China e-commerce whitepaper

China e-Commerce – A whitepaper from VAYTON & REBORN, Luxembourg ©2015

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e-Commerce: China’s Great Leap Forward

CHINA’S E-COMMERCE BOOM

Nowhere else in the world has e-commerce grown so rapidly in recent

years than in China. While China is the world's second largest economy, it holds

the largest share of the global e-commerce market (Barron’s Online, Nov., 2014).

New market opportunities for online retail sales and services in China seem

without limits.

Two key drivers contribute to this great leap forward in China. New

technological platforms, especially mobile phone applications, and changing

population demographics, namely income levels and urbanization, are fueling the

e-commerce boom in China.

Currently, the number of middle class Chinese residents with disposable

incomes exceeds the total population of the United States. The China E-

Commerce Research Center reported that e-commerce in China grew by 31.4


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percent to more than $2.1 trillion US dollars in 2014 (Tech In Asia, 2015). By the

first quarter (Q1) in 2015, China online shopping amounted to 757.41 billion

Yuan, up 45.2% from 2014. China’s e-tailing sales were about 10.7% of total retail

sales of consumer goods (iResearch 2015).

Both customer to customer (C2C) and business to customer (B2C) online

sales are thriving, with B2C growing by 65.4% from 2013 to 2014 at a rate twice

that for C2C. Morgan Stanly predicts that e-commerce in China within a few

years will comprise 18% of the country’s total retail sales – a considerable growth

compared to the current share of 8%. In just five years by the end of 2015,

according to iResearch, the consumer base will grow at a faster rate than in the

US.


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Few barriers to anytime, anywhere e-shopping remain. Initially, cross-

border e-commerce in China faced problems of international payments, shipping

logistics and language (Alibabagroup news, 2015). The Forbidden City gates for

international e-markets have been unlocked with improved technology platforms

developed by Chinese companies like Alibaba Group. The number one cross-border

e-commerce company in China, Alibaba.com developed Taobao for C2C business

comparable to eBay and Tmall for B2C transactions comparable to Amazon.

Mobile payments are easily facilitated through Alipay, which garners 78.5% of the

third-party mobile payment market share in China (iResearch, 2015). While, high

mobile Internet use can be expected in the cities, Alibaba Group and rival JD.com

(JingDong) are tapping into a new and emerging e-consumer base in rural China

where mobile Internet use is on the rise.

Fast Facts: Cross-Border e-Commerce in China

China’s middle class today is equal in size to the entire U.S. population and

is expected to reach 630 million by 2022.

Concerns about product safety feeds demand for imported goods with

perceived better quality control. Chinese consumers are looking for

products made outside of Mainland China.

Chinese consumers are discovering they can go online to buy goods

directly from foreign companies. These cross-border purchases by China’s

online shoppers grew ten-fold between 2010 and 2014, from less than $2

billion to more than $20 billion.

China's rural Internet users numbered 178 million as of June 2014.

Source: Alizila e-Commerce News, 2015


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Mobile phone use is linked to the success of e-commerce. In China,

consumers choose mobile technologies over the personal computer for e-

shopping. In 2000, mobile phone owners in China made up just seven percent of

the population and by 2013 grew to around 90 percent. China is the world’s

largest consumer of mobile phones (International Data Corporation, China

Quarterly Mobile Phone Tracker, February 19, 2014). According to a China Press

and Publication Academy report released in 2015, one-third of Chinese leisure

time is spent on the Internet, primarily mobile phone users. Chinese adults

spend 40 minutes twice a day reading on WeChat—the popular social media site

developed by Tencent, a major e-marketing competitor in China.

Mobile phone addicts get their own street lane in Chinese city of Chongqing

For Q1 2015, mobile shopping grabbed over 60% of the market share,

followed by mobile value-added services, mobile game and mobile advertising

taking a little over 13% of the market share (iResearch, 2015). Unlike in the US,

online shopping in China is not primarily tied to bricks and mortar stores. In the


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US, retail stores have a web presence. In China, digital stores like Alibaba and

JD.com. offer products not necessarily available in physical stores.

