China Trends: E-Commerce in the Middle Kingdom

When this blogger moved to China way back in 2008, online shopping was not only in its infancy, but it didn’t seem to be something that would catch on anytime soon. In a country where relationships are everything, buying things from strangers behind an electronic screen sounded like something that would be incompatible with the culture and that e-commerce would not be as fully embraced as it had been in the West. What’s more, the Chinese tend to prefer cash transactions over credit or debit cards, so the odds were totally stacked against web transactions taking off.

Boy, did China ever surprise us all.

In five short years, according to reports by consulting firms PwC and iResearch, Inc., the value of China’s e-commerce market has soared more than 10-fold, from RMB121 billion ($19.7 billion) in the year of the Olympiad to over RMB1.3 trillion ($211 billion) in 2012. That’s beyond outstanding; it’s unprecedented.

Not only is there more growth to come from further gains in the middle class population, but dependable logistical chains have not been developed in most Tier 3 and Tier 4 cities. There are tens of millions of consumers that don’t have access to the virtual marketplace yet simply because goods can’t be reliably sent to them.

Given the projected growth of both personal wealth and e-commerce volume in China, companies can position themselves to benefit handsomely if they can penetrate this market. Currently, the two largest players, by far, in the e-commerce space are Tmall and 360Buy (now JD.com). Combined, they control almost 55% of the market. Amazon is the only Western brand in the top 10, coming in at #4 with a 2.2% market share.

Those seemingly monopolistic numbers notwithstanding, there is still a huge opportunity for Western brands to plant a flag in this rapidly growing space. While Chinese people have been eager to embrace online retailing, they are still notoriously choosy about from whom they buy. It turns out that they base many of their decisions on recommendations and reviews from their circle of friends online.

Nearly half of all Chinese consumers are active marketplace users. That is, they not only shop, but they take time to read and write reviews. And they share them. 41.8% of e-consumers in China say that they have first heard about a product or sale via social media, while 61% say that they have made purchasing decisions at least partially based off of a social media campaign. In a country where 95% of the online population in Tier 1, Tier 2 & Tier 3 cities is using some form of social media, establishing your company’s presence in that space is crucial not just for branding purposes, but for marketing and sales as well.

Like in the West, establishing a social media presence in China isn’t as simple as setting up a Weibo account and posting ads. Perhaps even more so than Western consumers, Chinese netizens respond to interaction. They want to engage. Maintaining an active, dynamic social media presence is no small feat, of course, but logistical chains are maturing quickly and plugging into a network is nowhere near as hard as establishing a physical presence.

For those companies that do not have the resources – or the desire – to build up a robust China team, a whole new class of companies willing to help has arisen. These third-party outsourcing firms specialize in helping Western brands gain access to the lucrative Chinese market. They can be especially helpful in working with companies to adapt their practices to best fit the needs of Chinese consumers. As one industry watcher was quoted in The China Daily, the challenges faced by Western brands require more than just linguistic and social media skills:

“The online shopping market in China is quite different from the rest of the world. The key drivers are service and timely delivery. Customers are unhappy if the products are not delivered immediately and as such it would be difficult for big brands to undertake these services on their own.”

As the same article notes later, there is still incredible room for growth, both for companies who can establish a presence themselves, and for smaller firms who need assistance from Chinese firms:

But there is still a long way to go before companies fully realize the potential of e-commerce outsourcing, experts say. A recent survey from Tmall shows that of the more than 70,000 brands that have online stores in Tmall, only 2 percent have actually availed the outsourcing services. The same survey also indicated that nearly 86.5 percent are keen on outsourcing all or part of their online operations to third-party companies.

The real boom for e-commerce outsourcers will come when more companies ride the online retail wave in tandem with the surge in Internet traffic.

With growth so astounding and future prospects so good, this is an exciting time for Western brands to consider entering the Chinese market. The hurdles are high, but there is a pathway to success for those who are willing to take the chance.