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E-commerce takes off in China as buyers go online

2013-12-26 14:35 Shanghai Daily Web Editor: qindexing

Away from the big headlines about economic reform and rebalancing, China is witnessing a silent revolution — that of the rise of the consumer. Nowhere is this trend more visible than in the world of e-commerce. In 2011, China.s online retail purchases surpassed Japan.s. The following year, its online retail penetration hit 16 percent, cruising past that of the United States.

As growing affluence fuels aspirations for a better lifestyle, China.s consumers are shedding their generations-old inclination to save and are starting to spend. This is just what policy makers, not just in China but around the world, want to hear. China is trying to wean the world.s second-largest economy away from its reliance on large-scale investment as a driver of growth, and businesses worldwide are looking for new consumer markets as the West deleverages.

What is new about China.s emerging consumer class, though, is that it is becoming increasingly comfortable with using online websites to make retail purchases. Almost 600 million potential consumers have access to the Internet in the country today, more than twice the number in the US. Internet users have doubled in China over the past five years. Of these, 80 percent access the Internet through smartphones and other kinds of wireless devices.

Our recent study shows that the expansion and ease of Internet usage thanks to the spread of mobile devices, combined with the rapid development of supporting infrastructure, are driving China.s e-commerce market toward an inflection point. As the industry takes off, it is set to boost the profitability of not just top e-commerce businesses but also that of their service providers such as logistics companies, payment solutions providers and social-networking platforms.

Nevertheless, the ride has not been all smooth thus far, which probably explains the still-low valuations of even the industry leaders, despite strong underlying growth. The sector has undergone two years of consolidation, which has weeded out some of the smaller players and dimmed the appetite of venture capital firms; some firms offering services across the e-commerce value chain have run into cash-flow problems, and the .group-buy. model — where websites offer products at discounts when a minimum number of buyers make the purchase — has just not clicked.

As the industry emerges from the shakeout, many survivors are showing signs of breaking even. It is now becoming clear that China.s e-commerce market favors larger companies with strong user traffic and committed long-term strategies. Specifically, the winners are likely to be three types of companies: (1) e-commerce platforms with massive self-generating user traffic, (2) logistics-driven e-commerce firms and (3) companies with unique business models or niche products.

E-commerce companies need to manage their supply chains efficiently if they are to offer products at competitive prices and deliver them to customers quickly. The first step, though, is to have effective channels to acquire new users. Thus, the first category of likely winners emerging from the industry shakeout includes mobile search engines and social-networking, communications and content-driven media platforms. These firms typically have effective plans for revenue generation through advertisements or by offering themselves as marketing gateways for e-commerce. Based on the US experience, these companies should see profitability rising as marketing expenses to acquire new users decline over the longer term.

Reliable system

Next, e-commerce providers must offer secure payment solutions and a reliable system to deliver the products to customers. This generates the second group of winners — those offering mobile and online payment services, the warehousing firms and the final customer-delivery companies.

Indeed, logistics is seen as a cost-centre today, but it could well be tomorrow.s profit driver. All e-commerce platforms are trying to compete on three aspects: price, product offerings and service. Large companies find it difficult to differentiate themselves on product offerings, as brands are willing to list their products on multiple platforms.

However, as the US experience shows, their ability to offer competitive prices and services depend on sound logistics. Although efficient logistics require a large overhead investment, many companies are looking to employ these in-house rather than outsource them. As labor costs rise, they will need to invest heavily in automation to boost productivity. They will also need to spend on technology to leverage .big data..

That still leaves space for a small group of companies with unique product offerings or services. These are the third set of winners. This group could include companies offering mobile browsers, localized business services focused on specific towns or cities, mobile app distribution and online video services.

In China.s increasingly competitive domestic market, the best path to profitability would eventually be through finding a niche product, increasing productivity through warehousing and packaging automation, selecting the optimum level of service, reducing the rate of return of products, nurturing customer loyalty and reducing the cost of acquiring new customers.

China.s Internet sector is in a sweet spot, with strong growth prospects, as online shopping goes social and mobile. Online retail penetration in the country should go much higher over the longer term than that in the US, due to the fragmentation of China.s overall retail industry and its geographic diversification. Local players dominate the market, but they have the advantage of learning from the US experience both in the business-to-consumer (B2C) and the consumer-to-consumer (C2C) e-commerce segments. The US model shows that both kinds of companies can co-exist over the longer term.

Additionally, online consumption, by its very nature, is non-cyclical.

This bodes well for strong, secular growth of the entire eco-system supporting the e-commerce industry in the coming years. The ongoing consolidation led by the larger players to acquire more mobile Internet users should provide the extra nip to the shares of second-tier firms in the coming year.

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