ONLINE SHOPPING IN CHINA – BY THE NUMBERS

China Internet Network Information Center, 34th Statistical Report

The number of online shoppers in China reached 332 million, rising by

29.62 million over 2013, a growth rate of 9.8% by mid-year 2014.

The number of mobile shoppers reached 205 million with a semi-annual

growth rate of 42% by mid-year 2014.

Mobile shopping rose from 28.9% in 2013 to 38.9% by mid-year 2014.

Mobile payment users increased by 63.4% by mid-year 2014 compared to

2013.

Mobile payment use rose from 25.1% at the end of 2013 to 38.9% by mid-

year 2014.

The number of online payment users in China reached 292 million by mid-

year 2014.

Online payment activity increased by 32.08 million compared to 2013,

representing a semi-annual growth rate of 12.3%.

CINIC REPORT, JULY 14, 2014. The statistical reporting period was for the first six months in 2014, compared to all of 2013.

Higher prices in China have fueled the e-commerce boom. “Made in

China” does not mean the product originates in China. Chinese consumers pay more

for US brand products in retail stores than US consumers, even though they are

manufactured in China. The Chinese government relies heavily on tax revenue to run

the country. The multiple taxes levied, including value-added, consumption,

business tax, tariff, and related taxes, drive up retail prices for the consumer. An

Apple iPad manufactured in China costs about $499 in the U.S, but the Chinese


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customer will pay the equivalent of $757. One of the few international brands

originating in China is Lenovo, but the purchase cost in China is 10% higher than in

the U.S. (Why “Made in China” Costs More in China, econintersect.com blog,

Waiching Li, August 2011).

However, on the immediate horizon is a ten-year plan to shift from labor-

intensive manufacturing to smart manufacturing, led by Premier Li Keqiang and

outlined in Made in China 2025, released May 2015 by the State Council. New access

to retail and services markets through cross-border e-commerce will drive the

consumption economy and smart industrial development, modeled on Germany and

Japan, will address the decline in manufacturing in China.

A new Silk Road connecting global markets is planned. The National

Development and Reform Commission, Ministry of Foreign Affairs and Ministry of

Commerce, in March 2015, released its action plan Vision and Actions on Jointly

Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. The plan calls

on other countries to join them in building “an infrastructure network connecting all

sub-regions in Asia, and between Asia, Europe and Africa step by step." Notably, the

plan proposes to “jointly advance the construction of cross-border optical cables and

other communications trunk line networks, improve international communications

connectivity, and create an Information Silk Road” (full text:

http://news.xinhuanet.com/english/china/2015-03/28/c_134105858.htm). The plan

is ambitious and there is an urgent need to build a robust and reliable Information

Silk Road to support e-commerce markets. The Chinese State Council also plans to

increase the 4G network to full coverage and triple the broadband speed in major

urban areas to 30 Mbps and to at least 20 Mbps for smaller cities in China within

two years (iResearch, 2015, China Adds 20 Mln 4G Users in May).

http://news.xinhuanet.com/english/china/2015-03/28/c_134105858.htm


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New government liberalization policies will further open up

international trade. The Ministry of Industry and Information Technology

(MIIT) is allowing full foreign ownership for specific e-commerce businesses at

test sites where there is a growing middle class and a strong appetite for

international online shopping: Shanghai, Beijing, Chongqing, Zhejiang, and

Shenzhen. In 2013, the B2C cross-boarder e-commerce platform

kuajingtong.com was allowed to operate in the Free Trade Zone in Shanghai.

Amazon China will take advantage of the free trade zone and develop

warehousing centers in Shanghai. The Shanghai Customs, Shanghai Entry-Exit

Inspection and Quarantine Bureau and State Administration of Foreign Exchange

bring to the cross-border e-shopper guaranteed product authenticity,

competitive pricing, transparent taxes, convenient logistics and customer service.

