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Chinese Ecommerce Revolution

February 18, 2014

By 2020, the Chinese E-tail market will exceed the total amount of U.S., Japan and the UK markets combined together.

When you think about centers of technological innovation the first places that come to mind are likely to be Silicon Valley, Seattle or Seoul. After all they are the home to Amazon, Apple, Facebook, Google, Intel, Microsoft and Samsung – companies whose innovations have changed a lot of industries, from financial services to telecommunications, to media and business.
Today, however, growth-oriented consumer electronic retailing (E-tail) in China allows Hangzhou – based Alibaba, the largest network of retail ecommerce in China, to join the list. Alibaba trumpeted their ambitions by buying 18% stake in Sina Weibo, the Chinese version of Twitter and, as in other places of concentration of technology and innovation born in Hangzhou, determines the path of development of related industries.

The Chinese market for e-retailers is the second largest (after the U.S.) and the estimated last year’s amount is $ 210 billion. Since 2003 the Chinese ecommerce market has reached the average annual growth rate of over 110%. By 2020, the market for e-retailers in China will reach a size equal to the sum of today’s markets, the U.S., Japan, UK, Germany and France.

Despite the fact that the rate of broadband internet penetration in China is only 30%, e-trade in 2012 reached 6.5% of total retail sales, the numbers that are similar in the U.S.

And this sector is profitable: retail online stores claim 8-10% of operating profit (earnings before interest, taxes, depreciation and amortization), slightly higher than the average income for traditional retailers.

We can distinguish two characteristics of Chinese ecommerce. First, about 90% of China’s ecommerce transactions are carried on the ad-funded virtual markets. On these platforms – which resemble eBay and Amazon Marketplace – manufacturers, vendors and individuals offer their products and services to consumers through online storefronts. In the United States, Europe and Japan, the situation is completely different: some 70% of the market consists of the ecommerce stores on their own web sites.

Moreover, according to the McKinsey Global Institute study, online shopping in China is not just replacing the conventional purchase. Ecommerce will also support additional consumption: 1 U.S. online consumer in average generates about 40 cents of additional sales. Additional sales part is even higher in less developed cities in China, where a lack of conventional retail stores means that online stores provide access to otherwise inaccessible products and brands.

Mass consumption in China and other emerging economies represent the emergence of the Internet age. Given that in many of these countries, the ecommerce industry is still evolving, electronic retail is shaping not only the retail, but also the industries of manufacturing and financial services – and even the urban landscape.

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In most countries, the retail sector is generally developed in three stages: first – dominated by local and regional players; then the initiative is captured by a few national companies; and, ultimately, online shopping challenges the traditional businesses. But in China currently there is not enough national leaders, given the fact that today the five leaders of the Chinese retail market cover a variety of product categories by less than 20%, compared to the U.S., where it is around 60%. The creation of a strong physical presence throughout the country will be time consuming and costly.

On the other hand, Alibaba (that owns markets such as Taobao and 360buy.com) were in the top ten in the retail market in China and they already provide coverage throughout the country due to the large number of express delivery companies. As a result, the retail sector in China will develop in two stages, and ecommerce players will become the largest national players.
Other emerging markets are likely to follow a similar course. Chinese online stores are already using their own advantages, exporting its products worldwide directly from factories. The companies in other countries are adapting the same online business model.

China may have missed a lot during the Industrial Revolution in the nineteenth century. However, it’s approach to e-retailing is doomed to become one of the driving forces of the Internet revolution in the twenty-first century in emerging markets.

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