount of overseas digital purchases has increased tremendously in the past 3 years, with the number doubling annually, and the growth is expected to continue.

Join in the ride

Indeed, the demand for foreign products is constantly increasing in China. Now that you have a basic understanding of the key differences between Chinese and Western online consumer behavior, you can perhaps start to think about tapping into China’s online retail market yourself and provide Chinese shoppers with more Western products which are not yet accessible for them through physical retailing. However, for any foreign company to start their retail business online, they need to thoroughly understand the legal set-up of an online shop, the structure of the digital retail market in China, as well as the technical, logistical and financial aspects of running an online business.

Because of the complexities of the Chinese legal framework, you must first thoroughly understand the legal requirements for setting up your web-shop in China. By law, any foreign company that wishes to set up an online shop needs to first set up a Foreign Invested Commercial-Enterprise (FICE) for your physical store (FICE is a particular kind of WFOE that is allowed to do trading, wholesale, retail, and franchise). After obtaining your FICE status, you can establish your online store with the same range of products as your physical store. You do not need to obtain an Internet Content Provider (ICP) License for your web-shop unless you also plan on providing platform services to other third-party vendors. However, you will need to go to the telecommunications administration authorities for ICP filing. On a side note, if your company wishes to engage in online sales only, the application is handled by the provincial authorities instead of the central commerce bureau, resulting in a faster and smoother application process.

Besides the legal set-up of an online shop, you also need to decide on where to establish your online shop. Whilst online retail markets in Western countries are dominated by pure-play online merchants (Amazon) and brick-and-mortar retailers (Best Buy, Wal-Mart, and Carrefour etc.) that already have their physical presence prior to their online presence, the Chinese digital retail market is dominated by virtual marketplaces. These e-commerce mega-platforms such as Taobao, TMall, and 360Buy, are places where manufacturers, retailers, and individuals can all sell products directly to customers. In fact, almost 90% of online retailing in China occurs on these virtual platforms, with Taobao enjoying almost 70% of market share. In contrast, retailers who launched their own independent e-tail store have rarely experienced any success.

In addition, 70% of China’s online shopping occurs through the C2C (Consumer to Consumer) channel on platforms like Taobao (Chinese equivalent of EBay). Unlike Amazon or eBay, these Chinese megasites do not charge any listing fees, so many micro and small businesses have managed to run their online business with relatively low investment and high profit margin. While C2C model still dominates the online retail market, recent trends have indicated a rapid increase of popularity for B2C (Business to Consumer) sites such as TMall and 360Buy, marketplaces where companies can directly sell their brand-name products to customers. The reason behind this trend towards B2C is the ‘trust issue’: many consumers understandably trust the quality of the products as well as the customer services from these B2C sites more than individual vendors.

Generally, for any Western company that plans to venture into the digital retail market in China, it might not be advisable for them to operate their online sales independently on their own online shop. Instead, they should take advantage of these highly flexible and popular local e-commerce platforms, which will allow companies to generate more market exposure and possibly more online sales revenue.

Logistical and financial aspects of the business can also pose significant challenges to those seeking to set-up an online shop. Luckily in China, if you choose to use the market-dominant online platforms, they can connect you with certified service providers such as shipping and payment service providers. For example, on Taobao, vendors have to manage the delivery themselves. They normally hire logistics companies such as EMS, SF Express and YTO Express for their delivery services. Because a foreign company needs to establish a new WFOE and obtain the relevant transportation licence in order for them to provide delivery services themselves, it might be wise for the company to outsource the delivery service to a well-recognised logistics firm.

Furthermore, foreign enterprises are prohibited from online payment services. Therefore FIEs must rely on online payment systems such as AliPay or PayPal to process any monetary transactions. The biggest online payment platform in China is Alipay, which is owned by Alibaba group, along with Taobao and TMall. To cater to the Chinese consumers, Alipay developed a payment system called the “escrow payment system”. “Escrow” means that a buyer temporarily stores payment in a third-party platform upon order placement and the money is not received by the seller until the buyer confirms arrival of the correct product. The escrow payment system reduces the risks for both Chinese buyers who are cautious about instant cash transfer, in addition to Chinese merchants who are sceptical about cash on delivery.

Alipay is the Chinese version of PayPal and the biggest player in the market. Over 100 financial institutions including Visa and MasterCard have partnered up with Alipay, and it now supports transactions in 12 currencies including USD, EUR, GBP, and HKD. For foreign companies that wants to sell products to Chinese customers, Alipay will be the go-to financial service provider because it can remit the settlements directly back to the merchant’s home country. PayPal can also be used in China, but the market share is significantly lower.

Besides the related logistic and financial services, there are also many players on the market that offer IT support, online marketing, and website design services. You need to choose wisely the service provider you work with. Local expertise, experience with the market, and a history of successful implementation are key criterions.

Once you have all the aspects figured out about your online shop, you will be ready to kick-start your digital retail venture in China. November 11th is coming up again, and this time you can become the winner from this annual online sale bonanza in China.

If you have any questions in regard to E-commerce in China, please do not hesitate to contact Maxxelli Consulting. 

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