In 2013, there were 18 million online cross-border shoppers in China and of

those, 78% were mobile phone shoppers. (China Internet Watch, September

2014).

The Chinese government promises to lower taxes for exports to increase

domestic trade and initiate new competitive export tax policies (iResearch,

Chinese Government Announces New E-Commerce Guidelines for Businesses,

2015). Until recently, international companies interested in cross-border e-

commerce faced product payment and delivery issues, and most importantly,

Chinese government restrictions on foreign businesses. New mobile technology

platforms, including third-party payment applications, better delivery logistics

and more distribution centers as well as government economic liberalization

policies have clearly opened the way for exceptional e-commerce growth in

China.


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CHINA’S RISING INCOMES AND MARKET POTENTIAL

e-Commerce growth rides the wave of increasing income levels. As

reported in a McKinsey Report “Meet the 2020 Chinese Customer” (2011), 14 cities

in China are expected to make the list of the top 25 cities worldwide with the

highest GDP growth by 2020. According to the report, the Chinese consumer falls

into three main categories based on income: value, mainstream and affluent. Value

consumers are households with $6,000 to $16,000 disposable incomes. The next tier

is the mainstream consumer household with $16,000 to $34,000 disposable

incomes. They are considered wealthy and represent less than 14 million household

at that income level. For the affluent consumer, the household income is over

$34,000 and represents two percent of the urban population at 4.26 million. The

World Bank Development Research Center of the State Council in China 2030

Building a Modern, Harmonious, and Creative Society (2013) projected annual per

capita income in two decades will be approximately $16,000, tripling the current

levels.

Urbanization is a major driver for a new consumption economy.

According to the National New-Style Urbanization Plan (2014-2020), 60% of the

Chinese population will live in cities by 2020, which will be 100 million more urban

Chinese. By the end of 2014, there were 54.7 percent or 749.16 million permanent

Chinese living in cities, considerably lower than 80% for developed countries’ urban

populations (“New Style Urbanization Plan 2014-2020, Xinhua News Agency, March

16, 2014; ChinaDaily.com, Jan. 20, 2015). The four Tier-1 cities are Beijing, Shanghai,

Guangzhou, and Shenzhen.


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China’s Population Sectors: Households and GDP

Tier 1

4 cities; 16 million households

GDP 1 Trillion RMB/ $163 billion

Tier 2 23 cities; 38 million households

GDP 2 Trillion RMB/$325 billion

Tier 3 229 cities; 75 million households


Tier 4 1,612 cities; 86 million households


Rural

30,000 towns; 75 million households

GDP 4 Trillion RMB/ $650 billion

Source: Nielsen Report. China 2015, A New Era of Consumption

CHINA’S E-COMMERCE LIFESTYLE AND BEHAVIORS

“In the US, e-commerce is just shopping online. In China, e-commerce is a

lifestyle.” This observation by Jack Ma, CEO of Alibaba Group, the top e-commerce

company in China, is right on the mark, especially for urban Chinese with disposable

incomes. Among 3,500 consumers in 27 cities across China surveyed by Accenture (a

marketing consulting company), there were clear indications of a middle class

consumption lifestyle and an interest in higher quality goods. Among the surveyed

urban Chinese consumers, 73 percent go online to shop and close to 50 percent visit

social media sites every day.

Those more likely to make a brand purchase are urban, living in large cities where

there is a higher international brand presence, and young people because they tend

to have higher brand awareness. A majority (80%) of urban Chinese shop online at

least once a month. Finally, the Accenture survey found that urban Chinese are wary

shoppers. At least 75 percent of shoppers compare prices online and offline and


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more than half will go to the physical stores to see the products before buying

online (The Allure and Challenges of China’s Changing Consumer Market, Accenture,

2014). In Tier-1 cities like Shanghai, consumers shop for vacations, cars and high-end

cosmetics, handbags and clothing at a rate more frequent than consumers in Tier-2,

Tier-3 or Tier-4 cities (KGMP, China 360, 2014).

Chinese e-shoppers want the best deals and the best experiences.

