The Growth of Chinese E-Commerce Business


china economy becomes the world's second largest

As the world’s largest populated country, China is often billed as the world’s second-largest economy and e-commerce market as well. However, China is likely to pass the United States to become the world’s largest e-commerce market before the end of 2013.

Shocking fact: China’s market is on pace to reach $296 billion this year, compared to $252 billion for the United States

Chinese e-commerce companies earned $210 billion in revenues in 2012, and the market has been growing at 120 percent annually since 2003, according to a March report from the management-consulting firm McKinsey & Company. E-commerce commands 5 to 6 percent of total retail sales in China, compared to 5 percent of U.S. sales conducted online.

Why China has this huge spike in growth? Here are the three main reasons:

1. Buying Things (Especially Luxuries) Online

Hal Josephson, founder of MediaSense said “China cannot help being the largest e-commerce market on the planet — with over 500 million Internet users and one out of almost five phones on the planet.”

With 242 million online shoppers in 2012, China’s population of e-commerce shoppers will soon exceed the entire population of the United States. As buyers keep getting richer and more sophisticated, they increasingly purchase big-ticket items online. The luxury segment is booming, from Smart Cars to Lamborghinis.

The rise of mobile is also critical. Chinese consumers shop online using gadgets like smartphones and tablets more frequently than their counterparts elsewhere. Some 58 percent of Chinese respondents shop online at least once a week — versus 42 percent of U.S. shoppers — and they’re twice as likely as the global average to shop using mobile devices.

2. Unique Shopping Habits

90 percent of Chinese electronic retailing occurs on virtual marketplaces—sprawling e-commerce platforms where manufacturers, large and small retailers, and individuals offer products and services to consumers through online storefronts on large e-commerce sites like eBay or Amazon Marketplace. A large and growing network of third-party service providers offer sellers marketing and site-design services, payment fulfillment, delivery and logistics, customer service and IT support.

That means companies like Alibaba, which owns Taobao and Tmall, wields enormous influence on Chinese e-commerce. The Economist says those two sites handled more sales than Amazon and eBay combined. Vendors must learn to work with these marketplaces to negotiate the market’s complex logistics especially in second– and third–tier cities.

Other differences include a much higher percentage of consumer-to-consumer sales — 77 percent to roughly 20 percent, per Sapient Nitro. Chinese e-commerce customers also communicate differently. Most customers in China do their online shopping during working hours and most tend to use online chat for customer support.

There’s one more critical difference: payment. Debit cards, not credit cards, are the dominant payment method in China. Cash-on-delivery is still widely used and online orders are generated before payment information is entered.

3. Evolving Market

Most observers see the pace of Chinese e-commerce only increasing, along with the opportunity to find profits in the market. Understanding and exploiting Chinese e-purchasers will prove to be the most strategic market positioning any company can strive to achieve. Possible challenges include competition-driven price drops that could erode the healthy profit margins currently enjoyed by many Chinese e-commerce vendors. (Chinese e-commerce customers are heavily motivated by deals.) China is also said to be drafting laws to more closely regulate the e-commerce sector.

However,the biggest unknown is how long the large online marketplaces will continue to dominate the market. As the Chinese retail and payment infrastructure continues to improve and physical retail chains expand nationally, there could be a move toward a more decentralized approach to e-commerce in the country. Such a transition could open up opportunities for new players, but bring additional uncertainty to vendors now working with the large marketplaces.