China’s E-commerce Explosion

Written By Daniel Allen on June 28, 2007 at 3:56 am | In e-commerce, technology, connecting, China

Internet penetration and socio-economic factors drive online shopping growth in China.

Trend Description

E-commerce is still in its infancy among China’s 144 million netizens, but its popularity is rapidly rising. Already, some 6 million people a day shop on the internet in China. The vast majority are young people living in large cities. There are now 43 million registered online shoppers, and their purchases may total US$6.4 billion in 2007, a year-on-year leap of more than 60 percent.

The trade volume of China’s e-commerce, which includes B2B, B2C and C2C trading, has grown by nearly 60 percent over the past couple of years. China’s total online transactions grew 52 percent over 2005, to RMB1.1 trillion (over $US 14 billion) in 2006, according to a report released by China Center for Information Industry Development Consulting (CCID Consulting). Currently, 99 percent of China’s 42 million companies are small and medium-sized, yet only three percent of them made deals over the internet last year.

The ease of online sales has opened new opportunities for Chinese, empowering throngs of new young merchants, who are helping to drive China’s economic engine forward. Shopping in China is far different than in the West in terms of pricing, availability of goods and concentration of stores. Chain stores with multiple locations in the same city may price the same goods differently at each location, which means net-savvy Chinese consumers seeking the lowest prices have gone online.

The stereotype of Chinese consumers stuffing notes under their mattresses can no longer be attributed to the increasingly well-off middle-class Chinese youth segment. This bodes well for multinational companies that hope to tap into China’s fever for Web 2.0 and e-commerce. “E-shoppers are mostly 18 to 30 years old. We think the trend will expand to other age groups,” said Wang Fang, an analyst at iResearch, the Beijing-based web consultancy.

Case Studies

Alibaba

Alibaba, China’s largest e-commerce site, is to float on the stock market in what is likely to be the largest ever initial public offering by a Chinese internet firm. Alibaba has two main strands of business - a consumer site for Chinese residents with 16 million registered users, and a business to business website - Alibaba International - which claims over 500,000 visitors every day. Only the B2B site will float.

Alibaba International claims to offer big savings on traditional product sourcing. The vast site claims over 97,000 categories of “home supplies”. The site includes a TrustPass feature, to reassure buyers that the sellers are who they claim to be. Alibaba bought Yahoo China in October 2005 and Yahoo invested $1bn in the company.

Statistics from Taobao, an Alibaba subsidiary, show that Chinese consumers were purchasing over RMB100 million worth of products online per day in January 2007, with Taobao claiming to account for 70 percent of that trade. Taobao has steadily been eating into eBay’s consumer-to-consumer e-commerce market share in China, rising to 82 percent last year.

Image source: Alibaba

Joyo

Joyo is a Beijing-based shopping website. In 2004 it was bought into by Amazon. The US online retailer now owns 100 percent of the company, although it has struggled to make a profit since the first acquisition.

Although Joyo is not yet fully profitable it has rapidly increased the number of items it carries. The company maintains three warehouses in China and uses bicycle delivery people to get products to customers. Recently Amazon announced it had renamed Joyo.com “Joyo Amazon,” and is now offering customers a free shipping promotion to go along with the co-branded site name.

In May 2007, Joyo opened its latest fulfillment center in Guangzhou, which will primarily serve customers in Southern China – the company also operates fulfillment centers in Beijing and Suzhou. Joyo has also introduced “My Joyo.com,” a personalized tab at the top of every page which provides customized recommendations, based on the customer’s purchase and browse history.

Image source: Joyo

Dangdang

After seven years’ booming development, Dangdang has become China’s largest online retailer by offering more than 300,000 Chinese language books, movies and music products. As one of China’s most successful e-commerce companies, it successfully raised US$27 million of venture capital in its latest round of fundraising last year. According to co-president Li Guoqing, Dangdang generated RMB360 million (US$46 million) in revenues in 2006. Last month Dangdang announced it was entering into an agreement with the nation’s leading portal Sohu.com on advertising.

Image source: Dangdang

Trend Impact

Despite the fast growth, experts warn that China’s e-commerce still faces challenges stemming from a lack of policies and a credit system. Most Chinese still don’t use credit cards, and some buyers opt to pay cash on delivery of goods from postal carriers or courier companies. Online payment plans are slowly emerging. Taobao’s parent company has one called Alipay, which collects payments from buyers, holds the funds in escrow and then turns them over to sellers.

The rise of virtual currency used in online gaming environments in China shows that Chinese youth love e-commerce - if taking part is convenient. Because of the lack of credit cards in circulation, for many Chinese consumers the first introduction to e-commerce comes through the use of virtual currency. Several hundred million dollars’ worth of virtual currency was purchased last year, and the size of the virtual currency market is growing 30 percent annually.