Successful blitz sales such as Alibaba’s Singles Day, 11-11, gives the consumer both

the thrill of participating in a sales event with a theme and within a short time

frame, combined with the prospect of getting a good deal on purchases. The e-

shopping experience mimics gaming and taps into the Chinese love of group events.

In fact, marketing ploys like Singles Day give consumers a sense of belonging and

connectivity that underlies the popularity of social media in China. The revenue

generated in one day by this e-marketing ploy in 2013 amounted to RMB35.019

billion worth of transactions. Such high gross merchandise value (GMV) attests to

both the importance of the shopping experience and access to discounts for the

Chinese consumer.

Chinese females represent a significant proportion of e-shoppers. An

estimated 40% of Chinese females manage household expenses and 60% of mobile

Internet users are female. Among female shoppers in 2014, almost one third

(27.3%) of mobile Internet purchases were for clothing, shoes and bags. Cosmetic

products are very popular and placed third among products most often purchased

(iResearch 2014). The largest online discount retailer Vipshop Holdings Limited

commissioned the Economist Intelligence Unit to survey female online consumers in

Asia. The survey results published in 2014 were based on responses from 5,500

women in Greater China, India, Japan, Singapore and South Korea. The results

indicated that Chinese women are brand conscious, not necessarily brand loyal and

price remains the highest consideration when making purchases.


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Mainland Chinese Women Consumers

62% consider themselves joint bread winners in their family

91% of urban adult women contribute to household income

76% have their own bank accounts; 53% have their own credit cards

69% prefer shopping online to shopping in stores

74% of all women and 77% of 18-29 year olds buy for themselves most of the time when shopping online

63% believe products from abroad are superior

64% browse for products and services at least once per day

China’s rural population is an untapped e-commerce sector. At least 64%

of rural Chinese used mobile phones to shop online and 43.5% of rural Internet users

visited e-commerce websites multiple times a week in 2015, according e-company

giant Tencent. Three other key players have their sites set on a rural e-market.

Alibaba intends to invest 10 billion yuan to build 1,000 operation centers in county

seats and up to 100,000 service outlets in villages. JD.com Inc. (JingDong) will

establish a county-level center in south China's Guangdong Province to support

shopping online for rural farmers. Suning Commerce Group will develop 10,000

depots covering 25 percent of Chinese rural areas in five years, according Vice

President Sun Weimin (Xinhua news, Jan. 31, 2015).

Types of Purchases Made by Mainland Chinese Women

Cosmetics – 86%

Home products & furnishings – 63%

Clothing and accessories – 79% Electronics – 48%

Groceries – 78% Travel and Leisure – 47%

Maternity and children’s products 70%

Furniture – 39%

Source: Economist Intelligence Unit Report, 2014


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CHINA’S TRADITIONAL CULTURE AND CONFUCIAN VALUES

Chinese consumers are communal-oriented and social status or face

(mianzi) is highly valued. High net worth Chinese will pay more for global

brands and luxury items as a symbol of their elite social status. The rising middle

class consumers will pay higher prices for import goods, perceived to be better than

domestic goods, to demonstrate to others (outwardly) their place in society

(Warveni Jap, Confucius Face Culture on Chinese Consumer Consumption Values

toward Global Brands, The Journal of International Management Studies, Volume 5,

Number 1, April, 2010).

A brief by Globalization Partners International (2014) summarized Chinese

culture and values based on Geert Hofstede’s book Consequences, Comparing

Values, Behaviors, Institutions, and Organizations Across Nations (Thousand Oaks,

CA: Sage Publications, 2001.) Hofstede identified the following five key behavioral

characteristics of the Chinese:

Chinese Consumer Behaviors Steeped in Values and Tradition

Collectivism

Family and social groups versus the individual

Power Distance Confucian hierarchical authority versus egalitarianism

Masculinity-Femininity Assertiveness versus nurturing

High-Low Context Symbols and nonverbal cues versus explicit communication

Uncertainty Avoidance

Security versus risk-taking

Consequences, Comparing Values, Behaviors, Institutions, and Organizations Across Nations, Geert Hofstede, 2001


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Two cultural values underlying e-commerce behaviors in China are Xin

(trustworthiness) and Guanxi (connections and relations). Trust is important for the

Chinese e-shopper and explains in part why just 19 percent of consumers shop at

official brand or manufacturer websites, compared to 41 to 60 percent in Japan, the

United States, and the European Union. Chinese consumers prefer making purchase

decisions after considerable investigation of the product or service.

