E-commerce is a major force in China and will remain the key driver of growth and opportunity in a number of consumer goods categories for the foreseeable future.
One look at China’s market fundamentals, and you’ll not only understand the e-commerce phenomenon better–you’ll also see the role structural and conditional forces play.
Let’s review some of the key factors:
• Smartphones are a transaction device first: The vast majority of mobile users in China have known nothing but smartphones that support internet browsing, social media, and shopping capability. The whole “Nokia generation” of technology never really penetrated China. Therefore, rather than ever looking at a phone as a device from which to communicate via phone calls and then slowly migrating to a shopping device, smartphones in China have always been a transaction device first and a communication device second.
• Retail infrastructure: As the middle class grows, especially in burgeoning second- and third-tier cities dotted across the country, infrastructure, such as physical stores, warehouses, and supporting roads, have not kept pace. This lack of a positive shopping experience has driven a high proportion of emerging middle-class consumers to go online as a first resort. They can get what they want and have it delivered without worrying about the infrastructure in their particular city to support an in-store sales experience.
• Urbanisation: The strong push by the central government toward urbanisation has added to the viability of e-commerce. This is a simple “weight of numbers” equation where the higher the population within a small geography, the more likely it is to become a viable location for e-commerce–especially given that the physical shopping infrastructure is not keeping pace.
• Cross-border regulations: From a Western perspective, it seems paradoxical that products that have no legal status to be sold in China can be freely traded via cross-border e-commerce; however, this is the current market status. As a result, many brands have taken advantage and have done a great job at building their reputations in China despite having no product legally transacted “within” China. Key sectors to benefit from this status quo include highly regulated cosmetics and health supplements.
• Chinese entrepreneurship: The highly commercial, entrepreneurial approach taken by many in China has seen them embrace the ability to sell products and make money via e-commerce. Many of the most famous e-commerce platforms in China are dependent on individuals setting up their own stores and infrastructure to support the channel. Alibaba is one example, providing the platform for individual sellers to create their own e-stores in an online shopping mall. The Chinese have embraced this opportunity, which has developed into a mix of “daigou” sellers as well as highly professional companies established to tap into this market.
• Cost-effective labour: One of the key factors China has in its favour compared with the West is that, despite its sizeable and affluent middle class, there are still tens of millions of low-paid people that are effectively augmenting e-commerce development by offering cost-efficient, last-mile delivery. (I recently couriered a 2-kg package from Shanghai to Hangzhou that was delivered on the same day for under US$2.) All major cities have thousands of delivery personnel to fill this last-mile gap.