Opinions

Digital Commerce in China: No Choice but To Jump In

Posted by Brad Wills on November 16th, 2012 at 7:00 am

Along with China itself, Chinese e-commerce will mushroom in the next five years and beyond. For Western brands looking to make inroads in China, digital will be as crucial for them there as it is here. But in many ways, it’s very different in China. Western brands may find it hard to ramp up their digital efforts as quickly or as completely as other facets of business. And digital’s place in the marketing-and-sales mix could be very different, as well. But Western brands may have no choice but to start learning fast.

First a few salient facts. The number of internet users in China is expected to grow at nine percent annually through 2015, well above the one percent growth forecast for the U.S. and Japan, according to a Boston Consulting Group report in 2010. But China’s penetration rate currently is only roughly 25 percent (estimates vary), and much of the growth is expected in rural areas.

Westerners may be surprised to learn that Internet access for Chinese is largely through mobile phones and Internet cafes; China’s mobile penetration is expected to rise roughly 50 percent by 2015, to 84 percent, and there are already more than 200,000 cell-phone-optimized stores on China’s equivalent of eBay, Taobao. Meanwhile, personal computer penetration is expected to jump 70 percent, to 34 percent of the population – a significant increase, but a low overall percentage, compared to the U.S. and Japan.

A.T. Kearney estimates that Chinese e-commerce will have grown more than five-fold in the five years ending in 2014. And during that time, a crucial shift will have happened that brands should note: business-to-consumer internet sales will make up 40 percent of all commerce; today it is estimated at only 15 percent, with C-to-C sales, the majority on Taobao, making up roughly 85 percent.

Intersecting with this reality is the fact that currently, international companies haven’t penetrated China’s internet realm deeply. Most digital business-to-consumer commerce represents local companies, who are more agile in spotting preferences, tailoring offerings and working within the government’s dictates. Issues with transaction security and lower availability of credit card payment have compounded this, and have kept the average purchase quite small, with online travel being an exception.

The local nature of Chinese e-commerce is compounded by a feature of Chinese life that most Western internet shoppers long ago stopped worrying about: whether a product could be shipped to them and whether it would arrive, arrive on time and be in good shape.

A.T. Kearney points out that the development of domestic express delivery service is lagging behind e-commerce itself, dampening growth potential. Shoppers complain of late, lost or broken packages, sketchy COD or return policies and the lack of services like installation. The large B-to-C site 360buy.com established its own extensive delivery service and saw explosive growth. But A.T. Kearney suggests that for even the largest retailer, this will prove difficult as the Chinese online marketplace expands in coming years.

Outsourcing and partnering – sometimes with an investment component – are approaches other companies are trying, and some combination of this is likely to prove most effective, according to experts. But currently there’s a considerable gap between the growth of Chinese commerce and the capacity of the express delivery sector to handle the potential for sales.

For the Western retailer looking to expand its online footprint in China, there are additional important differences and considerations regarding basic functionality. For example, it’s typical for travel aggregator sites to allow registered users to book hotels without prepayment and to cancel reservations without penalty ahead of time. And the major Chinese e-pay websites employ a system in which the shopper only pays for an order when it arrives and is found satisfactory, with the funds released from an online account at that time.

More differences: Mobile phones are expected to continue to be a very significant shopping-and-payment method, more so than in the West. And at the same time, major retailers such as stores and airlines currently transact very little business on their own websites, leaving it to aggregators, a marked difference from the West and one that some businesses might find uneasy or unwieldy. Some expect significant change in this regard in the next decade, however.

And finally, there is the important issue of site functionality. More than half of China’s internet shoppers access sites on Internet Explorer 6, a result of rampant software pirating, which inhibits the upgrade process; as a result, many popular Chinese websites are optimized solely for IE6, and online banking in China is exclusively a Windows/IE6 experience. Consultancy Strangeloop Networks tested 100 sites from Western luxury brands on such machines and found average homepage load time to be a frustrating 16.2 seconds, eight times the optimum.

So it’s clear that Western companies looking to make inroads in Chinese e-commerce have many adaptations to make, as well as hard decisions about how to best leverage this crucial and growing – but currently very “foreign”– digital marketplace, at a time when their growth plans may require a confident digital strategy, despite the obstacles.

One Response to “Digital Commerce in China: No Choice but To Jump In”

  1. akshat Sethi says:

    China is one of popular country in the field of Outsourcing. In coming years, it will become the top outsourcing country in the world.

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