Chinese consumers are also inclined to yield to the majority because

harmony in person-to-group relations is important (Jap, 2010). Loyalty to family and

social groups explains why social media networking is so prevalent in China.

According to eMarketer (April 2015), China mobile social networking users should

reach 335.9 million with an increase of 20.7% in 2015. Currently, 80.3% of Chinese

access social media sites with 32.5% using mobiles phones for social networking at

least monthly. Social media is an important marketing channel in China for the top e-

commerce players.

Chinese e-consumers are not impulse spenders. According to the McKinsey

Report, 2011 (Meet the 2020 Chinese Customer), 28 percent of people admit to

buying on impulse compared with 49 percent in the United Kingdom. They look for

the best deal, the best recommendation and the best experience. Among 20

countries surveyed by Boston Consulting Group, over 40 percent of Chinese

shoppers indicated they read or posted reviews online, almost twice the rate in the

United States. The primary platform for online reviews in China is the social media

site. The top social media networks in China are Sina Weibo, Qzone, WeChat,

Tencent Weibo and Sohou Weibo (China Internet Watch, 2015).

Understanding the significance of traditional symbols for the Chinese is

absolutely necessary for successful e-marketing. In China, red represents good

fortune and joy. Yellow represents royalty and a higher social status. Green

http://www.chinainternetwatch.com/tag/china-mobile/


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represents money. The Chinese websites are dominated by vibrant red and yellow

colors. E-commerce billionaire Jack Ma can be seen wearing a bright green tie and

photographed against a background of green Chinese characters.

A Chinese New Year tradition is send to family and friends gifts of money

placed in a red envelope. Red envelope or hongbao is popular for birthdays,

weddings, and special occasion gift-giving as well. Seizing on this Chinese tradition,

Tencent rolled out a WeChat Red e-Envelope, an extremely successful marketing

scheme poplar with Chinese e-shoppers.

Using mobile payments linked to the Tencent social media application WeChat,

anyone can send or receive an e-red envelope for an array of transactions: send

money to friends, pay bills, hail taxis, pay for parking, buy movie tickets or book

flights. Participants can even designate an amount of money to be distributed to

friends and family, like a lottery, adding a gaming element to giving gifts of money

(China Research Center, 2015). WeChat reported 468 million monthly active users.

Within 10 days of the 2014 Spring Festival, more than 8 million users exchanged

over 40 million red envelopes (China Daily, 2015). Competing with Tecent, Alibaba

launched its own red envelope using its microblogging platform Sina Weibo. For just

one day in February, Alibaba reported 240 million virtual red envelopes, totaling

close to $640 million, were sent through Alipay (Forbes Asia, 2015).


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CHINA’S E-COMMERCE FORECAST Clearly, e-commerce in China is booming and is likely to keep its lead among

all other countries. The Chinese government is transitioning from a labor intensive

manufacturing economy to a consumption economy. In 2013, China had 302 million

e-consumers. By 2021, that number is expected to jump to over 680 million (Forbes

Business, June 2014).

Key drivers for exceptional growth will continue to be anytime, anywhere access to

cross-border online shopping possible with mobile technologies and third-party

mobile payment platforms; rising per capita incomes and urbanization; government

e-commerce liberalization policies; new rural consumer base; a growing number of

female e-shoppers; and e-marketing strategies drawing on Chinese traditions, values

and communal-oriented shopping behaviors.

China e-commerce whitepaper

Economy & Finance

Transcript of China e-commerce whitepaper